Introduction and Plan of the Work

Every nation's annual labor is the source of everything its people consume — all the necessities and comforts of life. That consumption consists either of what that labor directly produces, or of what's purchased from other nations with those products.

So whether a nation is well supplied or poorly supplied with the things it needs depends on one ratio: the size of this output compared to the number of people who need to consume it.

Two factors determine this ratio. First, the skill, efficiency, and judgment with which a nation's labor is applied. And second, the proportion of people engaged in productive work versus those who aren't. No matter what a country's soil, climate, or territory looks like, how well its people live ultimately comes down to those two things.

Of these two factors, the first matters far more than the second. In hunter-gatherer societies, virtually every able-bodied person works — hunting, fishing, doing whatever they can to provide the necessities and comforts of life for themselves and for the members of their family or tribe who are too old, too young, or too sick to provide for themselves. Yet despite this near-universal employment, these societies are so desperately poor that they are sometimes driven — or at least believe themselves driven — to abandon their infants, their elderly, and their chronically ill, leaving them to starve or be killed by wild animals.

In thriving, developed nations, the situation is completely reversed. A huge number of people don't do any productive work at all. Many of them consume the output of ten times — often a hundred times — more labor than most of the people who actually work. And yet the total output of the whole society is so enormous that everyone is generally well provided for. Even a worker at the very bottom of the economic ladder, if he's careful and hardworking, can enjoy more of life's necessities and comforts than any hunter-gatherer could ever hope to acquire.

What causes this massive improvement in labor's productive power? And in what order is that output naturally distributed among the different classes of society? These questions are the subject of the First Book of this work.

Whatever the current state of a nation's skill and efficiency, the abundance or scarcity of its annual output still depends — given that level of skill — on the ratio of productive workers to unproductive ones. As I'll show later, the number of useful, productive workers in any country is always proportional to the amount of capital invested in employing them, and to the particular way that capital is used. The Second Book, therefore, deals with the nature of capital: how it's gradually accumulated, and how different ways of deploying it put different amounts of labor to work.

Nations that have reached a reasonably advanced level of skill and efficiency have followed very different policies in directing their labor, and not all of these policies have been equally good for maximizing output. Some nations' policies have given special encouragement to rural industry; others have favored the industry of cities and towns. Hardly any nation has treated every kind of industry with equal and impartial support. Since the fall of the Roman Empire, European policy has consistently favored manufacturing, trade, and commerce — the industries of towns — over agriculture, the industry of the countryside. The circumstances that introduced and established this bias are explained in the Third Book.

Although these different policies were probably first introduced by the self-interest and prejudices of particular groups, with no thought about their consequences for society as a whole, they gave rise to very different theories of political economy. Some of these theories emphasize the importance of urban industry; others champion agriculture and rural production. These theories have had enormous influence — not just on the opinions of scholars, but on the actual policies of governments and rulers. In the Fourth Book, I've tried to explain these competing theories as clearly and thoroughly as I can, along with the major effects they've had in different eras and nations.

The purpose of these first four books, then, is to explain what has made up the income of the general population — the nature of the resources that have funded people's consumption in different times and places. The Fifth and final Book deals with the revenue of the government. In it, I've tried to address three questions. First, what does a government need to spend money on? Which of those expenses should be paid for by society as a whole, and which should fall on specific groups or individuals? Second, what are the different ways a society can raise the money to cover its shared expenses, and what are the advantages and drawbacks of each method? And third, why have nearly all modern governments ended up borrowing money and running up debts — and what effect has that debt had on the real wealth of their nations, on the actual annual output of their land and labor?

Book I: Of the Causes of Improvement in the Productive Powers of Labor

Chapter I: Of the Division of Labor

The greatest improvements in the productive power of labor — and most of the skill, dexterity, and good judgment that guide it — come from the division of labor.

The effects of dividing labor are easiest to understand if we look at how it works in specific industries. People tend to think it's most advanced in trivial, small-scale manufacturing. That's not necessarily because division of labor really goes further in those industries than in more important ones. It's just that in small manufactures — the kind that supply minor wants of a small number of people — the total workforce is small enough that you can gather all the workers into one workshop and see the whole process at a glance. In the great industries that supply the bulk of what most people need, each branch of the work employs so many people that you can't fit them all under one roof. You typically only see the workers in one single branch at a time. So even though those large-scale industries may actually divide their work into far more specialized steps than the small ones do, the division isn't nearly as visible, and people notice it far less.

Let me take an example, then, from a very minor industry — but one where the division of labor has always attracted attention: pin-making. A worker who hasn't been trained in this trade (which the division of labor has turned into a specialized occupation), and who isn't familiar with the machinery used in it (machinery that the division of labor itself probably inspired), could barely manage to make one pin a day working alone, and certainly couldn't make twenty. But here's how the business actually works today: not only is the whole operation a specialized trade, it's broken down into a number of branches, most of which are specialized trades in their own right. One person draws out the wire. Another straightens it. A third cuts it. A fourth sharpens the point. A fifth grinds the top to receive the head. Making the head itself requires two or three separate operations. Attaching the head is its own specialized job. Whitening the pins is another. Even putting them into the paper packaging is a trade by itself. The simple business of making a pin is, in this way, divided into about eighteen distinct operations, which in some factories are each performed by a different worker, though in others one person may handle two or three of them.

I once visited a small pin factory of this kind that employed only ten men, some of whom performed two or three operations each. They were poor and only had basic equipment. But when they really applied themselves, they could produce about twelve pounds of pins in a day. A pound contains over four thousand medium-sized pins. Those ten workers, then, could make more than forty-eight thousand pins in a day. That's four thousand eight hundred pins per person per day. But if each of them had worked separately and independently, without any training in this specialized trade, they certainly couldn't have made twenty pins each — maybe not even one. That means their output would have been, at best, one two-hundred-and-fortieth of what they actually produced. Perhaps not even one four-thousand-eight-hundredth of it. That's the power of properly dividing and combining their operations.

In every other craft and industry, the effects of dividing labor are similar to what we see in this small example — though in many cases the work can't be broken down into quite as many steps or reduced to quite as simple a set of operations. Still, wherever the division of labor can be introduced, it produces a proportional increase in productivity. The separation of different trades and occupations from one another seems to have grown out of this advantage. And this separation tends to go furthest in countries with the highest levels of industry and development. What one person does in a less developed society typically gets split among several workers in a more advanced one. In every advanced society, the farmer is generally just a farmer, and the manufacturer just a manufacturer. Even the labor needed to make a single finished product is almost always divided among many hands. Think about how many different trades are involved in each branch of the linen and wool industries — from the people who grow the flax and shear the sheep, all the way to the bleachers and smoothers of the linen, or the dyers and finishers of the cloth!

Agriculture, by its nature, doesn't allow for quite as much division of labor or as complete a separation of tasks as manufacturing does. You can't separate the work of raising cattle from growing grain as cleanly as the carpenter's trade is separated from the blacksmith's. The spinner is almost always a different person from the weaver, but the person who plows, harrows, sows the seed, and reaps the harvest is often the same individual. Since these different types of farm work come around with the changing seasons, no one person can stay busy with just one of them year-round. This inability to fully separate all the branches of agricultural labor is probably why productivity improvements in farming don't always keep pace with improvements in manufacturing.

The wealthiest nations generally outperform their neighbors in both agriculture and manufacturing, but they're usually more distinguished by their superiority in manufacturing. Their farmland is better cultivated, and with more labor and investment, produces more per acre relative to the land's natural fertility. But this advantage in agricultural output is rarely much more than proportional to the extra labor and investment. In farming, the rich country's labor isn't always that much more productive than the poor country's — or at least never as dramatically more productive as it is in manufacturing. As a result, the grain from a wealthy country won't always be cheaper at market than grain from a poorer one (assuming equal quality). The grain of Poland, for instance, is just as cheap as the grain of France, despite France's far greater wealth and development. French grain, in the main grain-producing regions, is fully as good and roughly the same price as English grain — even though France is arguably less prosperous than England. English farmland is better cultivated than French, and French farmland is said to be much better cultivated than Polish. But even though the poorer country, with its inferior farming methods, can more or less match the richer country in grain prices and quality, it can't begin to compete in manufacturing — at least not in the kinds of manufacturing that suit the richer country's climate and resources. French silks are better and cheaper than English ones, because silk manufacturing (at least with the high import duties on raw silk at the time) doesn't suit England's climate as well as France's. But English hardware and coarse woolens are incomparably superior to France's, and much cheaper at the same quality. Poland, meanwhile, is said to have barely any manufacturing at all, aside from the crude household production that no country can do without.

This enormous increase in output that the same number of workers can achieve through the division of labor comes down to three things: first, the improvement in each worker's skill and dexterity; second, the time saved by not having to switch between different types of work; and third, the invention of machines that make labor easier and allow one person to do the work of many.

First, improving a worker's dexterity naturally increases how much work he can do. And the division of labor, by reducing each person's job to one simple operation — making that operation his life's work — dramatically increases his dexterity. An ordinary blacksmith who's used to handling a hammer but has never made nails, if forced to try, could barely produce more than two or three hundred nails in a day — and bad ones at that. A smith who has some experience with nails, but whose main business lies elsewhere, can rarely make more than eight hundred or a thousand in a day, even working flat out. But I've seen boys under twenty who had never done anything but make nails, and when they pushed themselves, each of them could produce over two thousand three hundred nails in a day. Mind you, making a nail isn't even one of the simplest operations. The same person has to work the bellows, tend the fire, heat the iron, and forge every part of the nail — and when making the head, he has to switch tools. The operations involved in making a pin or a metal button are all much simpler than that, and the dexterity of someone who has done nothing else their whole life is usually far greater. The speed at which some of these manufacturing operations are performed would seem unbelievable to anyone who hadn't seen it firsthand.

Second, the advantage gained by saving the time normally lost in switching between different types of work is much greater than you'd first think. It's hard to move quickly from one kind of work to another when they're done in different places with completely different tools. A rural weaver who also farms a small plot must waste a lot of time going back and forth between his loom and his field. Even when two tasks can be done in the same workshop, the time lost in switching is still significant. A person typically dawdles a bit when shifting from one type of work to another. When he starts the new task, he's rarely fully focused — his mind, as they say, isn't in it yet, and for a while he's more or less going through the motions rather than really working. This habit of dawdling and half-hearted effort, which naturally develops in any rural worker who has to change tasks and tools every half hour and use his hands in twenty different ways almost every day, makes him consistently sluggish and lazy — incapable of any intense effort even when the situation demands it. So quite apart from his lack of specialized skill, this constant switching alone significantly reduces how much work he can get done.

Third and finally, everyone can see how much machinery helps to make labor easier and more efficient. I hardly need to give examples. But I will point out that the invention of these labor-saving machines seems itself to have been driven by the division of labor. People are far more likely to discover quicker and easier ways of doing something when their entire attention is focused on that one task, rather than scattered across many different things. And the division of labor naturally focuses each worker's attention on one very simple task. So it makes sense that sooner or later, someone working in each specialized branch of production would figure out easier and faster methods — wherever the nature of the work allows for improvement. In fact, many of the machines used in the most subdivided industries were originally invented by ordinary workers who, being employed in some very simple operation, naturally thought about how to do it more easily and quickly. Anyone who has spent much time visiting these factories has probably been shown clever little machines invented by the workers themselves to speed up their particular part of the process. In the early steam engines, for example, a boy was constantly employed to open and shut a valve connecting the boiler to the cylinder, depending on whether the piston was going up or coming down. One of these boys, who would rather have been playing with his friends, noticed that by tying a string from the valve handle to another part of the machine, the valve would open and shut by itself — freeing him to go play. One of the greatest improvements ever made to the steam engine was, in this way, the discovery of a boy who wanted to save himself some work.

Not all improvements in machinery, of course, have come from the people who use the machines. Many have been made by specialized machine-makers, once building machines became its own trade. And some have come from the people we call philosophers or theorists — people whose job isn't to make anything, but to observe everything, and who are therefore often able to combine the properties of very different and seemingly unrelated things. As society advances, philosophy and theoretical inquiry become, like every other occupation, the principal trade of a particular class of people. And like every other trade, it gets subdivided into many different branches, each one the specialty of a particular group of thinkers. This specialization within philosophy, just as in every other field, increases expertise and saves time. Each person becomes more skilled in their own branch, more total work gets done, and the sum of human knowledge grows considerably as a result.

It's this massive multiplication of output across all the different crafts and industries — the result of dividing labor — that creates, in a well-governed society, a general prosperity that reaches down to the lowest ranks of the people. Every worker produces far more of his own product than he personally needs. And since every other worker is in the same situation, each person can exchange a large quantity of his own goods for a large quantity of theirs — or, what amounts to the same thing, for the price of a large quantity of theirs. He supplies them generously with what they need, and they return the favor just as generously. A general abundance spreads through every level of society.

Consider the everyday possessions of the most common laborer in a prosperous, civilized country, and you'll realize that the number of people whose work contributed some small part to providing those possessions is beyond counting. Take the wool coat he wears, for example — as rough and plain as it may look, it's the product of the combined labor of a huge number of workers. The shepherd, the wool sorter, the wool comber, the dyer, the spinner, the weaver, the cloth finisher, the dresser, and many others all have to contribute their different skills just to produce this one humble garment. And then think of the merchants and carriers who transported materials between these workers, who often live far apart! Think of all the trade and shipping involved — the shipbuilders, sailors, sailmakers, ropemakers — needed just to bring together the various dyes used by the dyer, which often come from the remotest corners of the world. And what about the labor needed to produce the tools these workers use? Leaving aside complicated equipment like the sailor's ship, the cloth finisher's mill, or even the weaver's loom, just consider what it takes to make something as simple as the shears the shepherd uses to clip the wool. The miner, the furnace builder, the lumberjack, the charcoal burner, the brickmaker, the bricklayer, the furnace workers, the millwright, the forger, the blacksmith — all of them have to contribute their skills just to produce that one simple tool.

If we examined in the same way every other part of his clothing and household possessions — the plain linen shirt on his back, the shoes on his feet, the bed he sleeps in and all its parts, the kitchen stove where he cooks his food, the coal he burns (dug from deep underground and perhaps transported over long distances by sea and land), all his kitchen utensils, his table, his knives and forks, the ceramic or pewter plates he eats from, the different workers who prepared his bread and his beer, the glass window that lets in warmth and light while keeping out wind and rain (along with all the knowledge and craft needed to produce that beautiful and essential invention, without which the northern parts of the world could scarcely offer a comfortable home), together with the tools used by all the different workers who made all of these things — if we examine all of this, I say, and consider the staggering variety of labor involved in each item, we'll see that without the help and cooperation of many thousands of people, even the most ordinary person in a civilized country could not be supplied with what we mistakenly think of as his simple, easy way of living. Compared with the extravagant luxury of the wealthy, his lifestyle certainly looks simple and easy. But it may well be true that the lifestyle of a European prince does not exceed that of a hardworking, thrifty peasant by as great a margin as the peasant's lifestyle exceeds that of many an African king — the absolute ruler of ten thousand people living without any of these advantages.

Chapter II: Of the Principle Which Gives Occasion to the Division of Labor

The division of labor, from which so many advantages flow, is not originally the product of any human wisdom that foresees and plans the general prosperity it creates. It is the necessary — though very slow and gradual — result of a certain built-in human tendency that has no such grand purpose in mind: the tendency to trade, barter, and exchange one thing for another.

Whether this tendency is simply one of those basic features of human nature that can't be explained any further, or whether — as seems more likely — it's a natural consequence of our ability to reason and speak, isn't something we need to settle here. What matters is that it's universal among humans, and found in no other species. Animals show no sign of this or any other kind of contract. Two greyhounds chasing the same hare sometimes appear to be working together. Each one turns the hare toward the other, or tries to intercept it when the other drives it his way. But this isn't the result of any agreement. It's just the accidental alignment of their instincts at that particular moment. Nobody ever saw a dog make a fair and deliberate trade of one bone for another with another dog. Nobody ever saw one animal use gestures or cries to communicate to another: "This is mine, that's yours; I'll give you this if you give me that." When an animal wants something from a person or from another animal, it has no way of persuading except by winning the favor of whoever has what it needs. A puppy fawns on its mother. A spaniel uses a thousand little tricks to catch the attention of its master at the dinner table when it wants to be fed.

Humans sometimes use the same tactics. When a person has no other way of getting others to do what he wants, he'll try every kind of flattering, servile attention to win their goodwill. But he doesn't have time to do this for every interaction. In civilized society, he constantly needs the help and cooperation of large numbers of people, while his entire lifetime is barely enough to earn the close friendship of a handful. In almost every other species, an animal that reaches maturity is completely independent and has no need for any other creature. But a human being almost constantly needs the help of others, and it's pointless to expect that help purely from their generosity. He's far more likely to get what he needs if he can appeal to their self-interest — if he can show them that doing what he wants is to their own advantage. That's what anyone who offers a deal is really saying: "Give me what I want, and you'll get what you want." That's the meaning behind every offer of exchange. And this is how we actually obtain the vast majority of the good things we need from one another.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our own needs, but of their advantages.

Nobody but a beggar depends mainly on the charity of other people. And even a beggar doesn't depend on it entirely. The generosity of kind-hearted people does supply the whole basis of his support. But even though this generosity ultimately provides him with everything he needs to live, it can't always deliver those things exactly when he needs them. Most of his day-to-day needs are met the same way everyone else's are — through deals, barter, and purchase. With money that one person gives him, he buys food. Old clothes that another person gives him, he trades for different clothes that fit him better, or for lodging, or for food, or for money that can buy any of those things as the need arises.

Just as it's through deals, barter, and purchase that we get most of what we need from one another, it's this same trading instinct that originally gives rise to the division of labor. In a tribe of hunters or shepherds, suppose one person makes bows and arrows with more skill and speed than anyone else. He frequently trades them with his companions for cattle or venison. Eventually he realizes that he can get more cattle and venison this way than if he went out hunting himself. So out of self-interest, making bows and arrows becomes his main occupation, and he becomes a kind of weapons-maker. Another person excels at building the frames and coverings for their portable shelters. He gets used to doing this for his neighbors, who pay him back with cattle and venison, until he finds it's in his interest to devote himself entirely to this work and become a kind of carpenter. In the same way, a third person becomes a metalworker; a fourth, a leather-worker or hide-tanner — the main source of clothing in pre-agricultural societies. And so the certainty of being able to trade whatever surplus his own labor produces — above and beyond what he personally consumes — for whatever products of other people's labor he might need, encourages every person to specialize in one occupation and to develop whatever talent or ability he has for that particular line of work.

The natural differences in talent between people are, in reality, much smaller than we tend to think. The very different abilities that seem to distinguish people in different professions, once they've grown up, are in many cases not so much the cause of the division of labor as its effect. The difference between the most unlike characters — between a philosopher and a street porter, for example — seems to come not so much from nature as from habit, custom, and education. When they came into the world, and for the first six or eight years of life, they were probably very much alike. Neither their parents nor their playmates could see any significant difference between them. Around that age, or soon after, they start being channeled into very different occupations. The gap in their abilities starts to become noticeable and widens over time, until eventually the philosopher's vanity leads him to believe there was barely any resemblance to begin with. But without the instinct to trade, barter, and exchange, every person would have had to produce for himself every necessity and comfort of life. Everyone would have had the same duties and the same work, and there could have been no differences in occupation — which alone could give rise to any great differences in talent.

Just as this trading instinct creates the remarkable difference in talents we see among people of different professions, it also makes those differences useful. Many breeds of animals, all acknowledged to be of the same species, show far more dramatic natural variation in ability than what exists among humans before custom and education take effect. A philosopher is naturally not half as different from a street porter, in terms of innate ability and temperament, as a mastiff is from a greyhound, or a greyhound from a spaniel, or a spaniel from a sheepdog. Yet these very different breeds of dog, despite all being the same species, are barely any use to one another. The mastiff's strength gets no help from the greyhound's speed, or the spaniel's cleverness, or the sheepdog's trainability. Their different abilities and talents, for lack of any power or instinct to trade and exchange, can't be pooled together, and they don't contribute at all to the welfare of the species as a whole. Each animal must still fend for itself, separately and independently, gaining no advantage from the variety of talents nature has distributed among its fellows. Among humans, by contrast, the most different kinds of ability are useful to one another. Through the universal tendency to trade, barter, and exchange, the different products of each person's talents are brought together, as it were, into a common pool, where anyone can acquire whatever part of other people's output he needs.

Chapter III: That the Division of Labor Is Limited by the Extent of the Market

Since it's the ability to exchange that gives rise to the division of labor, the extent of that division must always be limited by the extent of that ability — or in other words, by the size of the market. When the market is very small, no one has any incentive to specialize in a single occupation, because there's no way to trade all the surplus output of his own labor (beyond what he personally consumes) for the products of other people's labor that he needs.

There are some kinds of work, even of the humblest sort, that can only be carried on in a large town. A porter, for example, can find work and make a living nowhere else. A village is far too small a world for him. Even an ordinary market town can barely keep him busy full-time. In the scattered homesteads and tiny villages spread across a country as remote as the Scottish Highlands, every farmer has to be his own butcher, baker, and brewer. In places like that, you can hardly expect to find even a blacksmith, a carpenter, or a mason within twenty miles of another in the same trade. The isolated families living eight or ten miles from the nearest specialist have to learn to handle a great many small jobs themselves — the kind of work that people in more populated areas would hire out in a heartbeat.

Rural workers are almost everywhere forced to dabble in all the different branches of work that use similar materials. A country carpenter does every kind of woodwork: he's not just a carpenter, but a cabinetmaker, a wood carver, a wheelwright, a plow-maker, and a wagon builder. A country blacksmith's work is even more varied. It would be impossible to make a living as a specialized nail-maker in the remote inland parts of the Scottish Highlands. Such a worker, making a thousand nails a day over three hundred working days, would produce three hundred thousand nails a year. But in such an isolated area, it would be impossible to sell even one thousand — that is, even one day's worth of output in an entire year.

Water transportation opens up a far larger market for every kind of industry than land transportation alone can provide. So it's on the seacoast and along the banks of navigable rivers that industry naturally begins to specialize and improve, and those improvements often don't reach the interior of the country until much later.

Consider this comparison: a heavy wagon drawn by eight horses and managed by two men can haul about four tons of goods between London and Edinburgh in roughly six weeks (there and back). In about the same time, a ship crewed by six or eight men, sailing between London and the port of Leith, frequently carries two hundred tons of goods back and forth. Six or eight men using water transport, then, can move the same quantity of goods as fifty wagons attended by a hundred men and pulled by four hundred horses. For those two hundred tons hauled overland, someone has to pay for the upkeep of a hundred men for three weeks, plus the maintenance and wear-and-tear on four hundred horses and fifty large wagons. For the same goods shipped by water, the cost is just the upkeep of six or eight men and the wear-and-tear on a two-hundred-ton ship, plus the slightly higher insurance premium for sea transport.

If the only connection between London and Edinburgh were by road, the only goods worth shipping would be those valuable enough relative to their weight to justify the expense. The two cities could carry on only a fraction of the trade they currently enjoy, and would give only a fraction of the boost they currently give to each other's industries. There could be little or no trade at all between truly distant parts of the world. What kind of goods could possibly justify the cost of overland shipping between London and Calcutta? And even if there were goods precious enough, how could they be safely transported through the territories of so many hostile nations? Yet these two cities currently carry on a thriving trade with each other, and by providing mutual markets, give tremendous encouragement to each other's industries.

Given these advantages of water transportation, it makes sense that the first advances in arts and industry should appear where waterways open up the whole world as a market. These advances are always much slower to reach the inland parts of a country. The interior can, for a long time, sell most of its goods only to the surrounding region that separates it from the coast and the major rivers. The size of its market, and therefore the pace of its economic development, is limited by the wealth and population of that surrounding area. In our North American colonies, for example, settlements have consistently followed either the seacoast or the banks of navigable rivers, and have rarely extended any significant distance from both.

The nations that, according to the best historical evidence, appear to have been the first to develop advanced civilizations were those living around the coast of the Mediterranean Sea. That sea — by far the largest inlet in the known world — has no tides, and therefore no waves except those driven by wind. Its smooth surface, its many islands, and the closeness of its surrounding shores made it extremely favorable for the world's earliest sailors. In those days, before the compass, people were afraid to lose sight of the coast, and before the art of shipbuilding matured, they didn't dare face the rough waves of the open ocean. To sail beyond the Pillars of Hercules — that is, out of the Straits of Gibraltar — was long considered one of the most terrifying feats of navigation in the ancient world. Even the Phoenicians and Carthaginians, the most skilled navigators and shipbuilders of antiquity, were slow to attempt it, and for a long time they were the only people who did.

Of all the countries around the Mediterranean, Egypt seems to have been the first to develop agriculture and manufacturing to any significant degree. Upper Egypt extends no more than a few miles from the Nile, and in Lower Egypt, that great river splits into many channels which, with a little engineering, provided water transportation not only between all the major towns but between all the notable villages, and even many individual farms — much like the Rhine and the Meuse rivers do in the Netherlands today. The extent and ease of this inland water network was probably one of the main reasons Egypt developed so early.

Similarly, agriculture and manufacturing appear to have very ancient origins in the provinces of Bengal in India and in several eastern provinces of China — though the full extent of this antiquity isn't confirmed by any historical records that we in the West can fully trust. In Bengal, the Ganges and several other great rivers create a network of navigable waterways, just as the Nile does in Egypt. In the eastern provinces of China, too, several great rivers and their branches form an extensive system of canals that connect with one another, providing an inland water network far more extensive than that of the Nile or the Ganges — perhaps more extensive than both of them combined. It's worth noting that neither the ancient Egyptians, nor the Indians, nor the Chinese encouraged foreign trade, but all seem to have derived their great prosperity from this inland water transportation alone.

All the interior parts of Africa, and all of Asia that lies any considerable distance north of the Black Sea and the Caspian Sea — ancient Scythia, modern Tartary and Siberia — seem to have been in the same undeveloped state throughout all recorded history. The sea north of Tartary is the frozen Arctic Ocean, which is useless for navigation. And though some of the world's greatest rivers flow through that region, they're too far apart to carry trade and communication across most of the territory. Africa has none of the great inlets that Europe and Asia enjoy — nothing like the Baltic and Adriatic seas in Europe, or the Mediterranean and Black seas shared by Europe and Asia, or the gulfs of Arabia, Persia, India, Bengal, and Siam in Asia — to carry ocean trade deep into the interior of that vast continent. And Africa's great rivers are too far apart from one another to support much inland navigation.

Furthermore, the trade that any nation can carry on by means of a river that doesn't branch into a network of channels and that passes through another country's territory before reaching the sea can never amount to much. The nations controlling that downstream territory can always block the upper country's access to the ocean. The navigation of the Danube, for example, is of very little use to Bavaria, Austria, and Hungary compared with what it would be if any one of them controlled the river's entire course all the way to where it empties into the Black Sea.

Chapter IV: Of the Origin and Use of Money

Once the division of labor is fully established, a person's own labor can supply only a tiny fraction of his needs. He meets the vast majority of them by exchanging whatever surplus his labor produces — above and beyond what he personally consumes — for whatever products of other people's labor he requires. Every person, in effect, lives by trading, becoming in some measure a merchant. And society itself becomes what we might properly call a commercial society.

But when the division of labor first began, this ability to exchange must have been constantly frustrated and hampered. Suppose one person has more of a certain commodity than he needs, while another has less. The first would naturally want to sell the surplus, and the second to buy it. But if the second person happens to have nothing the first one wants, no exchange can take place. The butcher has more meat in his shop than he can eat himself, and the brewer and baker would each be happy to buy some of it. But all they can offer in exchange is their own beer and bread — and the butcher already has all the bread and beer he needs right now. No deal can be struck. He can't be their supplier, and they can't be his customers. They're all worse off as a result.

To avoid this kind of deadlock, every sensible person throughout history, from the very beginning of the division of labor, must have naturally tried to keep on hand — in addition to whatever his own trade produced — a certain quantity of some commodity that he figured most other people would accept in exchange for their goods.

Many different commodities were probably tried out for this purpose at various times. In the earliest stages of society, cattle are said to have served as the common medium of exchange. Inconvenient as that must have been, we find that in ancient times, things were often valued by how many cattle they could be traded for. The armor of Diomedes, Homer tells us, cost only nine oxen, while the armor of Glaucus cost a hundred. Salt is said to be the standard medium of exchange in Abyssinia. Certain shells serve this purpose in parts of coastal India. Dried cod is the currency in Newfoundland. Tobacco plays this role in Virginia. Sugar does in some of our West Indian colonies. Hides or dressed leather fill this function in other places. And there is even today a village in Scotland where, I'm told, a worker sometimes brings nails instead of money to the baker's shop or the pub.

In every country, however, people eventually settled on metals over every other commodity — for irresistible reasons. Metals are among the least perishable of all goods, so they can be stored with almost no loss. But more importantly, they can be divided into any number of pieces without losing value, since the pieces can easily be melted back together. No other equally durable commodity has this property, and it's what makes metals uniquely suited to serve as the medium of exchange.

Consider the problem: a man who wants to buy salt but has only cattle to trade must buy salt in quantities equal to the value of a whole ox or a whole sheep at a time. He can rarely buy less, because his unit of payment can't easily be divided without loss. And if he wants more, he has to buy double or triple the amount — the value of two or three oxen, or two or three sheep. But if he has metal to trade instead of livestock, he can easily match the quantity of metal to the exact quantity of salt he needs at that moment.

Different nations have used different metals for this purpose. Iron was the standard currency among the ancient Spartans. Copper served the ancient Romans. Gold and silver have been used by all wealthy, commercial nations.

Originally, these metals seem to have been used in their raw form — plain bars without any stamp or marking. Pliny tells us, on the authority of the ancient historian Timaeus, that until the reign of Servius Tullius, the Romans had no coined money at all. They used unstamped bars of copper to buy whatever they needed. These crude bars, at that time, served as money.

But using metals in this raw state came with two serious problems: the difficulty of weighing them, and the difficulty of testing their purity. With precious metals, where a small difference in quantity means a big difference in value, weighing accurately requires very precise scales. Weighing gold is a particularly delicate operation. With cheaper metals, a small error matters less, so less precision is needed. But even so, imagine how tedious it would be if every time a poor man needed to buy or sell a penny's worth of goods, he had to weigh out the metal on a scale.

Testing purity — assaying — is even harder, even more time-consuming, and unless you actually melt a sample of the metal with the right chemical agents, any conclusion you draw is highly uncertain. Before coined money existed, unless people went through this tedious process, they were constantly vulnerable to fraud: receiving, in exchange for their goods, an adulterated mixture of the cheapest materials, disguised to look like pure silver or copper. To prevent these abuses, make exchange easier, and thereby encourage all kinds of industry and commerce, every country that has made any significant economic progress has found it necessary to stamp certain quantities of commonly used metals with an official public mark. This is the origin of coined money and of the public institutions called mints — which serve exactly the same purpose as the official inspectors who stamp wool and linen cloth with marks certifying quality. Both exist to guarantee, through a public stamp, the quantity and consistent quality of goods brought to market.

The earliest public stamps on metals seem, in many cases, to have been designed to verify only the most important and hardest thing to check: the fineness (or purity) of the metal. These stamps were like the sterling mark still used today on silver plate and bars, or the Spanish mark sometimes stamped on gold ingots — struck on only one side of the piece and not covering the whole surface, certifying purity but not weight.

In the Bible, Abraham weighs out four hundred shekels of silver to pay Ephron for the field of Machpelah. The shekels are described as "current money of the merchant," yet they're accepted by weight, not by count — the same way gold ingots and silver bars are handled today. The revenues of the ancient Saxon kings of England are said to have been paid not in money but in kind — in food and provisions of all sorts. William the Conqueror introduced the practice of paying in money, but for a long time that money was still accepted at the treasury by weight rather than by count.

The inconvenience of having to weigh metals for every transaction eventually led to the creation of coins whose stamp covered both sides of the piece — and sometimes the edges too — guaranteeing not just the purity but also the weight of the metal. Such coins could be accepted by count, as they are today, without the hassle of weighing.

The names of these coins originally described the actual weight of metal they contained. In the time of Servius Tullius, who first coined money in Rome, the Roman As, or Pondo, contained a Roman pound of good copper. It was divided, like our Troy pound, into twelve ounces, each containing a real ounce of copper. The English pound sterling, in the time of Edward I, contained a Tower pound of silver of a known purity. (The Tower pound was a bit more than the Roman pound and a bit less than the Troy pound. The Troy pound didn't enter the English mint until the reign of Henry VIII.) The French livre, in the time of Charlemagne, contained a Troy pound of silver of a known fineness. The fair at Troyes, in the Champagne region, was at that time attended by merchants from all over Europe, so its weights and measures were widely known and respected. The Scottish money pound, from the time of Alexander I to Robert Bruce, contained a pound of silver of the same weight and fineness as the English pound sterling. English, French, and Scottish pennies all originally contained an actual pennyweight of silver — one-twentieth of an ounce, one-two-hundred-and-fortieth of a pound. The shilling, too, seems to have originally been a unit of weight. An old statute from the reign of Henry III states that when wheat is at twelve shillings per quarter, a farthing's worth of bread should weigh eleven shillings and fourpence.

The relationship between the shilling and the penny on one hand, or the pound on the other, hasn't always been as stable as the relationship between the penny and the pound. During the first dynasty of French kings, the French sou (or shilling) contained five, twelve, twenty, or forty pennies at different times. Among the Anglo-Saxons, a shilling sometimes contained only five pennies, and it probably varied among them as much as among their neighbors, the Franks. But from the time of Charlemagne in France and William the Conqueror in England, the ratio between pound, shilling, and penny has been consistently the same as it is today — even though the actual value of each unit has changed dramatically.

Here's why. In every country in the world, I believe, the greed and dishonesty of rulers — abusing the trust of their subjects — have gradually reduced the real amount of metal originally contained in their coins. The Roman As, by the later years of the Republic, had been reduced to one twenty-fourth of its original value: instead of weighing a pound, it weighed only half an ounce. The English pound and penny now contain only about a third of their original metal. The Scottish pound and penny, about a thirty-sixth. The French pound and penny, about a sixty-sixth.

Through these debasements, rulers were able to appear to pay off their debts and meet their obligations with less silver than would otherwise have been required. But it was only an appearance. Their creditors were actually cheated out of part of what they were owed. And every other debtor in the country got the same benefit — they could repay loans made in the old, heavier currency with the same face value of the new, lighter coins. These operations have always been great for borrowers and devastating for lenders, and have sometimes caused a greater upheaval in the fortunes of ordinary people than even a major public catastrophe could have produced.

This is how money came to be, in all civilized nations, the universal instrument of trade — the medium through which goods of all kinds are bought, sold, and exchanged for one another.

What rules do people naturally follow when exchanging goods, either for money or for each other? That's what I'll examine next. These rules determine what we might call the relative or exchangeable value of goods.

The word "value," it should be noted, has two very different meanings. Sometimes it refers to the usefulness of a particular object. Other times it refers to the purchasing power that owning that object gives you. The first can be called "value in use." The second, "value in exchange." And here's the strange thing: the things with the greatest value in use often have little or no value in exchange, and vice versa.

Nothing is more useful than water. But water will buy almost nothing — you can hardly get anything in exchange for it. A diamond, on the other hand, has almost no practical use. But you can trade a diamond for an enormous quantity of other goods.

To investigate the principles that govern the exchangeable value of goods, I'll try to explain three things:

First, what is the real measure of exchangeable value — in other words, what actually determines the real price of all goods?

Second, what are the different components that make up this real price?

And third, what circumstances sometimes push these components above or below their natural or ordinary level — or in other words, what causes the market price (the actual price of goods) to sometimes diverge from what we might call their natural price?

I'll do my best to explain these three subjects as fully and clearly as I can in the three chapters that follow. And I must sincerely ask for both the patience and the attention of the reader: patience to work through details that may sometimes seem unnecessarily drawn out, and attention to follow reasoning that may, even after my best efforts to make it clear, still seem somewhat obscure in places. I am always willing to risk being a bit tedious in order to be sure I'm being clear. And even after taking every possible care to be clear, some murkiness may still remain — given that the subject is, by its very nature, deeply abstract.

Chapter V: Of the Real and Nominal Price of Commodities

Every person is rich or poor depending on how well they can afford the necessities, comforts, and pleasures of life. But once the division of labor has fully taken hold, only a tiny fraction of those things comes from your own work. The vast majority must come from other people's labor — and so you're rich or poor depending on how much of other people's labor you can command, or afford to buy. The value of any commodity, then, to someone who doesn't plan to use it personally but wants to trade it for other things, equals the amount of labor it lets him buy or command. Labor is the real measure of the exchangeable value of all commodities.

The real price of everything — what it truly costs the person who wants to acquire it — is the effort and trouble of getting it. And what anything is really worth to someone who already has it and wants to trade it away, is the effort and trouble it can save him, and impose on other people instead. What we buy with money or goods is purchased by labor, just as much as what we get through our own physical toil. Money and goods simply save us that toil. They contain the value of a certain quantity of labor, which we exchange for what's supposed to contain an equal quantity. Labor was the first price, the original currency paid for all things. It was not gold or silver, but labor, that originally purchased all the wealth of the world. And its value, to those who own it and want to trade it for something new, is precisely equal to the amount of labor it allows them to buy or command.

Wealth, as Thomas Hobbes says, is power. But someone who inherits or acquires a great fortune doesn't necessarily gain any political power, whether civil or military. His fortune might give him the means to acquire such power, but merely possessing it doesn't automatically hand him any. The power that wealth immediately and directly gives you is purchasing power — a certain command over all the labor, or over all the products of labor, currently available in the market. Your fortune is larger or smaller in exact proportion to this power — that is, in proportion to the amount of other people's labor, or the products of that labor, it allows you to buy or command. The exchangeable value of anything must always be precisely equal to the extent of this power it gives its owner.

But even though labor is the real measure of the exchangeable value of all commodities, it's not how we normally estimate their value. It's often hard to determine the ratio between two different quantities of labor. Time spent at two different kinds of work won't always tell you the whole story. You also have to factor in the different levels of hardship endured and skill required. There may be more labor in an hour of backbreaking work than in two hours of easy work, or more in an hour applying a trade that took ten years to learn than in a month of ordinary, straightforward work. But there's no precise way to measure hardship or skill. In practice, when people exchange the products of different kinds of labor for one another, they do make some allowance for both. This isn't adjusted by any precise measure, however, but by the haggling and bargaining of the market — a kind of rough equality that, while not exact, is good enough for the practical business of everyday life.

On top of that, any commodity is more often exchanged for and compared with other commodities than with labor directly. So it's more natural to estimate its exchangeable value by the quantity of some other commodity rather than by the labor it could buy. Most people also understand what a certain quantity of a particular commodity means better than what a certain quantity of labor means. One is a plain, tangible object; the other is an abstract concept — one that can be explained clearly enough, but isn't as naturally intuitive.

But when barter ends and money becomes the standard medium of exchange, every commodity gets traded for money more often than for anything else. The butcher rarely brings his beef or mutton directly to the baker or the brewer to swap for bread or beer. Instead, he takes it to the market, sells it for money, and then uses that money to buy bread and beer. The amount of money he gets for his meat also determines how much bread and beer he can buy afterward. So it's more natural and obvious for him to measure the value of his meat by the amount of money he gets for it — the commodity he immediately exchanges it for — rather than by the bread and beer he could eventually get with an extra step. He'd rather say his meat is worth three or four pence a pound than say it's worth three or four pounds of bread, or three or four quarts of small beer. And that's why the exchangeable value of every commodity gets measured in money more often than in labor or any other commodity.

Gold and silver, though, like every other commodity, fluctuate in value. They're sometimes cheaper and sometimes more expensive, sometimes easier and sometimes harder to obtain. The amount of labor that any particular quantity of gold or silver can buy depends on the productivity of the mines known at the time. The discovery of the incredibly rich mines of the Americas reduced the value of gold and silver in Europe during the sixteenth century to about a third of what it had been before. Since it cost less labor to bring those metals from the mine to the market, they could also buy less labor once they got there. This was perhaps the greatest revolution in their value, but it's by no means the only one recorded in history. Just as a unit of measurement like a "foot" based on an actual human foot — which varies from person to person — can never be a perfectly accurate way to measure other things, a commodity that constantly changes in its own value can never be an accurate way to measure the value of other commodities. Equal quantities of labor, at all times and in all places, can be said to be of equal value to the worker. In his normal state of health, strength, and spirits, with his ordinary level of skill and ability, he must always give up the same portion of his ease, his liberty, and his happiness. The price he pays is always the same, no matter how many goods he receives in return. Sometimes those goods amount to more, sometimes to less — but it's their value that varies, not the value of the labor that buys them. At all times and in all places, what's expensive is what's hard to get or costs a lot of labor to acquire, and what's cheap is what's easy to come by or takes very little labor. Labor alone, never varying in its own value, is the ultimate and real standard by which the value of all commodities can be estimated and compared, at all times and in all places. It is their real price; money is only their nominal price.

But even though equal quantities of labor are always of equal value to the worker, they appear to the employer to be sometimes worth more and sometimes less. He buys them sometimes with a larger and sometimes with a smaller quantity of goods, so to him, the price of labor seems to fluctuate like the price of everything else. It seems expensive in one case and cheap in the other. In reality, though, it's the goods that are cheap in one case and expensive in the other.

In this everyday sense, then, labor — like commodities — can be said to have both a real price and a nominal price. Its real price is the quantity of necessities and comforts of life given in exchange for it. Its nominal price is the amount of money. A worker is rich or poor, well or badly paid, in proportion to the real price of his labor, not the nominal price.

The distinction between the real and nominal price of commodities and labor isn't just academic theory — it can sometimes matter a great deal in practice. The same real price is always the same value. But because of fluctuations in the value of gold and silver, the same nominal price can represent very different values at different times. So when a landed estate is sold with a permanent rent attached to it, and the goal is for that rent to always have the same value, it matters a lot to the family receiving it that the rent not be set as a fixed sum of money. A fixed money rent would be vulnerable to two kinds of changes: first, the varying amounts of gold and silver contained in coins of the same name at different times (through debasement), and second, the varying value of equal quantities of gold and silver at different times.

Rulers and governments have frequently found it in their short-term interest to reduce the amount of pure metal in their coins, but they've rarely seen any reason to increase it. The metal content of coins in virtually every nation has, accordingly, been almost continually shrinking and hardly ever growing. Such changes, therefore, almost always tend to reduce the value of a money rent.

The discovery of the American mines reduced the value of gold and silver in Europe. This decline is widely believed — though I think without any definitive proof — to still be happening gradually, and it's likely to continue for a long time. On that assumption, such changes are more likely to reduce than to increase the value of a money rent, even if the rent is specified not in a particular number of coins of a given denomination (so many pounds sterling, for example), but in a set number of ounces of either pure silver or silver of a certain standard.

Rents that have been set in grain have held their value much better than those set in money, even where the denomination of the coinage hasn't changed. Under a statute from the reign of Elizabeth I, a third of the rent on all college leases was required to be reserved in grain — paid either in kind or at current market prices. The income from this grain portion of the rent, though originally just a third of the total, has in modern times, according to the legal scholar William Blackstone, typically grown to nearly double what comes from the other two-thirds combined. The old money rents of the colleges must have shrunk to roughly a fourth of their original value — or are worth little more than a fourth of the grain they once could have bought. Since the reign of Philip and Mary, the English coinage has undergone little or no change, and the same number of pounds, shillings, and pence have contained very nearly the same amount of pure silver. So this decline in the value of the colleges' money rents has come entirely from the decline in the value of silver itself.

When the falling value of silver is combined with a reduction in the amount of silver actually contained in coins of the same name, the loss is frequently even greater. In Scotland, where the coinage has undergone much bigger changes than in England, and in France, where it has changed even more dramatically than in Scotland, some ancient rents that were originally quite valuable have been reduced in this way to almost nothing.

Equal quantities of labor will, across long stretches of time, be purchased more closely with equal quantities of grain — the staple food of the worker — than with equal quantities of gold and silver, or perhaps any other commodity. Equal quantities of grain will therefore, over long periods, be more nearly of the same real value — that is, they'll enable the owner to buy or command roughly the same amount of other people's labor. They'll do this more closely than equal quantities of almost any other commodity, though I should note that even equal quantities of grain won't do it exactly. The cost of a worker's subsistence — the real price of labor — as I'll try to show later, varies quite a bit depending on circumstances. It's more generous in a society that's growing in wealth than in one that's standing still, and more generous in a stagnant society than in one that's declining. Still, at any particular time, any other commodity will buy more or less labor in proportion to how much food it can purchase at that time. So a rent reserved in grain is only subject to variations in how much labor a given quantity of grain can buy. But a rent reserved in any other commodity is subject to two kinds of variation: changes in how much labor a given quantity of grain can buy, and changes in how much grain a given quantity of that commodity can buy.

One important caveat, however: while the real value of a grain rent varies much less from century to century than a money rent, it varies much more from year to year. The money price of labor, as I'll try to show later, doesn't bounce around from year to year with the money price of grain. Instead, it seems to adjust to the average or ordinary price of this essential foodstuff, not to its temporary or occasional price. And the average price of grain is itself governed by the value of silver — by the richness or barrenness of the mines that supply silver to the market, or in other words, by how much labor (and consequently how much grain) must be spent to bring a given quantity of silver from the mine to market. The value of silver, though it sometimes changes dramatically from century to century, rarely changes much from year to year, and often stays the same or nearly the same for fifty or even a hundred years at a stretch. The ordinary money price of grain may therefore stay the same for that long, and along with it, the money price of labor — provided the society otherwise remains in roughly the same condition. Meanwhile, the temporary price of grain may frequently double from one year to the next, fluctuating, for example, from twenty-five to fifty shillings per quarter. When grain reaches the higher price, not only the nominal but the real value of a grain rent doubles — it commands double the quantity of labor or most other commodities, since the money price of labor and of most other things stays the same through all these fluctuations.

Labor, then, is clearly the only universal and truly accurate measure of value — the only standard by which we can compare the values of different commodities across all times and places. We can't estimate the real value of different commodities from century to century by the quantities of silver they sold for. We can't estimate it from year to year by the quantities of grain. But by quantities of labor, we can estimate it with the greatest accuracy, both across centuries and across years. From century to century, grain is a better measure than silver, because over long periods, equal quantities of grain will command roughly the same quantity of labor more reliably than equal quantities of silver will. From year to year, however, silver is a better measure than grain, because equal quantities of silver will command roughly the same quantity of labor more reliably over short periods.

But while distinguishing between real and nominal price is useful for setting perpetual rents or even very long leases, it's not particularly helpful for buying and selling — the most common everyday transactions.

At any given time and place, the real and nominal prices of all commodities are exactly proportional to each other. The more or less money you get for a commodity in the London market, for example, the more or less labor it allows you to buy at that time and place. At the same time and place, then, money is a perfectly good measure of the real exchangeable value of all commodities. But only at the same time and place.

Across different locations, there's no consistent relationship between the real and money prices of commodities. Yet the merchant who ships goods from one place to another only needs to think about money prices — the difference between how much silver he pays for goods and how much silver he can sell them for. Half an ounce of silver in Canton, China, might command a greater quantity of both labor and the necessities and comforts of life than an ounce in London. A commodity selling for half an ounce of silver in Canton may therefore be really more expensive — of more real importance to its owner there — than a commodity selling for an ounce in London is to its owner there. But if a London merchant can buy something in Canton for half an ounce of silver and sell it in London for an ounce, he makes a hundred percent profit on the deal, just as surely as if an ounce of silver had exactly the same value in both places. It doesn't matter to him that half an ounce of silver in Canton would have given him command over more labor and more goods than an ounce can buy in London. An ounce in London will always buy him double what half an ounce would have bought in Canton, and that's all he cares about.

Since it's the nominal, or money, price of goods that ultimately determines whether purchases and sales are wise or foolish — and thereby governs almost all the commercial transactions of everyday life — it's no surprise that people pay far more attention to it than to the real price.

In a work like this one, however, it's sometimes useful to compare the different real values of a particular commodity at different times and places — that is, the different degrees of power over other people's labor that it gave to those who possessed it on different occasions. In that case, we need to compare not so much the different amounts of silver for which it typically sold, but the different amounts of labor those amounts of silver could have purchased. The going price of labor at distant times and places, however, can rarely be known with any precision. Grain prices, though they've been regularly recorded in only a few places, are generally better known and have been more frequently noted by historians and other writers. So we generally have to settle for grain prices — not because they're always in exact proportion to labor prices, but because they're the closest approximation we can usually get. I'll have occasion to make several comparisons of this kind later on.

As commerce has progressed, trading nations have found it convenient to mint coins from several different metals: gold for large payments, silver for medium-sized purchases, and copper or some other base metal for small ones. They have always, however, treated one of these metals as the primary measure of value over the others. This preference has generally gone to whichever metal they happened to start using first as their medium of exchange. Having begun using it as their standard when they had no other form of money, they've generally kept using it that way even after the original necessity passed.

The Romans are said to have used nothing but copper money until about five years before the First Punic War, when they first began minting silver coins. Copper, therefore, appears to have remained the standard measure of value throughout the Roman Republic. All Roman accounts seem to have been kept, and all property values calculated, in either Asses or Sestertii. The As was always a copper coin. The word Sestertius means "two and a half Asses." So even though the Sestertius was originally a silver coin, its value was still expressed in copper terms. In Rome, a person who owed a great deal of money was said to have a great deal of other people's copper.

The northern peoples who established themselves on the ruins of the Roman Empire seem to have had silver money from the very beginning of their settlements, and didn't know either gold or copper coins for several centuries afterward. There were silver coins in England during the Saxon period, but little gold was minted until the time of Edward III, and no copper until the reign of James I. In England, therefore — and I believe for the same reason in all other modern European nations — all accounts are kept and the value of all goods and estates is generally calculated in silver. When we want to express the size of someone's fortune, we rarely mention the number of guineas but rather the number of pounds sterling we suppose it would sell for.

Originally, in all countries, I believe, legal tender could only be made in the coin of whichever metal was considered the standard or measure of value. In England, gold was not accepted as legal tender for a long time after it was first minted into coins. The exchange rate between gold and silver coins wasn't fixed by any law or official decree but was left to the market to determine. If a debtor offered to pay in gold, the creditor could either refuse entirely or accept it at whatever gold valuation the two could agree on. Copper is currently not legal tender except for making change from the smaller silver coins. Under these conditions, the distinction between the standard metal and the non-standard metal was more than just a matter of naming.

Over time, as people became more familiar with using different metals as coins and better acquainted with the relative values of each, most countries found it convenient to fix this ratio officially — declaring by law, for example, that a guinea of a certain weight and fineness should exchange for twenty-one shillings, or be accepted as legal tender for a debt of that amount. Once such a fixed ratio is in place and stays in force, the distinction between the standard metal and the non-standard metal becomes little more than a technicality.

But whenever this official ratio changes, the distinction becomes — or at least seems to become — something more than a technicality again. If the official value of a guinea were lowered to twenty shillings or raised to twenty-two, the majority of payments, since most accounts and debts are expressed in silver, could still be made with the same amount of silver as before — but would require very different amounts of gold: more in one case, less in the other. Silver would appear more stable in value than gold. Silver would seem to measure the value of gold, rather than the other way around. The value of gold would seem to depend on how much silver it could exchange for, while the value of silver wouldn't seem to depend on the gold it could fetch. This appearance, however, would be entirely due to the custom of keeping accounts and expressing sums in silver rather than gold. One of Mr. Drummond's banknotes for twenty-five or fifty guineas would, after such a change, still be payable with twenty-five or fifty guineas, just as before. It would be payable with the same quantity of gold as before, but with very different quantities of silver. In paying such a note, gold would appear to be the more stable metal. Gold would seem to measure the value of silver, not the reverse. If the custom of keeping accounts and writing promissory notes in gold terms ever became general, then gold, not silver, would be considered the primary standard of value.

In reality, as long as any official ratio between the different metal coins remains in effect, the value of the most precious metal determines the value of the entire coinage. Twelve copper pence contain half a pound of copper — not the best quality — which, before being minted, is rarely worth more than seven pence in silver. But since the official rate specifies that twelve such pence exchange for one shilling, the market treats them as worth a shilling, and a shilling can always be had for them. Even before the recent reform of the British gold coinage, the gold coins in circulation — at least those in London and its vicinity — were generally less worn down below their official weight than most of the silver coins. Twenty-one worn and battered shillings were still considered equivalent to a guinea, which might also be worn and battered, but usually less so. The recent reforms have brought the gold coinage as close to its official standard weight as is probably possible for any nation's circulating currency, and the requirement to accept gold at public offices only by weight is likely to keep it that way, as long as that rule is enforced. The silver coinage, meanwhile, remains in the same worn and degraded state as before the gold reform. Yet in the market, twenty-one shillings of this degraded silver are still treated as worth one guinea of the excellent new gold.

The reform of the gold coinage has clearly raised the value of the silver coins that can be exchanged for it.

At the English mint, a pound weight of gold is coined into forty-four and a half guineas, which at twenty-one shillings per guinea equals forty-six pounds, fourteen shillings, and sixpence. An ounce of such gold coin is therefore worth 3 pounds, 17 shillings, and 10 1/2 pence in silver. In England, no fee or seigniorage is charged for minting. Anyone who brings a pound or an ounce of standard gold bullion to the mint gets back the same weight in gold coin, without any deduction. Three pounds, seventeen shillings, and ten and a half pence per ounce is therefore called the mint price of gold in England — the amount of gold coin the mint gives in return for standard gold bullion.

Before the gold coin reform, the market price of standard gold bullion had for many years been above 3 pounds 18 shillings, sometimes 3 pounds 19 shillings, and very often 4 pounds an ounce — and that sum, in the worn and degraded gold coins of the time, probably rarely contained more than an ounce of standard gold. Since the reform, the market price of standard gold bullion has rarely exceeded 3 pounds, 17 shillings, 7 pence an ounce. Before the reform, the market price was always above the mint price. Since the reform, the market price has been consistently below the mint price. And the market price is the same whether paid in gold or silver coin. The gold coin reform has therefore raised the value not only of the gold coinage but also of the silver coinage relative to gold bullion, and probably relative to all other commodities as well — though since the prices of most other commodities are influenced by so many factors, the rise in coin value relative to them may not be as clear or noticeable.

At the English mint, a pound weight of standard silver bullion is coined into sixty-two shillings, containing the same pound weight of standard silver. Five shillings and two pence per ounce is therefore the mint price of silver in England — the amount of silver coin the mint gives in return for standard silver bullion. Before the gold coin reform, the market price of standard silver bullion was, at various times, five shillings and four pence, five shillings and five pence, five shillings and six pence, five shillings and seven pence, and very often five shillings and eight pence per ounce. Five shillings and seven pence seems to have been the most common price. Since the gold reform, the market price of standard silver bullion has occasionally fallen to five shillings and three pence, five shillings and four pence, and five shillings and five pence per ounce, and has rarely gone above that last figure. So while the market price of silver bullion has fallen considerably since the gold reform, it still hasn't fallen as low as the mint price.

In the proportions between different metals in English coinage, copper is rated well above its real value, while silver is rated somewhat below. In the European market, and in the French and Dutch coinages, an ounce of fine gold exchanges for about fourteen ounces of fine silver. In the English coinage, it exchanges for about fifteen ounces — that is, for more silver than gold is worth according to the common European valuation. But just as the price of copper in bars isn't pushed up by the high valuation of copper in English coins, the price of silver in bullion isn't pushed down by the low valuation of silver in English coins. Silver bullion maintains its proper proportion to gold, for the same reason that copper bars maintain their proper proportion to silver.

When the silver coinage was reformed under William III, the price of silver bullion still remained somewhat above the mint price. John Locke attributed this to the permission to export silver bullion combined with the ban on exporting silver coins. This export permission, he argued, made demand for silver bullion greater than demand for silver coin. But surely the number of people who need silver coins for everyday buying and selling at home far exceeds those who need silver bullion for export or any other purpose. A similar permission to export gold bullion exists today, along with a similar ban on exporting gold coins — and yet the price of gold bullion has fallen below the mint price. The explanation is that in English coinage, silver was then (as now) undervalued relative to gold, and the gold coinage (which at that time wasn't thought to need any reform) governed the real value of the entire currency, just as it does now. Since the silver coin reform didn't bring the price of silver bullion down to the mint price back then, it's unlikely a similar reform would do so now.

If the silver coinage were brought back to its full standard weight, like the gold, a guinea would probably — at the current ratio — exchange for more silver in coin than it could buy in bullion. Since the silver coins would contain their full standard weight, there would be a profit in melting them down, selling the bullion for gold coin, and then exchanging that gold coin for more silver coin to melt down again. Some adjustment to the current ratio seems to be the only way to prevent this problem.

The problem might actually be smaller if silver were overvalued in the coinage by the same amount it's currently undervalued — provided it were also enacted that silver would not be legal tender for more than making change for a guinea, just as copper is currently not legal tender for more than making change for a shilling. No creditor could be cheated by the high valuation of silver in the coinage, just as no creditor is currently cheated by the high valuation of copper. Only the bankers would suffer from this rule. When there's a run on them, banks sometimes try to buy time by paying out in sixpences, and this regulation would prevent them from using that disreputable trick to delay immediate payment. They would consequently have to keep larger cash reserves at all times, which would no doubt be a considerable inconvenience to them, but would also be a considerable security for their creditors.

Three pounds, seventeen shillings, and ten and a half pence — the mint price of gold — certainly doesn't contain, even in our present excellent gold coinage, more than an ounce of standard gold. So you might think it shouldn't be able to purchase more than an ounce of standard bullion. But gold in coin form is more convenient than gold in bullion, and although minting is free in England, gold brought to the mint in bullion can rarely be returned as coin for several weeks. In the current backlog at the mint, it might take several months. This delay is effectively a small fee, making gold in coin somewhat more valuable than an equal amount of gold in bullion. If silver were valued in English coinage at its proper ratio to gold, the price of silver bullion would probably fall below the mint price even without any reform of the silver coinage — since the value of even the current worn and degraded silver coins is governed by the value of the excellent gold coins they can be exchanged for.

A small seigniorage or minting fee on both gold and silver would probably increase even further the premium that coined metal commands over an equal amount of bullion. The fee would raise the value of coined metal in proportion to its size, for the same reason that craftsmanship raises the value of silverware in proportion to the cost of that craftsmanship. This premium of coin over bullion would discourage melting coins down and would deter their export. If some public emergency made it necessary to export coins, most of them would soon return on their own. Abroad, they could only be sold for their weight in bullion. At home, they would buy more than that weight. There would therefore be a profit in bringing them back. In France, a seigniorage of about eight percent is imposed on coinage, and the French coins, when exported, are said to return home of their own accord.

The short-term fluctuations in the market price of gold and silver bullion arise from the same causes as fluctuations in the price of all other commodities. The constant loss of these metals through various accidents by sea and land, the continual waste of them in gilding and plating, in lace and embroidery, in the wear and tear of coins, and in the wear and tear of silverware, all require any country without its own mines to continually import metal to make up for the losses. The importing merchants, like all other merchants, try as best they can to match their imports to what they expect the immediate demand to be. But despite their best efforts, they sometimes overdo it and sometimes underdo it. When they import more bullion than the market needs, rather than face the hassle and risk of re-exporting it, they're sometimes willing to sell some at less than the ordinary price. When they import too little, they get more than the ordinary price. But when, through all these short-term fluctuations, the market price of gold or silver bullion remains steadily above or below the mint price for several years running, we can be sure that this persistent gap is caused by something in the state of the coinage that makes a certain quantity of coin either more or less valuable than the precise amount of bullion it's supposed to contain. The constancy and steadiness of the effect implies a proportional constancy and steadiness in the cause.

The money of any particular country is, at any given time and place, a more or less accurate measure of value depending on whether the circulating coins conform to their official standard — that is, whether they contain more or less exactly the precise amount of pure gold or pure silver they're supposed to contain. If in England, for example, forty-four and a half guineas contained exactly a pound weight of standard gold (eleven ounces of fine gold and one ounce of alloy), the English gold coinage would be as accurate a measure of the real value of goods as the nature of the thing allows. But if, through rubbing and wearing, those forty-four and a half guineas generally contain less than a pound weight of standard gold — and the shortfall is greater in some coins than in others — then this measure of value becomes subject to the same kind of uncertainty as all other imprecise weights and measures. Since weights and measures are rarely in perfect conformity with their official standards, the merchant adjusts the price of his goods as best he can — not to what those measures should be, but to what he finds by experience they actually are. In the same way, a similar disorder in the coinage causes the price of goods to be adjusted not to the amount of pure gold or silver the coin ought to contain, but to what it's found, on average and by experience, to actually contain.

By the "money price" of goods, I should note, I always mean the quantity of pure gold or silver for which they sell, without any regard to the denomination of the coin. Six shillings and eight pence in the time of Edward I, for example, I consider to be the same money price as a pound sterling today, because it contained, as nearly as we can judge, the same quantity of pure silver.

Chapter VI: Of the Component Parts of the Price of Commodities

In the early, primitive state of society — before anyone has accumulated capital or claimed ownership of land — the proportion of labor needed to acquire different things seems to be the only basis for determining their exchange rates. If, among a nation of hunters, for example, it usually takes twice the labor to kill a beaver as it does to kill a deer, then one beaver should naturally exchange for, or be worth, two deer. It's natural that what usually takes two days or two hours of labor to produce should be worth double what takes one day or one hour.

If one kind of labor is harder than another, some allowance will naturally be made for that extra difficulty, and the product of one hour's labor in the tougher job may often exchange for the product of two hours' labor in the easier one.

Or if one kind of labor requires an unusual degree of skill and ingenuity, the respect people have for such talents will naturally give their products a value greater than the time spent on them would seem to warrant. But such talents can rarely be acquired without long practice, and the higher value of their products may often be no more than a reasonable compensation for the time and effort spent developing them. In an advanced society, allowances like these — for greater hardship and greater skill — are commonly built into the wages of labor. And something similar must probably have existed in the earliest and most primitive periods too.

In this state of things, the entire product of labor belongs to the worker. The amount of labor typically required to acquire or produce any commodity is the only thing that determines how much labor it can buy or exchange for.

As soon as capital has accumulated in the hands of certain individuals, some of them will naturally use it to put industrious people to work — supplying them with materials and subsistence in order to make a profit from the sale of what they produce, or from what their labor adds to the value of those materials. When the finished product is exchanged for money, for labor, or for other goods, something must be given, over and above the cost of materials and workers' wages, to cover the profits of the entrepreneur who risked his capital in this venture. The value that the workers add to the materials therefore splits into two parts: one pays their wages, and the other goes to the profits of their employer on the entire capital he advanced for materials and wages. He would have no reason to employ them unless he expected the sale of their work to bring in something more than what was needed to replace his capital. And he would have no reason to invest a large amount of capital rather than a small one unless his profits were proportional to the size of his investment.

Some people might think that the profits of capital are just another name for the wages of a particular kind of labor — the labor of supervising and managing. But they're actually something quite different, governed by entirely different principles, and they bear no relation to the amount, difficulty, or cleverness of this supposed supervisory labor. They're determined entirely by the amount of capital invested, and they're larger or smaller in proportion to that amount. Suppose, for example, that in some particular place where the standard annual return on manufacturing capital is ten percent, there are two different factories, each employing twenty workers at fifteen pounds a year, for a total labor cost of three hundred pounds per factory. Suppose further that the raw materials worked up annually in one factory cost only seven hundred pounds, while the finer materials in the other cost seven thousand. The total capital invested in the first factory amounts to only one thousand pounds, while the capital in the second amounts to seven thousand three hundred pounds. At ten percent, the owner of the first factory would expect an annual profit of about one hundred pounds, while the owner of the second would expect about seven hundred and thirty pounds. But even though their profits are vastly different, their work of supervision and management may be either identical or very nearly so. In many large enterprises, virtually all of this supervisory work is delegated to a head clerk. His wages properly reflect the value of this management labor. Although those wages typically take into account not only his labor and skill but also the trust placed in him, they never bear any regular proportion to the capital he oversees. And the owner of that capital, though relieved of nearly all the work, still expects his profits to be proportional to his investment. In the price of commodities, therefore, the profits of capital are a component entirely separate from the wages of labor, governed by entirely different principles.

In this state of things, the entire product of labor does not always belong to the worker. In most cases, he must share it with the owner of the capital that employs him. Nor is the amount of labor typically needed to produce a commodity the only thing that determines what it can exchange for. An additional amount is clearly owed for the profits of the capital that advanced the wages and supplied the materials.

As soon as all the land in a country has become private property, the landlords — like all other people — love to reap where they never sowed, and demand rent even for what the land produces naturally. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which cost the worker only the effort of gathering them when land was held in common, now have an additional price imposed on them. He must pay for the right to gather them, and must hand over to the landlord a portion of what his labor collects or produces. This portion — or what amounts to the same thing, the price of this portion — constitutes the rent of land. And in the price of the vast majority of commodities, it makes up a third component part.

The real value of all these different components of price, it should be noted, is measured by the quantity of labor each can buy or command. Labor measures the value not only of the part of price that consists of wages, but also of the part that goes to rent and the part that goes to profit.

In every society, the price of every commodity ultimately breaks down into one, two, or all three of these parts. And in every advanced society, all three enter — to a greater or lesser degree — into the price of the vast majority of commodities.

Take the price of grain, for example. One part pays the rent of the landlord. Another pays the wages and upkeep of the laborers and working animals used to produce it. And the third pays the profit of the farmer. These three parts seem to make up, either directly or ultimately, the entire price of grain. You might think a fourth part is needed to replace the farmer's capital — to compensate for the wear and tear of his working animals and other farming equipment. But consider that the price of any piece of farming equipment, such as a working horse, is itself made up of the same three parts: the rent of the land where it was raised, the labor of tending and raising it, and the profits of the farmer who advanced both the rent and the wages. So even though the price of grain may pay for the horse's purchase as well as its upkeep, the whole price still ultimately resolves into the same three parts: rent, labor, and profit.

In the price of flour, we must add to the price of the grain the profits of the miller and the wages of his workers. In the price of bread, add the profits of the baker and the wages of his workers. And in both, add the labor of transporting the grain from the farmer to the miller and from the miller to the baker, along with the profits of those who advance the wages for that transportation.

The price of flax breaks down into the same three parts as the price of grain. In the price of linen, we must add the wages of the flax-dresser, the spinner, the weaver, the bleacher, and so on, together with the profits of their respective employers.

As any particular commodity becomes more heavily processed, the share of its price that goes to wages and profit grows larger relative to the share that goes to rent. As manufacturing progresses, not only does the number of profit margins increase, but each successive profit margin is larger than the last — because the capital from which it derives must always be larger. The capital that employs the weavers, for example, must be greater than the capital that employs the spinners, because it not only replaces that earlier capital along with its profits, but also pays the weavers' wages on top. And profits always bear some proportion to the size of the capital.

In even the most advanced societies, however, there are always a few commodities whose price breaks down into only two parts — the wages of labor and the profits of capital — and an even smaller number whose price consists entirely of wages. Take the price of ocean fish, for example: one part pays the labor of the fishermen, and the other pays the profits on the capital invested in the fishing operation. Rent rarely enters into it, though it sometimes does, as I'll discuss later. It's a different story, at least throughout most of Europe, with river fisheries. A salmon fishery pays a rent, and that rent — although it can't properly be called rent on land — is part of the price of salmon, just like wages and profit. In some parts of Scotland, a few poor people make a living gathering along the seashore those small, colorful stones commonly known as Scotch Pebbles. The price paid to them by the stonecutter is entirely wages for their labor; neither rent nor profit makes any part of it.

But the entire price of any commodity must still ultimately break down into one, two, or all three of these parts. Whatever remains after paying the rent on the land and covering the total cost of all the labor involved in growing, manufacturing, and bringing the commodity to market must necessarily be profit for somebody.

Just as the price of every individual commodity breaks down into one or more of these three parts, so does the price of all the commodities that make up the entire annual output of every country's labor. That total must be divided among the country's inhabitants as either the wages of their labor, the profits of their capital, or the rent of their land. Everything that is annually collected or produced by a society's labor — or what amounts to the same thing, its total price — is in this way originally distributed among its members. Wages, profit, and rent are the three original sources of all income, as well as of all exchangeable value. All other income is ultimately derived from one or another of these.

Anyone who draws income from a source they own must get it from one of three things: their labor, their capital, or their land. Income from labor is called wages. Income from capital, earned by the person who manages or invests it, is called profit. Income from capital earned by someone who doesn't invest it himself but lends it to another is called interest, or the use of money. It's the compensation the borrower pays the lender for the profit the borrower has the opportunity to make by using the money. Part of that profit naturally belongs to the borrower, who takes the risk and does the work of investing it, and part goes to the lender, who makes that opportunity possible. Interest on money is always a derivative form of income — if it's not paid from the profit made by using the money, it must come from some other source of income (unless the borrower is a spendthrift who takes on a second debt to pay the interest on the first). Income that comes entirely from land is called rent and belongs to the landlord. The farmer's income comes partly from his labor and partly from his capital. To him, land is simply the tool that allows him to earn wages for his labor and profits on his capital. All taxes, and all government revenue that depends on them — all salaries, pensions, and annuities of every kind — are ultimately derived from one or another of these three original sources of income, and are paid either directly or indirectly from the wages of labor, the profits of capital, or the rent of land.

When these three different types of income belong to different people, they're easy to tell apart. But when they belong to the same person, they're sometimes mixed up with each other, at least in everyday language.

A gentleman who farms part of his own estate should, after paying the costs of cultivation, gain both the rent of a landlord and the profit of a farmer. He tends to call his entire gain "profit," however, blurring the line between rent and profit — at least in ordinary conversation. Most of the plantation owners in North America and the West Indies are in this situation. They farm their own estates, and so we rarely hear about the rent of a plantation, but frequently about its profit.

Ordinary farmers rarely hire an overseer to direct the general operations of their farm. They generally work a great deal with their own hands — plowing, harrowing, and so on. Whatever remains of the harvest after paying the rent should not only replace their capital used in farming, along with the ordinary profits on it, but should also pay them the wages they're owed both as laborers and as managers. Whatever is left after paying the rent and maintaining the capital, however, is called profit. But wages clearly make up part of it. By doing the work himself rather than hiring someone, the farmer saves those wages and therefore effectively earns them. Wages, in this case, get lumped in with profit.

An independent craftsman who has enough capital both to buy materials and to support himself until he can bring his finished product to market should earn both the wages of a worker employed under a master, and the profit that master would make from selling the worker's output. But his total earnings are typically just called "profit," and here too, wages get mixed up with profit.

A gardener who cultivates his own garden with his own hands combines in a single person the three distinct roles of landlord, farmer, and worker. His output should therefore pay him the rent of the first, the profit of the second, and the wages of the third. But the whole amount is usually thought of simply as the earnings of his labor. In this case, both rent and profit get lumped in with wages.

Since in a developed economy there are very few commodities whose value comes from labor alone — rent and profit contributing heavily to the price of the vast majority — the annual output of that economy's labor will always be enough to buy or command a much greater quantity of labor than was used to produce it. If a society were to employ every year all the labor its output could purchase, the total quantity of labor would increase enormously each year, and the output of each succeeding year would be vastly more valuable than the year before. But no country actually uses its entire annual output to support productive workers. The idle consume a large share of it everywhere. And depending on the proportions in which the output is annually divided between these two groups — the productive and the idle — its ordinary or average value must either increase, decrease, or stay the same from one year to the next.

Chapter VII: Of the Natural and Market Price of Commodities

In every society or community, there's an ordinary or average rate for both wages and profit in every different type of work and investment. This rate is determined, as I'll explain later, partly by the general condition of the society — its wealth or poverty, and whether it's growing, standing still, or declining — and partly by the particular nature of each line of work.

There's likewise an ordinary or average rate of rent in every society or community. This too is determined, as I'll show later, partly by the general condition of the society where the land is located, and partly by the natural or improved fertility of the land itself.

These ordinary or average rates can be called the natural rates of wages, profit, and rent, for the time and place where they prevail.

When the price of any commodity is exactly enough to pay the rent on the land, the wages of the labor, and the profits on the capital used in producing, processing, and bringing it to market — all at their natural rates — then the commodity is sold at what we can call its natural price.

In that case, the commodity is sold for exactly what it's worth, or for what it truly costs the person who brings it to market. In everyday language, the "cost" of a commodity doesn't usually include the seller's profit. But if he sells it at a price that doesn't give him the ordinary rate of profit in his area, he's clearly losing money on the deal — since he could have earned that profit by investing his capital elsewhere. His profit, after all, is his income, the source of his own livelihood. Just as he advances his workers their wages — their subsistence — while preparing and bringing goods to market, he also advances himself his own subsistence, which is generally proportional to the profit he can reasonably expect from selling his goods. Unless they yield him this profit, they haven't repaid what they can properly be said to have really cost him.

So while the price that includes this profit isn't always the absolute lowest a dealer might sometimes sell his goods for, it is the lowest at which he's likely to sell them over any extended period — at least in a market with full freedom of competition, where he can switch to a different line of business whenever he wants.

The actual price at which any commodity commonly sells is called its market price. It may be above, below, or exactly equal to the natural price.

The market price of any particular commodity is determined by the ratio between the quantity actually brought to market and the demand from people who are willing to pay the natural price — that is, the full value of the rent, labor, and profit that must be paid to bring it there. These people can be called the effectual demanders, and their demand the effectual demand, since it's sufficient to actually bring the commodity to market. This is different from what we might call absolute demand. A very poor man might, in some sense, be said to have a demand for a coach and six horses — he might want one — but his demand isn't effectual demand, because the commodity will never be brought to market to satisfy it.

When the quantity of any commodity brought to market falls short of the effectual demand, not everyone willing to pay the full natural price can get the amount they want. Rather than go without entirely, some of them will offer to pay more. A bidding war immediately breaks out among them, and the market price rises above the natural price. How far above depends on the size of the shortage and on how much the wealth and extravagant tastes of the buyers fuel the competition. Among buyers of equal wealth and luxury, the same shortage will generally produce a more or less fierce competition depending on how important the commodity is to them. This explains the outrageous prices for basic necessities during the siege of a city or during a famine.

When the quantity brought to market exceeds the effectual demand, it can't all be sold to those willing to pay the full natural price. Some of it must be sold to people willing to pay less, and the low price they pay drags down the price of the whole supply. The market price sinks below the natural price, and how far below depends on the size of the surplus and how urgently the sellers need to get rid of it. The same oversupply of perishable goods will create much fiercer competition among sellers than an oversupply of durable goods — oranges, for example, versus scrap iron.

When the quantity brought to market is just enough to meet the effectual demand and no more, the market price naturally settles at or very near the natural price. The entire supply can be sold at this price, and it can't fetch more. Competition among the various sellers forces them all to accept this price, but it doesn't force them to accept less.

The quantity of every commodity brought to market naturally adjusts itself to the effectual demand. It's in the interest of everyone who commits their land, labor, or capital to producing any commodity that the supply never exceeds the effectual demand. And it's in the interest of everyone else that it never falls short of it.

If the supply ever exceeds the effectual demand, some component of the price must be getting paid below its natural rate. If it's rent, the landlords will immediately move to pull some of their land out of that use. If it's wages or profit, the workers or the employers will pull some of their labor or capital out of that line of business. The quantity brought to market will soon fall back to just enough to meet the effectual demand. All the different components of the price will rise to their natural rates, and the total price will return to the natural price.

Conversely, if the supply ever falls short of the effectual demand, some component of the price must be rising above its natural rate. If it's rent, other landlords will naturally be prompted to prepare more land for producing this commodity. If it's wages or profit, other workers and businesses will quickly move to commit more labor and capital to producing and bringing it to market. The quantity brought to market will soon be enough to meet the effectual demand. All the different components of the price will soon fall back to their natural rates, and the total price will return to the natural price.

The natural price, then, is like a center of gravity to which the prices of all commodities are constantly being pulled. Various circumstances may sometimes hold them well above it, and sometimes push them below it. But whatever obstacles prevent them from settling at this resting point, they are always being drawn toward it.

The total amount of productive effort devoted each year to bringing any commodity to market naturally adjusts in this way to the effectual demand. It naturally aims at bringing exactly the quantity that's needed to meet that demand, and no more.

But in some industries, the same amount of effort will produce very different quantities of goods in different years, while in others it produces the same amount, or nearly the same, every year. The same number of farmworkers will, in different years, produce very different quantities of grain, wine, oil, hops, and so on. But the same number of spinners and weavers will produce the same, or very nearly the same, quantity of linen and woolen cloth every year. Only the average output of the first type of industry can be matched to the effectual demand. Since actual output frequently exceeds or falls short of that average, the quantity brought to market will sometimes be well above and sometimes well below the effectual demand. So even if demand stays constant, market prices will swing widely — sometimes falling well below and sometimes rising well above the natural price. In the second type of industry, where equal amounts of labor consistently produce equal amounts of output, supply can be more precisely matched to the effectual demand. As long as demand stays the same, the market price is likely to remain at or very near the natural price. Everyone's experience confirms that the price of linen and woolen cloth doesn't fluctuate as often or as dramatically as the price of grain. The price of manufactured cloth varies only with changes in demand. The price of grain varies not only with changes in demand but also with the much larger and more frequent changes in the quantity brought to market.

The short-term fluctuations in market price mainly affect the wage and profit components of a commodity's price. The rent component is less affected. A fixed cash rent isn't affected at all, in either its rate or its value. A rent that consists of a fixed share or quantity of raw produce is certainly affected in its annual value by market price fluctuations, but rarely in its annual rate. When setting the terms of a lease, the landlord and farmer try to base the rate not on the temporary or occasional price of the produce, but on its average or ordinary price.

These fluctuations affect both the value and the rate of wages and profits, depending on whether the market happens to be oversupplied or undersupplied with either goods or labor — with work already done, or with work that needs doing. A period of public mourning, for instance, drives up the price of black cloth (which the market is almost always undersupplied with on such occasions) and boosts the profits of merchants who happen to have a large stock of it. It has no effect on the wages of the weavers. The market is short of goods, not labor — short of finished work, not work to be done. But it does raise the wages of tailors, because the market is short of their labor. There's an effectual demand for more labor — more work to be done than can be had. At the same time, the mourning period depresses the price of colored silks and fabrics, reducing the profits of merchants who have large quantities on hand. It also depresses the wages of the workers who make those goods, for which all demand has suddenly stopped for six months or perhaps a year. In this case, the market is oversupplied with both goods and labor.

But while the market price of every commodity is constantly gravitating toward the natural price in this way, various forces can sometimes keep it well above the natural price for long stretches: particular accidents, natural causes, and sometimes government regulations.

When a surge in effectual demand pushes the market price of some commodity well above its natural price, those who invest their capital in supplying that market are generally careful to keep the situation secret. If it were widely known, their high profits would lure so many new competitors to invest in the same business that the effectual demand would quickly be fully met, and the market price would soon drop back to the natural price — or maybe even below it for a while. If the market is far from where the suppliers are based, they may sometimes manage to keep the secret for several years and enjoy their extraordinary profits without attracting new rivals. It must be acknowledged, however, that such secrets can rarely be kept for long, and the extraordinary profits last barely longer than the secrecy does.

Trade secrets in manufacturing can be kept longer than secrets in commerce. A dyer who discovers how to produce a particular color using materials that cost only half the usual price may, with careful management, enjoy the advantage of his discovery for the rest of his life, and even pass it on to his heirs. His extraordinary earnings come from the premium paid for his specialized skill. They properly consist of the high wages of that skill. But since they're earned on every unit of his capital, and since their total amount is proportional to the size of that capital, they're usually thought of as extraordinary profits on capital.

Such increases in the market price are clearly the result of particular circumstances, though their effects may sometimes last for many years.

Some natural products require such specific soil and location that all the suitable land in an entire country may not be enough to meet the effectual demand. The entire supply brought to market can therefore be sold to people willing to pay more than what's needed to cover the rent, wages, and profit at their natural rates. Such commodities may continue selling at these inflated prices for centuries, and the part of the price that goes to rent is typically the component paid above its natural rate. The rent on land that produces such rare and prized goods — like the rent on certain French vineyards blessed with especially favorable soil and location — bears no regular proportion to the rent on other equally fertile and equally well-cultivated land nearby. The wages and profits involved in bringing such commodities to market, on the other hand, rarely stray from their natural proportion to wages and profits in other occupations and investments in the same area.

Such increases in market price are clearly the result of natural causes that may prevent the effectual demand from ever being fully met, and which may therefore continue operating forever.

A monopoly granted to either an individual or a trading company has the same effect as a trade or manufacturing secret. Monopolists, by keeping the market constantly undersupplied and never fully meeting the effectual demand, sell their goods well above the natural price. They raise their compensation — whether in the form of wages or profit — far above the natural rate.

The monopoly price is, on every occasion, the highest that can be extracted. The natural price, or the price of free competition, is the lowest that can be sustained — not on every single occasion, but over any significant period of time. The monopoly price is the highest that can be squeezed out of buyers, or that they can be expected to pay. The competitive price is the lowest that sellers can commonly afford to accept while staying in business.

The exclusive privileges of guilds, apprenticeship laws, and all the regulations that limit competition in particular occupations to fewer people than would otherwise enter them have the same tendency, though to a lesser degree. They are a kind of expanded monopoly, and may keep the market price of certain goods above the natural price for generations — maintaining both the wages of the workers and the profits on the capital involved somewhat above their natural rates.

Such inflated market prices may last as long as the regulations that cause them.

The market price of any particular commodity, though it may stay above the natural price for a long time, can rarely stay below it for long. Whichever component is being paid below its natural rate will immediately be felt as a loss by the people it affects, and they'll immediately pull out some land, labor, or capital from that use. The quantity brought to market will soon be no more than enough to meet the effectual demand, and the market price will rise back to the natural price. This, at least, is how things work where there is full freedom of competition.

It's true that the same apprenticeship requirements and guild regulations that let workers raise their wages well above the natural rate when their industry is thriving can sometimes force them to accept wages well below it when the industry declines. Just as these rules keep many people out of a particular occupation during good times, they also keep workers locked into it during bad times, shutting them out of other jobs. But the effect of such regulations is far less lasting in pushing wages below the natural rate than in holding them above it. They can keep wages inflated for many centuries, but they can only depress them for as long as the lifetimes of the workers who were trained in the trade during its prosperous period. Once those workers are gone, the number of people trained for the trade will naturally adjust to match the effectual demand. It would take regulations as extreme as those of India or ancient Egypt — where every person was bound by religious principle to follow their father's occupation, and was believed to commit the most terrible sacrilege by changing to another — to keep either the wages of labor or the profits of capital below their natural rate in any particular occupation for several generations running.

That's all I think needs to be said for now about how and why the market price of commodities deviates from the natural price, whether temporarily or permanently.

The natural price itself changes whenever the natural rate of any of its component parts changes — wages, profit, or rent. And in every society, these rates vary with the society's circumstances: its wealth or poverty, and whether it's advancing, stagnant, or declining. In the next four chapters, I'll try to explain as fully and clearly as I can what causes these different variations.

First, I'll explain what circumstances naturally determine the rate of wages, and how those circumstances are affected by the wealth or poverty and the advancing, stationary, or declining state of the society.

Second, I'll explain what circumstances naturally determine the rate of profit, and how those too are affected by similar changes in the state of society.

Although money wages and money profits differ widely across different occupations and investments, a certain proportion usually exists between all the different wage rates across occupations and all the different profit rates across investments. This proportion, as will become clear later, depends partly on the nature of the different occupations and partly on the laws and policies of the society in which they operate. But while this proportion depends in many ways on laws and policy, it seems to be little affected by whether the society is rich or poor, growing or declining. It remains the same, or very nearly so, across all these different conditions. Third, I'll try to explain all the different circumstances that determine this proportion.

Fourth and finally, I'll explain what circumstances determine the rent of land, and what raises or lowers the real price of all the different products the land yields.

Chapter VIII: Of the Wages of Labor

The product of labor is the natural compensation — the natural wages — of labor.

In the original state of things, before anyone had claimed ownership of land or accumulated capital, the entire product of labor belonged to the worker. He had neither landlord nor employer to share with.

If this state had continued, wages would have risen along with every improvement in the productive powers of labor brought about by the division of labor. Everything would gradually have become cheaper, since it would have been produced with less labor. And since goods produced by equal amounts of labor would naturally exchange for one another under these conditions, they would also have been purchasable with the output of less labor.

But while everything would have become cheaper in reality, many things might have appeared to become more expensive — trading for a greater quantity of other goods. Suppose, for example, that in most occupations the productive powers of labor had improved tenfold, so that a day's work could produce ten times what it originally did. But in one particular occupation, they had improved only to double, so a day's work produced only twice the original output. When exchanging the product of a day's labor in most occupations for the product of a day's labor in this particular one, ten times the original quantity from the former would buy only twice the original quantity from the latter. Any given amount of the latter product — a pound, for example — would appear to be five times more expensive than before. In reality, however, it would be twice as cheap. Although it would take five times as many other goods to buy it, it would require only half the labor to either produce or purchase it. Getting it would actually be twice as easy as before.

But this original state of things, in which the worker enjoyed the full product of his own labor, could not survive past the earliest stages of land ownership and capital accumulation. It ended long before the most significant improvements in the productive powers of labor took place, and there's no point in speculating further about what its effects on wages might have been.

As soon as land becomes private property, the landlord demands a share of almost everything the worker can grow or gather from it. His rent is the first deduction from the product of labor employed on land.

The person who works the land rarely has enough resources to support himself until harvest. His living expenses are generally advanced to him from the capital of a master — the farmer who employs him — who would have no reason to employ him unless he got a share of the worker's output, or unless his capital was returned to him with a profit. This profit is the second deduction from the product of labor employed on land.

The product of almost all other kinds of labor faces the same kind of deduction for profit. In all crafts and manufacturing, most workers need a master to advance them the materials for their work, plus their wages and living expenses until the job is done. The master takes a share of their output, or of the value their labor adds to the materials, and this share is his profit.

It does sometimes happen that a single independent worker has enough capital both to buy his own materials and to support himself until the work is finished. He's both master and worker, and enjoys the full product of his own labor, or the full value it adds to the materials. This includes what would normally be two separate incomes belonging to two separate people: the profits of capital and the wages of labor.

Such cases, however, aren't very common. Throughout Europe, for every one independent worker, there are twenty working under a master. And "wages of labor" is everywhere understood to mean what workers typically earn when the worker and the owner of the capital that employs him are two different people.

What the going wage actually is depends everywhere on the bargain struck between these two parties, whose interests are by no means the same. Workers want to get as much as possible; employers want to pay as little as possible. Workers tend to band together to push wages up; employers band together to push them down.

It's not hard to predict which side usually has the advantage in this struggle, and which can force the other to accept its terms. Employers, being fewer in number, can organize much more easily. The law, moreover, authorizes — or at least doesn't prohibit — their combinations, while it prohibits those of workers. There are no laws against conspiring to push wages down, but many against conspiring to push them up. In all such disputes, employers can hold out much longer. A landlord, a farmer, a factory owner, or a merchant could generally live for a year or two on the capital they've already accumulated, without employing a single worker. Many workers couldn't survive a week without employment, few could last a month, and hardly any could last a year. In the long run, the worker may be just as necessary to his employer as his employer is to him — but the necessity isn't as immediate.

We rarely hear about employers' combinations, it's been said, though we frequently hear about workers'. But anyone who concludes from this that employers rarely combine is as ignorant of the real world as of the subject. Employers are always and everywhere in a kind of tacit, constant, and uniform agreement not to raise wages above their current level. Violating this unspoken pact is considered deeply unpopular — a kind of disgrace among one's fellow employers. We rarely hear about this combination because it's the normal, one might even say natural, state of things, which nobody ever bothers to mention. Employers also sometimes enter into explicit agreements to push wages even below this level. These are always carried out with the utmost secrecy and silence until the moment they're imposed. When workers give in, as they sometimes do without resistance — though they feel it deeply — nobody else even hears about it. Workers, however, frequently resist through counter-combinations of their own, and they sometimes organize without any provocation, simply to raise the price of their labor. Their usual justifications are sometimes the high cost of food and sometimes the large profits their employers make from their work. But whether their combinations are offensive or defensive, they always make plenty of noise. To force a quick resolution, they always resort to the loudest possible protests, and sometimes to shocking violence and disorder. They're desperate people, acting with the recklessness of the desperate, who must either starve or frighten their employers into immediately meeting their demands. The employers, for their part, are equally vocal, and never stop calling for the government to intervene and rigorously enforce the laws enacted with such severity against the combinations of workers. As a result, workers rarely gain any lasting advantage from these turbulent uprisings. Between government intervention, the employers' greater staying power, and the simple fact that most workers must give in for the sake of immediate survival, these movements generally end in nothing but punishment or ruin for the ringleaders.

But even though employers usually have the upper hand in disputes with their workers, there is a certain floor below which it seems impossible to push the ordinary wages of even the lowest kind of labor, at least for any considerable time.

A person must live from his work, and his wages must be at least enough to keep him alive. On most occasions, they must be somewhat more than that — otherwise he couldn't raise a family, and that type of worker would die out within a single generation. The economist Richard Cantillon seems, on this basis, to estimate that the lowest class of common laborers must earn at least double their own maintenance costs, so that on average they can support two children. The wife's labor, given her necessary care of the children, is assumed to be barely enough to provide for herself. But roughly half of all children born are estimated to die before reaching adulthood. The poorest laborers must therefore, on average, attempt to raise at least four children in order for two to have an even chance of surviving to working age. And the cost of feeding four children is estimated to be roughly equal to that of feeding one adult man. The same author adds that the labor of a healthy slave is estimated to be worth double his maintenance costs, and he argues that the labor of the lowest free worker can't be worth less than that. This much at least seems certain: in order to raise a family, the combined labor of a husband and wife must, even in the lowest kind of common work, earn something more than what's strictly necessary for their own maintenance. In exactly what proportion, whether the one I've just described or some other, I won't presume to say.

There are certain circumstances, however, that sometimes give workers the upper hand and allow them to raise their wages well above this floor — which is clearly the lowest consistent with basic decency.

When the demand in any country for wage-earners — laborers, skilled workers, servants of every kind — is continually increasing, when every year creates jobs for more people than the year before, workers have no need to organize to raise their wages. The shortage of available workers sparks competition among employers, who bid against each other to hire them, and in doing so voluntarily break through their natural agreement not to raise wages.

The demand for wage-earners can obviously only grow in proportion to the growth of the funds available for paying wages. These funds come from two sources: first, any income that's left over after the owners have covered their own maintenance; and second, any capital that's left over after what the owners need for their own business operations.

When a landlord, someone living on investments, or a wealthy person has more income than they think necessary to maintain their own family, they spend all or part of the surplus on hiring domestic servants. Increase that surplus, and they'll naturally hire more servants.

When an independent worker, such as a weaver or shoemaker, has accumulated more capital than he needs to buy his own materials and support himself until he can sell his work, he naturally hires one or more workers with the surplus, in order to profit from their labor. Increase that surplus, and he'll naturally hire more workers.

The demand for wage-earners, therefore, necessarily grows with the growth of a country's income and capital, and it cannot possibly grow without it. The increase of income and capital is the increase of national wealth. The demand for wage-earners, therefore, naturally grows with the increase of national wealth, and cannot possibly grow without it.

It's not the absolute size of national wealth that causes wages to rise, but its continual increase. Accordingly, it's not in the richest countries that wages are highest, but in the ones growing rich the fastest. England is certainly, at present, a much wealthier country than any part of North America. Yet wages are much higher in North America than anywhere in England. In the province of New York, common laborers earn three shillings and sixpence in local currency per day, equal to two shillings sterling. Ship carpenters earn ten shillings and sixpence in local currency, plus a pint of rum worth sixpence sterling — a total of six shillings and sixpence sterling. House carpenters and bricklayers earn eight shillings currency, equal to four shillings and sixpence sterling. Tailors earn five shillings currency, equal to about two shillings and ten pence sterling. All these wages are above London prices, and wages in the other colonies are said to be just as high as in New York. The cost of food is everywhere much lower in North America than in England. There has never been a famine there. Even in the worst seasons, they've always had enough for themselves, though less for export. So if the money price of labor is higher than anywhere in the mother country, and food costs less, the real price of labor — the actual command over the necessities and comforts of life that it gives the worker — must be higher by an even greater margin.

Although North America is not yet as wealthy as England, it's growing much faster and racing toward further wealth at a much greater speed. The most decisive sign of any country's prosperity is the growth of its population. In Great Britain and most of Europe, the population is not thought to double in less than five hundred years. In the British colonies of North America, it has been found to double in twenty or twenty-five years. And this growth is not mainly due to immigration but to natural increase. People who live to old age there reportedly see fifty to a hundred descendants — sometimes many more — from their own body. Labor is so well rewarded there that a large family of children, instead of being a burden, is a source of wealth and prosperity for the parents. The labor of each child, before it leaves the household, is estimated to be worth a clear gain of a hundred pounds to the parents. A young widow with four or five small children, who among the middle or lower classes in Europe would have very little chance of finding a second husband, is there frequently courted as something of a prize. The value of children is the greatest of all encouragements to marriage. It's no wonder, then, that people in North America generally marry very young. Despite the enormous population growth caused by such early marriages, there's a constant complaint about the shortage of workers in North America. The demand for labor — the funds available for paying workers — seems to grow even faster than they can find laborers to employ.

Even if a country's wealth is very great, if it has been stagnant for a long time, we shouldn't expect to find wages very high there. The funds available for paying wages — the income and capital of the inhabitants — may be enormous. But if they've stayed at the same or nearly the same level for several centuries, the number of workers seeking employment each year could easily match, and even exceed, the number needed. There would rarely be any shortage of workers, and employers wouldn't need to bid against each other to hire them. The workers, on the contrary, would multiply beyond what the job market could absorb. There would be a constant surplus of labor, and workers would bid against each other for the available jobs. If wages in such a country had ever risen above what was needed to keep a laborer alive and able to raise a family, the competition among workers and the self-interest of employers would soon push them back down to the lowest rate consistent with basic decency. China has long been one of the richest countries in the world — that is, one of the most fertile, best cultivated, most industrious, and most populous. But it seems to have been stagnant for a very long time. Marco Polo, who visited it more than five hundred years ago, describes its agriculture, industry, and population in almost the same terms that modern travelers use. It had perhaps, even long before his time, reached the full level of wealth that the nature of its laws and institutions would allow. The accounts of all travelers, though contradictory in many other respects, agree on the low wages of labor and the difficulty workers face in supporting a family in China. If a man can earn enough by digging all day to buy a small quantity of rice in the evening, he considers himself lucky. The condition of skilled workers is, if anything, even worse. Instead of waiting in their workshops for customers to come to them, as in Europe, they constantly run through the streets carrying the tools of their trade, offering their services, practically begging for work. The poverty of China's lower classes far surpasses that of the most impoverished nations in Europe. Near Canton, hundreds — it's commonly said thousands — of families have no home on land at all, but live permanently in small fishing boats on the rivers and canals. The food they find there is so meager that they eagerly fish up the foulest garbage thrown overboard from European ships. Any scrap of rotting meat — the carcass of a dead dog or cat, for instance, though half putrid and stinking — is as welcome to them as the most wholesome food would be to people in other countries. Marriage is encouraged in China not by the economic value of children, but by the freedom to destroy them. In all the great cities, several infants are every night abandoned in the street or drowned like unwanted animals. This horrifying practice is even said to be the acknowledged livelihood by which some people earn their subsistence.

China, however, though it may be standing still, doesn't seem to be going backward. Its towns are nowhere being abandoned by their inhabitants. Its cultivated land is nowhere being neglected. The same or very nearly the same amount of labor must therefore continue to be performed each year, and the funds for supporting it can't be significantly shrinking. The lowest class of laborers, despite their desperately meager existence, must somehow manage to keep their numbers up.

But things would be very different in a country where the funds for supporting labor were actually declining. Every year, the demand for workers in all occupations would be less than the year before. Many people trained in higher-skilled jobs, unable to find work in their own field, would be forced to compete for the lowest positions. The bottom rung would be flooded not only with its own workers but with the overflow from every other class. The competition for any employment at all would drive wages down to the most miserable, bare-bones subsistence. Many wouldn't even find work on those desperate terms, and would either starve or be driven to survive by begging or perhaps by committing terrible crimes. Deprivation, famine, and death would sweep through the working class and spread upward to all the higher classes, until the population was reduced to whatever number could be supported by the remaining income and capital — whatever had survived the tyranny or catastrophe that destroyed the rest. This is perhaps close to the current state of Bengal and some other British settlements in the East Indies. In a fertile country that had previously been heavily populated, where getting enough to eat should therefore not be very difficult, yet where three or four hundred thousand people nevertheless die of hunger in a single year, we can be sure that the funds available for supporting the working poor are rapidly shrinking. The contrast between the spirit of the British constitution, which protects and governs North America, and that of the mercantile company that oppresses and dominates the East Indies, could hardly be better illustrated than by the very different conditions in those two places.

Good wages for workers, then, are both the necessary result and the natural symptom of growing national wealth. Meager maintenance of the working poor is the natural symptom of a stagnant economy, and their starvation is the sign that things are rapidly going downhill.

In Great Britain, wages today are clearly more than what's strictly necessary to allow a worker to raise a family. To convince ourselves of this, we don't need any complicated or questionable calculations of the minimum income on which it's possible to do so. There are many plain signs that wages in this country are nowhere at the absolute floor consistent with basic decency.

First, in almost every part of Great Britain, even for the lowest kinds of labor, there's a difference between summer and winter wages. Summer wages are always higher. But because of the high cost of fuel, maintaining a family is most expensive in winter. Since wages are highest when living costs are lowest, they clearly aren't determined by what's needed to cover those costs. They're determined by the quantity and perceived value of the work. You might argue that a worker should save part of his higher summer wages to cover his winter expenses, and that averaged over the year, his earnings don't exceed what's necessary to maintain his family year-round. But a slave, or someone entirely dependent on you for immediate support, wouldn't be treated this way. His daily provisions would match his daily needs.

Second, wages in Great Britain don't fluctuate with the price of food. Food prices vary everywhere from year to year, and often from month to month. But in many places, the money price of labor stays exactly the same for half a century at a stretch. If the working poor in these places can maintain their families during expensive years, they must be comfortable in years of moderate plenty and practically affluent in years of extraordinary cheapness. The high food prices of the past ten years haven't been accompanied by any noticeable rise in money wages in many parts of the country. In some places wages have risen, but that's probably due more to increased demand for labor than to higher food prices.

Third, while food prices vary more from year to year than wages, wages vary more from place to place than food prices. The price of bread and butcher's meat is generally the same, or nearly so, throughout the United Kingdom. These and most other goods sold at retail — the way the working poor buy everything — are generally at least as cheap in large cities as in the more remote parts of the country, for reasons I'll explain later. But wages in a large city and its surroundings are frequently twenty to twenty-five percent higher than they are just a few miles away. Eighteen pence a day can be considered the standard wage for labor in London and its vicinity. A few miles out, it falls to fourteen or fifteen pence. In Edinburgh and its vicinity, ten pence can be considered the standard. A few miles away, it drops to eight pence — the typical wage for common labor throughout most of the Scottish Lowlands, where it varies much less than in England. Such a difference in the price of labor — which apparently isn't even enough to get people to move from one parish to another — would create so massive a flow of bulky goods not just between parishes but across the entire country, even across the world, that it would quickly equalize their prices. For all the talk about the fickleness and restlessness of human nature, experience shows clearly that a human being is the hardest kind of cargo to transport. If the working poor can support their families where wages are lowest, they must be practically affluent where wages are highest.

Fourth, the variations in the price of labor not only fail to match those in the price of food — in either time or place — but are frequently the exact opposite.

Grain, the food of the common people, is more expensive in Scotland than in England. Scotland imports very large quantities from England almost every year. But English grain must sell for more in Scotland — the country it's shipped to — than in England, the country it comes from. And relative to its quality, it can't sell for more in Scotland than the Scottish grain competing with it in the same market. The quality of grain depends mainly on how much flour it yields at the mill, and in this respect English grain is so much superior to Scottish that, though it often appears more expensive per bushel, it's actually cheaper relative to its quality or even its weight. Wages, however, are higher in England than in Scotland. So if the working poor in Scotland can maintain their families, those in England must be practically well-off. Oatmeal, it's true, provides the Scottish common people with the largest and best part of their diet, which is generally much inferior to that of their English counterparts of the same rank. But this dietary difference is the effect of the wage difference, not the cause. By a strange misunderstanding, I've frequently heard it presented the other way around. It's not because one man keeps a carriage while his neighbor walks that the first is rich and the second poor. It's because one is rich that he keeps a carriage, and because the other is poor that he walks.

During the last century, taking one year with another, grain was more expensive in both parts of the United Kingdom than it has been in the present century. This is a fact that can no longer be reasonably doubted, and the evidence for it is, if anything, even more conclusive for Scotland than for England. In Scotland, it's supported by the evidence of the public fiars — official annual valuations, made under oath, of the actual market prices of all different types of grain in every Scottish county. If such direct proof needed any supporting evidence, I'd note that the same has been true in France and probably in most of Europe. With regard to France, the evidence is crystal clear. But while grain was somewhat more expensive in the last century than in the present one across both parts of the United Kingdom, it's equally certain that labor was much cheaper. So if the working poor could raise their families then, they must be much better off now. In the last century, the most common daily wages for ordinary labor throughout most of Scotland were six pence in summer and five pence in winter. Three shillings a week — essentially the same rate — is still paid in some parts of the Highlands and Western Islands. Throughout most of the Lowlands today, the standard wage for common labor is eight pence a day; ten pence, sometimes a shilling, around Edinburgh; and in the counties bordering England — probably because of that proximity — and in a few other places where labor demand has recently surged, like Glasgow, Carron, and Ayrshire, wages are higher still. In England, improvements in agriculture, manufacturing, and trade began much earlier than in Scotland. The demand for labor, and consequently its price, must have risen along with those improvements. In the last century, as in the present, wages were higher in England than in Scotland. They've risen considerably since then, though because of the wider variation in wages paid across different English locations, it's harder to say by exactly how much. In 1614, the daily pay of a foot soldier was the same as it is now: eight pence a day. When this rate was first established, it would naturally have been based on the usual wages of common laborers — the class from which foot soldiers are typically drawn. Lord Chief Justice Hales, writing during the reign of Charles II, calculated that the necessary expenses for a laborer's family of six — father, mother, two children old enough to do some work, and two who weren't — came to ten shillings a week, or twenty-six pounds a year. If they couldn't earn that much through labor, he supposed they'd have to make up the difference through begging or stealing. He appears to have investigated this subject very carefully. In 1688, the statistician Gregory King, whose skill was highly praised by the economist Charles Davenant, estimated the ordinary income of laborers and outdoor servants at fifteen pounds per year for a family of, on average, three and a half people. His calculation, though different in appearance, lines up very closely at bottom with Judge Hales's. Both assume weekly expenses for such families of about twenty pence per person. Both the money income and expenses of such families have increased considerably since then across most of the country — more in some places, less in others — though perhaps nowhere as much as some of the exaggerated recent reports about current wages would have the public believe. The price of labor, it should be noted, can't be determined very precisely anywhere, since different rates are often paid in the same place for the same kind of work — not only depending on the abilities of the workers, but on how generous or stingy the employers are. Where wages aren't set by law, the best we can do is identify the most common rate. And experience seems to show that the law can never regulate wages properly, though it has often tried to do so.

The real compensation of labor — the actual quantity of necessities and comforts of life that a worker can afford — has during the present century increased perhaps by an even greater proportion than its money price. Not only has grain become somewhat cheaper, but many other foods that give working people an enjoyable and healthy variety in their diet have become much cheaper. Potatoes, for example, now cost less than half what they did thirty or forty years ago across most of the country. The same is true of turnips, carrots, and cabbages — vegetables that used to be grown only by hand with a spade but are now commonly raised with a plow. Garden produce in general has also become cheaper. Most of the apples and even the onions consumed in Great Britain were imported from Flanders in the last century. Major improvements in the manufacturing of both linen and woolen cloth have given workers cheaper and better clothing. Improvements in metalworking have given them cheaper and better tools, as well as many useful and pleasant household items. Soap, salt, candles, leather, and alcoholic beverages have admittedly become considerably more expensive, mainly because of the taxes levied on them. But the amounts of these that working people actually need are so small that the price increase doesn't offset the decrease in the price of so many other things. The common complaint that luxury is spreading even to the lowest ranks of society, and that working people won't settle for the same food, clothing, and housing that satisfied them in earlier times, should convince us that it's not just the money price of labor that has increased, but its real compensation.

Is this improvement in the circumstances of the lower classes a good thing or a bad thing for society? The answer seems blindingly obvious. Workers, laborers, and employees of all kinds make up the vast majority of every large society. What improves the circumstances of the majority can never be considered a disadvantage to the whole. No society can be flourishing and happy when the vast majority of its members are poor and miserable. It is only fair, moreover, that those who feed, clothe, and house the entire population should receive enough of the product of their own labor to be themselves reasonably well fed, clothed, and housed.

Poverty, though it certainly discourages marriage, doesn't always prevent it. It even seems to be favorable to childbearing. A half-starved woman in the Scottish Highlands frequently bears more than twenty children, while a pampered upper-class woman is often unable to bear any and is generally exhausted after two or three. Infertility, so common among women of wealth and fashion, is very rare among women of lower status. Luxury, while it may intensify the desire for pleasure, seems always to weaken and frequently to destroy altogether the ability to reproduce.

But poverty, though it doesn't prevent the bearing of children, is extremely hostile to their survival. The tender plant is produced, but in such cold soil and such a harsh climate, it quickly withers and dies. I have frequently been told that it's not uncommon in the Scottish Highlands for a mother who has borne twenty children to have no more than two still alive. Several experienced military officers have assured me that, far from being able to recruit from the children of their soldiers, they've never even been able to fill their need for drummers and fifers from all the children born in the regiment — despite the fact that you'll rarely see a finer collection of healthy children anywhere than around a soldiers' barracks. Very few of them, it seems, survive to age thirteen or fourteen. In some places, half of all children born die before the age of four; in many places, before seven; and in almost all places, before nine or ten. This enormous death rate, however, falls mainly on the children of the common people, who can't afford to care for them as attentively as wealthier families do. Though working-class marriages are generally more fertile than those of the upper classes, a much smaller proportion of their children survive to adulthood. In orphanages and among children raised by parish charities, the death rate is even higher than among the children of the common people generally.

Every species of animal naturally multiplies in proportion to its food supply, and no species can ever multiply beyond it. But in a civilized society, it's only among the lower classes that scarcity of food can limit the further growth of the human population. And it can do so in no other way than by killing off a large share of the children that their fertile marriages produce.

Good wages, by enabling workers to provide better for their children and thus raise more of them to adulthood, naturally tend to push those limits outward. And it deserves to be noted that this happens in roughly the proportion that the demand for labor requires. If demand is continually increasing, wages will necessarily encourage marriage and population growth at a rate sufficient to meet that continually increasing demand through a continually increasing population. If wages ever fall below what's needed for this purpose, the resulting labor shortage will soon push them back up. If they ever rise above it, the resulting population boom will soon bring them back down. The labor market would be either undersupplied in one case or oversupplied in the other, and this would quickly force the price of labor back to the level the society requires. In this way, the demand for workers, like the demand for any other commodity, necessarily regulates the production of workers — speeding it up when it's too slow and slowing it down when it's too fast. This demand is what determines the rate of population growth in every country in the world: rapid in North America, slow and gradual in Europe, and completely stagnant in China.

It's been observed that the upkeep of a slave is at the master's expense, while the upkeep of a free worker is at his own. In reality, however, the upkeep of the free worker is just as much at the master's expense as that of the slave. The wages paid to workers and servants of every kind must be enough, on average, to allow them to maintain and replace their numbers as the society's increasing, decreasing, or stable demand for labor requires. But even though the maintenance of a free worker costs the master just as much in principle, it generally costs him much less in practice than maintaining a slave. The fund for maintaining and replacing a slave is typically managed by a negligent master or a careless overseer. The fund for maintaining a free worker is managed by the free worker himself. The wasteful habits that generally prevail in the management of the rich naturally creep into the management of slaves. The strict thrift and careful budgeting of the poor naturally govern the management of free workers' own resources. Under such different management, achieving the same purpose requires very different amounts of spending. From the experience of all ages and nations, I believe, the work done by free workers turns out to be cheaper in the end than that done by slaves. This holds true even in Boston, New York, and Philadelphia, where the wages of common labor are very high.

Good wages for workers, then, are both the result of increasing wealth and the cause of increasing population. To complain about them is to complain about the necessary effect and cause of the greatest public prosperity.

It perhaps deserves to be noted that it's in the progressive state — when a society is advancing toward further wealth, rather than when it has reached its full capacity — that the condition of the working poor, the great body of the people, seems to be happiest and most comfortable. It's hard in the stationary state and miserable in the declining one. The progressive state is the cheerful and vigorous state for every class of society. The stationary is dull. The declining is bleak.

Good wages not only encourage population growth but also increase the productivity of the common people. Wages are the incentive for hard work, which, like every other human quality, improves in proportion to the incentive it receives. Generous pay increases a worker's physical strength, and the hopeful prospect of bettering his condition — of perhaps ending his days in comfort and plenty — inspires him to push that strength to the utmost. Where wages are high, we'll always find workers more active, diligent, and efficient than where they're low — in England, for example, versus Scotland; near large cities versus remote rural areas. Some workers, it's true, when they can earn a week's maintenance in four days, will be idle for the other three. But this is by no means the case with the majority. On the contrary, when workers are generously paid by the piece, they're very prone to overwork themselves and ruin their health within a few years. A carpenter in London, and in some other places, isn't expected to maintain his peak performance for more than eight years. Something similar happens in many other trades where workers are paid by the piece — as they generally are in manufacturing, and even in agricultural labor wherever wages are above average. Almost every class of skilled workers is prone to some occupational ailment caused by the excessive demands of their particular kind of work. The eminent Italian physician Ramazzini wrote an entire book about such diseases. We don't usually think of soldiers as the most industrious people among us. Yet when soldiers have been put to work on specific tasks and paid generously by the piece, their officers have frequently had to negotiate with the contractor to limit how much the soldiers could earn per day. Without this cap, competition and the desire for more money frequently drove them to overwork themselves and damage their health through excessive labor. In fact, working excessively hard for four days is frequently the real cause of the idleness on the other three that gets so loudly criticized. Intense labor, whether mental or physical, sustained over several days, is naturally followed in most people by an overwhelming desire for rest. Unless it's held back by force or strong necessity, this desire is almost irresistible. It's nature's way of insisting on relief — sometimes through simple rest, sometimes through recreation and entertainment. If this need isn't met, the consequences are often dangerous, sometimes fatal, and almost always eventually bring on the occupational diseases of the trade. If employers would listen to the dictates of reason and compassion, they would more often need to moderate their workers' efforts rather than push for more. In every trade, I believe, the person who works at a sustainable pace — one that allows him to work steadily day after day — not only preserves his health the longest but actually produces the greatest quantity of work over the course of a year.

In cheap years, it's claimed, workers are generally lazier, and in expensive years they work harder. A generous food supply, it's been concluded, makes them slack, while a meager one sharpens their effort. That slightly better-than-usual living conditions might make some workers idle is certainly possible. But that this would be the general effect — that people in general work better when they're poorly fed than when they're well fed, when they're demoralized than when they're in good spirits, when they're frequently sick than when they're generally healthy — doesn't seem very likely. Years of high food prices, it should be noted, are generally years of sickness and death among the common people, which inevitably reduces the output of their labor.

In years of plenty, workers frequently leave their employers and try to get by on what they can earn independently. But the same low food prices, by increasing the funds available for hiring workers, encourage employers — especially farmers — to take on more. Farmers in such times expect to profit more from their grain by hiring additional laborers than by selling it cheaply at market. The demand for workers increases just as the number of available workers decreases. Wages therefore frequently rise in years of cheap food.

In years of scarcity, the difficulty and uncertainty of finding food make all these independent workers eager to return to employment. But the high cost of food, by shrinking the funds available for hiring, pushes employers to reduce rather than increase their workforce. In expensive years, poor independent workers also frequently use up the small reserves of capital they'd been using to buy their own materials, and are forced to become hired workers just to survive. More people want jobs than can easily find them. Many are willing to work for less than usual, and the wages of both servants and hired workers frequently fall during expensive years.

Employers of all kinds, therefore, frequently strike better deals with their workers in expensive years than in cheap ones, and find them more docile and compliant in the former than the latter. Naturally, then, employers praise expensive years as better for productivity. Landlords and farmers, the two largest classes of employers, have an additional reason to prefer high food prices: their rents and profits depend heavily on them. Nothing could be more absurd, however, than to imagine that people in general work less hard when they work for themselves than when they work for someone else. A poor independent worker will generally be more industrious than even a hired worker paid by the piece. The independent worker enjoys the full product of his own labor; the hired worker shares it with his employer. The independent worker, in his separate state, is also less exposed to the temptations of bad company that so frequently corrupt the morals of workers in large factories. The superiority of the independent worker over servants hired by the month or year — whose wages and upkeep are the same whether they do much or little — is likely to be even greater. Cheap years tend to increase the proportion of independent workers relative to hired ones, while expensive years tend to decrease it.

A French author of great knowledge and ingenuity, Monsieur Messance, a tax official in the district of St. Etienne, tries to show that the poor do more work in cheap years than in expensive ones. He compares the quantity and value of goods produced in three different manufacturing industries during cheap and expensive years: one producing coarse woolen goods at Elbeuf, one producing linen, and one producing silk, the latter two spread across the whole region of Rouen. According to his account, which is drawn from public records, the quantity and value of goods produced in all three industries was generally greater in cheap years than in expensive ones — always greatest in the cheapest years and least in the most expensive. All three appear to be mature industries whose output, though it varies somewhat from year to year, is on the whole neither growing nor shrinking.

The linen industry in Scotland and the coarse woolen industry in the West Riding of Yorkshire, on the other hand, are growing industries whose output is generally — though with some fluctuations — increasing in both quantity and value. In examining the published accounts of their annual output, however, I haven't been able to find any clear connection between those fluctuations and the price of food. In 1740, a year of extreme scarcity, both industries did decline significantly. But in 1756, another year of great scarcity, the Scottish linen industry actually grew more than usual. The Yorkshire woolen industry did decline that year, and its output didn't recover to its 1755 level until 1766, after the repeal of the American Stamp Act. In that year and the following one, it surged past anything seen before, and it has continued to advance ever since.

The output of all large industries producing for distant markets must depend not so much on the price of food where the goods are made, but on conditions affecting demand where they're consumed: on peace or war, on the prosperity or decline of competing industries, and on the mood of their main customers. Furthermore, much of the extra work done in cheap years never shows up in official industry statistics. Male servants who leave their employers become independent workers. Women return to their families and typically spin cloth for their household's own use. Even independent workers don't always produce for the market — they're often hired by neighbors for household manufacturing. The output of their labor therefore frequently makes no appearance in the official records that are sometimes published with such fanfare, and from which merchants and manufacturers love to proclaim the prosperity or decline of entire empires.

Although variations in the price of labor don't always match those in the price of food — and are in fact frequently opposite — we shouldn't imagine that food prices have no influence on wages. The money price of labor is necessarily determined by two things: the demand for labor, and the price of the necessities and comforts of life. The demand for labor, depending on whether it's increasing, stable, or declining — and thus whether it requires a growing, stable, or shrinking population — determines the quantity of necessities and comforts that must be given to the worker. And the money price of labor is determined by what it costs to purchase that quantity. So even though money wages are sometimes high when food prices are low, they would be even higher — if demand stayed the same — when food prices are high.

The money price of labor sometimes rises in years of sudden, extraordinary plenty, and falls in years of sudden, extraordinary scarcity, because the demand for labor increases in the first case and decreases in the second.

In a year of sudden, extraordinary plenty, many employers find themselves with funds sufficient to hire and support more workers than the year before. But the extra workers can't always be found. Those employers who need more workers bid against each other to get them, which sometimes pushes up both the real and money price of labor.

The opposite happens in a year of sudden, extraordinary scarcity. The funds available for hiring are smaller than the year before. A considerable number of people are thrown out of work and bid against each other for the remaining jobs, which sometimes pushes down both the real and money price of labor. In 1740, a year of extraordinary scarcity, many people were willing to work for bare subsistence. In the following years of plenty, it was much harder to find laborers and servants.

The scarcity of an expensive year, by reducing the demand for labor, tends to push wages down, even as the high cost of food tends to push them up. The plenty of a cheap year, by increasing the demand for labor, tends to push wages up, even as the low cost of food tends to push them down. In the normal range of food price variations, these two opposing forces seem to roughly cancel each other out. This is probably part of the reason why wages are everywhere so much more stable and permanent than the price of food.

Rising wages necessarily raise the price of many commodities, by increasing the wage component of their cost, and this tends to reduce their consumption both domestically and abroad. But the same cause that raises wages — the growth of capital — also tends to increase the productive power of labor, enabling a smaller quantity of labor to produce a greater quantity of output. The owner of capital who employs many workers naturally tries, in his own interest, to organize and distribute work so that his employees can produce as much as possible. For the same reason, he tries to equip them with the best machinery that either he or they can devise. What happens among the workers in a single workshop happens, for the same reason, among the workers of a whole society. The more workers there are, the more they naturally sort themselves into different classes and specializations of work. More minds are devoted to inventing the best machinery for each kind of job, and so better machinery is more likely to be invented. The result is that many commodities come to be produced with so much less labor than before that the rise in labor's price is more than offset by the reduction in the quantity of labor needed.

Chapter IX: Of the Profits of Stock

The rise and fall of profits on capital depend on the same causes as the rise and fall of wages — namely, whether the wealth of the society is growing or declining. But these causes affect wages and profits very differently.

The growth of capital, which raises wages, tends to lower profits. When the capital of many wealthy merchants flows into the same trade, their competition naturally drives down its profits. And when there's a similar increase of capital across all the different trades in a society, the same competition must produce the same effect in every one of them.

It's already been observed that it's not easy to determine the average wages of labor even in a particular place and time. The best we can usually do is identify the most common wages. But even that is rarely possible when it comes to the profits of capital. Profit is so volatile that a person running a particular business often can't tell you himself what his average annual profit is. It's affected not only by every change in the price of the goods he deals in, but by the good or bad luck of both his competitors and his customers, and by a thousand other accidents to which goods are vulnerable whether they're being shipped by sea or land, or even just stored in a warehouse. Profit varies, therefore, not only from year to year but from day to day, almost from hour to hour. Determining the average profit across all the different trades in a large country must be far more difficult still, and trying to assess what it was in earlier times or distant periods is simply impossible.

But even though we can't precisely determine what the average profits of capital are or were — either now or in the past — we can form some idea of them from the interest rate on money. It can be stated as a general rule that wherever a great deal of money can be made by investing capital, a great deal will be paid for the use of it; and wherever little can be made, little will be paid. As the usual market rate of interest varies in any country, we can be sure that the ordinary profits of capital vary with it — falling as interest falls and rising as it rises. The trajectory of interest rates, then, can give us some idea of the trajectory of profits.

Under a statute of Henry VIII, all interest above ten percent was declared illegal. Even higher rates had apparently sometimes been charged before that. Under Edward VI, religious zeal prohibited all interest entirely. This prohibition, however, like all others of its kind, is said to have had no effect and probably made the problem of excessive interest worse rather than better. Henry VIII's statute was revived under Elizabeth I, and ten percent remained the legal ceiling until the reign of James I, when it was lowered to eight percent. It was reduced to six percent soon after the Restoration, and to five percent under Queen Anne. All these various statutory changes seem to have been made wisely. They appear to have followed the market rate of interest — the rate at which creditworthy people actually borrowed — rather than trying to lead it. Since the time of Queen Anne, five percent seems to have been slightly above the market rate rather than below it. Before the recent war, the government was borrowing at three percent, and creditworthy people in London and many other parts of the country at three and a half, four, and four and a half percent.

Since the time of Henry VIII, the wealth and income of the country have been continually advancing, and the pace of that advance seems to have been gradually accelerating rather than slowing down. The economy seems to have been not only growing, but growing faster and faster. Wages have been continually rising during the same period, while profits in the greater part of different trades and industries have been falling.

It generally takes more capital to carry on any trade in a large city than in a country village. The large amounts of capital invested in every line of business, and the greater number of wealthy competitors, generally push the profit rate in the city below what it is in the countryside. But wages are generally higher in a large city than in a country village. In a thriving city, people with large amounts of capital to invest frequently can't find enough workers and bid against each other to hire them. This pushes wages up and profits down. In remote parts of the country, there's often not enough capital to employ everyone, so workers bid against each other for the available jobs. This pushes wages down and profits up.

In Scotland, though the legal interest rate is the same as in England, the market rate is somewhat higher. Even the most creditworthy people there rarely borrow below five percent. Private bankers in Edinburgh actually pay four percent on their promissory notes, from which depositors can withdraw at any time. Private bankers in London pay no interest at all on deposits. Most trades can be run with less capital in Scotland than in England. The ordinary rate of profit must therefore be somewhat higher. Wages, as already noted, are lower in Scotland than in England. The country is not only much poorer, but the steps by which it's advancing to a better condition — and it is clearly advancing — seem to be much slower and more gradual.

The legal interest rate in France has not always followed the market rate during the present century. In 1720, interest was cut from five to two percent. In 1724, it was raised to three and a third percent. In 1725, it went back up to five percent. In 1766, under the administration of Monsieur Laverdy, it was cut to four percent. The Abbe Terray later raised it back to the old rate of five percent. The supposed purpose of many of these dramatic interest rate cuts was to prepare the way for reducing the interest on the national debt — a purpose that was sometimes actually carried out. France is probably not as rich a country as England at present. And although the legal interest rate has frequently been lower in France than in England, the market rate has generally been higher — because in France, as in other countries, there are several safe and easy ways to get around the law. The profits of trade, I've been assured by British merchants who have done business in both countries, are higher in France than in England. This no doubt explains why many British businesspeople choose to invest their capital in a country where commerce is looked down upon, rather than in one where it's highly respected. Wages are lower in France than in England. When you travel from Scotland to England, the difference you notice in the dress and appearance of the common people in the two countries is a clear sign of the difference in their circumstances. The contrast is even more striking when you come back from France. France, though no doubt wealthier than Scotland, doesn't seem to be moving forward as fast. It's a common and even popular opinion in France that the country is actually going backward — an opinion that I think is mistaken even regarding France, but which no one could possibly hold about Scotland who has seen the country now and saw it twenty or thirty years ago.

The province of Holland, on the other hand, relative to the size of its territory and population, is a richer country than England. The Dutch government borrows at two percent, and creditworthy private individuals at three. Wages are said to be higher in Holland than in England, and the Dutch, as everyone knows, trade on lower profit margins than any other people in Europe. Some have claimed that Dutch trade is declining, and it may be true that certain specific branches of it are. But these symptoms are sufficient to show that there is no general decline. When profits shrink, merchants are very quick to complain that trade is decaying — though falling profits are the natural result of prosperity, or of more capital being invested than before. During the recent war, the Dutch captured the entire shipping trade of France, and they still hold a very large share of it. The enormous amounts they've invested in both French and English government bonds — reportedly about forty million pounds in the English funds alone, though I suspect that's a considerable exaggeration — and the large sums they lend to private borrowers in countries where the interest rate is higher than at home, certainly demonstrate that their capital has grown beyond what they can profitably invest in their own country's domestic business. But this doesn't prove that domestic business itself has declined. Just as a private individual's wealth, though originally built up in a particular trade, can grow beyond what that trade can absorb — while the trade itself continues to expand — the same can happen with the capital of a great nation.

In our North American and West Indian colonies, not only wages but also interest rates — and consequently the profits of capital — are higher than in England. In the different colonies, both the legal and market interest rates run between six and eight percent. High wages and high profits, however, are things that almost never go together, except in the special circumstances of new colonies. A new colony must, for some time, have too little capital relative to the size of its territory and too few people relative to the size of its capital, compared with most established countries. The colonists have more land than they have capital to farm. What capital they have is therefore applied only to cultivating the most fertile and best-situated land — along the seacoast and the banks of navigable rivers. Such land is often purchased at a price below the value of even what it would produce naturally. Capital invested in buying and improving such land must yield a very large profit and can therefore afford to pay a very high rate of interest. The rapid accumulation of capital in such a profitable setting enables the planter to increase his workforce faster than he can find new workers in a fresh settlement. Those he can find are therefore very generously paid. As the colony grows, the profits of capital gradually decline. Once all the most fertile and best-located land has been taken, less profit can be made from cultivating inferior land, and less interest can be afforded on the capital invested in it. In most of our colonies, accordingly, both the legal and market rates of interest have fallen considerably during the present century. As wealth, development, and population have increased, interest has declined. But wages don't fall as profits fall. The demand for labor grows with the growth of capital, whatever its rate of profit. And after profits have diminished, capital may not only continue to grow, but may grow much faster than before. It's the same with prosperous nations as with prosperous individuals: a large fortune, even with small returns, generally grows faster than a small fortune with high returns. Money, as the proverb says, makes money. Once you've got a little, it's often easy to get more. The great difficulty is getting that first little bit. The connection between the growth of capital and the growth of industry — or of the demand for productive labor — has already been partly explained and will be explored more fully later, in the discussion of capital accumulation.

The acquisition of new territory or new branches of trade may sometimes raise the profits of capital, and with them the interest rate, even in a country that's rapidly growing richer. When the country's total capital isn't enough to handle all the new business opportunities that such acquisitions create, it gets directed toward the branches that offer the greatest profit. Some capital that had previously been invested in other trades is necessarily pulled out and redirected into the new, more profitable ones. In all those older trades, competition therefore decreases, the market becomes less fully supplied with many types of goods, their price rises, and higher prices yield greater profits to those who deal in them — who can therefore afford to borrow at higher interest. For some time after the end of the recent war, not only the most creditworthy private individuals but some of the largest companies in London were commonly borrowing at five percent, having previously paid no more than four or four and a half. The enormous new territory and trade gained through our acquisitions in North America and the West Indies is sufficient to explain this, without assuming any decline in the nation's total capital. Such a massive amount of new business, to be conducted with the existing capital, must necessarily have reduced the amount invested in many established trades. With less competition in those trades, profits must have been higher. I'll have occasion later to explain the reasons why I believe the capital of Great Britain was not actually reduced even by the enormous expense of the recent war.

When the total capital of a society does actually decline — when the funds available for supporting industry shrink — this lowers wages and raises profits, and consequently raises interest rates. With wages lower, the owners of whatever capital remains can bring their goods to market more cheaply. And with less capital supplying the market, they can sell those goods at higher prices. Their profits are thus boosted on both ends, and they can well afford to pay high interest. The great fortunes so suddenly and easily acquired in Bengal and the other British settlements in the East Indies should convince us that where wages are very low, the profits of capital are very high — in those devastated countries. Interest rates are proportionally extreme. In Bengal, money is frequently lent to farmers at forty, fifty, and sixty percent, with the next harvest pledged as collateral. Since profits that can support such interest rates must consume almost the entire rent that should go to the landlord, such outrageous lending rates must in turn consume most of those profits. Before the fall of the Roman Republic, similarly extreme interest rates seem to have been common in the provinces, under the ruinous administration of their provincial governors. The supposedly virtuous Brutus lent money in Cyprus at forty-eight percent, as we learn from the letters of Cicero.

In a country that had reached the full capacity of wealth that its soil, climate, and position relative to other countries would allow — one that could advance no further and wasn't going backward — both wages and profits would probably be very low. In a country fully populated relative to what its territory could support or its capital could employ, the competition for jobs would be so intense that wages would be driven down to barely enough to maintain the number of workers — and since the country would already be fully populated, that number could never be increased. In a country fully invested, with as much capital as could be deployed in every branch of business, competition would be everywhere at its maximum and ordinary profits would be as low as possible.

But perhaps no country has ever actually reached this point. China seems to have been stagnant for a long time, and had probably long ago reached the full level of wealth consistent with its laws and institutions. But that level may be far below what different laws and institutions could achieve given its soil, climate, and geographic position. A country that neglects or scorns foreign trade, and allows foreign ships into only one or two of its ports, cannot do the same volume of business it could with different policies. In a country where the wealthy and the owners of large capital enjoy considerable security but the poor and owners of small capital enjoy almost none — where they're liable at any time to be robbed and plundered by petty officials under the pretense of justice — the total capital invested in business can never reach what the nature and scale of that business would allow. In every industry, the oppression of the poor establishes the monopoly of the rich, who, by controlling the entire trade themselves, can extract very large profits. Twelve percent is accordingly said to be the standard interest rate in China, and the ordinary profits of capital must be high enough to support that kind of rate.

A deficiency in the legal system may sometimes push interest rates considerably above what the country's level of wealth or poverty would normally require. When the law doesn't enforce contracts, it puts all borrowers in roughly the same position as bankrupts or people of questionable credit in better-regulated countries. The uncertainty of getting his money back forces the lender to charge the same exorbitant interest usually demanded from bankrupts. Among the peoples who overran the western provinces of the Roman Empire, contract enforcement was left for many centuries to the good faith of the parties involved. The courts of their kings rarely got involved. The high interest rates that prevailed in those ancient times may be partly explained by this.

When the law prohibits interest altogether, it doesn't actually prevent it. Many people must borrow, and nobody will lend without compensation for the use of their money — compensation adequate not only to what can be earned by investing it, but to the difficulty and danger of breaking the law. The high interest rates throughout the Muslim world are attributed by Montesquieu not to poverty, but partly to the prohibition of interest and partly to the difficulty of recovering the money.

The lowest ordinary rate of profit must always be somewhat more than enough to cover the occasional losses that every investment of capital is subject to. Only this surplus is the net or clear profit. What's called gross profit frequently includes not only this surplus but also a reserve for compensating those occasional losses. The interest a borrower can afford to pay is proportional only to the clear profit.

The lowest ordinary rate of interest must likewise be somewhat more than enough to compensate for the occasional losses that lending, even with reasonable caution, involves. If it weren't, the only motives for lending would be charity or friendship.

In a country that had reached its full capacity of wealth — where the maximum possible capital was invested in every branch of business — the ordinary rate of clear profit would be very small. The usual market rate of interest that could be paid from it would be so low that it would be impossible for anyone except the very wealthiest to live on the interest from their money. Everyone with a small or moderate fortune would have to personally manage the investment of their own capital. Almost everyone would need to be a businessperson or engage in some kind of trade. The province of Holland seems to be approaching this condition. There, it's unfashionable not to be in business. Necessity makes it the norm for nearly everyone, and custom everywhere shapes fashion. Just as it would be ridiculous not to get dressed, it's somewhat ridiculous there not to be employed like everyone else. Just as a civilian professional looks out of place in a military camp and is even at some risk of being looked down on, so does an idle person among people of business.

The highest ordinary rate of profit would be one that, in the price of most commodities, consumes everything that should go to rent on the land, leaving only enough to pay for the labor of preparing and bringing goods to market at the lowest rate labor can possibly be paid — bare subsistence for the worker. The worker must always have been fed somehow while doing the work, but the landlord needn't necessarily have been paid. The profits of the trade that the servants of the East India Company conduct in Bengal may not be very far from this rate.

The proportion that the usual market rate of interest should bear to the ordinary rate of clear profit necessarily varies as profit rises or falls. In Great Britain, double the interest rate is considered what merchants call a "good, moderate, reasonable profit" — terms that I take to mean nothing more than a common and usual profit. In a country where the ordinary rate of clear profit is eight or ten percent, it may be reasonable for half of it to go to interest when business is conducted with borrowed money. The capital is at the borrower's risk — he's effectively insuring it for the lender — and four or five percent may, in most trades, be both adequate compensation for the risk of this insurance and adequate reward for the trouble of managing the capital. But this proportion between interest and clear profit might not hold in countries where the ordinary rate of profit was either much lower or much higher. If it were much lower, perhaps half couldn't be spared for interest. If it were much higher, more could be.

In countries that are rapidly growing richer, the low rate of profit may, in the price of many commodities, offset the high wages of labor, enabling those countries to sell as cheaply as their less prosperous neighbors, where wages may be lower.

In fact, high profits tend to raise the price of goods much more than high wages do. Suppose that in the linen industry, the wages of all the different workers — the flax-dressers, spinners, weavers, and so on — were all raised by two pence a day. The price of a piece of linen would need to increase by only the number of workers involved, multiplied by the number of days they worked, multiplied by two pence. The wage component of the commodity's price would, through all the different stages of manufacturing, rise only in a simple, additive (arithmetic) proportion to the wage increase. But if the profits of all the different employers of those workers were raised by five percent, the profit component of the price would, through all the stages of manufacturing, rise in a compounding (geometric) proportion. The employer of the flax-dressers would, when selling his processed flax, require an additional five percent on the entire value of both the materials and wages he had advanced to his workers. The employer of the spinners would require an additional five percent on both the now-higher price of the flax and the wages of his spinners. And the employer of the weavers would require an additional five percent on both the now-higher price of the linen yarn and the wages of his weavers. In raising the price of commodities, higher wages work like simple interest on a debt. Higher profits work like compound interest. Our merchants and factory owners complain loudly about the terrible effects of high wages in raising prices and reducing the sale of their goods both at home and abroad. They say nothing about the effects of high profits. They are silent about the damaging consequences of their own gains. They complain only about other people's.

Chapter X: Of Wages and Profit in the Different Employments of Labor and Stock

Of Wages and Profit in the Different Employments of Labor and Capital

The total advantages and disadvantages of different jobs and investments must, within the same area, be either perfectly equal or constantly moving toward equality. If some job in a neighborhood were obviously more or less attractive than the rest, people would flood into it in the first case or abandon it in the second, until its advantages returned to the same level as everything else. This, at least, is what would happen in a society where things followed their natural course — where there was perfect freedom, and where everyone was free to pick whatever occupation they wanted and to switch whenever they felt like it. Self-interest alone would drive people toward the good jobs and away from the bad ones.

Actual wages and profits, of course, vary enormously across Europe depending on the type of work or investment. But this variation comes from two sources: partly from certain features of the jobs themselves that compensate for low pay in some cases and offset high pay in others, and partly from European government policies that never leave things in a state of perfect freedom.

Examining these features and policies will divide this chapter into two parts.

Part I

Inequalities Arising from the Nature of the Jobs Themselves

As far as I've been able to observe, five main factors compensate for low pay in some jobs and offset high pay in others. First, how pleasant or unpleasant the work is. Second, how easy and cheap, or difficult and expensive, it is to learn. Third, how steady or irregular the employment is. Fourth, how much trust must be placed in the workers. And fifth, how likely or unlikely success is.

First: Wages vary with how easy or hard, clean or dirty, and respectable or disreputable the work is.

In most places, averaged over the year, a journeyman tailor earns less than a journeyman weaver. His work is much easier. A journeyman weaver earns less than a journeyman smith. His work isn't always easier, but it's much cleaner. A journeyman blacksmith, though he's a skilled worker, rarely earns as much in twelve hours as a coal miner — who is just an ordinary laborer — earns in eight. The blacksmith's work isn't quite as dirty, is less dangerous, and takes place in daylight above ground.

Prestige makes up a large part of the reward for all respected professions. In terms of actual pay, all things considered, they're generally undercompensated — as I'll show later. Disgrace has the opposite effect. Butchering is a brutal and ugly business, but in most places it's more profitable than most ordinary trades. The most detestable of all jobs — public executioner — is, relative to the amount of work involved, better paid than any common trade.

Hunting and fishing, the most important occupations of humanity in its earliest stage, become the most popular hobbies in an advanced society. People pursue for pleasure what they once did out of necessity. In an advanced society, then, it's only very poor people who follow as a profession what everyone else does for fun. Fishermen have been poor since the time of the ancient Greek poet Theocritus. A poacher is everywhere a poor man in Great Britain. In countries where strict laws prevent poaching, the licensed hunter isn't much better off. The natural appeal of these activities draws more people into them than can comfortably make a living, so the products of their labor always come to market too cheap to provide anything beyond the barest subsistence.

Unpleasantness and disgrace affect the profits on capital the same way they affect wages. The owner of an inn or tavern, who is never master of his own house and is exposed to the rudeness of every drunk, runs neither a very pleasant nor a very respectable business. But there's hardly any common business where a small investment produces such a large profit.

Second: Wages vary with how easy and cheap, or difficult and expensive, it is to learn the trade.

When an expensive machine is built, you'd expect that the work it performs before it wears out will repay the capital invested in it, with at least the ordinary rate of profit. A person educated at great cost in time and money for a job requiring extraordinary skill can be compared to one of those expensive machines. The work he learns to do must, over and above the usual wages of common labor, repay the full cost of his education with at least the ordinary profits on an equally valuable investment. And it needs to do this within a reasonable timeframe, given the uncertain length of a human life — just as we'd calculate for the more predictable lifespan of a machine.

The wage gap between skilled and unskilled labor is based on this principle.

European policy treats the labor of all mechanics, craftsmen, and manufacturers as skilled labor, and all farm labor as common labor. It assumes the former is more refined and delicate than the latter. In some cases that's true, but for the most part it's quite the opposite, as I'll show later. European laws and customs therefore require an apprenticeship to qualify for the skilled trades — though enforcement varies from place to place — while leaving farm work free and open to everyone. During the apprenticeship, all of the apprentice's labor belongs to his master. Meanwhile, the apprentice typically has to be supported by his parents or relatives, and almost always has to be clothed by them. Some money is usually paid to the master for the training as well. Those who can't pay money pay with time, serving more years than usual — an arrangement that, while not always beneficial to the master (given the typical laziness of apprentices), is always a disadvantage for the apprentice. In farm work, by contrast, the laborer learns the harder parts of his job while doing the easier ones, and his own labor supports him through every stage of his training. It's reasonable, then, that in Europe the wages of mechanics, craftsmen, and manufacturers should be somewhat higher than those of common laborers. And they are. Their higher earnings make them a generally higher-ranking class of people in most places. This advantage, however, is usually quite small. The daily or weekly earnings of journeymen in the more common types of manufacturing — plain linen and woolen cloth, for instance — are, on average, only a little more than the daily wages of common laborers. Their work is steadier, though, and taking the whole year together, the gap may be somewhat larger. But it's evidently no more than enough to compensate for the extra cost of their training.

Education in the creative arts and the learned professions is even longer and more expensive. The financial compensation for painters and sculptors, lawyers and doctors, should therefore be much more generous. And it is.

Profits on capital, by contrast, don't seem to be much affected by how easy or hard it is to learn the trade. All the different businesses where capital is commonly invested in major cities seem, in reality, about equally easy and equally difficult to master. One branch of foreign or domestic trade isn't really a much more complex business than another.

Third: Wages vary with how steady or irregular the employment is.

Some trades offer much steadier work than others. In most manufacturing jobs, a journeyman can expect employment almost every day of the year that he's able to work. A mason or bricklayer, on the other hand, can't work in hard frost or bad weather, and even in good weather his employment depends on when customers happen to need him. He's frequently out of work as a result. What he earns when he is employed has to not only support him during his idle periods, but also compensate him for the anxiety and discouragement that such a precarious situation inevitably causes. In most places, while the earnings of ordinary manufacturers are roughly equal to common laborers' daily wages, masons and bricklayers earn anywhere from fifty percent more to double. Where common laborers earn four to five shillings a week, masons and bricklayers often earn seven to eight. Where common laborers earn six, they often earn nine to ten. And where common laborers earn nine to ten, as in London, they commonly earn fifteen to eighteen. Yet no skilled trade seems easier to learn than masonry and bricklaying. In London, sedan-chair carriers are said to sometimes work as bricklayers during the summer. The high wages of these workers, then, aren't so much a reward for their skill as compensation for the irregularity of their employment.

A house carpenter seems to practice a somewhat more refined and skilled trade than a mason. In most places, though — it's not universal — his daily wages are a bit lower. His work, while somewhat dependent on customer demand, isn't as completely at its mercy, and it's not interrupted by weather.

When trades that usually offer steady work happen not to in a particular place, wages always rise well above their usual ratio to common labor. In London, nearly all journeymen craftsmen are liable to be hired and dismissed by their masters from day to day and week to week, just like day laborers elsewhere. Even the lowest class of craftsmen, journeymen tailors, earn half a crown a day there — about two shillings and sixpence — though eighteen pence is about the going rate for common labor. In small towns and villages, journeyman tailors' wages barely match those of common laborers. But in London they're often unemployed for weeks, especially during the summer.

When irregular employment is combined with hard, unpleasant, and dirty work, it sometimes pushes the wages of the most common labor above those of the most skilled craftsmen. A coal miner working by the piece supposedly earns around double the wages of common labor in Newcastle, and in many parts of Scotland about triple. His high pay comes entirely from the hardship, unpleasantness, and filth of his work. His employment can be as steady as he wants it to be. Coal heavers in London do work that's nearly as hard, dirty, and unpleasant as mining, and because coal ships arrive irregularly, most of them have extremely unsteady work. If coal miners typically earn double or triple the wages of common labor, it shouldn't seem unreasonable that coal heavers sometimes earn four or five times those wages. In an investigation into their conditions a few years ago, it was found that at their current rates they could earn six to ten shillings a day. Six shillings is about four times the wages of common labor in London, and in any trade, the lowest common earnings are what the vast majority actually make. However extravagant these earnings may seem, if they were more than enough to compensate for all the unpleasant aspects of the work, so many competitors would flood in that — in a trade with no exclusive privileges — wages would quickly drop.

The steadiness or irregularity of employment doesn't affect the ordinary profits on capital in any particular trade. Whether capital is constantly employed depends not on the trade, but on the trader.

Fourth: Wages vary according to how much trust must be placed in the workers.

Goldsmiths and jewelers are paid more than many workers of equal or even superior skill, because of the precious materials entrusted to them.

We trust our health to the doctor and our fortune — sometimes our life and reputation — to the lawyer. That kind of confidence can't safely be placed in people of very low social standing. Their compensation must therefore be enough to give them the social rank that such important trust requires. The long training and high cost of their education, combined with this factor, push the price of their labor even higher.

When someone invests only their own capital in a business, trust isn't an issue. Any credit they get from others depends not on the nature of the trade, but on others' opinion of their wealth, integrity, and judgment. Different profit rates across different lines of business, then, can't be explained by different degrees of trust placed in the traders.

Fifth: Wages vary according to how likely or unlikely success is.

The probability that any given person will actually become qualified for the job they're trained for varies enormously across occupations. In most skilled trades, success is nearly guaranteed. In the learned professions, it's deeply uncertain. Send your son to apprentice with a shoemaker, and there's little doubt he'll learn to make shoes. Send him to study law, and the odds are at least twenty to one against him ever getting good enough to make a living at it. In a perfectly fair lottery, those who draw winning tickets should gain exactly what's lost by those who draw blanks. In a profession where twenty people fail for every one who succeeds, that one winner should earn everything the twenty losers would have earned. The lawyer who finally starts making money around age forty should receive not only the return on his own long and expensive education, but the return on the educations of the twenty-plus others who never make anything from theirs. However extravagant legal fees may sometimes seem, actual compensation for lawyers never reaches that level. Add up what all the shoemakers or weavers in a given area earn in a year and compare it to what they spend, and you'll find that their total earnings usually exceed their expenses. Do the same calculation for all the lawyers and law students across all the Inns of Court, and you'll find that their annual earnings are a tiny fraction of their annual costs — even if you estimate their earnings generously and their expenses conservatively. The lottery of law, therefore, is far from being a fair one. The legal profession, like many other learned and respectable careers, is clearly undercompensated in financial terms.

Yet these professions stay competitive with other occupations. Despite these discouragements, the most ambitious and talented people are still eager to enter them. Two things draw them in. First, the desire for the reputation that comes with excellence. Second, the natural confidence that everyone has, to one degree or another, not only in their own abilities but in their own good luck.

To excel in any profession where few even reach mediocrity is the clearest mark of what we call genius or superior talent. The public admiration that comes with such distinction is always part of the reward — a larger or smaller part depending on the degree of admiration. It makes up a significant part of the reward in medicine, an even larger part in law, and in poetry and philosophy it's nearly the whole thing.

There are some very appealing and beautiful talents that command a kind of admiration, but whose exercise for money is considered — whether reasonably or not — a kind of public degradation. The pay for people who use these talents commercially must therefore be enough to compensate not just for the time, effort, and expense of acquiring them, but also for the social stigma of using them to earn a living. The enormous pay of actors, opera singers, dancers, and so on is based on these two factors: the rarity and beauty of the talent, and the social disgrace attached to using it this way. It seems absurd at first that we should look down on these people personally while rewarding their talents so lavishly. But as long as we do one, we inevitably do the other. If public opinion ever changed about these occupations, pay would quickly drop. More people would enter the field, and competition would drive down prices. Such talents, though far from common, are nowhere near as rare as people imagine. Many people have them in abundance but wouldn't dream of using them this way, and many more could develop them if doing so were considered respectable.

The inflated confidence that most people have in their own abilities is an ancient failing noted by philosophers and moralists throughout history. Their equally absurd overconfidence in their own good luck has gotten less attention. But it's even more universal. There's no one alive who, in decent health and spirits, doesn't have at least some of it. Everyone overestimates their chances of winning, and most people underestimate their chances of losing. Hardly anyone, when feeling reasonably well, gives the risk of loss its true weight.

That people overvalue their chances of winning, we can see from the universal popularity of lotteries. The world has never seen, and never will see, a perfectly fair lottery — one where total winnings equal total losses — because the operator wouldn't make anything. In state lotteries, tickets aren't actually worth what buyers pay, yet they routinely sell on the secondary market at a 20, 30, or even 40 percent premium. The vain hope of winning a big prize is the only reason for this demand. The most level-headed people barely consider it foolish to pay a small sum for a shot at ten or twenty thousand pounds, even though they know that small sum is probably 20 to 30 percent more than the chance is actually worth. If a lottery's biggest prize were only twenty pounds — making it a much fairer lottery overall — tickets wouldn't sell nearly as well. To improve their odds of landing a big prize, some people buy multiple tickets, while others buy small shares in even more. But there's no more certain proposition in mathematics than this: the more tickets you buy, the more likely you are to be a loser. Buy every ticket in the lottery, and you lose for certain. The more tickets you hold, the closer you get to that certainty.

That people undervalue their chances of losing, we can see from the very modest profits of insurance companies. To make fire or marine insurance a viable business at all, premiums need to cover the average losses, pay for management expenses, and still yield the same profit that an equal amount of capital would earn in any other line of business. Someone who pays no more than this is paying no more than the true value of the risk — the lowest price at which they could reasonably expect coverage. Yet though many people have made a modest living from insurance, very few have made a fortune — which tells us that the average balance of profit and loss in insurance isn't any more favorable than in other ordinary businesses. Even so, many people think so little of risk that they won't bother paying for insurance at all. Across the whole kingdom, on average, nineteen out of twenty houses — or perhaps even ninety-nine out of a hundred — aren't insured against fire. The risk of loss at sea alarms people more, so the proportion of insured to uninsured ships is much higher. Still, many ships sail in all seasons — even in wartime — without any insurance. Sometimes this isn't imprudent. When a large company or a major merchant has twenty or thirty ships at sea, they can effectively insure themselves. The total premiums they save may more than cover whatever losses they're likely to encounter in the ordinary course of events. But the failure to insure ships, like the failure to insure houses, is in most cases not the result of such careful calculation. It's pure carelessness and reckless contempt for risk.

This contempt for risk and overconfident hope of success are most powerful at the age when young people choose their careers. How little the fear of failure can counterbalance the hope of success shows up even more clearly in working-class people's eagerness to enlist as soldiers or go to sea than in the enthusiasm of wealthier people for the learned professions.

What a common soldier stands to lose is obvious enough. Yet young volunteers never enlist so eagerly as at the start of a new war, even though they have almost no real chance of advancement. In their youthful imaginations, they picture a thousand opportunities for glory and distinction that never actually come. These romantic dreams are what they're selling their lives for. Their pay is less than a common laborer's, and in active service their hardships are far greater.

The lottery of the sea isn't quite as bad as the army's. The son of a respectable laborer or craftsman may go to sea with his father's blessing, but if he enlists as a soldier, it's always without it. Other people can at least see some chance of his making something of himself in the navy; no one but the soldier himself sees any chance in the army. A great admiral gets less public admiration than a great general, and the highest success at sea promises a less brilliant fortune and reputation than equal success on land. The same disparity runs through every lower rank of advancement in both services. By the official rules of precedence, a navy captain ranks with an army colonel — but he doesn't in the public's estimation. Since the top prizes in the naval lottery are smaller, the smaller prizes must be more numerous. Common sailors do in fact get ahead more often than common soldiers, and the hope of these prizes is mainly what makes the trade attractive. Even though sailors' skill and dexterity far exceed those of almost any craftsman, and though their whole life is one continuous ordeal of hardship and danger, all they receive for that skill and those dangers — as long as they remain common sailors — is little more than the satisfaction of exercising the one and surviving the other. Their wages are no higher than those of common laborers at the port that sets the rate for seamen's pay. Since sailors are constantly moving from port to port, monthly pay is more uniform across Great Britain for sailors than for any other type of worker, and the rate at the port with the most traffic — London — sets the standard for the rest. In London, wages for most types of workers are roughly double those in Edinburgh. But sailors sailing from London rarely earn more than three or four shillings a month above those sailing from the port of Leith, and often the gap is even smaller. In peacetime merchant service, the London rate runs from a guinea to about twenty-seven shillings per calendar month. A common laborer in London, at nine or ten shillings a week, can earn forty to forty-five shillings in a month. Sailors do get food on top of their pay, but its value may not always exceed the difference between their pay and a common laborer's. And even when it does, it's not a clear gain for the sailor — he can't share those meals with his wife and family, whom he must support from his wages back home.

The dangers and narrow escapes of an adventurous life, far from discouraging young people, often make a career more appealing. A worried mother from the lower classes is frequently afraid to send her son to school in a seaport town, worried that the sight of ships and sailors' tales of adventure will tempt him to sea. The distant prospect of dangers that we think we can overcome through courage and skill doesn't bother us and doesn't push wages up. It's different with dangers where courage and skill can't help. In trades known to be seriously unhealthy, wages are always remarkably high. Unhealthiness is a form of unpleasantness, and its effect on wages falls under the same general principle.

In all the different uses of capital, the ordinary rate of profit varies with the certainty or uncertainty of returns. Returns are generally less uncertain in domestic trade than in foreign trade, and in some branches of foreign trade more than others — in trade with North America, for example, compared to trade with Jamaica. The ordinary rate of profit always rises somewhat with the risk. But it doesn't seem to rise in proportion to the risk — not enough to fully compensate for it. Bankruptcies are most common in the riskiest trades. The most hazardous trade of all — smuggling — though the most profitable when it succeeds, is the surest road to bankruptcy. The overconfident hope of success acts here as it does everywhere else, luring so many adventurers into risky trades that competition pushes profits below what's needed to cover the risk. To fully compensate, the average returns would need to cover not only ordinary profits and occasional losses, but also provide a surplus comparable to an insurer's profit. If the average returns were enough for all that, bankruptcies wouldn't be any more common in these trades than in others.

Of these five factors, then, only two affect the profits on capital: how pleasant or unpleasant the business is, and how safe or risky. Among different lines of business, there's little difference in pleasantness, but a huge difference among different types of labor. And while profit rises with risk, it doesn't always rise proportionally. It follows that, within the same area, the average rates of profit across different businesses should be closer together than the wages across different types of labor. And that's exactly what we see. The gap between a common laborer's earnings and those of a well-employed lawyer or doctor is clearly much greater than the gap between ordinary profits in any two different lines of business. What looks like a difference in profits across different businesses is often an illusion — it comes from our failure to distinguish between what should really count as wages and what should count as profit.

The profit margin of a pharmacist has become proverbial for being outrageous. But this seemingly enormous profit is often nothing more than reasonable wages for the pharmacist's labor. A pharmacist's skill is a much more refined and demanding thing than any craftsman's, and the trust placed in them is far greater. The pharmacist is the doctor for the poor in all cases and for the rich when the illness isn't too serious. The pharmacist's compensation should therefore match their skill and the trust placed in them, and it typically comes from the markup on drugs. But the total drugs that even the busiest pharmacist in a large market town sells in a year might not cost more than thirty or forty pounds wholesale. Selling them for three or four hundred pounds — a markup of a thousand percent — may therefore be nothing more than reasonable wages charged in the only way they can be: through the price of the drugs. Most of what looks like profit is actually wages in disguise.

In a small seaport town, a little grocer might make 40 or 50 percent profit on a hundred pounds of capital, while a major wholesale merchant in the same town barely makes 8 or 10 percent on ten thousand. The grocer's business may be necessary for the town's residents, and the market may be too small for a larger investment. But the grocer has to not only make a living from the trade, but make a living appropriate to what the job demands. Besides having a small amount of capital, the grocer needs to be able to read, write, and do accounts, and must be a decent judge of maybe fifty or sixty different kinds of goods — their prices, their qualities, and where to get them cheapest. In short, the grocer needs all the knowledge of a major merchant. The only thing stopping the grocer from becoming one is lack of capital. Thirty or forty pounds a year isn't too much compensation for the labor of someone with all these qualifications. Subtract that from the seemingly huge profits on the grocer's capital, and what's left is probably just ordinary profits. Here too, most of the apparent profit is really wages.

The gap between apparent retail and wholesale profits is much smaller in the capital city than in small towns and villages. Where ten thousand pounds can be employed in the grocery trade, the grocer's labor adds only a tiny fraction to the real profits on such a large investment. Big-city retailers' apparent profits are therefore much closer to those of wholesale merchants. This is why retail goods are generally as cheap — and often cheaper — in the capital as in small towns and villages. Groceries, for example, are generally much cheaper in the city. Bread and butcher's meat are often just as cheap. It costs no more to ship groceries to the city than to a country village, but it costs much more to bring in grain and livestock, since most of it has to travel a much greater distance. Since the wholesale cost of groceries is the same in both places, they're cheapest where the markup is smallest. The wholesale cost of bread and meat is higher in the city than in the country, so even though the markup is smaller, they're not always cheaper — just often about the same price. For products like bread and meat, the same force that reduces apparent profit — wider markets employing more capital — also increases the base cost by requiring supplies from farther away. These two effects roughly cancel each other out. That's probably why, even though the prices of grain and livestock vary a lot across the country, the prices of bread and butcher's meat are generally about the same everywhere.

Though profits on capital in both wholesale and retail trade are generally lower in the capital than in small towns and villages, large fortunes are frequently built from small beginnings in the former and almost never in the latter. In small towns, the market is too narrow for trade to expand as capital grows. The rate of profit for a particular person might be very high, but the total amount of profit can never be very large, and neither can their annual savings. In large cities, trade can expand as capital increases, and the credit of a careful, successful businessperson grows much faster than their capital. Their business expands in proportion to both their capital and credit, total profits grow in proportion to the size of the business, and annual savings grow in proportion to total profits. Still, even in large cities, great fortunes are rarely made in any regular, established line of business — except through a long life of hard work, frugality, and careful attention. Quick fortunes, when they do happen in such places, are usually made through what's called speculation. The speculative merchant doesn't stick to any one established business. He's a grain dealer this year, a wine merchant the next, and a sugar, tobacco, or tea merchant the year after. He jumps into any trade that looks more profitable than usual and exits when he sees profits falling back to normal levels. His gains and losses bear no regular relationship to those of any established trade. A bold speculator may sometimes make a considerable fortune from two or three successful bets — but is just as likely to lose one from two or three bad ones. This type of business can only happen in major cities. Only in places with the most extensive commerce and networks of information can you get the intelligence it requires.

These five factors, then, cause significant differences in wages and profits, but they don't create any differences in the total advantages and disadvantages — real or imagined — of different jobs and investments. That's the whole point: they compensate for low pay in some cases and offset high pay in others.

For this equalization to actually work, however — even with the most perfect freedom — three conditions must be met. First, the jobs must be well known and long established in the area. Second, they must be in their normal, or what we might call their natural, state. Third, they must be the sole or main occupation of the people doing them.

First: This equalization only works for jobs that are well known and long established.

Where all other things are equal, wages are generally higher in new trades than in old ones. When an entrepreneur tries to start a new manufacturing business, he has to lure workers away from other jobs by offering higher wages than they can earn in their current trades — or than the nature of his work would otherwise justify — and a long time has to pass before he can risk cutting pay to the normal level. Industries driven by fashion and novelty are constantly changing and rarely last long enough to count as established. Industries driven by practical necessity, on the other hand, are less likely to change, and the same type of product may stay in demand for centuries. Wages are therefore likely to be higher in fashion-driven industries than in necessity-driven ones. Birmingham mainly produces fashion-driven goods; Sheffield mainly produces practical, necessity-driven ones. Wages in these two cities reportedly reflect this difference.

Launching any new business, new branch of trade, or new farming technique is always a speculation. The entrepreneur expects extraordinary profits. Sometimes these profits really are extraordinary. Sometimes — more often, perhaps — they're quite the opposite. But in general they bear no regular relationship to profits in established trades nearby. If the venture succeeds, profits are usually very high at first. Once the business is thoroughly established and well known, competition brings them down to the level of other trades.

Second: This equalization only works when jobs are in their normal, or what we might call natural, state.

Demand for almost every type of labor is sometimes higher and sometimes lower than usual. In the first case, the advantages of the job rise above the normal level; in the second, they fall below it. Demand for farm labor rises during hay-making and harvest and wages rise with it. In wartime, when forty or fifty thousand sailors are pressed from the merchant fleet into the royal navy, demand for merchant sailors naturally rises with their scarcity, and their wages typically jump from the normal range of a guinea to twenty-seven shillings a month up to forty shillings or even three pounds. In a declining industry, on the other hand, many workers would rather accept lower wages than leave their old trade.

Profits on capital fluctuate with the prices of the goods in which it's invested. When the price of a commodity rises above its average level, the profits on at least some of the capital used to bring it to market rise above their normal level too — and when prices fall, profits fall with them. All commodities fluctuate in price to some degree, but some much more than others. For goods produced by human labor, the quantity of labor employed each year naturally adjusts to match annual demand, so that average annual production roughly equals average annual consumption. In some industries, as I've noted earlier, the same amount of labor always produces the same — or nearly the same — amount of goods. In linen or woolen manufacturing, for instance, the same number of workers will process roughly the same quantity of cloth year after year. Price fluctuations for such goods can only come from shifts in demand. A period of public mourning drives up the price of black cloth. But since demand for most basic linen and woolen cloth is fairly stable, so are their prices. Other industries are different: the same amount of labor produces wildly different quantities in different years. The same effort will yield very different amounts of grain, wine, hops, sugar, or tobacco depending on the year. Prices for these goods fluctuate not only with demand but with much larger and more frequent swings in supply, and are therefore extremely volatile. The profits of at least some dealers must swing with these prices. Speculative merchants focus on exactly these kinds of goods. They try to buy when they expect prices to rise and sell when they expect prices to fall.

Third: This equalization only works when the jobs are the sole or main occupations of the people doing them.

When someone earns their living from one job that doesn't take up most of their time, they're often willing to work at another job during their free time for less than it would normally pay.

There's still a class of people in many parts of Scotland called cotters or cottagers, though they were more common years ago than they are now. They're a kind of outdoor servant to the landlords and farmers. Their usual compensation is a house, a small garden for vegetables, enough pasture for a cow, and maybe an acre or two of poor farmland. When their employer needs their labor, he also gives them two pecks of oatmeal a week, worth about sixteen pence. During much of the year, he has little or no need for their work, and farming their own small plot doesn't fill their remaining time. When these workers were more common, they were reportedly willing to give their spare time to anyone for very little pay, working for less than other laborers. In earlier times, they seem to have been common throughout Europe. In poorly cultivated and sparsely populated regions, most landlords and farmers couldn't otherwise get the large number of hands that farming requires at peak seasons. The daily or weekly pay these workers received from their employers clearly wasn't the full price of their labor — their small plot of land was a significant part of it. But this daily or weekly pay seems to have been treated as the whole price by many writers who've collected historical data on wages and prices, and who've enjoyed portraying both as astonishingly low.

The products of such labor often come to market cheaper than they should. Stockings in many parts of Scotland are knitted much cheaper than they can be made on a loom. They're the work of servants and laborers who earn most of their living from other jobs. More than a thousand pairs of Shetland stockings are imported into Leith every year at five to seven pence a pair. In Lerwick, the small capital of the Shetland Islands, ten pence a day is reportedly a common wage for common labor. Yet in those same islands, people knit worsted stockings worth a guinea a pair and more.

Spinning linen yarn in Scotland works much the same way as stocking-knitting — it's done by servants mainly hired for other purposes. Anyone who tries to earn their entire living from either trade will barely scrape by. In most parts of Scotland, a good spinner can earn twenty pence a week.

In wealthy countries, the market is generally big enough that any single trade can fully occupy those who work in it. The phenomenon of people living from one job while earning a bit of extra income from another is mainly found in poorer countries. The following example, however, comes from the capital of a very rich one. I believe there's no city in Europe where house rent is higher than in London, and yet I know of no capital where a furnished apartment can be rented so cheaply. Lodging is not only much cheaper in London than in Paris; it's much cheaper than in Edinburgh for the same quality. And the seemingly strange thing is that expensive house rent is actually the cause of cheap lodging. High house rent in London comes partly from the same factors that make it high in any major capital — expensive labor, expensive building materials that mostly have to be brought from far away, and above all expensive land, with every landlord acting as a monopolist, often charging more rent for a single acre of bad land in town than could be had for a hundred acres of the best land in the countryside. But it also comes partly from the distinctive customs of the English, which require every head of household to rent an entire house from top to bottom. A "dwelling house" in England means everything under one roof. In France, Scotland, and many other parts of Europe, it often means just a single floor. A London tradesman has to rent a whole house in the part of town where his customers live. His shop is on the ground floor, his family sleeps in the attic, and he tries to cover part of his rent by letting out the two middle floors to lodgers. He expects to support his family through his trade, not from his lodgers. In Paris and Edinburgh, by contrast, the people who let rooms typically have no other source of income, and the rent they charge has to cover not just the cost of the building, but their entire household expenses.

Inequalities Caused by the Policy of Europe

Those are the inequalities in the total advantages and disadvantages of different jobs and investments that arise when any of the three conditions I mentioned above aren't met — even with the most perfect freedom. But European policy, by never leaving things at perfect freedom, creates other inequalities of much greater importance.

It does this mainly in three ways. First, by restricting competition in some trades to fewer people than would otherwise want to enter them. Second, by increasing competition in other trades beyond its natural level. And third, by blocking the free movement of labor and capital from job to job and from place to place.

First: European policy creates a major inequality by restricting competition in some trades to fewer people than would otherwise enter them.

The exclusive privileges of guilds are the main tool used for this purpose.

A guild's exclusive right to practice a trade necessarily limits competition in the town where it operates to those who are "free of the trade" — that is, licensed members. The usual requirement for this membership is to have completed an apprenticeship in the town under a properly qualified master. Guild bylaws sometimes regulate the number of apprentices each master can take on, and almost always set the number of years each apprentice must serve. Both rules are designed to restrict competition to far fewer people than would otherwise enter the trade. Limiting the number of apprentices does this directly. A long apprenticeship does it more indirectly, but just as effectively, by raising the cost of training.

In Sheffield, a bylaw allows no master cutler to have more than one apprentice at a time. In Norfolk and Norwich, no master weaver can have more than two, on penalty of forfeiting five pounds a month to the king. No master hatter anywhere in England — or in the English colonies — can have more than two apprentices, on penalty of five pounds a month, split between the king and whoever brings the lawsuit. Both these regulations, though confirmed by national law, are clearly driven by the same guild mentality that produced Sheffield's bylaw. The silk weavers of London had barely been incorporated for a year before they passed a bylaw restricting each master to two apprentices. It took a special act of Parliament to overturn it.

Seven years was traditionally the standard apprenticeship across most of Europe for most guild trades. All such guilds were originally called "universities" — which is actually the proper Latin word for any corporate body. "The university of smiths," "the university of tailors" — these expressions are common in the old charters of ancient towns. When the institutions we now specifically call universities were first established, the period of study required for a master of arts degree was evidently copied from the trade apprenticeship, which was a much older institution. Just as you had to work seven years under a qualified master to become a master in a common trade and take on your own apprentices, you had to study seven years under a qualified master to become a master, teacher, or doctor (words that originally meant the same thing) in the liberal arts and take on your own scholars or apprentices (also originally synonymous terms).

The Statute of Apprenticeship, passed under Elizabeth I in 1563, decreed that no one could practice any trade then existing in England without first serving at least a seven-year apprenticeship. What had been the bylaw of many individual guilds became the general law for all trades conducted in market towns. The statute's language is very broad and seems to cover the entire kingdom, but in practice it was interpreted as applying only to market towns. In country villages, a person could practice several different trades without a seven-year apprenticeship in each, since those trades were necessary for the convenience of the residents and there often weren't enough people to supply each trade with its own set of workers.

Through a strict reading of the statute's text, its scope was further limited to trades that existed in England before 1563, and it was never extended to trades introduced after that date. This created some distinctions that, considered as practical regulations, are as absurd as you could possibly imagine. It was ruled, for example, that a coach maker could neither make nor employ journeymen to make his own coach wheels — he had to buy them from a licensed wheelwright, since that trade existed before 1563. But a wheelwright, even without any apprenticeship to a coach maker, could make or employ journeymen to make coaches — since coach making didn't exist in England when the statute was passed. Many of the industries of Manchester, Birmingham, and Wolverhampton are exempt from the statute for this same reason: they didn't exist in England before 1563.

In France, apprenticeship terms vary by town and by trade. In Paris, five years is required for many trades, but before qualifying as a master, you must also serve five more years as a journeyman. During this period, you're called a "companion" of your master, and the period itself is called a "companionship."

In Scotland, there's no national law setting a standard apprenticeship term. It varies by guild. Where the term is long, part of it can usually be waived by paying a small fine. In most towns, a small fine is also enough to buy membership in any guild. Weavers of linen and hemp — the country's main manufacturing trade — along with all craftsmen who support them (wheel makers, reel makers, and so on) can practice their trades in any chartered town without paying any fine at all. In all chartered towns, anyone is free to sell butcher's meat on any lawful day of the week. Three years is a common apprenticeship in Scotland, even in some quite skilled trades. In general, I know of no country in Europe where guild laws are as lenient.

The property that every person has in their own labor is the original foundation of all other property, and it is the most sacred and inviolable. A poor person's entire inheritance lies in the strength and skill of their hands. To prevent them from using that strength and skill however they see fit — as long as they're not harming their neighbor — is a clear violation of this most sacred property. It's an obvious infringement on the liberty of both the worker and anyone who might want to hire them. It stops the one from working at what they choose, and the others from hiring whomever they choose. Surely the employers whose interests are most at stake can be trusted to judge whether someone is fit for the job. The politician's anxious concern that employers might hire the wrong person is as meddlesome as it is oppressive.

Long apprenticeships do nothing to guarantee that shoddy work won't be sold to the public. When bad work reaches the market, it's usually due to fraud, not incompetence — and no length of apprenticeship can prevent fraud. Entirely different regulations are needed for that. The sterling mark on silverware and the inspection stamps on linen and woolen cloth give buyers far more protection than any apprenticeship law. Buyers generally check for these marks but never bother to ask whether the worker served a seven-year apprenticeship.

Long apprenticeships don't teach young people to be hardworking, either. A journeyman paid by the piece is likely to work hard, because he benefits directly from every ounce of effort. An apprentice is likely to be lazy — and almost always is — because he has no immediate reason not to be. In lower-level jobs, the whole appeal of work is the paycheck. Those who start earning sooner develop a taste for work sooner and build good habits earlier. A young person naturally develops an aversion to work when they go a long time without seeing any benefit from it. Boys sent into apprenticeships by public charities are generally bound for longer than the usual term, and they generally turn out to be very lazy and worthless.

The ancient world knew nothing of apprenticeships. The mutual duties of master and apprentice fill entire sections of every modern legal code. Roman law is completely silent on the subject. I know of no Greek or Latin word — and I'm fairly confident none exists — that conveys the concept we attach to "apprentice": a worker bound to practice a particular trade for the benefit of a master over a fixed period, on condition that the master teaches them that trade.

Long apprenticeships are entirely unnecessary. Even the most sophisticated trades — like clock and watch making — contain no secret that requires years of instruction. The original invention of such beautiful machines, and of the tools used to make them, was undoubtedly the product of deep thought and long effort, and may rightly be counted among humanity's finest achievements. But once the machines and instruments have been invented and are well understood, explaining to a young person in complete detail how to use the tools and build the machines shouldn't take more than a few weeks of lessons — perhaps even a few days. In ordinary mechanical trades, a few days would certainly be enough. Real dexterity, of course, can only come from practice and experience. But a young person would practice much more diligently and attentively if they worked from the beginning as a journeyman — paid in proportion to the little work they could manage, and paying in turn for the materials they might ruin through clumsiness. Their training would generally be more effective this way, and always less tedious and expensive. The master, admittedly, would lose out — he'd lose all the apprentice's free labor that he currently enjoys for seven years. And in the end, the apprentice might also be worse off: in a trade so easily learned, he'd face more competitors, and his wages as a fully qualified worker would be lower. The same increase in competition would reduce masters' profits as well as workers' wages. The trades, the crafts, the "mysteries" — all would lose. But the public would gain, because the work of all craftsmen would come to market much cheaper.

It's precisely to prevent this reduction in prices — and consequently in wages and profits — by blocking the free competition that would surely cause it, that guilds and most guild regulations have been established. In earlier times, setting up a guild in many parts of Europe required nothing more than the approval of the town government where it was based. In England, a royal charter was also needed. But this royal prerogative seems to have been used more for extracting money from subjects than for protecting the public against oppressive monopolies. Upon payment of a fee, the charter was generally granted without fuss. When a particular group of craftsmen or traders decided to act as a guild without a charter — forming what were called "adulterine guilds" — they weren't always shut down, but simply forced to pay an annual fine to the king for permission to exercise their unauthorized privileges. Day-to-day oversight of all guilds and their bylaws belonged to the town government in which they were based, and whatever discipline they faced came from that larger municipal body, of which the individual guilds were merely parts.

Town governments were entirely in the hands of traders and craftsmen. And it was clearly in every trade's interest to prevent the market from being — as they liked to put it — "overstocked" with their particular type of product. What this really meant, of course, was keeping it permanently understocked. Each trade was eager to establish rules for this purpose, and was happy to let every other trade do the same — as long as they could too. As a result, each trade had to buy goods from other trades within the town at somewhat higher prices than they otherwise would have paid. But in return, they could sell their own goods at equally inflated prices. So among the different trades within the town, it was all a wash — "as broad as long," as the saying goes. But in their dealings with the countryside, they were all big winners. And it's those dealings with the countryside that make up the entire trade that supports and enriches every town.

Every town draws its entire food supply and all its raw materials from the countryside. It pays for these in two main ways. First, by sending back a portion of those raw materials, now processed and manufactured — in which case the price includes the workers' wages and their employers' profits on top of the raw material cost. Second, by sending raw or manufactured goods imported from other countries or distant parts of the same country — in which case the price includes the wages of the carriers or sailors and the profits of the merchants who employ them. What the town gains from the first type of trade is the advantage of its manufacturing. What it gains from the second is the advantage of its domestic and foreign trade. Workers' wages and employers' profits make up everything gained from both. Any regulations that push those wages and profits above their natural level therefore allow the town to buy the products of more countryside labor in exchange for less town labor. They give urban traders and craftsmen an advantage over rural landlords, farmers, and laborers, breaking down the natural equality that would otherwise exist in trade between them. The entire annual output of the nation's labor is divided between these two groups. These regulations shift a larger share to town residents and a smaller share to country residents.

The real price a town pays for the food and materials it imports each year is the quantity of manufactured and other goods it exports. The more expensive the exports, the cheaper the imports. Town industry becomes more profitable, and country industry less.

That urban industry is everywhere in Europe more profitable than rural industry, we can confirm without complicated calculations through one simple observation. In every European country, for every person who has built a great fortune from small beginnings through farming and land improvement — the industry that properly belongs to the countryside — you'll find at least a hundred who have done so through trade and manufacturing, the industry that properly belongs to towns. Industry must therefore be better rewarded in towns — wages and profits must clearly be higher. And since capital and labor naturally seek the most profitable employment, they naturally flow toward the towns and away from the countryside.

Town residents, gathered in one place, can easily organize. Even the most trivial trades in towns have been incorporated into guilds in one place or another. And even where they haven't, the guild mentality — suspicion of outsiders, reluctance to take apprentices, secrecy about trade practices — generally prevails, and often leads tradespeople to form voluntary associations and agreements to block the free competition they can't prohibit through bylaws. Trades employing only a small number of workers form such combinations most easily. A mere half dozen wool combers may be needed to keep a thousand spinners and weavers busy. By conspiring not to take apprentices, they can not only monopolize their field but reduce the entire manufacturing chain to a kind of slavery and push their wages far above what the nature of their work deserves.

Country residents, scattered across the landscape, can't easily organize. They've never been formed into guilds, and the guild mentality has never taken hold among them. No apprenticeship has ever been considered necessary for farming — the great industry of the countryside. Yet after the fine arts and the learned professions, there's perhaps no occupation that requires such a wide variety of knowledge and experience. The countless volumes written about agriculture in every language should convince us that even among the wisest and most learned nations, it has never been considered easy to understand. And from all those volumes, you'll search in vain for the knowledge of farming's varied and complicated operations that even an ordinary farmer possesses — however contemptuously the thoroughly contemptible authors of some of those volumes may talk about him. There's hardly a common mechanical trade, on the other hand, whose every operation couldn't be completely explained in a pamphlet of just a few pages. In the encyclopedia of trades currently being published by the French Academy of Sciences, several are explained in exactly this way. Managing farm operations that must change with every shift in weather and countless other variables requires far more judgment and discretion than directing operations that are always the same.

Not only the overall direction of farming, but many lower-level country tasks require far more skill and experience than most mechanical trades. The person who works with brass and iron uses tools and materials whose properties are always the same, or nearly so. But the person who plows a field with a team of horses or oxen works with instruments whose health, strength, and temperament vary from day to day. The materials they work with are just as variable, and both require considerable judgment and discretion to manage. The ordinary plowman, though generally seen as the picture of stupidity and ignorance, is rarely lacking in this judgment and discretion. He's less accustomed to social interaction than the urban mechanic, it's true. His speech and manner are rougher and harder for city people to follow. But his understanding, exercised on a much wider variety of problems, is generally far superior to that of the factory worker, whose entire attention from morning to night is consumed by performing one or two very simple operations. How much the working class of the countryside is truly superior to those of the towns is well known to anyone who has spent much time with both. Accordingly, in China and India, both the social rank and the wages of farm workers are reportedly higher than those of most craftsmen and manufacturers. They would probably be higher everywhere, if guild laws and the guild mentality didn't prevent it.

The advantage that urban industry holds over rural industry throughout Europe isn't entirely due to guilds and guild laws. It's reinforced by many other regulations. High tariffs on foreign manufactured goods and on all goods imported by foreign merchants serve the same purpose. Guild laws let town residents raise their prices without fear of being undercut by free competition from their own countrymen. These other regulations protect them equally from foreigners. The higher prices caused by both are ultimately paid by rural landlords, farmers, and laborers, who have rarely opposed these monopolies. They typically have neither the inclination nor the organizational ability to form combinations of their own. And the self-serving arguments and sophistry of merchants and manufacturers easily persuade them that the private interest of one subordinate part of society is the same as the general interest of the whole.

In Great Britain, the advantage of urban over rural industry seems to have been greater in the past than it is now. Country wages are closer to manufacturing wages, and agricultural profits are closer to trading and manufacturing profits, than they reportedly were in the previous century or the beginning of the current one. This shift can be seen as the necessary — though very late — consequence of the extraordinary advantages given to urban industry. The capital accumulated in towns eventually grows so large that it can no longer be invested at the old profit rates in urban industries alone. Urban industry has its limits like any other, and as capital grows, increased competition inevitably drives down profits. Lower urban profits push capital out to the countryside, where it creates new demand for rural labor and raises rural wages. Capital then spreads — if I may put it this way — across the face of the land, returning through agricultural investment to the countryside at whose expense it was largely accumulated in the first place. I'll try to show later that throughout Europe, the greatest improvements in the countryside have been driven by these overflows of capital originally accumulated in towns. At the same time, I'll demonstrate that although some countries have reached considerable prosperity through this process, it's inherently slow, uncertain, vulnerable to countless disruptions, and in every respect contrary to the natural and rational order of things. The interests, prejudices, laws, and customs that created this situation I'll try to explain as fully and clearly as I can in the Third and Fourth Books of this work.

People of the same trade seldom meet together, even for fun and socializing, but the conversation ends in a conspiracy against the public, or in some scheme to raise prices. It's impossible to prevent such meetings through any law that could actually be enforced or that would be consistent with liberty and justice. But while the law can't stop people in the same trade from occasionally getting together, it should do nothing to make these gatherings easier — much less to make them necessary.

A regulation requiring everyone in a given trade to register their names and addresses in a public directory makes such gatherings easier. It connects people who might never otherwise have known each other, and gives every member of the trade directions to find every other member.

A regulation allowing people in the same trade to tax themselves to provide for their poor, sick, widows, and orphans — by giving them a shared interest to manage — makes such gatherings necessary.

A full guild incorporation not only makes these gatherings necessary, but gives the majority the power to bind the whole membership. In an open market, an effective price-fixing agreement requires the unanimous consent of every single trader and lasts only as long as every trader stays on board. A guild majority can enact a bylaw with penalties attached, restricting competition more effectively and more durably than any voluntary agreement ever could.

The claim that guilds are necessary for maintaining quality is baseless. The real discipline that keeps workers honest isn't their guild — it's their customers. The fear of losing business is what restrains fraud and corrects carelessness. An exclusive guild necessarily weakens this discipline. The town has to use that particular set of workers, no matter how they behave. This is why, in many large guild-dominated towns, you can't find a decent craftsman even in the most essential trades. If you want tolerable work, you have to get it done in the suburbs, where workers have no exclusive privileges and nothing but their reputation to rely on — and then smuggle the finished product into the town as best you can.

This, then, is how European policy, by restricting competition in some trades to fewer people than would naturally enter them, creates a very significant inequality in the total advantages and disadvantages of different jobs and investments.

Second: European policy, by increasing competition in some trades beyond its natural level, creates an opposite kind of inequality.

It has been considered so important that enough young people be trained for certain professions that both governments and private benefactors have established pensions, scholarships, fellowships, and bursaries for this purpose. These draw far more people into these careers than could otherwise afford to pursue them. In every Christian country, I believe, the education of most clergymen is paid for this way. Very few are educated entirely at their own expense. The long, tedious, and expensive education of those who do pay their own way therefore doesn't always bring a suitable return — the profession is flooded with people who, desperate for any position, are willing to accept far less compensation than such an education would otherwise justify. The competition of the subsidized poor takes away the rewards of the self-funded. It would be improper, of course, to compare a curate or chaplain directly with a journeyman in any common trade. But a curate's or chaplain's pay can quite reasonably be viewed as the same kind of thing — wages paid for work according to whatever deal they can negotiate with their superiors.

Until the mid-fourteenth century, five marks — containing roughly as much silver as ten pounds in current money — was the standard pay for a curate or stipendiary parish priest in England, as set by various national church councils. At the same period, four pence a day (equivalent to a shilling in current money) was the official rate for a master mason, and three pence a day (nine pence in current money) for a journeyman mason. The wages of both these workers, assuming steady employment, were considerably higher than the curate's. Even the master mason's wages, assuming he was unemployed a third of the year, would have fully equaled the curate's pay. By the reign of Queen Anne in the early 1700s, Parliament declared that since curates had been so poorly paid that parishes were "meanly supplied," bishops were empowered to set their stipend at between twenty and fifty pounds a year. Forty pounds a year is considered very good pay for a curate today, and despite this act, many still earn less than twenty. There are journeyman shoemakers in London who earn forty pounds a year, and hardly an industrious worker of any kind in that city earns less than twenty. Even that sum doesn't exceed what common laborers frequently earn in many rural parishes. Whenever the legislature has tried to regulate workers' wages, it has always aimed to lower them. But the law has repeatedly tried to raise curates' wages, for the dignity of the church, attempting to force parish rectors to pay them more than the pittance they'd otherwise accept. In both cases, the law has been equally ineffective — never managing to raise curates' pay or lower laborers' wages to the intended level. It couldn't stop the one group from accepting less than the legal amount, given their poverty and the crowd of competitors; nor could it stop the other from receiving more, given the competing demand of employers eager for their services.

The great benefices and senior church positions uphold the honor of the profession despite the miserable circumstances of its junior members. The respect paid to the clergy also provides some compensation for their poor financial rewards. In England, and in all Roman Catholic countries, the church lottery is actually much more favorable than it needs to be. The examples of the churches of Scotland, Geneva, and several other Protestant countries show that in such a respectable profession, where education is easily obtained, the prospect of much more moderate rewards is enough to attract a sufficient number of learned, decent, and respectable people into the clergy.

In professions without such endowed positions — like law and medicine — if the same proportion of students were educated at public expense, competition would become so intense that financial rewards would plummet. It might then not be worth anyone's while to educate their child for either profession at their own cost. The fields would be left entirely to those trained through public charity, whose numbers and desperation would force them to accept miserable compensation — completely degrading the currently respectable professions of law and medicine.

That unfortunate class of people commonly called "men of letters" are in roughly the situation that lawyers and doctors would be under the scenario just described. Throughout Europe, most of them were originally educated for the church but were prevented from entering the clergy for various reasons. They've generally been educated at public expense, and their numbers are so large everywhere that they drive the price of their labor down to a pittance.

Before the invention of printing, the only way a man of letters could earn anything from his talents was as a public or private teacher — communicating the interesting and useful knowledge he had acquired. And this is surely a more honorable, more useful, and generally even more profitable occupation than the other option the printing press created: writing for a bookseller. The time, study, genius, knowledge, and dedication needed to become an outstanding teacher of the sciences are at least equal to what's needed to become a top lawyer or doctor. But the typical pay of an eminent teacher bears no relation to that of a lawyer or physician, because teaching is flooded with people educated at public expense, while law and medicine have very few who didn't pay for their own training. Even the modest pay that teachers receive would be lower still if the competition of even poorer men of letters — those who write for bread — weren't pulling some people out of the teaching market. Before the invention of printing, "scholar" and "beggar" seem to have been practically synonymous. University administrators before that time appear to have regularly granted their scholars licenses to beg.

In ancient times, before any charitable endowments existed for educating poor people in the learned professions, the rewards for outstanding teachers were apparently much larger. Isocrates, in his discourse "Against the Sophists," criticizes the teachers of his own era for their inconsistency. "They make the most magnificent promises to their students," he says. "They undertake to teach them wisdom, happiness, and justice — and for this invaluable service they ask the paltry fee of four or five minas. People who teach wisdom ought to be wise themselves. If anyone sold such a bargain at such a price, he'd be convicted of the most obvious folly." Isocrates certainly isn't exaggerating the fee — we can be sure it was at least what he says. Four minas equaled about thirteen pounds, six shillings, and eight pence; five minas about sixteen pounds, thirteen shillings, and four pence. Something at least equal to the larger sum must have been the standard fee for the most eminent teachers in Athens at that time. Isocrates himself charged ten minas — about thirty-three pounds, six shillings, and eight pence — per student. At Athens, he reportedly had a hundred students at a time, attending what we'd call a single course of lectures. That's not an extraordinary number for such a famous teacher in such a great city, especially since he taught what was then the most fashionable of all subjects: rhetoric. He must therefore have earned a thousand minas per course — about 3,333 pounds, six shillings, and eight pence. A thousand minas is indeed reported by Plutarch to have been his standard teaching fee. Many other eminent teachers of that era apparently acquired great fortunes. Gorgias donated a solid gold statue of himself to the temple at Delphi — though it probably wasn't life-sized. His lifestyle, like that of Hippias and Protagoras, two other famous teachers of the time, is described by Plato as splendid to the point of ostentation. Plato himself reportedly lived in considerable magnificence. Aristotle, after tutoring Alexander the Great — and being most generously rewarded by both Alexander and his father Philip, as everyone agrees — still thought it worthwhile to return to Athens to resume teaching at his school. Teachers of the sciences were probably less common then than they became a generation or two later, when increased competition had presumably driven down both their fees and the awe in which they were held. Even so, the most eminent among them always appear to have enjoyed a degree of respect far above anything comparable today. The Athenians sent Carneades the Academic philosopher and Diogenes the Stoic as official ambassadors to Rome. Though Athens had declined from its former greatness, it was still an independent and considerable republic. Carneades was actually Babylonian by birth, and since no people were more wary of admitting foreigners to public office than the Athenians, the esteem in which they held him must have been extraordinary.

This inequality — the oversupply of publicly educated people in certain professions — is on balance probably more helpful than harmful to the public. It may somewhat degrade the profession of teaching, but the affordability of education is surely an advantage that far outweighs this minor drawback. The public might gain even more from it if the organization of schools and colleges were more sensible than it currently is across most of Europe.

Third: European policy, by blocking the free movement of labor and capital from job to job and place to place, creates yet another kind of inequality.

Apprenticeship laws block the free movement of labor from one type of work to another, even within the same town. Guild privileges block it from one place to another, even within the same trade.

It frequently happens that workers in one booming industry are earning high wages while workers in another declining industry can barely survive. One industry is expanding and constantly needs new workers; the other is shrinking and has a growing surplus of hands. These two industries may be in the same town — even the same neighborhood — yet are unable to help each other at all. Apprenticeship laws may prevent it in one case, and both apprenticeship laws and exclusive guild privileges in the other. In many different industries, though, the work is so similar that workers could easily switch between them — if these absurd laws didn't block them. Weaving plain linen and weaving plain silk, for example, are almost identical. Weaving plain wool is somewhat different, but the difference is so minor that either a linen or silk weaver could become a competent wool weaver in a few days. If any of these three major industries were declining, workers could find refuge in one of the other two that was doing better. Wages wouldn't rise too high in the thriving industry or fall too low in the declining one. Linen manufacturing in England is technically open to everyone by special statute, but since it's not widely practiced, it provides no general safety net for workers in other failing trades. Under apprenticeship laws, those workers have no choice but to go on parish welfare or work as common laborers — for which their training has left them far less qualified than for any manufacturing work similar to their own. So they generally choose the parish.

Whatever blocks the free movement of labor from one job to another also blocks the movement of capital, since the amount of capital that can be invested in any line of business depends heavily on the labor available for it. Guild laws, however, obstruct the movement of capital between places less than they obstruct the movement of labor. It's far easier for a wealthy merchant to buy the right to trade in a guild-controlled town than for a poor craftsman to get the right to work there.

The obstruction that guild laws place on the free movement of labor is common, I believe, throughout Europe. But the obstruction created by the poor laws is, as far as I know, unique to England. It consists in the difficulty a poor person faces in gaining a "settlement" — or even permission to practice their trade — in any parish other than their own. Guild laws only block the free movement of skilled workers. Settlement laws block even that of common laborers. It's worth giving some account of the origin, development, and current state of this problem — perhaps the worst in all of English domestic policy.

When the destruction of the monasteries deprived the poor of religious charity, Parliament eventually enacted under Elizabeth I (the 43rd of Elizabeth, Chapter 2) that every parish must provide for its own poor, with overseers appointed annually to raise the necessary funds through a parish tax.

This statute imposed an absolute obligation on every parish to care for its own poor. Who counted as "the poor of each parish" therefore became an important question. After some back and forth, it was settled under Charles II that forty days of undisturbed residence gave a person a settlement in any parish — but that within those forty days, two justices of the peace could, upon complaint from church wardens or poor-law overseers, remove any new resident to the parish where they were last legally settled. The only exceptions were for those renting property worth ten pounds a year or those who could provide the justices with satisfactory security that they wouldn't become a burden on the parish.

Fraud reportedly followed. Parish officials would sometimes bribe their own poor to sneak into another parish and hide out for forty days to gain a settlement there — thereby shifting the burden from their own parish. So under James II it was enacted that the forty days of undisturbed residence would count only from the time the newcomer delivered written notice of their address and family size to the local churchwardens or overseers.

But parish officials, it turns out, weren't always more honest about their own parish's interests. They sometimes winked at intrusions, accepting the notice but taking no action. Since everyone in a parish was assumed to have an interest in preventing such freeloading, it was further enacted under William III that the forty days would count only from the public reading of the written notice in church on Sunday, immediately after the service.

"After all," says the legal authority Dr. Burn, "this kind of settlement, by continuing forty days after publication of notice in writing, is very seldom obtained. The real purpose of the acts is not so much to help people gain settlements as to help them avoid settlements by coming into a parish openly. Giving notice is really just forcing the parish to take action and remove you. But if a person's situation is ambiguous — if it's unclear whether they can actually be removed — then giving notice forces the parish either to let them stay and concede a settlement, or to try removing them and test the legal question in court."

This statute made it virtually impossible for a poor person to gain a new settlement the old way, through forty days of residence. But to avoid completely barring ordinary people from establishing themselves in a new parish, it created four alternative paths to settlement — none requiring published notice. First, being assessed for and paying parish taxes. Second, being elected to and serving a full year in an annual parish office. Third, completing an apprenticeship in the parish. Fourth, being hired for a year's service and working the full term.

No one can gain a settlement through the first two methods without the parish collectively choosing to include them — and parishes are far too aware of the consequences to voluntarily take on any newcomer who has nothing but their labor for support.

No married person can easily gain settlement through the last two methods, either. Apprentices are almost never married, and the law explicitly states that no married servant can gain a settlement through annual service. The main effect of the service-based settlement has been to largely kill off the old English custom of hiring servants by the year — which had been so common that even today, if no specific term is agreed upon, the law assumes every servant is hired for a year. But employers are reluctant to give servants a settlement by hiring them this way, and servants are reluctant to be hired this way, since each new settlement cancels all previous ones — meaning they might lose their original settlement in their birthplace, where their parents and relatives live.

No independent worker, whether laborer or craftsman, is likely to gain a new settlement through either apprenticeship or service. When such a person brought their skills to a new parish, they could be removed — no matter how healthy and hard-working they were — at the whim of any churchwarden or overseer. Their only escape was to rent property worth ten pounds a year (impossible for someone who lives by their labor) or to provide security that the justices deemed sufficient. What security the justices require is left entirely to their discretion, but they can't well ask for less than thirty pounds — since Parliament declared that even buying a freehold property worth less than thirty pounds doesn't qualify for a settlement. This is security that virtually no working person can provide, and the actual amount demanded is frequently much higher.

To partially restore the free movement of labor that these various statutes had almost entirely destroyed, the system of certificates was invented. Under William III, it was enacted that if a person brought a certificate from the parish where they were last legally settled — signed by the churchwardens and overseers and approved by two justices — then any other parish was required to admit them. The certificate holder couldn't be removed simply for being likely to become a burden, but only for actually becoming one. When that happened, the parish that issued the certificate had to pay for both the person's maintenance and the cost of removal. To give complete assurance to the receiving parish, the same statute provided that a certificate holder could gain no new settlement there by any means whatsoever — except by renting property worth ten pounds a year or by serving a full year in an annual parish office. Settlement couldn't be gained through notice, service, apprenticeship, or paying parish taxes. Under Queen Anne, it was further enacted that neither the servants nor the apprentices of a certificate holder could gain settlement in the parish where their master lived under such a certificate.

How well this invention actually restored free movement of labor, we can judge from Dr. Burn's shrewd observation: "It's obvious that there are several good reasons for requiring certificates from people settling in any place: persons living under certificates can gain no settlement through apprenticeship, service, notice, or paying rates; they can't settle apprentices or servants; if they become a burden, it's clear where to send them, and the issuing parish must pay for both removal and maintenance in the meantime; and if they fall sick and can't be moved, the certificate parish must support them. None of these protections exist without a certificate. These same reasons argue equally strongly for parishes not granting certificates to their own residents under ordinary circumstances — since it's far more likely than not that they'll get the certificate holders back again, and in worse shape." The lesson here is that receiving parishes should always demand certificates from incoming poor people, while home parishes should almost never grant them. "There's something harsh in this certificate system," the same perceptive author writes in his History of the Poor Laws, "since it gives a parish officer the power to essentially imprison a person for life — no matter how inconvenient it is for them to remain in the place where they had the misfortune to acquire what is called a settlement, and whatever advantages they might find elsewhere."

A certificate carries no reference to good character. It certifies nothing except that the person belongs to the parish they actually belong to. Yet it's entirely at the parish officers' discretion whether to grant or refuse it. "A mandamus was once sought," says Dr. Burn, "to compel churchwardens and overseers to sign a certificate, but the Court of King's Bench rejected the motion as a very strange attempt."

The wildly unequal wages that we frequently find in England in places not far apart from each other are probably caused by the settlement laws, which prevent poor workers from freely moving their labor from one parish to another without a certificate. A healthy, hard-working single man can sometimes get away with living in a parish without one. But a man with a wife and family who tried the same thing would almost certainly be removed, and if the single man later married, he'd generally be removed too. The labor shortage in one parish can't always be relieved by the surplus in another, as it constantly is in Scotland and, I believe, in all other countries without settlement restrictions. In those countries, although wages may rise a little near a large town or wherever there's unusual demand for labor, and gradually fall as distance increases until they settle back to the normal rate, you never encounter the sudden, inexplicable wage differences between neighboring places that sometimes occur in England. There, it's often harder for a poor person to cross the artificial boundary of a parish than to cross an arm of the sea or a mountain range — natural barriers that sometimes mark distinct wage zones in other countries.

To remove a person who has committed no offense from the parish where they choose to live is an obvious violation of natural liberty and justice. The common people of England, though fiercely proud of their liberty but — like ordinary people everywhere — never quite understanding what it actually consists of, have for more than a century submitted to this oppression without protest. Some thoughtful observers have criticized the settlement laws as a public injustice, but it has never become the target of the kind of popular outrage that was directed at, say, general warrants — which were certainly an abuse, but one unlikely to cause widespread harm. There is scarcely a poor person in England over forty, I'll venture to say, who hasn't at some point in their life been cruelly oppressed by this badly designed law of settlements.

I'll conclude this long chapter with the observation that although it was once customary to regulate wages — first through national laws applying to the whole kingdom, and later through orders from local justices of the peace in each county — both practices have now fallen entirely out of use. "After more than four hundred years of experience," says Dr. Burn, "it seems time to abandon all efforts to bring under strict regulation what by its very nature resists precise limitation. If all workers in the same trade received equal wages, there would be no incentive for hard work and no room for skill or creativity."

Individual acts of Parliament, however, still sometimes try to regulate wages in specific trades and places. The 8th of George III, for example, prohibits — under heavy penalties — all master tailors in London and within five miles of the city from paying, and their workers from accepting, more than two shillings and seven and a half pence a day, except during a general mourning period. Whenever the legislature tries to settle disputes between employers and workers, its advisors are always the employers. When the resulting regulation favors the workers, it's always fair and just. But when it favors the employers, it sometimes isn't. The law requiring employers in various trades to pay their workers in money rather than goods is perfectly fair and just. It imposes no real burden on employers — it simply requires them to pay in cash the value they had claimed to be paying in goods but often weren't. This law favors workers. But the 8th of George III favors employers. When employers conspire to cut wages, they typically enter into a secret agreement not to pay above a certain amount, with penalties for violators. If workers tried the same thing — agreeing not to accept below a certain wage, with penalties for breaking ranks — the law would punish them severely. And if the law were impartial, it would punish the employers the same way. But the 8th of George III gives legal force to exactly the kind of arrangement that employers sometimes try to impose through private conspiracy. The workers' complaint — that this law puts the most skilled and hardest-working on the same footing as an average worker — seems perfectly justified.

In earlier times, it was also common to try regulating merchants' profits by fixing the prices of food and other goods. The price controls on bread are, as far as I know, the only surviving remnant of this practice. Where there's an exclusive guild, it might make sense to regulate the price of this basic necessity. But where there's no guild, competition will set the price far better than any regulation. The method of setting bread prices established under George II couldn't even be implemented in Scotland because of a legal technicality — it depended on the office of Clerk of the Market, which didn't exist there. This wasn't fixed until the 3rd of George III. The absence of bread price controls had caused no noticeable problems, and their establishment in the few places where it occurred produced no noticeable benefits. In most Scottish towns, however, there is a bakers' guild that claims exclusive privileges, though these aren't very strictly enforced.

The ratio between wage rates and profit rates across different types of labor and capital doesn't seem to be much affected — as I've already noted — by whether a society is rich or poor, growing, stagnant, or declining. Such shifts in national prosperity affect the general levels of both wages and profits, but ultimately affect them equally across all occupations. The ratio between them, therefore, stays the same and can't be significantly altered — at least not for any considerable time — by such changes.

Chapter XI: Of the Rent of Land

Of the Rent of Land

Rent, considered as the price paid for using land, naturally tends toward the highest amount the tenant can afford to pay given the land's actual conditions. In negotiating the lease, the landlord tries to leave the tenant with no more of the produce than what's needed to cover the seed, pay the labor, and purchase and maintain the livestock and other farming equipment — along with the ordinary profits on farming capital in the area. This is clearly the smallest share the tenant can accept without losing money, and the landlord rarely intends to leave any more. Whatever part of the produce — or equivalently, whatever part of its price — exceeds this share, the landlord naturally tries to claim as rent. And this is clearly the most the tenant can afford to pay given the land's actual circumstances. Sometimes the landlord's generosity, and more often the landlord's ignorance, leads to accepting somewhat less than this amount. Sometimes too, though more rarely, the tenant's ignorance leads to agreeing to pay more, or to accepting less than the ordinary profits on farming capital in the area. But this amount can still be considered the natural rent — the rent at which land is naturally meant to be leased.

It might be argued that rent is often just a reasonable profit or return on the capital the landlord invested in improving the land. This may partly be true in some cases, but it can hardly ever be more than partly true. Landlords charge rent even for unimproved land, and the supposed return on improvement costs is generally added on top of this original rent. Besides, the improvements aren't always funded by the landlord's capital — sometimes the tenant pays for them. When the lease comes up for renewal, however, the landlord typically demands the same increase in rent as if he had made all the improvements himself.

Landlords sometimes demand rent for land that's completely incapable of human improvement. Kelp is a species of seaweed that, when burned, produces an alkaline salt useful for making glass, soap, and various other products. It grows in several parts of Great Britain, particularly in Scotland, only on rocks that lie below the high-water mark — rocks that are submerged by the sea twice a day, and whose output was never increased by any human effort. Yet the landlord whose estate borders such a kelp shore charges rent for it just as he would for his grain fields.

The sea around the Shetland Islands is extraordinarily rich in fish, which make up a large part of the islanders' diet. But to profit from the sea's bounty, the fishermen need somewhere to live on the neighboring land. The landlord's rent is therefore based not on what the farmer can make from the land alone, but on what he can make from both the land and the sea. Part of the rent is actually paid in fish — one of the very few cases where rent enters into the price of that commodity.

Rent, then, considered as the price paid for using land, is by its nature a monopoly price. It's not based on what the landlord spent on improvements, or on what the landlord can afford to accept. It's based on what the tenant can afford to pay.

Only those products of the land whose ordinary price is high enough to cover the cost of the capital used to bring them to market — plus the ordinary profits on that capital — can normally be brought to market at all. If the ordinary price exceeds this threshold, the surplus naturally goes to the landlord as rent. If it doesn't exceed it, the product can be sold but yields no rent. Whether the price is high enough depends on demand.

Some products of the land always face enough demand to command a price higher than what's needed to bring them to market. Other products may or may not face such demand. The first type always yields rent for the landlord. The second type sometimes does and sometimes doesn't, depending on circumstances.

Notice, then, that rent enters into the price of goods in a fundamentally different way than wages and profits do. High or low wages and profits are the causes of high or low prices. High or low rent is the effect. A commodity's price is high or low because high or low wages and profits must be paid to bring it to market. But the rent it yields is high, low, or nonexistent because the price happens to be far above, slightly above, or no higher than what's needed to cover those wages and profits.

Examining these relationships will divide this chapter into three parts: first, those products that always yield some rent; second, those that sometimes do and sometimes don't; and third, the changes that naturally occur over time in the relative value of these two categories of raw produce, compared to each other and to manufactured goods.

Part I

Products That Always Yield Rent

Since humans, like all other animals, naturally increase in proportion to their food supply, food is always in demand to some degree. It can always buy some amount of labor, because someone can always be found who is willing to work for it. The amount of labor food can buy isn't always equal to what it could support if managed most efficiently — because wages are sometimes higher than bare subsistence. But it can always buy as much labor as it can support at the going rate for that kind of work in the area.

Land, in almost any location, produces more food than what's needed to support all the labor required to bring it to market, even when that labor is paid generously. The surplus is also more than enough to replace the capital that employs that labor, along with its profits. So there's always something left over as rent for the landlord.

Even the most barren moors in Norway and Scotland produce some pasture for cattle, and the milk and offspring are always more than enough to support the labor needed to tend the herds, pay the ordinary profit to the farmer or herd owner, and still leave some rent for the landlord. Rent increases with the quality of the pasture. Better pasture not only supports more cattle on the same area of land, but since the animals are closer together, less labor is needed to tend them and collect their output. The landlord gains both ways: from increased production and from reduced labor costs.

Rent varies not only with the land's fertility — regardless of what it produces — but also with its location, regardless of its fertility. Land near a town yields higher rent than equally fertile land in a remote part of the country. Even though it costs no more labor to farm, it always costs more to transport the distant land's produce to market. More labor must be devoted to transportation, so the surplus — from which both the farmer's profit and the landlord's rent are drawn — shrinks. And in remote areas, as I've already shown, the rate of profit is generally higher than near a large town. So a smaller proportion of this already-reduced surplus goes to the landlord.

Good roads, canals, and navigable rivers are the greatest of all improvements. By reducing transportation costs, they put remote areas on nearly equal footing with those near towns. They encourage farming in distant regions — which will always constitute the largest area of the country. They benefit towns by breaking the monopoly that nearby farms enjoy. And they even benefit those nearby farms. True, they introduce competing products into the local market, but they also open many new markets for local produce. Besides, monopoly is the great enemy of good management, which can only become universal through the free and open competition that forces everyone to adopt it in self-defense. It's been less than fifty years since some counties near London petitioned Parliament against extending turnpike roads into more remote counties. Those distant counties, they claimed, would be able to sell their grass and grain cheaper in the London market thanks to lower labor costs, reducing rents and ruining farming near the capital. Their rents, however, have risen, and their agriculture has improved since then.

A grain field of moderate fertility produces a much larger quantity of food for humans than the best pasture of equal size. Though cultivation requires much more labor, the surplus remaining after replacing the seed and supporting all that labor is also much larger. If a pound of butcher's meat were never worth more than a pound of bread, this larger surplus would everywhere be more valuable and would make up a larger fund for both the farmer's profit and the landlord's rent. This seems to have been the case universally in the earliest stages of agriculture.

But the relative values of bread and meat are very different at different stages of agricultural development. In the earliest stages, the vast unimproved wilderness that covers most of the country is given over entirely to cattle. There's more meat than bread, and bread — being the food in shortest supply — fetches the highest price. In Buenos Aires, according to the Spanish explorer Ulloa, forty or fifty years ago an ox chosen from a herd of two or three hundred cost about four reals — roughly one shilling and nine and a half pence. He doesn't mention the price of bread, probably because he found nothing remarkable about it. An ox there, he says, costs little more than the labor of catching it. But growing grain always requires substantial labor, and in a country on the River Plate — then the direct route from Europe to the silver mines of Potosi — the cost of labor couldn't have been very cheap. As cultivation expands across the country, the situation reverses. There's then more bread than meat, competition shifts direction, and the price of meat rises above the price of bread.

As cultivation expands further, the remaining uncultivated land can no longer supply enough meat. A large portion of farmland must be devoted to raising and fattening cattle, and the price of meat must therefore be high enough to cover not only the labor of tending the animals, but also the rent and profit the landlord and farmer could have earned using that land for crops. Cattle raised on the most barren moors, when brought to the same market, sell at the same price per pound as cattle raised on the best farmland. The owners of those moors profit accordingly, raising their rents in proportion to cattle prices. Not much more than a century ago, in many parts of the Scottish Highlands, butcher's meat was as cheap as — or cheaper than — bread made from oatmeal. The Act of Union opened the English market to Highland cattle. Their ordinary price has roughly tripled since the beginning of the century, and rents on many Highland estates have tripled or quadrupled over the same period. In almost every part of Great Britain today, a pound of the best butcher's meat is generally worth more than two pounds of the best white bread, and in plentiful years it's sometimes worth three or four pounds.

This is how, as agriculture progresses, the rent and profit of unimproved pasture come to be governed by the rent and profit of improved farmland, which are in turn governed by the rent and profit of grain. Grain is an annual crop. Meat takes four or five years to "grow." Since an acre of land produces a much smaller quantity of meat than grain, the lower quantity must be compensated by a higher price. If the price more than compensated, farmers would convert cropland to pasture. If it didn't compensate enough, pasture would be converted back to cropland.

This balance between the rent and profit of pasture and those of grain — between land that directly produces animal food and land that directly produces human food — holds true across most of the improved farmland of a large country. But in some particular locations, it's quite different, and the rent and profit of pasture far exceed what grain can yield.

Near a large town, for instance, the demand for milk and horse feed, combined with the high price of meat, often pushes the value of pasture above its natural proportion to grain. This local advantage obviously can't be shared with distant lands.

Special circumstances have sometimes made certain countries so populous that their entire territory — like the land near a big city — couldn't produce both the grass and the grain needed for their population. Their land has therefore been devoted mainly to grass, the bulkier product that can't easily be transported long distances, while grain — the food of the majority — has been primarily imported. Holland is currently in this situation, and a significant part of ancient Italy seems to have been during the height of the Roman Republic. "To feed cattle well," said old Cato, as reported by Cicero, "was the first and most profitable use of a private estate; to feed tolerably well, the second; to feed poorly, the third. Plowing he ranked only fourth in profitability." Crop farming near Rome must have been heavily discouraged by the free or nearly free grain distributions to the Roman people. This grain came from conquered provinces, several of which were required to furnish a tenth of their harvest at a fixed price of about sixpence per peck — as a tax substitute — to the republic. The low price at which this grain was distributed to the people must have driven down the price of locally grown grain and discouraged farming in the region around Rome.

In an open country whose main product is grain, a well-fenced piece of pasture will often rent higher than any neighboring grain field. It's convenient for maintaining the draft animals used in crop farming, and its high rent is really paid not from the value of its own output, but from that of the cropland it helps cultivate. This premium would likely disappear if all the surrounding land were properly fenced. The currently high rent of enclosed land in Scotland seems to stem from the scarcity of enclosures, and will probably last only as long as that scarcity. The benefits of fencing are greater for pasture than for crops. It saves the labor of guarding the cattle, who also feed better when they're not constantly being disturbed by their keeper or his dog.

But where there's no such local advantage, the rent and profit of grain — or whatever the common staple food happens to be — naturally sets the standard for the rent and profit of pasture on any land capable of producing grain.

The development of cultivated grasses, turnips, carrots, cabbages, and other innovations that allow the same amount of land to feed more cattle than natural grass alone might be expected to reduce the premium that meat prices naturally command over bread prices in a developed country. This does seem to have happened. There's reason to believe that, at least in the London market, the price of butcher's meat relative to bread is considerably lower now than it was at the beginning of the last century.

In the appendix to the Life of Prince Henry, Dr. Birch provides an account of the meat prices that prince typically paid. The four quarters of an ox weighing six hundred pounds usually cost him nine pounds and ten shillings — about thirty-one shillings and eight pence per hundredweight. Prince Henry died on November 6, 1612, at nineteen years old.

In March 1764, Parliament held an inquiry into the causes of the high food prices at that time. Among other evidence, a Virginia merchant testified that in March 1763 he had provisioned his ships at twenty-four or twenty-five shillings per hundredweight of beef, which he considered the normal price. In that expensive year of 1764, he had paid twenty-seven shillings for the same weight and quality. This "high" price in 1764 was, however, four shillings and eight pence cheaper than Prince Henry's normal price. And it's worth noting that only the best beef is suitable for salting for long voyages.

Prince Henry's price works out to about three and four-fifths pence per pound for the whole carcass, averaging choice and common cuts together. At that rate, the choice cuts couldn't have retailed for less than four and a half to five pence per pound.

In the 1764 parliamentary inquiry, witnesses stated that the best beef cuts were selling to consumers at four to four and a quarter pence per pound, while common cuts ran from about one and three-quarters to two and a half to two and three-quarters pence — all roughly a half-penny more than their usual March prices. But even this "high" price is still considerably cheaper than what the ordinary retail price must have been in Prince Henry's time.

During the first twelve years of the seventeenth century, the average price of the best wheat at the Windsor market was one pound, eighteen shillings, and about three and a sixth pence per quarter of nine Winchester bushels.

But in the twelve years ending in 1764, the average price of the same measure at the same market was two pounds, one shilling, and nine and a half pence.

In the first twelve years of the seventeenth century, then, wheat appears to have been considerably cheaper and butcher's meat considerably more expensive than in the twelve years ending in 1764.

In all large countries, most cultivated land is used to produce either food for people or food for livestock. The rent and profit of these two uses set the standard for the rent and profit of all other cultivated land. If any particular crop yielded less, the land would quickly be switched to grain or pasture. If any yielded more, some grain or pasture land would quickly be switched to that crop.

Crops that require either a larger initial investment to prepare the land, or greater annual cultivation expenses, do tend to yield higher rent or higher profit than grain or pasture. But this premium typically amounts to no more than a reasonable return on the extra investment.

In a hop garden, a fruit orchard, or a vegetable garden, both the landlord's rent and the farmer's profit are generally higher than in a grain or grass field. But preparing the land for these uses costs more — hence the higher rent owed to the landlord. These crops also require more attentive and skilled management — hence the higher profit owed to the farmer. The harvest, at least for hops and fruit, is more uncertain too. The price must therefore compensate for occasional crop failures, much like an insurance premium. The circumstances of gardeners — generally modest and never more than comfortable — suggest that their considerable skill is not typically overcompensated. Their delightful art is practiced by so many wealthy people as a hobby that those who do it for a living can't charge much — because the people who should naturally be their best customers are growing their own finest produce.

The return landlords earn from such improvements never seems to have exceeded what was needed to cover the original cost. In ancient agriculture, after the vineyard, a well-watered vegetable garden was considered the most valuable part of a farm. But Democritus, who wrote about farming around two thousand years ago and was regarded by the ancients as one of the founders of the art, thought it unwise to enclose a garden. The profit, he said, wouldn't cover the cost of a stone wall, and bricks — he meant sun-dried bricks, I assume — crumbled in the rain and winter storms and needed constant repairs. Columella, who reports Democritus's view without challenging it, suggests a frugal alternative: a hedge of brambles and briars, which he found by experience to be both durable and impenetrable — though this technique apparently wasn't known in Democritus's day. Palladius adopts Columella's recommendation, as had Varro before him. In the judgment of these ancient farming experts, it seems, a vegetable garden's produce was barely enough to cover the extra costs of cultivation and watering. In countries with hot climates, both then and now, it was considered essential to have command of a water source that could reach every bed in the garden. Throughout most of Europe today, a vegetable garden still isn't considered worth a better fence than what Columella recommended. In Great Britain and other northern countries, however, the finest fruits can only be grown with the help of a wall. Their price in such countries must therefore cover the cost of building and maintaining this wall. The fruit wall typically surrounds the vegetable garden, which thus enjoys the protection of an enclosure its own produce could rarely pay for.

That the vineyard, properly planted and brought to maturity, was the most valuable part of the farm seems to have been an unquestioned principle in ancient agriculture, as it remains throughout wine-producing countries today. Whether it was worth planting a new vineyard, however, was debated among ancient Italian farmers, as we learn from Columella. He argues — as a true enthusiast for ambitious cultivation — in favor of the vineyard, trying to demonstrate through profit-and-loss calculations that it was the best possible investment. Such comparisons between the projected costs and returns of new ventures are generally unreliable, and never more so than in agriculture. If the actual returns from such plantations had commonly been as large as he imagined, there would have been no debate. The same question is still hotly debated in wine countries today. Their agricultural writers — lovers and promoters of intensive cultivation — generally side with Columella in favor of the vineyard. In France, the anxiety of existing vineyard owners to prevent the planting of new ones seems to support this view, suggesting they know from experience that this type of farming is currently more profitable than any other. But at the same time, it suggests something else: that this superior profit can last only as long as the laws restricting the free cultivation of grapevines. In 1731, French vineyard owners obtained a royal decree prohibiting both the planting of new vineyards and the renewal of old ones whose cultivation had been interrupted for two years — without special royal permission, granted only after a provincial official certified that the land was incapable of any other use. The stated justification was a scarcity of grain and pasture and an oversupply of wine. But if the oversupply had been real, it would have prevented new vineyard planting on its own, by driving vineyard profits below their natural proportion to grain and pasture profits. As for the supposed grain scarcity caused by too many vineyards, grain is nowhere in France more carefully cultivated than in the wine regions where the soil suits it — Burgundy, Guienne, and Upper Languedoc. The many workers employed in vine cultivation actually encourage grain farming by providing a ready market for its output. Reducing the number of people who can afford to buy grain is surely a bizarre way to promote grain production. It's like a policy that would promote agriculture by discouraging manufacturing.

The rent and profit from crops requiring extra investment, then — whether in initial land preparation or annual cultivation — though often considerably higher than those from grain and pasture, are in reality governed by the rent and profit of those common crops, whenever the premium merely compensates for the extra expense.

Sometimes, however, the amount of land suitable for a particular crop is too small to meet the effectual demand. The entire harvest can be sold to buyers willing to pay more than what's needed to cover rent, wages, and profit at their normal rates. The surplus — the amount by which the price exceeds the full cost of improvement and cultivation — may in this case, and only in this case, bear no regular relationship to the comparable surplus from grain or pasture. It may exceed it by almost any amount. And most of this excess naturally goes to the landlord as rent.

The normal, natural relationship between wine's rent and profit and those of grain and pasture holds only for vineyards that produce nothing but ordinary, decent wine — the kind that can be grown almost anywhere on light, gravelly, or sandy soil and has nothing to recommend it beyond its strength and wholesomeness. It's only with such vineyards that common farmland can compete. With vineyards of exceptional quality, obviously, it cannot.

The grapevine is more affected by differences in soil than any other fruit plant. From certain soils it produces a flavor that, supposedly, no amount of cultivation or skill can replicate elsewhere. This flavor, real or imagined, is sometimes unique to a handful of vineyards, sometimes extends across a small district, and sometimes through a substantial part of a large province. The entire output of such wines falls short of the effectual demand — that is, the demand from people willing to pay the full costs of production and transportation at the normal rates. The entire quantity can therefore be sold to buyers willing to pay more, which necessarily drives the price above that of ordinary wine. The premium depends on how much the wine's fashionability and scarcity intensify competition among buyers. Whatever the premium, most of it goes to the landlord as rent. Although such vineyards are generally cultivated more carefully than most, the high price of the wine seems to be not so much the result of this careful cultivation as the cause of it. When the product is so valuable, the cost of neglect is so high that it forces even the most careless owners to pay attention. Only a small part of the high price, therefore, is needed to cover the extra labor and capital devoted to their cultivation.

The sugar colonies that European nations possess in the West Indies can be compared to these exceptional vineyards. Their entire output falls short of Europe's effectual demand and can be sold to buyers willing to pay more than the full cost of production and transportation at normal rates. In Cochin China, the finest white sugar commonly sells for three piastres per quintal — about thirteen shillings and sixpence — according to Mr. Poivre, a careful observer of that country's agriculture. What they call a quintal there weighs between 150 and 200 Paris pounds, averaging about 175, which works out to roughly eight shillings per English hundredweight. That's not a quarter of what we commonly pay for the brown or muscovado sugars imported from our colonies, and not a sixth of what the finest white sugar costs. Most of Cochin China's farmland is devoted to grain and rice, the staple food of its people. The relative prices of grain, rice, and sugar there are probably in their natural proportion — the proportion that naturally develops across most cultivated land and compensates landlords and farmers according to the usual costs of improvement and cultivation. But in our sugar colonies, the price of sugar bears no such proportion to what a grain or rice field produces, whether in Europe or America. Sugar planters commonly say that the rum and molasses should cover all their cultivation expenses, and the sugar itself should be pure profit. If this is true — and I won't vouch for it — it's as if a grain farmer expected to cover all his expenses from the chaff and straw, with the grain itself being pure profit. We regularly see groups of London merchants buying up wasteland in our sugar colonies, expecting to improve and cultivate it profitably through agents and managers — despite the great distance, uncertain returns, and defective legal system in those countries. Nobody would try the same thing with even the most fertile land in Scotland, Ireland, or the grain-producing regions of North America, even though the more reliable legal systems in those places would promise more dependable returns.

In Virginia and Maryland, tobacco farming is preferred over grain farming as more profitable. Tobacco could be grown successfully across much of Europe, but in almost every part of Europe it has become a major source of tax revenue. Collecting a tax from every individual farm where tobacco might be grown would be harder, it's assumed, than levying one at the customs house on imports. Tobacco cultivation has therefore been absurdly prohibited across most of Europe — which effectively gives a monopoly to the countries where it's allowed. Virginia and Maryland, as the largest producers, capture the lion's share of this monopoly, though they have some competitors. Tobacco farming, however, doesn't appear to be as profitable as sugar. I've never even heard of a tobacco plantation that was developed and run by investors based in Great Britain, and our tobacco colonies don't send home the kind of fabulously wealthy planters we regularly see arriving from our sugar islands. Although the preference for tobacco over grain in those colonies suggests that Europe's effectual demand for tobacco isn't fully met, it's probably closer to being met than the demand for sugar. And although the current price of tobacco is probably more than enough to cover the full rent, wages, and profit needed to produce and market it at normal rates for grain land, the excess isn't as large as for sugar. Our tobacco planters have accordingly shown the same anxiety about oversupply that French vineyard owners have about too much wine. By colonial legislation, they've restricted cultivation to six thousand plants per enslaved worker between the ages of sixteen and sixty — expected to yield about a thousand pounds of tobacco. Such a worker, they estimate, can also manage four acres of corn beyond this tobacco allotment. To prevent the market from being overstocked, they've sometimes, in abundant years — according to Dr. Douglas, though I suspect his information may not be accurate — actually burned a certain quantity of tobacco per enslaved worker, much as the Dutch are said to do with spices. If such extreme measures are necessary to maintain the current price of tobacco, whatever advantage tobacco cultivation has over grain farming probably won't last much longer.

This, then, is how the rent of cultivated land that produces human food regulates the rent of most other cultivated land. No crop can long yield less rent than grain and pasture, because the land would immediately be converted to those uses. If any crop consistently yields more, it's because the amount of land suitable for growing it is too small to meet the effectual demand.

In Europe, grain is the main crop that serves directly as human food. Except in special circumstances, grain land's rent therefore sets the standard for the rent of all other cultivated land in Europe. Britain need not envy France's vineyards or Italy's olive groves. Except in special circumstances, the value of those crops is governed by grain's value, and Britain's grain-growing capacity isn't much inferior to either country's.

If the common staple food of a country's population came from a plant that, with the same or similar cultivation, produced a much larger quantity per acre than grain, the landlord's rent — the surplus food remaining after paying labor and replacing capital with its ordinary profits — would necessarily be much larger. Whatever the going rate of wages in that country, this greater surplus could always support more labor, enabling the landlord to buy or command a larger quantity. The real value of the rent — the landlord's real power and authority, the command over the necessities and comforts of life that other people's labor could provide — would be much greater.

A rice field produces a much larger quantity of food than even the most fertile grain field. Two harvests per year of thirty to sixty bushels each are reportedly the ordinary yield per acre. Though rice cultivation requires more labor, a much larger surplus remains after all that labor is supported. In rice-growing countries where rice is the staple food and workers are fed with it, a larger share of this larger surplus should go to the landlord than in grain countries. In Carolina, where the planters are generally both farmers and landlords (so rent and profit are mixed together), rice farming is found to be more profitable than grain farming — even though they get only one harvest per year, and even though rice is not the staple food there, given European dietary customs.

A good rice field is a swamp in every season, and a flooded swamp during part of the year. It's unsuitable for grain, pasture, vineyards, or indeed any other crop that's very useful to people. And land that's good for those crops isn't good for rice. So even in rice-growing countries, rice land's rent can't set the standard for other cultivated land, since that land can never be converted to rice.

The food produced by a field of potatoes is not inferior in quantity to what a rice field produces, and far exceeds what a wheat field yields. Twelve thousand pounds of potatoes per acre isn't a larger harvest than two thousand pounds of wheat. The actual nutrition — the solid nourishment — from each isn't quite proportional to their weight, since potatoes contain so much water. But even allowing that half the weight of potatoes is water — a very generous allowance — an acre of potatoes still produces six thousand pounds of solid nourishment: three times what an acre of wheat produces. An acre of potatoes also costs less to cultivate than an acre of wheat, since the fallow period that usually precedes wheat planting more than offsets the extra hoeing and other work potatoes require. If potatoes were ever to become, in any part of Europe, what rice is in some Asian countries — the common staple food of the population, occupying the same proportion of farmland that wheat and other grains currently do — the same amount of cultivated land would support a much larger population. Workers fed mainly on potatoes would leave a larger surplus after all the capital and labor costs of farming were covered. A larger share of this surplus, too, would go to the landlord. Population would increase, and rents would rise far beyond their current levels.

The land that's good for potatoes is good for almost any other useful crop. If potatoes occupied the same proportion of farmland that grain currently does, they would set the standard for the rent of most other cultivated land in the same way.

In some parts of Lancashire, I've been told, people claim that oatmeal bread is a heartier food for working people than wheat bread, and I've frequently heard the same argument in Scotland. I'm somewhat doubtful, though. The common people of Scotland, who live on oatmeal, are generally neither as strong nor as good-looking as the same class in England, who eat wheat bread. They don't work as well or look as well. And since there's no comparable difference between the upper classes of the two countries, experience seems to show that the diet of Scotland's common people isn't as well suited to human health as that of their English counterparts. But it seems to be different with potatoes. The sedan-chair carriers, porters, and coal heavers in London, and those unfortunate women who live by prostitution — the strongest men and the most beautiful women, perhaps, in all the British dominions — are said to come largely from the poorest class of people in Ireland, who are generally raised on potatoes. No food could offer more decisive evidence of its nutritional value, or of its being particularly suited to human health.

It's difficult to keep potatoes through the year and impossible to store them like grain for two or three years. The fear of not being able to sell them before they spoil discourages their cultivation, and is perhaps the main reason they may never become, like bread, the staple food of all classes in any large country.

Products That Sometimes Do and Sometimes Don't Yield Rent

Food seems to be the only product of land that always and necessarily yields some rent to the landlord. Other products sometimes do and sometimes don't, depending on circumstances.

After food, clothing and shelter are humanity's two great needs.

In its original, uncultivated state, land can supply the raw materials for clothing and shelter to far more people than it can feed. In its improved state, it can sometimes feed more people than it can supply with those materials — at least in the form people want them and are willing to pay for. In the first case, then, there's always a surplus of these materials, which are frequently worth little or nothing. In the second, there's often a shortage, which drives up their value. In the first case, much of it is thrown away as useless, and the price of what is used merely covers the labor and cost of preparing it — yielding no rent for the landlord. In the second, everything is used, and there's frequently demand for more than can be supplied. People are always willing to pay more for these materials than what it costs to bring them to market. Their price can therefore always yield some rent.

The skins of large animals were the original raw material for clothing. Among hunter-gatherer and herding peoples, whose diet consists mainly of animal flesh, every person who provides themselves with food automatically provides themselves with more clothing material than they can wear. Without foreign trade, most of these hides would be thrown away as worthless. This was probably the case among the indigenous nations of North America before Europeans arrived — Europeans with whom they now exchange their surplus pelts for blankets, firearms, and brandy, giving those pelts some value. In the current global economy, even the least developed nations with established land ownership have some foreign trade of this kind. They find among their wealthier neighbors enough demand for all the clothing materials their land produces — materials that can't be processed or consumed at home — to push the price above what it costs to ship them. This yields some rent for the landlord. When most Highland cattle were consumed on their own hills, the export of their hides was the most significant branch of that region's trade, and the income from that exchange contributed to the rent of Highland estates. England's wool, which in earlier times couldn't be consumed or processed at home, found a market in the then wealthier and more industrious Flanders, and its price contributed something to the rent of the land that produced it. In countries no better developed than England was then — or the Scottish Highlands are now — and with no foreign trade, the raw materials for clothing would be so abundant that much would be thrown away, and none would yield any rent.

Building materials can't always be transported as far as clothing materials, and so they don't as easily become objects of foreign trade. When they're more abundant than needed in the country that produces them, it often happens — even in today's global economy — that they're worthless to the landlord. A good stone quarry near London would yield considerable rent. In many parts of Scotland and Wales, one yields none at all. Construction timber is highly valuable in a densely populated, well-cultivated country, and the land that produces it earns significant rent. But in many parts of North America, the landlord would be grateful to anyone who would cart away most of his large trees. In parts of the Scottish Highlands, bark is the only part of a tree that can get to market, for lack of roads or water transport. The timber is left to rot on the ground. When building materials are this abundant, whatever gets used is worth only the labor and cost of preparing it for use. It yields no rent, and the landlord generally grants its use to anyone who asks. The demand from wealthier nations, however, can sometimes generate a rent. The paving of London's streets has enabled the owners of some barren rocks on the Scottish coast to collect rent from what never yielded any before. The forests of Norway and the Baltic coast find a market in many parts of Great Britain that they couldn't find at home, and thereby earn some rent for their owners.

Countries are populous not in proportion to how many people their land can clothe and shelter, but in proportion to how many it can feed. When food is available, finding clothing and shelter is easy enough. But when clothing and shelter are at hand, finding food may still be difficult. In some parts of the British dominions, what is called a house can be built by one person in a day's work. The simplest form of clothing — animal skins — takes somewhat more labor to prepare, but not much. In hunter-gatherer and early pastoral societies, a hundredth part or slightly more of the year's total labor is enough to provide most people with satisfactory clothing and shelter. The remaining ninety-nine parts are often barely enough to provide food.

But once land improvement and cultivation advance to the point where one family's labor can produce food for two, half the society's labor is freed up. That other half — or at least the greater part of it — can be devoted to providing other things, to satisfying people's other wants and desires. Clothing, shelter, household furnishings, and personal luxuries are the main objects of these wants and desires. A rich person doesn't consume more food than a poor neighbor. It may be different in quality, requiring more labor and skill to select and prepare, but in quantity it's about the same. Compare the spacious mansion and vast wardrobe of one with the hovel and few rags of the other, though, and you'll see that the difference in their clothing, housing, and furnishings is nearly as great in quantity as in quality. Every person's desire for food is limited by the small capacity of the human stomach. But the desire for nicer buildings, finer clothes, and better furnishings seems to have no limit whatsoever. Those who command more food than they can eat are always willing to exchange the surplus — or its monetary equivalent — for these other kinds of gratification. What's left over after satisfying the limited appetite for food goes to amuse the desires that seem completely endless. The poor, in order to get food, work to satisfy the whims of the rich, and to win this business they compete with each other on both price and quality. The number of workers increases with the growing supply of food — with the expanding improvement and cultivation of land — and since these industries allow for extreme division of labor, the quantity of goods they produce grows in a much greater proportion than their numbers. This creates demand for every kind of material that human ingenuity can use, whether practically or decoratively — in buildings, clothing, furnishings, and personal accessories. This includes the minerals and metals buried in the earth: the precious metals and the precious stones.

Food is therefore not only the original source of rent, but every other product of the land that eventually yields rent gets its value from improvements in labor's ability to produce food — improvements driven by the cultivation and development of land.

These other products of land, however, don't always yield rent, even in developed and cultivated countries. Demand for them isn't always strong enough to push their price above what's needed to cover the labor and replace the capital (with its ordinary profits) used to bring them to market. Whether demand is strong enough depends on circumstances.

Whether a coal mine can yield any rent, for example, depends partly on its productivity and partly on its location.

A mine of any kind can be called productive or unproductive based on whether the amount of mineral that a given amount of labor can extract from it is greater or less than what the same amount of labor could extract from most other mines of the same type.

Some coal mines that are well located can't be profitably worked because they're too unproductive. Their output doesn't cover expenses. They yield neither profit nor rent.

Other mines produce just enough to cover the labor costs and replace the capital (with its ordinary profits) used to work them. They provide some profit to the mine operator, but no rent to the landlord. They can only be profitably worked by the landlord himself, who acts as his own operator and earns the ordinary profit on the capital he invests. Many coal mines in Scotland are worked this way, and can only be worked this way. The landlord won't let anyone else work them without paying rent, and nobody can afford to pay any.

Still other coal mines in the same country — productive enough in themselves — can't be worked because of their location. Enough coal to cover the operating costs could be extracted with ordinary labor or less. But in a sparsely populated inland area, without good roads or water transport, it simply couldn't be sold.

Coal is a less pleasant fuel than wood. It's also said to be less healthy. The cost of coal where it's consumed must therefore generally be somewhat less than the cost of wood.

The price of wood, in turn, varies with the state of agriculture in much the same way and for exactly the same reasons as the price of cattle. In the earliest stages, most of the country is covered with forest, which is nothing but a nuisance to the landlord, who would gladly give it away to anyone who'd cut it down. As agriculture advances, the woods are partly cleared for farming and partly destroyed by growing herds of cattle. Cattle don't multiply as fast as grain — which is entirely a product of human effort — but they do increase under human care and protection. People store up feed during abundant seasons for lean times, provide more food year-round than wild nature does, and by killing off predators, ensure the cattle can enjoy everything nature provides. Large herds wandering through the woods don't destroy old trees, but they prevent young ones from growing, so that over a century or two the entire forest decays. The resulting scarcity of wood drives up its price. It begins to yield good rent, and landlords sometimes find that they can hardly use their best land more profitably than by growing timber — where the size of the eventual profit often compensates for how long you have to wait. This seems to be roughly the situation today in several parts of Great Britain, where the profit from planting trees is found to equal that from grain or pasture. The advantage a landlord gets from planting can never exceed — at least not for long — the rent that grain or pasture would yield, and in a well-cultivated inland area it usually comes close to matching it. On the coast of a well-developed country, however, if coal is readily available for fuel, it may sometimes be cheaper to import building timber from less developed foreign countries than to grow it domestically. In Edinburgh's New Town, built in recent years, there's perhaps not a single piece of Scottish timber.

Whatever the price of wood, if coal is priced so that a coal fire costs about the same as a wood fire, we can be sure that coal is at its maximum price in that place and those circumstances. This seems to be the case in some inland parts of England, particularly Oxfordshire, where it's common — even among ordinary people — to burn a mix of coal and wood, suggesting the cost difference between the two fuels can't be very large.

In coal-producing regions, coal is everywhere well below this maximum price. If it weren't, it couldn't bear the cost of being transported any distance by land or water. Only a small quantity could be sold, and mine owners and operators find it more profitable to sell large quantities at a price somewhat above the minimum than small quantities at the maximum. The most productive coal mine in an area sets the price for all the others. Both the landlord and the mine operator find that they can earn more — the landlord in rent, the operator in profit — by slightly undercutting all their neighbors. Those neighbors are soon forced to match the price, even though they can't afford it as easily, and this always reduces — and sometimes eliminates entirely — both their rent and their profit. Some mines are abandoned. Others can yield no rent and can only be worked by the landlord himself.

The lowest price at which coal can be sold over any significant period is, like that of all other goods, the price that barely covers the capital invested in bringing it to market, along with ordinary profits. At a coal mine that yields no rent — one the landlord must either work himself or abandon entirely — coal prices will generally be near this level.

Even where coal does yield rent, rent's share of the price is generally smaller than for most other raw products of the land. The rent of farmland above ground typically amounts to what's estimated as a third of the gross output, and it's usually a fixed amount regardless of crop variations. In coal mines, a fifth of gross output is very high rent; a tenth is the typical rent, and it's rarely fixed — it depends on how much coal actually comes out, which varies enormously. These fluctuations are so large that in a country where thirty years' income is considered a fair price for a farm, ten years' income is considered a good price for a coal mine.

The value of a coal mine to its owner depends as much on location as on productivity. For a metal mine, productivity matters more and location matters less. Both common and precious metals, once separated from their ore, are valuable enough to bear the cost of very long overland or overseas transport. Their market isn't confined to nearby countries — it extends to the entire world. Japanese copper is traded in Europe. Spanish iron is shipped to Chile and Peru. Peruvian silver finds its way not only to Europe, but from Europe to China.

The price of coal in Westmorland or Shropshire has little effect on coal prices in Newcastle, and the price in the Lyonnais region of France has no effect at all. Coal from such distant mines never competes with each other. But the output of even the most distant metal mines frequently does compete — and commonly does. The price of both common and especially precious metals at the most productive mines in the world therefore necessarily affects their price at every other mine. The price of copper in Japan must have some influence on copper prices at European mines. The price of silver in Peru — how much labor or goods it can buy there — must have some influence on silver prices not only at European mines, but at Chinese ones too. After the discovery of the Peruvian mines, most European silver mines were abandoned. Silver's value dropped so much that their output could no longer cover operating costs or replace — with any profit — the food, clothing, shelter, and other necessities consumed in the mining operation. The same thing happened to the mines of Cuba and Hispaniola, and even to Peru's older mines after the discovery of Potosi.

Since the price of every metal at every mine is regulated to some extent by its price at the world's most productive working mine, most mines can do little more than cover their operating costs and can rarely yield much rent to the landlord. At most mines, accordingly, rent makes up only a small share of the price of common metals, and an even smaller share for precious metals. Labor and profit make up the bulk of both.

A sixth of gross output is reportedly the average rent of the tin mines of Cornwall — the most productive in the world — according to the Reverend Mr. Borlase, vice-warden of the Stannaries. Some yield more, some less. A sixth of gross output is also the rent of several highly productive lead mines in Scotland.

In the silver mines of Peru, according to Frezier and Ulloa, the landowner frequently demands nothing from the mine operator except that the ore be ground at his mill, paying the standard milling fee. Until 1736, the Spanish king's tax on silver was one-fifth of the standard metal, which could be considered the real rent of most Peruvian silver mines — the richest ever known. If there had been no tax, this fifth would naturally have gone to the landlord, and many mines that couldn't bear the tax would have been worked. The Duke of Cornwall's tax on tin is estimated at more than 5 percent, or one-twentieth of the value. Whatever the duke's share, it too would naturally belong to the mine owner if tin were tax-free. Adding one-twentieth to one-sixth, the total average rent of Cornwall's tin mines was to the total average rent of Peru's silver mines as thirteen is to twelve. But Peru's silver mines can no longer even pay this low rent, and the silver tax was reduced from one-fifth to one-tenth in 1736. Even this reduced silver tax tempts more smuggling than the one-twentieth tax on tin, and smuggling is much easier with a precious metal than a bulky commodity. Spain's silver tax is reportedly very poorly collected, while the Duke of Cornwall's tin tax is paid quite reliably. Rent, therefore, probably makes up a larger share of tin's price at the most productive tin mines than silver's price at the most productive silver mines in the world. After replacing the capital invested in working these different mines (along with ordinary profits), the residue left for the mine owner is apparently larger for the common metal than for the precious one.

Nor are the profits of silver mine operators in Peru generally very impressive. The same highly respected and well-informed authors tell us that when someone undertakes to develop a new mine in Peru, everyone considers him a man destined for bankruptcy and ruin. He's shunned and avoided by all. Mining there, it seems, is viewed the same way it is here: as a lottery where the prizes don't compensate for the blanks, even though the size of some prizes tempts many adventurers to throw away their fortunes on these unprofitable ventures.

Since the government, however, derives a considerable portion of its revenue from silver mining, Peruvian law gives every possible encouragement to discovering and developing new mines. Whoever discovers one is entitled to mark off 246 feet along the supposed direction of the vein, and half as much in width. He becomes the owner of this section and can work it without paying anything to the landowner. The Duke of Cornwall's interests have produced a similar regulation in that ancient duchy. On uncultivated, unfenced land, anyone who discovers a tin mine can mark off its limits to a certain extent — what's called "bounding a mine." The bounder becomes the effective owner and can either work it himself or lease it to someone else without the landowner's consent, though a small fee must be paid to the landowner when mining begins. In both cases, the sacred rights of private property are sacrificed to the supposed interests of public revenue.

Peru gives the same encouragements for discovering and developing new gold mines. For gold, the king's tax amounts to only one-twentieth of the standard metal. It was once a fifth, then a tenth (as for silver), but the mining couldn't bear even the lower of these two rates. If it's rare to find someone who's made a fortune from a silver mine, say the same authors Frezier and Ulloa, it's even rarer to find one who's done so from a gold mine. This one-twentieth tax appears to be roughly the entire rent paid by most gold mines in Chile and Peru. Gold is also even more prone to smuggling than silver — not only because the metal is more valuable relative to its bulk, but because of how nature produces it. Silver is very rarely found in pure form. Like most metals, it's combined with other substances and can only be separated in quantities worth the effort through a laborious and time-consuming process, which requires dedicated facilities — facilities that are exposed to inspection by the king's officials. Gold, by contrast, is almost always found in pure form. It sometimes appears in sizeable pieces, and even when mixed in tiny, nearly invisible particles with sand, dirt, and other substances, it can be separated through a very quick and simple process that anyone with a small amount of mercury can carry out at home. If the king's tax is poorly collected on silver, it's likely to be much worse collected on gold. Rent must therefore make up an even smaller share of gold's price than it does of silver's.

The lowest price at which precious metals can be sold over any significant period — that is, the smallest amount of other goods they can be exchanged for — is determined by the same principles that set the minimum price for everything else. The capital that must be invested, the food, clothing, shelter, and other necessities that must be consumed in getting the metal from the mine to the market — these set the floor. The price must at least be enough to replace that capital with its ordinary profits.

Their highest price, however, seems to have no fixed ceiling other than the actual scarcity or abundance of the metals themselves. It's not limited by the price of any other commodity, as coal's price is capped by wood's price — a ceiling that no degree of scarcity can push coal past. Increase the scarcity of gold enough, and the tiniest fragment of it could become more precious than a diamond and exchange for a greater quantity of other goods.

Demand for these metals arises partly from their usefulness and partly from their beauty. Setting aside iron, they are perhaps more useful than any other metal. Since they resist rust and corrosion, they can be kept clean more easily, and kitchen and table utensils made from them are often preferred for that reason. A silver pot is cleaner than one made of lead, copper, or tin, and by the same logic, a gold one would be better still than a silver one. But their principal appeal lies in their beauty, which makes them especially suited for decorating clothing and furnishings. No paint or dye can produce so brilliant a color as gilding. The appeal of their beauty is greatly increased by their scarcity. For most wealthy people, the chief pleasure of being rich is displaying that wealth — and the display is never quite as satisfying as when it involves things that nobody else can afford. In their eyes, the value of any object that's somewhat useful or beautiful is greatly enhanced by its rarity, or by the enormous labor required to collect any significant quantity — labor that only the rich can afford. They'll gladly pay more for such objects than for things that are much more beautiful and useful but more common. These qualities of usefulness, beauty, and scarcity are the original foundation of precious metals' high price — that is, the large quantity of other goods they can everywhere be exchanged for. This value existed before and independently of their use as money, and it was precisely this quality that made them suitable for use as currency. That use, however, by creating additional demand and reducing the quantity available for other purposes, may have helped maintain or increase their value.

The demand for precious stones arises entirely from their beauty. They have no practical use — they serve only as ornaments — and the appeal of that beauty is greatly enhanced by their scarcity and by the difficulty and expense of extracting them from mines. Wages and profit accordingly make up almost the entire price on most occasions. Rent contributes only a tiny share, frequently nothing at all. Only the most productive mines yield any significant rent. When Tavernier, a jeweler, visited the diamond mines of Golconda and Vijayanagar, he was told that the local ruler — for whose benefit they were worked — had ordered all of them shut down except those yielding the largest and finest stones. The others, apparently, weren't worth the trouble.

Since the price of both precious metals and precious stones is set worldwide by their price at the most productive working mine, the rent that any mine can yield is proportional not to its absolute productivity, but to its relative productivity — its superiority over other mines of the same type. If new mines were discovered that were as much richer than Potosi's as Potosi's were richer than Europe's old mines, the value of silver might fall so far that even the Potosi mines wouldn't be worth working. Before the discovery of the Spanish colonies in the Americas, Europe's most productive mines may have yielded as much rent as Peru's richest mines do now. Though the quantity of silver was much smaller, it could buy the same amount of other goods, and the owner's share would have commanded the same amount of labor and commodities. The value of both the output and the rent — the real income they provided to the public and to the owner — could have been identical.

The most abundant mines of precious metals or stones could add little to the world's real wealth. A product whose value comes mainly from its scarcity is necessarily cheapened by abundance. Silverware and other frivolous ornaments of clothing and furniture could be bought for less labor or fewer goods. That would be the only benefit the world would gain from such abundance.

It's completely different with land above ground. The value of both its output and its rent is proportional to its absolute productivity, not its relative productivity. Land that produces a certain amount of food, clothing, and shelter can always feed, clothe, and house a certain number of people. Whatever the landlord's share, it will always give them a proportional command over those people's labor and whatever that labor can produce. The value of the most barren land isn't reduced by being near the most fertile land. On the contrary, it's generally increased. The large population supported by the fertile land creates a market for many products of the barren land that could never have been sold to the few people the barren land itself could support.

Whatever increases the fertility of food-producing land increases not only the value of the land that's improved, but also contributes to the value of many other lands by creating new demand for their products. The abundance of food that, as a result of agricultural improvement, many people have more of than they can eat — this is the great cause of demand for precious metals and precious stones, as well as for every other luxury of clothing, housing, furnishings, and personal accessories. Food is not only the principal component of the world's wealth; it is the abundance of food that gives most of the value to many other kinds of wealth. The poor inhabitants of Cuba and Hispaniola, when the Spanish first arrived, used to wear little bits of gold as ornaments in their hair and on their clothing. They seemed to value these pieces much as we would value unusually pretty pebbles — worth picking up, but not worth refusing to anyone who asked. They gave them to their new visitors at the first request, without seeming to think they had given away anything particularly valuable. They were astonished at the Spaniards' frenzy to obtain them. They had no idea that there could be a country where so many people had such an enormous surplus of food — food that was always so scarce among themselves — that for a tiny quantity of these glittering trinkets they would willingly pay enough to feed an entire family for many years. Had they been able to understand this, the Spaniards' passion would not have surprised them.

Variations in the Relative Value of Products That Always Yield Rent and Products That Sometimes Do and Sometimes Don't

As agricultural improvement and cultivation increase the supply of food, demand must necessarily grow for every product of the land that isn't food — everything that can be used practically or as decoration. Over the whole course of economic progress, then, you might expect just one consistent trend in the relative values of these two categories of product. The value of goods that sometimes yield rent and sometimes don't should steadily rise relative to goods that always yield rent. As art and industry advance, the raw materials for clothing and shelter, the useful minerals from the earth, the precious metals and precious stones should gradually face more and more demand. They should trade for larger and larger quantities of food — in other words, they should gradually become more and more expensive. And this is indeed what has happened with most of these goods on most occasions. It would have happened with all of them on all occasions, if particular events hadn't sometimes increased the supply of some of them by an even greater proportion than demand grew.

The value of a sandstone quarry, for example, will necessarily increase as the surrounding area develops and its population grows — especially if it's the only quarry nearby. But the value of a silver mine, even if there isn't another one within a thousand miles, won't necessarily increase just because the country around it is developing. The market for a sandstone quarry rarely extends more than a few miles, and demand generally tracks the improvement and population of that small area. But the market for a silver mine can extend across the entire known world. Unless the world as a whole is advancing in development and population, even major improvements in a large country near the mine might not increase the demand for silver at all. And even if the world as a whole were improving, if richer new mines were discovered in the course of that improvement — mines far more productive than any known before — then although demand for silver would necessarily increase, the supply might increase by so much more that the real price of the metal could gradually fall. That is, any given quantity — a pound of silver, for example — might gradually buy less and less labor, or trade for less and less grain, the main staple of working people's diet.

The great market for silver is the commercially advanced and developed part of the world.

If, through general economic progress, demand in this market increases while supply doesn't keep pace, the value of silver will gradually rise relative to grain. Any given quantity of silver will trade for more and more grain. In other words, the average money price of grain will gradually become cheaper and cheaper.

If, on the other hand, supply happens to increase for many years in a greater proportion than demand, the metal will gradually become cheaper. In other words, the average money price of grain will — despite all improvements — gradually become higher and higher.

But if supply increases at roughly the same rate as demand, silver will continue to buy roughly the same amount of grain, and the average money price of grain will — despite all improvements — remain roughly the same.

These three scenarios seem to cover every possible combination of events that can occur over the course of economic progress. And during the four centuries preceding our own, judging by what has happened in both France and Great Britain, each of these three scenarios appears to have actually occurred in the European market — and roughly in the same order I've just described them.

In 1350, and for some time before that, the average price of a quarter of wheat in England appears to have been no less than four ounces of silver (Tower-weight), equal to about twenty shillings in today's money. From that price, it seems to have gradually fallen to two ounces of silver — about ten shillings in today's money — the price we find it at by the beginning of the sixteenth century, where it stayed until around 1570.

In 1350, the 25th year of Edward III's reign, a law called the Statute of Laborers was enacted. In its preamble, it complains bitterly about the insolence of servants who were trying to raise their wages. It therefore orders that all servants and laborers must from now on be content with the same wages and liveries they had been receiving in the 20th year of the king's reign and the four years before that. ("Liveries" in those days meant not just clothing but food and provisions.) Under this law, their livery wheat was not to be valued higher than tenpence a bushel anywhere, and the master always had the option of paying them in either wheat or money.

Tenpence a bushel, then, was considered a very moderate price for wheat in 1350 — otherwise it wouldn't have taken a special statute to force servants to accept it instead of their usual food provisions. And it had been considered a reasonable price ten years earlier, in the 16th year of the king's reign, which is the reference point the statute uses. Now, in the 16th year of Edward III, tenpence contained about half an ounce of silver (Tower-weight) and was roughly equal to half a crown in today's money. Four ounces of silver (Tower-weight), therefore — equal to six shillings and eightpence in the money of those times, and to roughly twenty shillings today — must have been considered a moderate price for a quarter (eight bushels) of wheat.

This statute is surely better evidence of what was considered a moderate grain price in those times than the prices from particular years that historians tend to record. Those prices were typically noted because they were extraordinarily high or low, which makes it hard to judge what the ordinary price actually was. There are other reasons too for believing that in the early fourteenth century, and for some time before, the common price of wheat was no less than four ounces of silver per quarter, with other grains priced proportionally.

In 1309, Ralph de Born, prior of St. Augustine's in Canterbury, threw a feast for his installation, and William Thorn preserved not just the menu but the prices of many items. At this feast, they consumed: first, fifty-three quarters of wheat costing nineteen pounds (seven shillings and twopence per quarter, equal to about twenty-one shillings and sixpence in today's money); second, fifty-eight quarters of malt costing seventeen pounds ten shillings (six shillings per quarter, equal to about eighteen shillings today); and third, twenty quarters of oats costing four pounds (four shillings per quarter, equal to about twelve shillings today). The prices of malt and oats here seem higher than their usual ratio to wheat prices.

These prices weren't recorded because they were unusually high or low. They were mentioned incidentally as the actual prices paid for large quantities of grain consumed at a feast that was famous for its magnificence.

In 1262, the 51st year of Henry III's reign, an ancient statute called the Assize of Bread and Ale was revived. The king says in the preamble that it had been made in the times of his ancestors, former kings of England. It probably dates back at least to his grandfather Henry II, and may even be as old as the Norman Conquest. This statute regulated the price of bread according to wheat prices ranging from one shilling to twenty shillings per quarter (in the money of those times). Now, statutes of this kind generally aim to cover all deviations from the middle price equally — those below it as well as those above it. Ten shillings, therefore — containing six ounces of silver (Tower-weight), equal to about thirty shillings in today's money — must, on this reasoning, have been considered the middle price of a quarter of wheat when the statute was first enacted, and must have still been so in 1262 under Henry III. We can't be far off, then, in assuming that the middle price was at least one-third of the highest price that the statute covers — that is, six shillings and eightpence of that era's money, containing four ounces of silver (Tower-weight).

From all these facts, we have good reason to conclude that around the mid-fourteenth century, and for a considerable time before, the ordinary price of a quarter of wheat was thought to be no less than four ounces of silver (Tower-weight).

From the mid-fourteenth century to the early sixteenth century, the reasonable and moderate price of wheat — that is, the ordinary or average price — seems to have gradually fallen to about half of this, settling at around two ounces of silver (Tower-weight), equal to about ten shillings in today's money. It stayed at this price until around 1570.

In the household account book of Henry, the fifth Earl of Northumberland, drawn up in 1512, wheat is estimated at two different prices. One values it at six shillings and eightpence per quarter, the other at just five shillings and eightpence. In 1512, six shillings and eightpence contained only two ounces of silver (Tower-weight) and was equal to about ten shillings in today's money.

From the 25th year of Edward III to the beginning of Elizabeth's reign — a span of more than two hundred years — six shillings and eightpence had continued, according to several different statutes, to be considered the moderate and reasonable (that is, the ordinary or average) price of wheat. The actual quantity of silver contained in that nominal sum was, however, continually shrinking during this period due to various changes made to the coinage. But the increase in silver's value seems to have roughly offset the reduction in the amount of silver in the coins, so the legislature apparently didn't think the discrepancy was worth addressing.

So in 1436, a law was passed allowing wheat to be exported without a license when the price was as low as six shillings and eightpence. And in 1463, another law prohibited wheat imports unless the price exceeded six shillings and eightpence per quarter. The reasoning was that when the price was that low, exporting wouldn't cause any problems, but when it rose higher, it became wise to allow imports. Six shillings and eightpence — containing about the same amount of silver as thirteen shillings and fourpence in today's money (one-third less silver than the same nominal sum contained in Edward III's time) — was still considered the moderate and reasonable price of wheat.

In 1554, under Philip and Mary, and in 1558, under Elizabeth, wheat exports were similarly prohibited whenever the quarter price exceeded six shillings and eightpence, which by then contained barely two pennies' worth more silver than the same nominal sum does today. But it was quickly discovered that prohibiting exports until the price dropped that low was, in practice, banning exports entirely. So in 1562, under Elizabeth, wheat exports were allowed from certain ports whenever the quarter price didn't exceed ten shillings — containing nearly the same amount of silver as ten shillings does today. This price was then considered the moderate and reasonable price of wheat. It aligns closely with the Northumberland household book's estimate from 1512.

In France, the average grain price similarly fell in the late fifteenth and early sixteenth centuries compared to the two preceding centuries, as both Mr. Dupre de St. Maur and the elegant author of the Essay on the Regulation of Grain have observed. The same decline probably occurred across most of Europe during this period.

This rise in silver's value relative to grain may have been caused entirely by increased demand for silver (due to growing economic improvement) while the supply stayed the same. Or, with demand holding steady, it may have been caused entirely by a gradual decline in supply, since most of the known mines were becoming exhausted and therefore more expensive to work. Or it may have been partly due to both factors. By the late fifteenth and early sixteenth centuries, most of Europe was approaching a more stable form of government than it had enjoyed for centuries. Greater security would naturally boost industry and economic improvement. The demand for precious metals, like the demand for every other luxury, would naturally increase along with rising wealth. A larger annual output of goods would require more coinage to circulate it, and a greater number of wealthy people would want more silver plates and other silver ornaments. It's also reasonable to suppose that most of the mines then supplying the European market were becoming significantly depleted and more expensive to operate. Many of them had been worked since Roman times.

However, most writers who have studied commodity prices in ancient times have held that from the Norman Conquest — or perhaps even from Julius Caesar's invasion — until the discovery of the American mines, the value of silver was continually falling. They seem to have been led to this view partly by their observations about the prices of grain and some other raw agricultural products, and partly by the popular belief that as the quantity of silver naturally increases with a country's growing wealth, its value must decrease as its quantity grows.

Three different things seem to have frequently misled them in their observations about grain prices.

First, in ancient times nearly all rents were paid in kind — a certain amount of grain, cattle, poultry, and so on. Sometimes, however, the landlord would stipulate his right to demand from the tenant either the annual payment in kind or a fixed sum of money instead. In Scotland, the price at which the in-kind payment was exchanged for money is called the "conversion price." Since the landlord always had the option of taking either the goods or the cash, the conversion price needed to be set below the average market price for the tenant's protection. In many places, accordingly, it was not much above half the market price. Throughout most of Scotland, this custom still continues for poultry, and in some places for cattle. It probably would have continued for grain too, had the institution of the "public fiars" not replaced it. These are official annual valuations of the average price of all different types and qualities of grain, based on actual market prices in each county. This system made it safe enough for tenants and much more convenient for landlords to convert their grain rents at whatever the fiars price turned out to be each year, rather than at some fixed price.

But the writers who collected grain prices from ancient times seem frequently to have confused the conversion price with the actual market price. Fleetwood himself admits on one occasion that he made this mistake. However, since he wrote his book for a particular purpose, he doesn't make this admission until after he has already cited this conversion price fifteen times. The price in question is eight shillings per quarter of wheat. In 1423, the year he starts with, this sum contained the same amount of silver as sixteen shillings in today's money. But by 1562, the year he ends with, it contained no more than eight shillings does today.

Second, these writers have been misled by the sloppy way some ancient pricing statutes were transcribed by lazy copyists — and sometimes perhaps sloppily drafted by the legislature itself.

The ancient statutes of assize seem to have always started by determining what bread and ale should cost when wheat and barley were at their lowest price, then proceeded step by step through higher and higher grain prices. But the copyists often thought it was enough to transcribe only the first three or four prices — the lowest ones — saving themselves the trouble and apparently assuming this was sufficient to show the pattern that applied at all higher prices.

So in the Assize of Bread and Ale from 1262 (the 51st year of Henry III), the price of bread was regulated according to wheat prices from one shilling to twenty shillings per quarter (in the money of those times). But in the manuscripts from which all pre-Ruffhead editions of the statutes were printed, the copyists had only transcribed the regulation up to twelve shillings. Several writers, misled by this truncated copy, naturally concluded that the middle price — six shillings per quarter, equal to about eighteen shillings in today's money — was the ordinary average price of wheat at that time.

In the Statute of Tumbrel and Pillory, enacted around the same period, the price of ale is regulated according to every sixpence rise in barley prices, from two shillings to four shillings per quarter. But four shillings was not considered the highest price barley could reach in those times. These prices were merely given as examples of the pattern to be followed at all other prices, high or low. We can tell this from the statute's final words: "et sic deinceps crescetur vel diminuetur per sex denarios" — the phrasing is quite sloppy, but the meaning is clear enough: "And the price of ale is to be raised or lowered in this manner for every sixpence change in barley prices." The legislature itself seems to have been just as careless in drafting this statute as the copyists were in transcribing the other one.

In an ancient manuscript of the Regiam Majestatem, an old Scottish law book, there's a statute of assize that regulates the price of bread according to wheat prices from tenpence to three shillings per Scottish boll (about half an English quarter). Three Scottish shillings, at the time this statute was supposedly enacted, were equal to about nine shillings sterling in today's money. Mr. Ruddiman seems to have concluded from this that three shillings was the highest price wheat ever reached in those times, and that tenpence, one shilling, or at most two shillings were the normal prices. But when you actually consult the manuscript, it's clear that all these prices are merely examples of the proportional relationship between wheat and bread prices. The statute's closing words make this plain: "reliqua judicabis secundum praescripta habendo respectum ad pretium bladi" — "You shall judge the remaining cases according to the rules written above, with due regard to the price of grain."

Third, these writers were also misled by the very low prices at which wheat was sometimes sold in very ancient times, imagining that since its lowest price was much lower then than in later periods, its ordinary price must have been much lower too. But they could just as easily have noticed that the highest prices in those ancient times were just as far above anything seen in later periods as the lowest prices were below them.

For example, in 1270, Fleetwood gives us two prices for a quarter of wheat. One is four pounds sixteen shillings (in the money of those times, equal to fourteen pounds eight shillings today). The other is six pounds eight shillings (equal to nineteen pounds four shillings today). No prices from the late fifteenth or early sixteenth century come anywhere close to these extremes.

Grain prices, though always subject to fluctuation, swing most wildly in turbulent, disorderly societies where disrupted commerce and communication prevent the abundance of one region from relieving the scarcity of another. In the chaotic England of the Plantagenets, who governed from roughly the mid-twelfth to the late fifteenth century, one district might have plenty while another nearby district — whose crops had been destroyed by bad weather or by the raid of some neighboring baron — suffered the horrors of famine. Yet if the lands of a hostile lord lay between them, the prosperous district might have no way to help the starving one. Under the vigorous rule of the Tudors, who governed England through the latter fifteenth and all of the sixteenth century, no baron was powerful enough to dare disturb the public peace.

At the end of this chapter, the reader will find all the wheat prices Fleetwood collected from 1202 to 1597, converted to today's money and organized chronologically into seven periods of twelve years each. At the end of each period, the twelve-year average is also given. Over that long stretch, Fleetwood was only able to collect prices for eighty out of those nearly four hundred years, leaving the final twelve-year period four years short. I've therefore added, from Eton College's records, the prices for 1598, 1599, 1600, and 1601 — my only addition. The reader will see that from the early thirteenth century through the mid-sixteenth century, the average price for each twelve-year period gradually falls, and that toward the end of the sixteenth century it begins rising again. The prices Fleetwood managed to collect were mainly those noted for being either remarkably expensive or remarkably cheap, and I won't pretend that any very certain conclusion can be drawn from them. But insofar as they prove anything at all, they confirm the account I've been trying to give.

Fleetwood himself, however, seems to have believed — along with most other writers — that throughout this entire period, silver's value was continually falling due to increasing abundance. The grain prices he himself collected certainly don't support that view. They agree perfectly with the account of Mr. Dupre de St. Maur, and with the one I've been trying to explain here. Bishop Fleetwood and Mr. Dupre de St. Maur are the two authors who seem to have collected the most diligent and faithful records of ancient prices. It's somewhat curious that despite their very different opinions, their facts — at least regarding grain prices — line up so precisely.

However, it's not so much from the low price of grain as from the low prices of other raw agricultural products that the most thoughtful writers have inferred that silver was very valuable in those ancient times. Grain, they've argued, is essentially a manufactured product — in those primitive ages, it was much more expensive relative to most other commodities. By "other commodities," I take them to mean unprocessed goods: cattle, poultry, wild game, and so on. And it's undeniably true that in those times of poverty, such products were proportionally much cheaper than grain.

But this cheapness wasn't caused by silver being more valuable. It was caused by those commodities being less valuable. It wasn't because silver could buy more labor, but because those raw goods represented much less labor than they would in times of greater wealth and development.

Silver is certainly cheaper in Spanish America than in Europe — cheaper in the country where it's produced than in the one to which it must be shipped at the cost of a long journey by land and sea, plus freight and insurance charges. Yet we're told by Ulloa that not many years ago, in Buenos Aires, the price of an ox chosen from a herd of three or four hundred was just twenty-one and a half pence sterling. And according to Mr. Byron, a good horse in the capital of Chile cost sixteen shillings sterling. In a naturally fertile country where the vast majority of land is uncultivated, cattle, poultry, game, and the like — since they can be acquired with very little labor — will command very little in return. Their low money price doesn't prove that silver is very valuable there; it proves that those commodities have very little value.

We must always remember: it's labor — not any particular commodity or set of commodities — that is the real measure of the value of both silver and everything else.

In countries that are mostly empty or thinly populated, cattle, poultry, game, and similar products are spontaneous productions of nature, and nature frequently produces far more of them than the inhabitants can consume. In such conditions, supply regularly exceeds demand. In different stages of social development, therefore, such commodities will represent very different quantities of labor.

In every state of society and every stage of development, grain is a product of human industry. But the average output of every type of industry is always more or less matched to average consumption — average supply to average demand. At every stage of improvement, moreover, raising equal amounts of grain on the same quality of land in the same climate requires, on average, roughly equal amounts of labor (or what comes to the same thing, roughly equal costs). The continual increase in labor productivity that comes with agricultural improvement is more or less offset by the continually rising price of cattle, the principal tools of agriculture.

For all these reasons, we can be confident that equal quantities of grain will, in every state of society, more closely represent equal quantities of labor than equal quantities of any other raw agricultural product. As I've already noted, grain is a more accurate measure of value across different stages of wealth and development than any other commodity. We can therefore judge the real value of silver more reliably by comparing it with grain than with anything else.

Beyond this, grain — or whatever the common staple food of the people happens to be — makes up the main part of a laborer's subsistence in every civilized country. Thanks to the spread of agriculture, every country produces far more plant food than animal food, and laborers everywhere live mainly on the cheapest and most abundant wholesome food available. Meat, except in the most prosperous countries where labor is best rewarded, makes up only a small part of a laborer's diet. Poultry is an even smaller part, and game essentially none of it. In France, and even in Scotland (where labor is somewhat better paid than in France), working people rarely eat meat except on holidays and other special occasions.

The money price of labor, therefore, depends much more on the average money price of grain — the laborer's main food — than on the price of meat or any other raw product. The real value of gold and silver — the real amount of labor they can buy — depends much more on how much grain they can purchase than on how much meat or anything else.

Such scattered observations about the prices of grain or other commodities wouldn't have misled so many intelligent writers, however, if they hadn't also been influenced by the popular belief that as the quantity of silver naturally grows with increasing wealth, its value falls as its quantity grows. This notion, however, seems to be entirely groundless.

The quantity of precious metals may increase in any country for two distinct reasons. First, the mines supplying it may become more abundant. Second, the people may become wealthier — the annual product of their labor may grow. The first cause is indeed necessarily connected with a decrease in the metals' value, but the second is not.

When richer mines are discovered, more precious metals come to market. If the quantity of goods and necessities available for exchange remains the same, equal amounts of metal will exchange for smaller amounts of commodities. So when precious metals increase because of more abundant mines, their value necessarily falls.

But when a country's wealth increases — when the annual output of its labor grows steadily greater — more coinage is needed to circulate more goods. And the people, having more to trade for it, will naturally acquire more and more silver plate and ornaments. The quantity of coinage increases out of necessity; the quantity of silverware increases out of vanity and ostentation — for the same reason that fine statues, paintings, and every other luxury multiply in a prosperous society. But just as sculptors and painters don't get paid less in times of wealth and prosperity than in times of poverty, gold and silver won't be paid for less either.

When there's no accidental discovery of richer mines to push prices down, the price of gold and silver naturally rises with a country's wealth. Whatever the state of the mines, it's always naturally higher in a rich country than in a poor one. Gold and silver, like all other commodities, seek the market where they'll fetch the best price — and the best price for everything is usually offered by the country that can best afford to pay it.

Remember, labor is the ultimate price paid for everything. In countries where labor is equally well rewarded, the money price of labor will be proportional to the cost of a laborer's subsistence. But gold and silver will exchange for a greater quantity of subsistence in a rich country than in a poor one. If the two countries are far apart, the difference may be enormous — because although metals naturally flow from the worse market to the better one, it's hard to transport enough to equalize prices across great distances. If the countries are nearby, the difference will be smaller and sometimes barely noticeable, since transportation is easy.

China is a much richer country than any part of Europe, and the difference between the cost of food in China and in Europe is very large. Rice in China is much cheaper than wheat anywhere in Europe. England is much richer than Scotland, but the difference in grain prices between those two countries is much smaller — barely noticeable. Measured by quantity, Scottish grain generally appears considerably cheaper than English. But measured by quality, it's actually somewhat more expensive. Scotland imports large quantities of grain from England every year, and any commodity must ordinarily cost somewhat more in the country it's shipped to than in the country it comes from. English grain, therefore, must be more expensive in Scotland than in England — yet relative to its quality, it can't usually be sold for more than the Scottish grain competing with it in the same market.

The difference between the money price of labor in China and in Europe is even greater than that between the money prices of food, because the real compensation of labor is higher in Europe than in China. Most of Europe is in a state of economic improvement, while China seems to be standing still. The money price of labor is lower in Scotland than in England because real compensation is much lower there too. Scotland is advancing toward greater wealth, but much more slowly than England. The frequency of emigration from Scotland and its rarity from England are proof enough that labor demand is very different in the two countries. The proportion between the real compensation of labor in different countries, it must be remembered, is naturally determined not by their actual wealth or poverty, but by whether their condition is improving, stagnant, or declining.

Gold and silver are naturally most valuable among the richest nations and least valuable among the poorest. Among hunter-gatherer societies — the poorest of all nations — they're barely valuable at all.

In large cities, grain is always more expensive than in remote parts of the country. But this isn't because silver is cheap in cities — it's because grain is expensive there. It doesn't cost less labor to bring silver to a major city than to the countryside, but it costs a great deal more to bring grain.

In some very wealthy and commercial countries, like Holland and the territory of Genoa, grain is expensive for the same reason it's expensive in major cities: they don't produce enough to feed their inhabitants. They're rich in the skill and industry of their craftsmen and manufacturers, in every kind of labor-saving machinery, in shipping, and in every other instrument and means of transportation and trade. But they're poor in grain, which must be imported from distant countries and therefore costs more to cover the shipping expense. It doesn't cost less labor to bring silver to Amsterdam than to Danzig, but it costs a great deal more to bring grain. The real cost of silver is nearly the same in both places, but the real cost of grain is very different.

Reduce the real wealth of Holland or Genoa while keeping their populations the same. Reduce their ability to bring in food from distant countries. The price of grain, instead of falling along with the decrease in silver that must accompany this decline (whether as cause or effect), will rise to famine levels. When we're desperate for necessities, we'll trade away all our luxuries — and luxuries, whose value rises in prosperous times, plunge in value during poverty and distress. It's the opposite with necessities. Their real price — the amount of labor they can command — rises in times of poverty and falls in times of prosperity, which are always times of great abundance (otherwise they wouldn't be prosperous times). Grain is a necessity. Silver is only a luxury.

Whatever, therefore, may have been the increase in precious metals during the period from the mid-fourteenth to the mid-sixteenth century that resulted from growing wealth and development, it could not have tended to reduce their value — not in Great Britain, and not anywhere else in Europe. If those who collected ancient prices had no reason to infer that silver was declining in value from their observations of grain or other commodity prices, they had even less reason to infer it from any supposed increase in wealth and development.

However varied the opinions of scholars may have been about the direction of silver's value during the first period, they are unanimous about the second.

From about 1570 to about 1640 — a span of roughly seventy years — the relationship between silver and grain reversed course entirely. Silver fell in its real value, meaning it would exchange for less labor than before. Meanwhile, grain rose in its nominal price: instead of commonly selling for about two ounces of silver per quarter (roughly ten shillings in today's money), it came to sell for six to eight ounces of silver per quarter (roughly thirty to forty shillings in today's money).

The discovery of the enormously productive mines of America appears to have been the sole cause of this decline in silver's value relative to grain. Everyone accounts for it in the same way. There has never been any dispute about either the fact or the cause. Most of Europe was advancing in industry and economic development during this period, so the demand for silver must have been growing. But the increase in supply, it seems, so far outstripped the increase in demand that silver's value fell considerably. It's worth noting that the discovery of the American mines doesn't seem to have had any noticeable effect on English prices until after 1570, even though the mines of Potosi had been discovered more than twenty years earlier.

From 1595 to 1620, inclusive, the average price of a quarter of nine bushels of the best wheat at Windsor market, according to the Eton College records, was 2 pounds, 1 shilling, 6 and 9/13 pence. Ignoring the fraction and deducting one-ninth (4 shillings, 7 and 1/3 pence) to convert from nine bushels to a quarter of eight bushels, the price comes out to 1 pound, 16 shillings, 10 and 2/3 pence. And deducting another ninth (4 shillings, 1 and 1/9 pence) for the difference between the best wheat and mid-grade wheat, the price of mid-grade wheat comes out to about 1 pound, 12 shillings, 8 and 8/9 pence — or about six and one-third ounces of silver.

From 1621 to 1636, inclusive, the average price of the same measure of the best wheat at the same market was 2 pounds, 10 shillings. Making the same deductions, the average price of a standard quarter (eight bushels) of mid-grade wheat comes out to 1 pound, 19 shillings, 6 pence — or about seven and two-thirds ounces of silver.

Between 1630 and 1640 — around 1636 — the effect of the American mines in reducing the value of silver appears to have run its full course. The value of silver relative to grain seems never to have sunk lower than it was around that time. It appears to have risen somewhat during the present century, and had probably begun doing so even before the end of the last.

From 1637 to 1700 — the sixty-four final years of the last century — the average price of a quarter of nine bushels of the best wheat at Windsor market was, according to the Eton College records, 2 pounds, 11 shillings, and a third of a penny. That's only 1 shilling and a third of a penny more expensive than it had been during the sixteen years before 1637. But during those sixty-four years, two events occurred that must have driven grain prices much higher than weather alone would have warranted — more than enough to account for this very small increase without supposing any further decline in silver's value.

The first was the English Civil War, which by discouraging farming and disrupting trade must have pushed grain prices well above what seasonal conditions alone would have caused. This effect would have been felt at markets throughout the kingdom, but especially around London, which needed grain from the greatest distances. In 1648, the price of the best wheat at Windsor market reached 4 pounds, 5 shillings per quarter of nine bushels, and in 1649 it hit 4 pounds. The excess of these two years above the sixteen-year pre-1637 average of 2 pounds, 10 shillings totals 3 pounds, 5 shillings. Spread across those sixty-four years, that alone would nearly account for the small price increase we observe. And those were only the most extreme prices — far from the only high prices caused by the civil wars.

The second event was the grain export bounty (subsidy) granted in 1688. Many people have argued that this bounty, by encouraging farming, eventually produced greater abundance and therefore cheaper grain in the domestic market. I'll examine later how far the bounty could actually have this effect. For now, I'll just point out that between 1688 and 1700, it hadn't had enough time to produce any such result. During this short period, its only effect was to push surplus production into exports each year, preventing the abundance of one year from offsetting the scarcity of another, and thereby raising domestic prices. The scarcity that gripped England from 1693 to 1699 was no doubt mainly caused by bad weather and extended across much of Europe. But the bounty must have made it somewhat worse. Accordingly, in 1699 further grain exports were prohibited for nine months.

A third event during the same period, while it couldn't have caused any actual grain scarcity or any increase in the real amount of silver paid for it, must have caused some increase in the nominal sum. This was the severe debasement of the silver coinage through clipping and wear. This problem had begun under Charles II and grew steadily worse until 1695, when, as we learn from Mr. Lowndes, the circulating silver coin was on average nearly twenty-five percent below its official standard value. The nominal price at which any commodity sells at market is naturally determined not by the amount of silver that should be in the coins according to the standard, but by the amount that experience shows actually is in them. This nominal price is therefore naturally higher when the coinage has been severely debased through clipping and wear than when it's close to its standard value.

During the present century, the silver coinage has never been as far below its standard weight as it is right now. But though quite worn, its value has been propped up by the gold coinage for which it is exchanged. Before the recent re-coining, the gold coins were somewhat defaced too, but less so than the silver. In 1695, by contrast, the value of the silver coinage was not supported by the gold. A guinea in those days typically exchanged for thirty shillings of worn and clipped silver. Before the recent gold re-coinage, the price of silver bullion was rarely higher than five shillings and sevenpence an ounce — just fivepence above the mint price. But in 1695, the common price of silver bullion was six shillings and fivepence an ounce — fifteenpence above the mint price. So even before the recent gold re-coinage, the combined coinage of gold and silver, compared against silver bullion, was thought to be no more than eight percent below its standard value. In 1695, by contrast, it was thought to be nearly twenty-five percent below. But at the start of the present century — that is, right after the great re-coinage under King William — most of the circulating silver must have been much closer to standard weight than it is now.

During the present century, moreover, there has been no great national catastrophe like the civil war to discourage farming or disrupt internal trade. And though the grain export bounty, which has been in effect for most of the century, must always push grain prices somewhat above where they would otherwise be given the actual state of farming, the bounty has now had plenty of time to produce all the good effects attributed to it — encouraging cultivation and thereby increasing the domestic grain supply. According to one school of thought (which I'll explain and examine later), the bounty may have done as much to lower grain prices through increased production as it has done to raise them through encouraged exports. Many people believe it has done more.

Accordingly, during the first sixty-four years of the present century, the average price of a quarter of nine bushels of the best wheat at Windsor market was, by the Eton College records, 2 pounds, 0 shillings, 6 and 19/32 pence. That is about ten shillings and sixpence — more than twenty-five percent — cheaper than it had been during the last sixty-four years of the previous century. It's about nine shillings and sixpence cheaper than during the sixteen years before 1636, when the American mines may be supposed to have had their full effect. And it's about one shilling cheaper than during the twenty-six years before 1620, before the mines can be supposed to have had their full effect. By this reckoning, the average price of mid-grade wheat during the first sixty-four years of the present century comes out to about thirty-two shillings per standard quarter of eight bushels.

The value of silver, therefore, seems to have risen somewhat relative to grain during the present century, and had probably begun doing so even before the end of the last.

In 1687, the price of a quarter of nine bushels of the best wheat at Windsor market was 1 pound, 5 shillings, 2 pence — the lowest it had been at any point since 1595.

In 1688, Mr. Gregory King, a man famous for his expertise in such matters, estimated the average price of wheat in years of moderate abundance at 3 shillings, 6 pence per bushel to the grower, or twenty-eight shillings per quarter. By "grower's price" I understand he means the contract price — the price at which a farmer contracts to deliver a set quantity of grain to a dealer over several years. Since such contracts save the farmer the cost and trouble of marketing, the contract price is generally lower than the average market price. Mr. King judged twenty-eight shillings per quarter to be the ordinary contract price in years of moderate plenty. Before the scarcity caused by the recent extraordinary run of bad seasons, I've been told that this was indeed the ordinary contract price in all normal years.

In 1688, the parliamentary bounty on grain exports was granted. The country gentlemen, who then made up an even larger share of the legislature than they do today, had noticed that the money price of grain was falling. The bounty was a scheme to artificially raise it back to the high prices that had been common under Charles I and Charles II. It was to apply until wheat reached forty-eight shillings per quarter — that is, twenty shillings, or five-sevenths, more expensive than what Mr. King had estimated the grower's price to be in years of moderate plenty that very same year. If his calculations deserve any part of their widely recognized reputation, forty-eight shillings per quarter was a price that, without some device like the bounty, couldn't have been expected except in years of extraordinary scarcity. But King William's government was not yet firmly established. It was in no position to refuse anything to the country gentlemen, from whom it was at that very moment requesting the first establishment of the annual land tax.

The value of silver relative to grain had therefore probably already risen somewhat before the end of the last century, and seems to have continued rising through most of the present — though the bounty must have slowed this rise from being as noticeable as it otherwise would have been, given the actual state of farming.

In plentiful years, the bounty drives up the price of grain above what it otherwise would be, since it encourages extraordinary amounts of export. Keeping up grain prices even in the most abundant years was the openly stated purpose of the policy.

In years of great scarcity, the bounty has generally been suspended. But it must have had some effect on prices even in many of those years. By stimulating excessive exports in abundant years, it frequently prevents the plenty of one year from compensating the scarcity of another.

In both plentiful and scarce years, therefore, the bounty raises grain prices above what they would naturally be given the actual state of farming. So if the average price during the first sixty-four years of this century has been lower than during the last sixty-four years of the previous one, it must have been even lower still — much lower — without the bounty's distorting effect.

But without the bounty, some might argue, the state of farming itself wouldn't have been the same. What the bounty has actually done for agriculture is something I'll try to examine later, when I discuss subsidy policy in detail. For now, I'll simply note that this rise in silver's value relative to grain has not been peculiar to England. It has been observed in France during the same period and in nearly the same proportion, by three very careful and diligent collectors of grain prices: Mr. Dupre de St. Maur, Mr. Messance, and the author of the Essay on the Regulation of Grain. But in France, grain exports were prohibited by law until 1764. It's rather hard to believe that nearly the same price decline that occurred in one country despite an export ban could, in another country, have been caused by the extraordinary encouragement given to exports.

It would be more accurate, perhaps, to view this decline in the average money price of grain as the result of a gradual rise in the real value of silver across the European market, rather than any fall in the real value of grain. As I've already observed, grain is a more accurate measure of value over long time periods than either silver or perhaps any other commodity. When, after the discovery of the abundant American mines, grain rose to three or four times its former money price, everyone attributed this change not to any increase in the real value of grain but to a decline in the real value of silver. If during the first sixty-four years of the present century the average money price of grain has fallen somewhat below its level in most of the previous century, we should account for this in the same way — not as a fall in grain's real value, but as some rise in the real value of silver in the European market.

The high grain prices of the last ten or twelve years have admittedly raised suspicions that silver's real value is still declining in the European market. But these high prices clearly seem to be the result of extraordinarily bad weather and should be viewed as a temporary event, not a permanent one. The seasons have been unfavorable for the past ten or twelve years across most of Europe, and the political upheavals in Poland have greatly increased scarcity in all the countries that used to get grain from that market in expensive years. Such a long run of bad seasons, while not a very common event, is by no means a unique one. Anyone who has studied the history of grain prices in earlier times will recall several similar episodes. Ten years of extraordinary scarcity are no more remarkable than ten years of extraordinary abundance. The low grain prices from 1741 to 1750 can very well be set against the high prices of the last eight or ten years. From 1741 to 1750, the average price of a quarter of nine bushels of the best wheat at Windsor market was only 1 pound, 13 shillings, 9 and 4/5 pence — nearly 6 shillings, 3 pence below the average for the first sixty-four years of the century. The average price of a standard quarter (eight bushels) of mid-grade wheat during those ten years comes out to only 1 pound, 6 shillings, 8 pence.

Between 1741 and 1750, however, the bounty must have prevented grain from falling as low domestically as it naturally would have. During those ten years, total grain exports of all kinds, according to customs records, amounted to no less than 8,029,156 quarters and one bushel. The bounty paid on these exports totaled 1,514,962 pounds, 17 shillings, 4 and a half pence. In 1749, Prime Minister Mr. Pelham observed to the House of Commons that an extraordinary sum had been paid as a grain export bounty over the preceding three years. He had good reason to make this remark, and in the following year he might have had even better cause. In that single year, the bounty paid amounted to no less than 324,176 pounds, 10 shillings, 6 pence. It's hardly necessary to point out how much this forced exportation must have raised domestic grain prices above what they would otherwise have been.

At the end of the accounts appended to this chapter, the reader will find those ten years broken out separately. There too is a separate account of the ten years before them, whose average also falls below the general average of the first sixty-four years of the century, though not by as much. The year 1740, however, was a year of extraordinary scarcity. These twenty years before 1750 can be set against the twenty years before 1770. Just as the earlier twenty were well below the century's average despite one or two expensive years mixed in, the later twenty have been well above it despite one or two cheap ones (1759, for example). If the earlier period wasn't as far below the average as the later period has been above it, we should probably attribute the difference to the bounty. The change has obviously been too sudden to be blamed on any shift in silver's value, which is always slow and gradual. The only thing that can explain such a sudden effect is a cause that can act suddenly — the random variation of the seasons.

The money price of labor in Great Britain has certainly risen during the present century. But this seems to be the result not so much of any decline in silver's value in the European market as of an increase in the demand for labor in Great Britain, driven by the great and nearly universal prosperity of the country. In France, a country not quite so prosperous, the money price of labor has, since the middle of the last century, been observed to fall gradually alongside the average money price of grain. Both in the last century and in this one, the daily wages of common labor in France are said to have held pretty steadily at about one-twentieth of the average price of a septier of wheat (a measure slightly larger than four Winchester bushels). In Great Britain, as I've already shown, the real compensation of labor — the actual quantities of necessities and comforts of life given to the laborer — has increased considerably during the present century. The rise in money wages seems to be the result not of any decline in the value of silver in the general European market, but of a rise in the real price of labor in the particular market of Great Britain, owing to the country's uniquely favorable circumstances.

For some time after America was first discovered, silver continued to sell at or near its former price. Mining profits were for a while very high — well above their natural rate. But those who imported silver into Europe would soon have found that the whole annual supply couldn't be sold at this high price. Silver would gradually exchange for less and less. Its price would slowly fall until it reached its natural price — just enough to cover, at their normal rates, the wages of labor, the profits of capital, and the rent of land needed to bring it from the mine to market.

In most of Peru's silver mines, the king of Spain's tax — amounting to a tenth of the gross output — eats up, as I've already noted, the entire rent of the land. This tax was originally a half; it soon dropped to a third, then a fifth, and finally to a tenth, where it remains today. In most of Peru's silver mines, this seems to be all that's left after the mine operator replaces his capital along with its ordinary profits. And it is universally acknowledged that these profits, once very high, are now as low as they can possibly be while still keeping the mines in operation.

The king of Spain's tax was reduced to one-fifth of registered silver in 1504 — forty-one years before 1545, when the mines of Potosi were discovered. In the ninety years between then and 1636, these mines — the most productive in all of America — had enough time to produce their full effect, reducing the value of silver in the European market as low as it could go while still bearing this tax. Ninety years is plenty of time to bring any commodity that isn't a monopoly down to its natural price — the lowest price at which, while paying a particular tax, it can continue to be sold for any extended period.

The price of silver in the European market might have fallen even further, making it necessary to cut the tax not just to one-tenth (as was done in 1736) but to one-twentieth — just as the tax on gold had been reduced. Or it might have become necessary to abandon most of the American mines currently in operation. What probably prevented this was the gradual growth of demand for silver — the steady expansion of the market for the output of America's silver mines. This growing demand has not only held up silver's value in the European market but may have pushed it somewhat higher than it was around the middle of the last century.

Since America was first discovered, the market for its silver mines has been growing steadily more extensive.

First, the European market itself has expanded. Since the discovery of America, most of Europe has improved significantly. England, Holland, France, and Germany — even Sweden, Denmark, and Russia — have all advanced considerably in both agriculture and manufacturing. Italy seems not to have gone backward. (Italy's decline came before the conquest of Peru, and since then it seems to have recovered a little.) Spain and Portugal are generally thought to have fallen behind. Portugal, however, is only a very small part of Europe, and Spain's decline is perhaps not as great as commonly supposed. In the early sixteenth century, Spain was a very poor country, even compared to France, which has improved so much since then. Emperor Charles V, who traveled frequently through both countries, famously remarked that everything was abundant in France, but everything was lacking in Spain. The growing output of European agriculture and manufacturing has naturally required a gradual increase in the silver coinage needed to circulate it, and the increasing number of wealthy individuals has required a corresponding increase in their silver plates and ornaments.

Second, America itself is a new market for the output of its own silver mines. Since its agriculture, industry, and population are advancing much more rapidly than the most prosperous European countries, its demand must be growing much faster too. The English colonies are an entirely new market that, for both coinage and silverware, requires a continually growing supply of silver across a vast continent where none was ever demanded before. Most of the Spanish and Portuguese colonies are likewise entirely new markets. New Granada, the Yucatan, Paraguay, and Brazil were inhabited, before European contact, by peoples who had neither established crafts nor agriculture. Considerable amounts of both have now been introduced throughout these regions. Even Mexico and Peru, which can't be considered entirely new markets, are certainly much larger ones than they ever were before.

After all the marvelous tales published about the supposed splendor of these civilizations in ancient times, anyone who reads the history of their discovery and conquest with sober judgment will clearly see that their inhabitants were, in arts, agriculture, and commerce, much more primitive than the Tartars of the Ukraine are today. Even the Peruvians, the more developed of the two civilizations, though they used gold and silver as ornaments, had no coined money of any kind. All their commerce was conducted through barter, and accordingly there was barely any division of labor among them. Those who farmed also had to build their own houses, make their own furniture, clothing, shoes, and agricultural tools. The few craftsmen among them were reportedly maintained by the sovereign, the nobles, and the priests, and were probably their servants or slaves. All the ancient arts of Mexico and Peru have never furnished a single manufactured product to Europe.

The Spanish armies, though they almost never exceeded five hundred men and frequently numbered less than half that, found it extremely difficult to get food almost everywhere they went. The famines they are said to have caused wherever they appeared — in countries simultaneously described as highly populated and well cultivated — are sufficient proof that the stories of dense populations and advanced agriculture are largely fictional.

The Spanish colonies operate under a government that is in many ways less favorable to agriculture, development, and population growth than the English colonial governments. Yet they seem to be advancing in all these areas much more rapidly than any country in Europe. In a fertile land with a pleasant climate, the great abundance and cheapness of land — a feature common to all new colonies — is apparently such a powerful advantage that it compensates for many defects in civil government. Frezier, who visited Peru in 1713, puts Lima's population at between twenty-five and twenty-eight thousand. Ulloa, who lived there between 1740 and 1746, puts it at over fifty thousand. The discrepancy between their accounts of other major towns in Chile and Peru is similarly large. Since there's no reason to doubt either man's information, this suggests a growth rate rivaling that of the English colonies. America, therefore, is a new market for the output of its own silver mines, with demand growing much faster than in the most prosperous European country.

Third, the East Indies is yet another market for American silver, and one that has been absorbing ever-greater quantities since those mines were first discovered. The direct trade between America and East Asia, carried on via the Manila galleons through Acapulco, has been continually expanding, and the indirect trade through Europe has been growing even faster. During the sixteenth century, the Portuguese were the only Europeans with a regular trade to the East Indies. In the closing years of that century, the Dutch began encroaching on this monopoly and within a few years expelled the Portuguese from their main Indian settlements. For most of the seventeenth century, these two nations divided the bulk of the East India trade between them, with the Dutch share continually growing as the Portuguese share declined. The English and French also conducted some India trade in the seventeenth century, but it has expanded greatly in the present one. The Swedes and Danes entered the East India trade during this century as well. Even the Russians now trade regularly with China via overland caravans through Siberia and Tartary to Beijing. The East India trade of all these nations — except perhaps that of the French, which the last war nearly destroyed — has been almost continuously growing. The increasing European consumption of East Indian goods seems large enough to provide expanding business for all of them.

Tea, for example, was a product barely used in Europe before the mid-seventeenth century. Today, the value of tea imported annually by the English East India Company for domestic consumption alone amounts to more than one and a half million pounds a year — and even that isn't enough, since a great deal more is constantly smuggled into the country from the ports of Holland, from Gothenburg in Sweden, and from the French coast (as long as the French East India Company was prospering). The consumption of Chinese porcelain, spices from the Moluccas, piece goods from Bengal, and countless other articles has increased in nearly the same proportion. The total tonnage of European shipping employed in the East India trade at any one time during the last century was probably not much greater than that of the English East India Company alone before its recent reduction in fleet size.

In the East Indies — particularly in China and India — the value of precious metals, when Europeans first began trading there, was much higher than in Europe, and it remains so today. In rice-growing countries, which typically yield two and sometimes three crops a year, each more plentiful than any ordinary grain harvest, the abundance of food must be much greater than in any grain-growing country of equal size. Such countries are accordingly much more densely populated. Their wealthy classes, having a much larger surplus of food beyond what they themselves consume, have the means to purchase a much greater quantity of other people's labor. The retinue of a great lord in China or India is, by all accounts, much more numerous and splendid than that of the richest people in Europe.

This same food surplus allows these wealthy individuals to offer more for all those rare things that nature produces only in small quantities — the precious metals and precious stones that are the great prizes in the competition among the rich. Even if the mines supplying the Indian market were as rich as those supplying Europe, such commodities would naturally exchange for a greater amount of food in India than in Europe. But the mines that supplied India with precious metals were actually considerably less productive, while those supplying it with precious stones were considerably more so. The precious metals would therefore naturally exchange in India for somewhat more in precious stones and for much more in food than in Europe. The money price of diamonds — the greatest of all luxuries — would be somewhat lower in India, and the money price of food — the first of all necessities — would be far lower.

But the real price of labor — the actual quantity of necessities given to the worker — is, as I've already noted, lower in both China and India than in most of Europe. Workers' wages there buy a smaller quantity of food, and since food is also much cheaper in money terms, the money price of labor is low on both counts: both because of the small quantity of food it buys and because of the low price of that food. In countries of roughly equal manufacturing skill, the money price of most manufactured goods will be proportional to the money price of labor. China and India, though somewhat behind, are not far behind Europe in manufacturing ability. The money price of most manufactures, therefore, is naturally much lower in these great empires than anywhere in Europe.

Throughout most of Europe, moreover, the cost of land transportation greatly increases both the real and nominal price of most manufactured goods. It costs more labor — and therefore more money — to bring raw materials and then the finished products to market. In China and India, the extensive and varied systems of inland waterways save most of this labor and therefore most of this money, reducing both the real and nominal price of most manufactures even further.

For all these reasons, precious metals have always been — and continue to be — an extremely profitable commodity to ship from Europe to India. Nothing fetches a better price there. Nothing, relative to the amount of labor and goods it costs in Europe, commands a greater amount of labor and goods in India. It's especially profitable to ship silver rather than gold, because in China and most other Asian markets, the ratio of fine silver to fine gold is only about ten or twelve to one, whereas in Europe it's fourteen or fifteen to one. In China and most of the East, ten or at most twelve ounces of silver buy an ounce of gold; in Europe, it takes fourteen to fifteen ounces. In the cargoes of most European ships sailing to India, silver has therefore generally been one of the most valuable items. It's the most valuable article in the Manila galleons that sail from Acapulco. American silver, then, appears to be one of the principal commodities enabling commerce between the two extremities of the Old World, and it is largely through silver that these distant parts of the globe are connected to each other.

To supply such an enormously widespread market, the quantity of silver brought from the mines annually must be large enough not only to support the continual increase in both coinage and silverware that all prospering countries need, but also to replace the continual waste and consumption of silver that occurs everywhere the metal is used.

The continual consumption of precious metals through the wearing of coins and the wearing and polishing of silverware is very significant. For commodities so widely used, this alone would demand a very substantial annual supply. The consumption of these metals in certain manufacturing processes, while perhaps no greater overall than this gradual wearing away, is much more conspicuous because it's much faster. In the workshops of Birmingham alone, the gold and silver used annually for gilding and plating — thereby permanently losing its identity as metal — is said to amount to more than fifty thousand pounds sterling. From this, we can get some idea of how vast the total annual consumption must be across all parts of the world, whether in industries similar to Birmingham's, or in laces, embroidery, gold and silver textiles, book gilding, furniture gilding, and so on. A considerable amount must also be lost every year in transporting these metals from place to place, both by sea and by land. And in most Asian governments, the nearly universal custom of burying treasure underground — the location frequently dying with the person who hid it — must cause the loss of an even greater quantity.

The total gold and silver imported annually at Cadiz and Lisbon — including both what comes through official registration and what is estimated to be smuggled — amounts, according to the best accounts, to about six million pounds sterling per year.

According to Mr. Meggens, the average annual import of precious metals into Spain over six years (1748 to 1753) and into Portugal over seven years (1747 to 1753) amounted to 1,101,107 pounds weight of silver and 49,940 pounds weight of gold. The silver, at sixty-two shillings per pound Troy, comes to 3,413,431 pounds, 10 shillings sterling. The gold, at forty-four and a half guineas per pound Troy, comes to 2,333,446 pounds, 14 shillings sterling. Together: 5,746,878 pounds, 4 shillings sterling. He assures us that the registered figures are exact. He gives the details of where each metal came from and how much each source contributed, according to the official records. He also makes allowances for what he estimates was smuggled. The great experience of this shrewd merchant gives his estimates considerable weight.

According to the eloquent and sometimes well-informed author of the Philosophical and Political History of European Settlements in the Two Indies, the average annual registered import of gold and silver into Spain over eleven years (1754 to 1764) amounted to just under fourteen million piastres of ten reals. Accounting for smuggling, he estimates the total annual import at seventeen million piastres, which at 4 shillings, 6 pence per piastre equals 3,825,000 pounds sterling. He too gives the detailed breakdown of sources and quantities. He also tells us that if we judged the gold imported annually from Brazil into Lisbon by the amount of the king of Portugal's tax (one-fifth of the standard metal), we could value it at eighteen million cruzadoes, or forty-five million French livres, equal to about two million pounds sterling. Adding one-eighth more for smuggling (250,000 pounds), the total comes to 2,250,000 pounds sterling. By this account, then, the combined annual import of precious metals into Spain and Portugal amounts to about 6,075,000 pounds sterling.

Several other very well-authenticated accounts — though in manuscript form — agree, I've been told, in putting this total annual import at roughly six million pounds sterling on average, sometimes a bit more, sometimes a bit less.

The annual import into Cadiz and Lisbon, it should be noted, is not equal to the total annual output of the American mines. Some is sent each year via the Manila galleons to the Philippines. Some goes into the contraband trade that the Spanish colonies carry on with other European colonies. And some, no doubt, stays in the Americas. The American mines, moreover, are far from the only gold and silver mines in the world — they are, however, by far the most productive. The output of all other known mines is, by common acknowledgment, insignificant compared to theirs, and the great majority of American output is, again by common acknowledgment, annually shipped to Cadiz and Lisbon.

But the consumption of Birmingham alone, at fifty thousand pounds a year, equals one-hundred-and-twentieth of this annual import at the rate of six million pounds per year. The total annual consumption of gold and silver across all the countries of the world where these metals are used may therefore be roughly equal to total annual production. The remainder may barely suffice to meet the growing demand of all prospering countries. It may even have fallen so far short of this demand as to have pushed the price of these metals up somewhat in the European market.

The quantity of brass and iron brought annually from the mines to market is incomparably greater than that of gold and silver. Yet we don't imagine that those common metals will therefore multiply beyond demand and become cheaper and cheaper over time. Why should we assume that precious metals will? True, common metals are harder, but they're also put to much harder uses, and being less valuable, less care is taken to preserve them. Precious metals, however, are no more immortal than common ones — they too are subject to being lost, wasted, and consumed in a great variety of ways.

The price of all metals, though subject to slow, gradual shifts, varies less from year to year than almost any other raw product of the land. The price of precious metals is even less prone to sudden changes than that of common ones. The durability of metals is the foundation of this extraordinary price stability. The grain brought to market last year will be almost entirely consumed before this year is out. But some of the iron mined two or three hundred years ago may still be in use, and perhaps some of the gold mined two or three thousand years ago as well. The different quantities of grain that supply the world's consumption in different years will always be roughly proportional to each year's harvest. But the proportion between the different total quantities of iron in use in any two years will be barely affected by whatever happens to iron mine output in those two years. And the proportion between the total quantities of gold in use will be even less affected by fluctuations in gold mine output. So although the annual production of most mines varies even more than the annual harvest of most farmland, these variations don't have the same impact on the price of metals as harvest variations have on the price of grain.

Before the discovery of the American mines, the official ratio of gold to silver at the various European mints was somewhere between one-to-ten and one-to-twelve. That is, an ounce of fine gold was considered worth ten to twelve ounces of fine silver. By around the middle of the seventeenth century, this ratio had shifted to between one-to-fourteen and one-to-fifteen: an ounce of fine gold was now considered worth fourteen to fifteen ounces of fine silver.

Gold had risen in its nominal value — the amount of silver given for it. Both metals had fallen in their real value — the amount of labor they could purchase. But silver had fallen more than gold. Although the American mines of both metals were more productive than any previously known, the silver mines had apparently been even more spectacularly productive relative to the gold ones.

The large quantities of silver shipped annually from Europe to India have gradually reduced the value of silver relative to gold in some of the English settlements there. At the Calcutta mint, an ounce of fine gold is valued at fifteen ounces of fine silver, the same ratio as in Europe. This is perhaps set too high for the actual market value of gold in Bengal. In China, the ratio of gold to silver is still about one-to-ten or one-to-twelve. In Japan, it's reportedly as low as one-to-eight.

According to Mr. Meggens's figures, the ratio of gold to silver imported annually into Europe is roughly one-to-twenty-two — that is, for every ounce of gold, a little more than twenty-two ounces of silver are imported. The large quantities of silver sent to the East Indies each year, he supposes, reduce the amounts remaining in Europe to the ratio of one-to-fourteen or one-to-fifteen, which is also the ratio of their market values. He seems to think that the value ratio must necessarily match the quantity ratio, and that it would therefore be one-to-twenty-two if not for this heavy silver export.

But the normal ratio between the values of two commodities doesn't have to match the ratio between their quantities in the market. The price of an ox, at about ten guineas, is roughly sixty times the price of a lamb at 3 shillings, 6 pence. It would be absurd to conclude that there are therefore sixty lambs in the market for every ox. And it would be equally absurd to conclude, because an ounce of gold buys fourteen to fifteen ounces of silver, that there are only fourteen or fifteen ounces of silver in the market for every ounce of gold.

The quantity of silver actually in the market is probably much greater, relative to gold, than the value of a given quantity of gold is to an equal quantity of silver. The total quantity of a cheap commodity brought to market is usually not just larger than that of an expensive one, but also of greater total value. The total quantity of bread sold annually is not only greater than the total quantity of meat, but worth more in total. The total quantity of meat exceeds that of poultry. And the total quantity of poultry exceeds that of wild fowl. There are so many more buyers for a cheap commodity than for an expensive one that not only more of it can be sold, but more total value can be exchanged. The total quantity of the cheap commodity must therefore be proportionally greater, relative to the expensive one, than the per-unit value of the expensive one is to the per-unit value of the cheap one.

When we compare the precious metals to each other, silver is the cheap commodity and gold the expensive one. We should naturally expect, then, that the market always contains not only a greater quantity of silver but also a greater total value of silver than of gold. Anyone who has both can confirm this by comparing their own silver possessions with their gold ones: they'll probably find that both the quantity and the total value of silver greatly exceed those of gold. Many people have quite a bit of silverware but no gold items at all. And even those who do have gold tend to have it only in things like watch cases, snuffboxes, and similar trinkets — never amounting to much total value.

In British coinage, gold does predominate in value, but this isn't true everywhere. In some countries, the two metals are roughly equal in the coinage. In Scottish coinage before the union with England, gold barely predominated, though it did somewhat, as the mint records show. In the coinage of many countries, silver predominates. In France, the largest sums are normally paid in silver, and it's hard to get more gold than you need to carry in your pocket. However, the greater value of silverware compared to gold plate — which holds true in every country — more than compensates for whatever preponderance gold has over silver in some countries' coinage.

Though in one sense of the word, silver has always been, and probably always will be, much cheaper than gold, there's another sense in which gold may currently be said to be somewhat cheaper than silver — at least in the Spanish market. A commodity can be called expensive or cheap not only based on the absolute size of its usual price, but also based on how far that price is above the lowest price at which it can be sustainably brought to market. This lowest price is the one that just covers the cost of capital and labor with a moderate profit — the price that affords nothing to the landlord, with rent forming no part of it.

In the current state of the Spanish market, gold is certainly somewhat closer to this minimum price than silver is. The king of Spain's tax on gold is only one-twentieth (five percent), while his tax on silver is one-tenth (ten percent). As I've already noted, these taxes basically constitute the entire rent of most gold and silver mines in Spanish America, and the tax on gold is even harder to collect than the one on silver. The profits of gold mine operators, who even more rarely make a fortune, must generally be lower still than those of silver mine operators. The price of Spanish gold, therefore — yielding both less rent and less profit — must be somewhat closer to the minimum sustainable price than the price of Spanish silver. When all costs are figured in, it seems that the whole quantity of gold cannot be sold as profitably in the Spanish market as the whole quantity of silver.

The king of Portugal's tax on Brazilian gold, however, is the same as the old Spanish tax on Mexican and Peruvian silver used to be — one-fifth of the standard metal. It remains uncertain, therefore, whether the total mass of American gold reaches the general European market at a price closer to the minimum sustainable level than the total mass of American silver does.

The price of diamonds and other precious stones may perhaps be even closer to the minimum sustainable price than that of gold itself.

Although it's unlikely that any part of the silver tax — which is not only levied on a perfectly appropriate luxury item but also yields extremely important revenue — will ever be given up as long as it can possibly be paid, the same impossibility of paying it that forced its reduction from one-fifth to one-tenth in 1736 may eventually force further reductions, just as it was necessary to reduce the gold tax to one-twentieth. Everyone who has studied the state of these mines acknowledges that the silver mines of Spanish America, like all mines, are becoming gradually more expensive to work, due to the greater depths required and the growing costs of pumping out water and supplying fresh air.

These factors — which amount to a growing scarcity of silver, since a commodity can be said to grow scarcer when it becomes harder and more expensive to collect a given quantity of it — must eventually lead to one of three outcomes. The rising costs must either: first, be entirely offset by a proportional increase in the metal's price; or second, be entirely offset by a proportional reduction in the silver tax; or third, be partly offset by one and partly by the other. This third outcome is quite possible. Just as gold rose in price relative to silver despite a large reduction in the gold tax, silver might rise in price relative to labor and commodities despite an equal reduction in the silver tax.

Such successive tax reductions, however, even if they don't entirely prevent silver's value from rising, must certainly slow it down. Because of these reductions, many mines that couldn't have been profitably worked under the old tax can now be operated. The quantity of silver brought to market annually will always be somewhat greater, and therefore the value of any given quantity somewhat less, than it otherwise would have been. As a result of the 1736 reduction, the value of silver in the European market — though it may not be lower today than before the reduction — is probably at least ten percent lower than it would have been had Spain continued to charge the old rate.

Despite this reduction, the facts and arguments I've presented above incline me to believe — or more accurately, to suspect and conjecture — that silver's value has, during the present century, begun to rise somewhat in the European market. The best opinion I can form on this subject barely deserves to be called a belief. The rise, if it has occurred at all, has been so slight that after everything I've said, many people may find it uncertain not only whether this rise has actually happened but whether the opposite may not be true — whether silver's value may in fact still be falling in the European market.

It should be noted, however, that whatever the supposed annual import of gold and silver may be, there must come a time when annual consumption equals annual import. As the total mass of these metals grows, their value decreases. They get used more and treated less carefully, so consumption rises even faster than the mass itself. Eventually, annual consumption must catch up with annual imports — assuming those imports aren't continually increasing, which in present times they are not thought to be.

If, once annual consumption has come to equal annual imports, the imports should then gradually decline, consumption may for a time exceed imports. The total mass of these metals would gradually and imperceptibly shrink, and their value would gradually and imperceptibly rise, until imports stabilize again and consumption slowly adjusts to whatever level those imports can sustain.

The increase of European wealth, combined with the popular belief that the quantity of precious metals naturally grows along with wealth and that their value falls as their quantity rises, may incline many people to think that silver's value is still declining in the European market. The gradually rising price of many raw agricultural products may reinforce this opinion even further.

But I've already tried to show that an increase in the quantity of precious metals resulting from a country's growing wealth does not tend to diminish their value. Gold and silver flow to rich countries for the same reason all luxuries and curiosities do — not because they're cheaper there than in poorer countries, but because they're more expensive, because a better price is offered for them. It's the higher price that attracts them, and as soon as that price advantage disappears, they stop flowing.

I've also already tried to show that — setting aside grain and other crops raised entirely by human industry — all other kinds of raw produce (cattle, poultry, game, useful minerals, and so on) naturally grow more expensive as a society advances in wealth and development. Though such commodities may come to exchange for more silver than before, it doesn't follow that silver has become cheaper or that it buys less labor. Rather, these commodities have become more expensive — they buy more labor than before. It's not just their nominal price that rises, but their real price. The increase in their nominal price is the effect not of any decline in silver's value, but of a rise in their real value.

Different Effects of Progress on Three Sorts of Raw Produce

These different types of raw produce can be divided into three categories.

The first includes those things that human industry can barely increase at all. The second includes those it can multiply in proportion to demand. The third includes those where the effectiveness of human industry is either limited or uncertain.

As wealth and development advance, the real price of the first category may rise without any definite ceiling. The real price of the second, though it may rise significantly, has a natural upper limit it can't pass for long. The real price of the third, while it naturally tends to rise with development, may — depending on circumstances — sometimes fall, sometimes stay flat, and sometimes rise more or less, as various factors make human industry more or less successful in increasing the supply.

First Category: Things That Can't Be Multiplied

The first type of raw produce whose price rises with progress is that which human industry can barely increase at all. This includes things that nature produces only in limited quantities and that, being highly perishable, can't be stockpiled across seasons. Most rare and unusual birds and fish fall into this category, along with many types of game, nearly all wild fowl, all migratory birds in particular, and many other things.

When wealth and the luxury that comes with it increase, the demand for these rises too — but no amount of human effort can increase the supply much beyond what it already was. The quantity stays roughly the same while the competition to buy them continually intensifies, so their price can rise to any degree of extravagance, with no definite ceiling. If woodcocks became fashionable enough to sell for twenty guineas each, no amount of human effort could increase the number brought to market much beyond what it is today.

The extravagant prices the Romans paid at the height of their grandeur for rare birds and fish can easily be explained in this way. These high prices weren't the result of silver being less valuable in those times — they were the result of such rarities being incredibly valuable, since human industry couldn't multiply them at will.

In fact, the real value of silver was higher in Rome, for some time before and after the fall of the Republic, than it is across most of Europe today. Three sestertii, equal to about sixpence sterling, was the price the Republic paid for a modius (about a peck) of Sicilian tithe wheat. This price was probably below the average market price, since the obligation to deliver wheat at this rate was effectively a tax on Sicilian farmers. When the Romans needed more grain than the tithe provided, they were required by treaty to pay four sestertii (eightpence sterling) per peck for the surplus — and this was probably considered the moderate and reasonable contract price of those times. That's equivalent to about twenty-one shillings per quarter. Before the recent years of scarcity, twenty-eight shillings per quarter was the ordinary contract price for English wheat, which is inferior in quality to Sicilian wheat and generally sells for less in the European market. Silver's value in those ancient times must therefore have stood to its present value in roughly a three-to-four ratio — that is, three ounces of silver would then have bought the same quantity of labor and goods that four ounces buy today.

So when we read in Pliny that Seius bought a white nightingale as a gift for the Empress Agrippina for six thousand sestertii (about fifty pounds in today's money), and that Asinius Celer purchased a red mullet for eight thousand sestertii (about sixty-six pounds, thirteen shillings, and fourpence today), the extravagance of these prices — however astonishing it may seem — actually appears about one-third less extreme than it really was. Their real price — the amount of labor and subsistence traded for them — was about one-third higher than the nominal figures suggest to us today. Seius paid the equivalent of what sixty-six pounds, thirteen shillings, and fourpence would command in today's labor and goods. Asinius Celer paid what eighty-eight pounds, seventeen shillings, nine and one-third pence would command.

What caused these extravagant prices was not the abundance of silver, but the abundance of labor and subsistence that these Romans had at their disposal beyond their own needs. The amount of silver they commanded was actually quite a bit less than what the same quantity of labor and subsistence would have bought them today.

Second Category: Things That Can Be Multiplied in Proportion to Demand

The second type of raw produce whose price rises with progress is that which human industry can multiply to match demand. This includes useful plants and animals that nature produces in wild abundance in uncultivated countries — so abundantly that they're worth little or nothing. As farming advances, these are gradually displaced by more profitable crops. Over a long stretch of development, their quantity continually shrinks while demand for them continually grows. Their real value — the real amount of labor they can command — gradually rises until it eventually becomes just as profitable to raise them deliberately as to grow anything else on the most fertile, best-cultivated land. Once it reaches that point, it can't go much higher. If it did, more land and labor would quickly be devoted to increasing the supply.

Take cattle, for example. When their price rises high enough that cultivating land specifically to raise cattle feed becomes as profitable as growing grain, it can't easily go higher. If it did, more cropland would soon be converted to pasture. The spread of tillage reduces the amount of natural grazing land, shrinking the supply of meat the country produces without deliberate effort, while simultaneously increasing the number of people who have grain — or the equivalent purchasing power — to exchange for meat. The price of meat, and therefore of cattle, must gradually rise until it becomes as profitable to use the best farmland for raising animal feed as for growing grain.

But this can only happen late in the progress of development. Until farming has expanded enough to push cattle prices to this level, those prices must be continually rising if the country is advancing at all. Some parts of Europe may not yet have reached this threshold. Scotland certainly hadn't before the union with England. If Scottish cattle had always been confined to the Scottish market — in a country where the amount of land useful only for grazing is so large relative to land suitable for other purposes — it's hard to imagine their price could ever have risen high enough to make it profitable to cultivate land specifically for feeding them.

In England, the price of cattle seems, near London, to have reached this level around the beginning of the seventeenth century. In more remote counties, it was probably much later, and in some it may barely have reached it yet. Of all the products in this second category, cattle are probably the first whose price reaches this ceiling in the course of development.

Until cattle prices reach this level, it seems nearly impossible for even the best farmland to be fully cultivated. On all farms too far from a town to bring in manure (which means the vast majority of farms in any large country), the amount of well-cultivated land must be proportional to the amount of manure the farm itself produces — which in turn depends on how much cattle it maintains. Land is fertilized either by pasturing cattle on it or by feeding them in stables and spreading their dung. But unless cattle prices are high enough to cover both the rent and the profit on cultivated land, the farmer can't afford to pasture them on it — and he certainly can't afford to stable-feed them on cultivated crops.

If the price of cattle isn't sufficient to justify grazing them on improved land, it will be even less sufficient when the feed must be harvested and brought to them. Collecting the thin, scattered produce of uncultivated waste land would require too much labor and expense. Under these circumstances, the only cattle profitably kept in stables are those needed for plowing. But these can never produce enough manure to keep all the land they're capable of working in good condition. What manure they do produce will naturally be reserved for the most fertile fields, or those nearest the farmyard. These will be kept in good shape and fit for tillage. The rest — most of the farm, in fact — will be left as waste, producing barely enough miserable pasture to keep alive a few scrawny, half-starved cattle. The farm, though drastically understocked relative to what full cultivation would require, will often be overstocked relative to what it actually produces.

A portion of this waste land, after being grazed in this wretched fashion for six or seven years, might be plowed up and yield perhaps a poor crop or two of bad oats or some other coarse grain. Then, being completely exhausted, it must be rested and returned to pasture, while another section gets plowed up and run through the same cycle of exhaustion and rest.

This was, in fact, the general farming system across lowland Scotland before the union. The well-manured, properly maintained land rarely exceeded a third or a quarter of the whole farm, and sometimes didn't amount to a fifth or a sixth. The rest was never fertilized, but portions of it were, in rotation, regularly plowed and exhausted. Under this system, even the best Scottish farmland produced only a fraction of what it was capable of.

However disadvantageous this system appears, the low price of cattle before the union made it almost unavoidable. If it still persists in many areas despite a great rise in cattle prices, that's due in some places to ignorance and attachment to old ways, but mostly to the natural obstacles that resist the quick adoption of a better system. First, there's the poverty of the tenants, who haven't yet had time to build up enough cattle to cultivate their land fully — the same price increase that would make a larger herd worthwhile also makes it harder to afford one. Second, the land itself hasn't yet been brought into condition to support a larger herd properly. Increasing livestock numbers and improving the land must go hand in hand; neither can get far ahead of the other. Without more livestock, the land can barely be improved, but without improved land, a larger herd can't be maintained.

These natural obstacles can only be overcome through a long course of thrift and hard work. Perhaps another half-century or century must pass before the old system, which is gradually wearing out, is completely abolished across Scotland. Of all the economic advantages Scotland has gained from the union with England, this rise in cattle prices is perhaps the greatest. It has not only raised the value of every Highland estate but has arguably been the primary driver of improvement in the Lowlands.

In all new colonies, the vast amount of waste land useful for nothing but grazing quickly makes cattle extremely abundant, and with great abundance comes great cheapness. Although all the cattle in the European colonies in America were originally brought from Europe, they multiplied so rapidly and became so worthless that even horses were allowed to run wild in the forests with nobody bothering to claim them. It takes a very long time after a colony's founding before feeding cattle on cultivated land becomes profitable. The same causes — lack of manure and a mismatch between the livestock and the land they're meant to cultivate — are likely to produce a farming system in the colonies not unlike what still prevails in much of Scotland.

The Swedish traveler Mr. Kalm, describing the farming practices in some English colonies of North America as he found them in 1749, observes that he can hardly detect the character of the English nation, so skilled in every branch of agriculture. The colonists make almost no manure for their fields, he says. When one piece of ground is exhausted by continuous cropping, they clear and cultivate a fresh piece. When that's exhausted, they move on to a third. Their cattle wander through the woods and uncultivated ground, half-starved, having long ago destroyed almost all the native annual grasses by grazing them too early in spring, before they could flower or go to seed. These grasses were apparently the best natural pasture in that part of North America, and when Europeans first settled there, they grew very thick and three to four feet high. A piece of land that in Kalm's time could barely support one cow would, he was told, formerly have supported four — each giving four times the milk. In his view, the poor pasture had caused the cattle to degenerate noticeably from generation to generation. They were probably much like the stunted breed that was common all over Scotland thirty or forty years ago — a breed that has since been so much improved through the lowlands, not so much by introducing new breeds (though that has been tried in some places) as by simply feeding them better.

So while cattle are late in development to fetch a price high enough to justify cultivating land specifically to feed them, they're probably the first of all products in this second category to reach that price. Until they do, agricultural improvement can barely approach the levels achieved in many parts of Europe.

As cattle are among the first, venison is perhaps among the last products in this category to reach a fully profitable price. The price of venison in Great Britain, however extravagant it may seem, isn't nearly enough to cover the cost of maintaining a deer park, as anyone with experience feeding deer well knows. If it were, deer farming would quickly become a common agricultural enterprise — the way the ancient Romans profitably raised the small birds called turdi, as Varro and Columella attest. (The fattening of ortolans — migratory birds that arrive lean — is said to be profitable in some parts of France even today.) If venison stays fashionable and Britain's wealth and luxury keep growing as they have, its price may well rise considerably higher.

Between the stage of development that brings the price of something as essential as cattle to its peak and the stage that does the same for a luxury like venison, there's a very long interval. During this time, many other raw products gradually reach their maximum prices — some sooner, some later, depending on the circumstances.

On every farm, the scraps from the barn and stables will support a certain number of poultry. Since these birds are fed on what would otherwise go to waste, they're essentially free. They cost the farmer almost nothing, so he can sell them for almost nothing. Nearly everything he gets is pure profit, and the price could scarcely fall low enough to discourage him from keeping this number. But in poorly cultivated, thinly populated countries, the poultry raised this way for free often fully meets the entire demand. In these circumstances, poultry can be as cheap as meat or any other animal food.

But the total amount of poultry a farm produces at no cost is always much less than the total amount of meat it produces. And in times of wealth and luxury, what is rare — with roughly equal quality — is always preferred over what is common. As wealth and luxury grow through economic improvement, the price of poultry gradually rises above that of meat, until eventually it becomes profitable to cultivate land specifically to feed them. Once it reaches that point, it can't go much higher — more land would quickly be devoted to the purpose. In several provinces of France, poultry farming is considered an important part of rural economy, profitable enough that farmers raise considerable amounts of Indian corn and buckwheat specifically for it. A middling French farmer may keep four hundred fowl in his yard. Poultry farming doesn't seem to be considered nearly as important in England yet, though poultry is certainly more expensive there than in France, since England imports considerable quantities from France.

In the progress of development, the period when any particular type of animal food is most expensive is naturally the time just before cultivating land specifically to raise it becomes common practice. For some time before this practice spreads, scarcity inevitably drives the price up. After it becomes common, new feeding methods are typically discovered that allow the farmer to raise much more of that animal food on the same amount of land. The resulting abundance not only forces the farmer to sell cheaper but, thanks to these improvements, enables him to sell cheaper profitably. (If he couldn't afford to sell at lower prices, the abundance wouldn't last.) It was probably in this way that the introduction of clover, turnips, carrots, cabbages, and similar crops helped push down the average price of meat in the London market somewhat below where it was around the start of the seventeenth century.

The hog, which finds its food among filth and greedily devours many things rejected by every other useful animal, is — like poultry — originally kept as a free scavenger. As long as the number of hogs that can be raised at little or no expense is enough to meet demand, this kind of meat comes to market at a much lower price than any other. But when demand outstrips what can be raised for free and it becomes necessary to grow food specifically for fattening hogs, just as for other cattle, the price necessarily rises. It becomes proportionally higher or lower than other meat depending on whether the local conditions and state of agriculture make hog-raising more or less expensive than raising other cattle. In France, according to Mr. Buffon, the price of pork is nearly equal to that of beef. In most parts of Great Britain, it is currently somewhat higher.

The great increase in the price of both hogs and poultry in Britain has frequently been blamed on the decline in the number of cottagers and other small landholders — an event that in every part of Europe has been the immediate precursor of agricultural improvement, but which may also have pushed these prices up somewhat sooner and faster than they would otherwise have risen. Just as the poorest family can often keep a cat or dog at no expense, the poorest small landholders can usually maintain a few poultry, or a sow with a few pigs, at very little cost. The scraps from their own table — whey, skimmed milk, buttermilk — feed these animals partly, and they find the rest in nearby fields without doing any noticeable damage. By reducing the number of these small occupiers, the quantity of such provisions produced virtually for free has certainly shrunk considerably, and their prices must have risen both sooner and faster than they otherwise would have. Sooner or later, though, in the course of development, these prices would have risen to their maximum anyway — the price that covers the labor and expense of cultivating the land that produces their food, just as well as these costs are covered on most other cultivated land.

The dairy business, like hog and poultry farming, originally starts as a way to use what would otherwise go to waste. The cattle necessarily kept on the farm produce more milk than is needed for raising their calves or supplying the farmer's household, and they produce the most at one particular season. But of all the products of land, milk is perhaps the most perishable. In warm weather, when it's most abundant, it barely keeps twenty-four hours. By making it into fresh butter, the farmer stores a small part of it for a week. As salt butter, for a year. And as cheese, he stores a much larger part for several years. Some of all these products are reserved for his own family. The rest goes to market, where it will fetch whatever price it can — and the price can hardly be low enough to discourage him from selling whatever exceeds his family's needs.

If the price is very low, though, he'll likely manage his dairy in a sloppy, dirty fashion and probably won't bother dedicating a separate room or building to it. Instead, the whole business will be carried on amid the smoke, filth, and grime of his own kitchen — as was the case on nearly all Scottish farms thirty or forty years ago, and still is on many of them.

The same forces that gradually raise the price of meat — growing demand combined with, as the country develops, a shrinking supply of animals that can be fed at little or no cost — raise the price of dairy products in the same way, since dairy prices naturally track meat prices (or, more precisely, the cost of feeding cattle). The higher price pays for more labor, care, and cleanliness. The dairy becomes more worthy of the farmer's attention, and quality gradually improves. The price eventually gets high enough that it becomes worthwhile to use some of the best farmland specifically for dairy cattle. Once it reaches this point, it can't go much higher — more land would quickly be devoted to the purpose.

This seems to have happened across most of England, where good land is commonly used this way. Outside the vicinity of a few major towns, it doesn't seem to have happened anywhere in Scotland, where ordinary farmers seldom use good land to raise feed specifically for dairy cows. The price of dairy products, though it has risen considerably in recent years, is probably still too low. And the inferior quality of Scottish dairy products compared to English ones is fully proportional to the price difference. But this inferior quality is perhaps more the effect of the low price than its cause. Even if the quality were much better, most of what comes to market couldn't, I believe, fetch a much better price under current conditions. And the current price probably wouldn't cover the cost of land and labor needed to produce much better quality. Throughout most of England, despite the higher prices, dairying is not considered more profitable than growing grain or fattening cattle — agriculture's two main enterprises. Throughout most of Scotland, therefore, it can't yet be even that profitable.

No country's land can ever be completely cultivated and improved until the price of every product that human industry must raise on it has gotten high enough to pay for the full cost of improvement and cultivation. To do that, the price of each product must be sufficient, first, to cover the rent of good grain land (since that sets the standard for the rent of most other cultivated land) and, second, to cover the farmer's labor and expenses as well as they are covered on good grain land — in other words, to replace his capital along with its ordinary profits.

This rise in the price of each product must obviously come before the improvement and cultivation of the land intended to produce it. Profit is the whole point of improvement, and nothing deserves that name if loss is its inevitable result. And loss is the inevitable result of improving land to produce something whose price can never cover the expense. If the complete improvement and cultivation of the country is — as it most certainly is — the greatest of all public benefits, then the rising price of all these different kinds of raw produce should not be seen as a public disaster. It should be recognized for what it is: the necessary forerunner and companion of the greatest of all public benefits.

This rise in the nominal or money price of all these products has not been the result of any decline in silver's value, but of a rise in their real price. They have become worth not only more silver but also more labor and subsistence than before. Since it costs more labor and subsistence to bring them to market, they represent or are equivalent to more when they get there.

Third Category

The third and final type of raw produce whose price naturally rises with development is that where human industry's ability to increase the quantity is either limited or uncertain. Although the real price of these products naturally tends to rise with development, different circumstances may make human industry more or less successful in boosting the supply. As a result, the real price may sometimes actually fall, sometimes stay the same across very different periods of development, and sometimes rise more or less within the same period.

The same forces that gradually raise the price of meat as economic development progresses should, you might think, have the same effect on the prices of wool and raw hides, raising them in roughly the same proportion. And they probably would, if the market for these products were just as narrow in the early stages of development as the market for meat. But the extent of their respective markets is typically very different.

The market for meat is almost everywhere confined to the country that produces it. Ireland and some parts of British America do carry on a significant trade in salted provisions, but they are, I believe, the only countries in the commercial world that export any considerable amount of meat.

The market for wool and raw hides, on the other hand, is seldom confined to the country that produces them, even in the earliest stages of development. Both can easily be transported to distant countries — wool without any preparation, raw hides with very little. And since they are raw materials for many industries, the demand from other countries' manufacturers may create a market for them even when domestic industry would not.

In poorly cultivated, thinly populated countries, the price of wool and hides always makes up a much larger share of the total value of the animal than in countries where development and population have advanced further and there's more demand for meat. As Hume observes, in Saxon times the fleece was estimated at two-fifths of the total value of the sheep — far above its current proportion. In some provinces of Spain, I've been told, sheep are frequently killed just for the fleece and the tallow. The carcass is often left to rot on the ground or be eaten by scavengers. If this happens even in Spain, it happens constantly in Chile, Buenos Aires, and many other parts of Spanish America, where horned cattle are routinely slaughtered solely for the hide and tallow. The same used to happen regularly in Hispaniola when it was plagued by buccaneers, before the settlement, improvement, and growing population of the French plantations (which now extend around the coast of nearly the entire western half of the island) gave some value to the cattle of the Spanish, who still possess not only the eastern coast but the whole mountainous interior.

Though the price of the whole animal necessarily rises with improvement and population growth, the price of the carcass is likely to be affected much more than that of the wool and hide. The market for the carcass, always confined in primitive times to the producing country, must expand in proportion to that country's improvement and population. But the market for wool and hides from even a primitive country often already extends to the entire commercial world, so it can rarely be expanded in the same proportion. The state of global commerce is seldom much affected by the improvement of any single country, so the market for these commodities may remain essentially unchanged by such improvements.

In the natural course of things, however, the market should on the whole be somewhat expanded. If manufacturing industries that use these materials come to flourish in the country itself, the market — though perhaps not much enlarged — would at least be brought much closer to the point of production. The price of these raw materials could increase by at least the amount previously spent on shipping them to distant countries. So while wool and hide prices might not rise in the same proportion as meat prices, they ought naturally to rise somewhat, and they certainly shouldn't fall.

In England, however, despite the flourishing state of its woolen industry, the price of English wool has actually fallen very considerably since the time of Edward III. Numerous authentic records show that during his reign (around the mid-fourteenth century, roughly 1339), the moderate and reasonable price for a tod (twenty-eight pounds) of English wool was no less than ten shillings in the money of those times — containing, at twenty pence per ounce, six ounces of silver (Tower-weight), equal to about thirty shillings in today's money. Nowadays, twenty-one shillings per tod is considered a good price for very good English wool.

The money price of wool in Edward III's time, therefore, was to its money price today as ten to seven. But the decline in its real price was even greater. At six shillings and eightpence per quarter, ten shillings was the price of twelve bushels of wheat in those ancient times. At twenty-eight shillings per quarter, twenty-one shillings is the price of only six bushels today. The ratio between real prices, ancient and modern, is therefore twelve to six — or two to one. In those ancient times, a tod of wool would have purchased twice the amount of food it will purchase today, and consequently twice the amount of labor, assuming real wages were the same in both periods.

This decline in both the real and nominal value of wool could never have happened through the natural course of things. It has been entirely the result of deliberate policy — or as we might more bluntly say, of force and manipulation. Specifically: first, the outright prohibition on exporting wool from England; second, the permission to import Spanish wool duty-free; and third, the prohibition on exporting Irish wool to any country except England.

As a result of these regulations, the market for English wool, instead of being somewhat expanded as England's economy improved, has been confined to the domestic market — a market where the wool of several other countries is allowed to compete freely and where Irish wool is compelled to compete. Ireland's own woolen manufacturing has been discouraged as much as any sense of fairness permits, so the Irish can only work up a small portion of their own wool at home. They are therefore forced to send the bulk of it to Great Britain, the only market they're allowed.

I haven't been able to find any equally reliable records concerning the ancient price of raw hides. Wool was commonly paid as a tax to the king, and its valuation for that purpose at least roughly establishes its ordinary price. But this apparently wasn't done with raw hides. Fleetwood, however, found an account from 1425 between the prior of Burcester, Oxford, and one of his canons that gives us some prices: five ox hides at twelve shillings; five cow hides at seven shillings and threepence; thirty-six two-year-old sheep skins at nine shillings; and sixteen calfskins at two shillings.

In 1425, twelve shillings contained about the same amount of silver as twenty-four shillings in today's money. An ox hide was therefore valued at the silver equivalent of about four shillings and four-fifths pence today. Its nominal price was considerably lower than at present. But at six shillings and eightpence per quarter, twelve shillings would have bought fourteen and four-fifths bushels of wheat in those times, which at three shillings and sixpence per bushel would cost fifty-one shillings and fourpence today. So an ox hide would then have purchased as much grain as ten shillings and threepence would buy today. Its real value was equal to ten shillings and threepence in today's money.

In those ancient times, when cattle were half-starved through most of the winter, we can't suppose they were very large. An ox hide weighing four stone (sixty-four pounds) is not considered bad today, and in those times would probably have been considered quite good. But at half a crown per stone — which at this moment, February 1773, I understand to be the going price — such a hide would today cost only ten shillings. So although the nominal price of hides is higher now than in those ancient times, the real price — the actual amount of food it can command — is actually somewhat lower.

The price of cow hides in that account is roughly in the usual proportion to ox hides. Sheep skins are priced well above that proportion — probably because they were sold with the wool still on. Calfskins, by contrast, are priced far below it. In countries where cattle prices are very low, calves not needed to maintain the breeding stock are generally slaughtered very young — as was the case in Scotland twenty or thirty years ago. This saves the milk, which the calf's selling price wouldn't cover. Their skins are therefore usually worth very little.

The price of raw hides is considerably lower at present than it was a few years ago, probably because of the removal of the duty on seal skins and the temporary permission (granted in 1769) to import raw hides from Ireland and the colonies duty-free. Taking the whole of the present century at an average, though, their real price has probably been somewhat higher than in those ancient times.

Raw hides are not quite as well suited for transport to distant markets as wool. They deteriorate more in storage. A salted hide is considered inferior to a fresh one and sells for a lower price. This naturally tends to push down the price of hides produced in a country that doesn't process them and must export them raw, while raising the price in countries that do have their own tanning industries. It tends to push prices down in primitive economies and up in developed, manufacturing ones — down in ancient times and up in modern ones.

Our tanners, moreover, haven't been quite as successful as our clothiers in convincing the nation's lawmakers that the safety of the state depends on the prosperity of their particular industry. They have accordingly received much less favorable treatment. Raw hide exports have indeed been prohibited and declared a public nuisance. But imports from foreign countries have been subjected to a duty. And although this duty has been removed for hides from Ireland and the plantations (for a limited five-year period only), Ireland has not been restricted to selling its surplus hides exclusively to Great Britain. The hides of common cattle have only recently been added to the list of "enumerated commodities" — colonial goods that could be shipped nowhere but to the mother country. Ireland's trade in hides has not been oppressed to support British manufacturing in the way its wool trade has.

Whatever regulations push the price of wool or raw hides below its natural level must, in a developed and cultivated country, tend to raise the price of meat. The total price of cattle raised on improved land must be enough to cover the landlord's rent and the farmer's expected profit on that land. If it isn't, they'll stop raising cattle. So whatever part of this price is not covered by the wool and hide must be covered by the carcass. The less that's paid for one, the more must be paid for the other. How the total price is divided among the animal's parts is immaterial to landlords and farmers, as long as they receive the full amount.

In a developed and cultivated country, therefore, such regulations can't much affect the interests of landlords and farmers — though their interests as consumers may suffer from the resulting rise in food prices. But it would be quite different in an undeveloped country where most of the land is suitable only for grazing and where wool and hides make up the principal value of the cattle. There, the interests of landlords and farmers would be deeply affected, while consumer interests would be barely touched. In that case, a fall in wool and hide prices wouldn't raise meat prices, because with most land suitable only for grazing, the same number of cattle would still be raised. The same quantity of meat would still come to market. Demand for it wouldn't increase, so its price would stay the same. The entire price of cattle would fall, and with it the rent and profit on all the land whose main product was cattle — that is, most of the country's land.

The permanent prohibition on exporting wool, which is commonly but quite wrongly attributed to Edward III, would have been the most destructive regulation imaginable in the England of that era. It would not only have reduced the current value of most of the kingdom's land but, by depressing the price of the most important species of small livestock, would have greatly retarded subsequent agricultural improvement.

Scottish wool fell very substantially in price as a result of the union with England, which shut it out of the great European market and confined it to the narrow British one. The value of land in the southern Scottish counties — primarily sheep country — would have been devastated by this event, had the simultaneous rise in meat prices not fully compensated for the fall in wool prices.

The effectiveness of human industry in increasing the supply of either wool or raw hides is limited insofar as it depends on a country's own production, and uncertain insofar as it depends on other countries' production. It depends not so much on how much other countries produce as on how much they don't manufacture themselves, and on whatever export restrictions they choose to impose. These circumstances, being entirely independent of domestic industry, necessarily make its efforts more or less uncertain. In expanding this type of raw production, then, human industry is not merely limited but uncertain as well.

In expanding another very important type of raw produce — the quantity of fish brought to market — human industry is likewise both limited and uncertain. It's limited by the country's geography: how close its various regions are to the sea, the number of its lakes and rivers, and the relative abundance or scarcity of fish in those waters. As population grows and the national economy expands, more people want to buy fish, and those buyers have more goods — or equivalently, more purchasing power — to offer in exchange. But the growing market generally can't be supplied without using proportionally more labor than was needed for the smaller one. A market that grows from needing a thousand tons of fish annually to needing ten thousand can rarely be supplied with merely ten times the labor. The fish must generally be sought at greater distances. Larger vessels must be used, and more expensive equipment of every kind. The real price of fish, therefore, naturally rises as an economy develops. I believe it has done so, more or less, in every country.

Admittedly, while any particular day's catch is unpredictable, the overall effectiveness of the fishing industry in bringing a certain quantity to market over the course of a year or several years may seem certain enough — and no doubt it is. But since it depends more on geography than on wealth and industry, it may be the same in very different periods of a country's development, or very different in the same period across different countries. Its connection to economic development is uncertain, and that's the kind of uncertainty I'm discussing here.

When it comes to increasing the quantity of minerals and metals drawn from the earth — particularly the precious ones — the effectiveness of human industry seems not merely limited but altogether uncertain.

The quantity of precious metals found in any country isn't limited by local conditions like the productivity of its own mines. These metals are often abundant in countries with no mines at all. Their quantity in any given country seems to depend on two different factors. First, the country's purchasing power — the state of its industry, the annual output of its land and labor — which determines how much labor and subsistence it can afford to devote to acquiring luxuries like gold and silver, whether from its own mines or from others. Second, the productivity of whatever mines happen to supply the commercial world at any given time. Because precious metals are so easy and cheap to transport — small in bulk, great in value — their quantity in even the most remote countries will be affected by the productivity of those mines. The amount of gold and silver in China and India must have been influenced by the abundance of the American mines.

Insofar as the quantity of precious metals in any country depends on the first factor — its purchasing power — their real price, like that of all other luxuries, is likely to rise with the country's wealth and development and fall with its poverty and decline. Wealthier countries can afford to pay more labor and subsistence for a given quantity of these metals.

Insofar as the quantity depends on the second factor — the productivity of the mines supplying the commercial world — their real price will obviously fall in proportion to the mines' productivity and rise in proportion to their depletion.

But the productivity of the mines that happen to supply the commercial world at any given time is a circumstance that clearly may have no connection whatsoever with the state of industry in any particular country. It seems to have no very necessary connection even with the state of the world in general. As arts and commerce spread over a larger portion of the earth, the search for new mines extends over a wider surface and may have a somewhat better chance of success than when confined to narrower bounds. But the discovery of new mines, as old ones are gradually exhausted, is a matter of the greatest uncertainty — something no human skill or industry can guarantee. All geological indicators are acknowledged to be doubtful. Only the actual discovery and successful operation of a new mine can confirm its value or even its existence.

In this search, there seem to be no definite limits to either the possible success or the possible failure of human effort. Over the course of a century or two, mines far more productive than any yet known might be discovered. And it's equally possible that the most productive mine then known might be less productive than anything worked before the American discoveries.

But whether one event or the other occurs makes very little difference to the real wealth and prosperity of the world — to the real value of the annual output of the land and labor of humanity. Its nominal value, the quantity of gold and silver expressing that annual output, would certainly be very different. But its real value — the actual quantity of labor it could purchase or command — would be exactly the same. A shilling might in one case represent no more labor than a penny does now. And in the other, a penny might represent as much as a shilling does now. But in the first case, a person with a shilling in his pocket would be no richer than someone with a penny today. And in the second, a person with a penny would be exactly as rich as someone with a shilling today.

The cheapness and abundance of gold and silver plate would be the only advantage the world could derive from discovering richer mines. And the expense and scarcity of those trifling luxuries would be the only inconvenience it could suffer from finding poorer ones.

Most writers who have collected historical price data seem to have assumed that low money prices for grain and goods in general — in other words, a high value of gold and silver — proved not only that those metals were scarce, but that the country itself was poor and uncivilized. This idea is connected to the mercantilist theory that national wealth consists of having lots of gold and silver, and national poverty consists of not having enough. I'll explain and examine that system at length in the fourth book of this work. For now, I'll just point out that a high value of precious metals tells us nothing about whether a particular country is poor or prosperous. It only tells us about the productivity of whatever mines happened to be supplying the commercial world at that time.

A poor country can no more afford to pay extra for gold and silver than a rich one can. So the value of these metals isn't likely to be higher in poor countries than in rich ones. In China, a country much wealthier than any part of Europe, the value of precious metals is much higher than anywhere in Europe. As Europe's wealth has grown considerably since the discovery of the American mines, the value of gold and silver has gradually fallen. But this decline wasn't caused by the increase in Europe's real wealth — the annual output of its land and labor. It was caused by the accidental discovery of more productive mines than any previously known.

The increase in gold and silver in Europe and the increase in its manufacturing and agriculture are two events that happened around the same time but arose from completely different causes, with barely any natural connection between them. The flood of precious metals came from a mere accident — one that neither planning nor policy had anything to do with. The growth of industry came from the collapse of the feudal system and the establishment of governments that gave people the only encouragement industry really needs: some reasonable assurance that they'll get to keep what they earn.

Poland, where the feudal system was still in full effect, remained just as poor as it had been before the discovery of America. The money price of grain had risen there, and the real value of precious metals had fallen, just as in the rest of Europe. So the quantity of gold and silver must have increased there too, roughly in proportion to the country's annual output. But this increase in precious metals didn't increase that annual output. It didn't improve the country's manufacturing or agriculture, and it didn't improve the living conditions of its people.

Spain and Portugal, the countries that actually owned the mines, were — after Poland — perhaps the two poorest countries in Europe. The value of precious metals must have been lower in Spain and Portugal than anywhere else in Europe, since these metals traveled from those countries to the rest of Europe loaded down not only with freight and insurance costs but also with the expense of smuggling, since their export was either banned or taxed. So relative to their annual output, the quantity of precious metals in those countries must have been greater than anywhere else in Europe. Yet those countries were poorer than most of Europe. Though the feudal system had been abolished in Spain and Portugal, what replaced it wasn't much better.

So just as a low value of gold and silver doesn't prove that a country is wealthy and flourishing, a high value of those metals — or the low money price of goods in general, or of grain in particular — doesn't prove that a country is poor or uncivilized.

That said, while the low money price of goods in general, or of grain in particular, proves nothing about poverty or prosperity, the low money price of certain specific goods — such as cattle, poultry, and wild game — relative to grain is extremely telling. It clearly demonstrates two things. First, that these goods were abundant relative to grain, meaning that much more land was devoted to pasture and hunting than to growing grain. Second, that this non-grain land was cheap relative to grain-growing land, which means most of the country's land was uncultivated and unimproved. In short, it shows that the country's capital and population were small relative to its territory — the kind of situation you find in societies still in their early stages of development.

From the high or low money price of goods in general, or of grain in particular, we can only infer whether the mines supplying the commercial world happened to be productive or unproductive — not whether the country was rich or poor. But from the high or low money price of some goods relative to others, we can infer with near certainty whether a country was rich or poor, whether most of its land was cultivated or wild, and whether it was more or less developed.

Any rise in the money price of goods caused entirely by a decline in the value of silver would affect all goods equally — raising prices universally by a third, a fourth, or a fifth, depending on how much silver had lost its former value. But the rise in food prices that has been the subject of so much discussion and debate hasn't affected all types of food equally. Taking the average over the current century, the price of grain — even according to those who blame the rise on falling silver values — has risen much less than the price of certain other foods. So the price increase for those other foods can't be entirely due to a decline in the value of silver. Other causes must be at work, and the ones I've discussed above will, I think, sufficiently explain the rise in those specific food prices without needing to invoke any supposed decline in the value of silver.

As for grain itself, during the first sixty-four years of the current century, before the recent unusual run of bad harvests, its price was actually somewhat lower than during the last sixty-four years of the previous century. This is confirmed not just by the records from Windsor Market but also by the official price records from every county in Scotland, and by data from several French markets collected with great care by Mr. Messance and Mr. Dupre de St. Maur. The evidence is more thorough than one might reasonably expect for something that's naturally so difficult to pin down.

As for the high grain prices of the last ten or twelve years, the bad harvests explain them well enough without assuming any decline in the value of silver.

The theory that silver is continually losing value, therefore, doesn't seem to be supported by good evidence from either grain prices or other food prices.

Now, someone might object: "According to your own analysis, the same amount of silver will buy much less of certain foods today than it would have during parts of the last century. And figuring out whether this change is due to rising food values or falling silver values is just a pointless academic distinction. It's no help to the person who has a fixed amount of silver to spend at the market, or a fixed income in money terms."

I certainly don't claim that understanding this distinction will help anyone buy things more cheaply. But it may not be entirely useless for all that.

It can be useful to the public by providing clear evidence of the country's prosperity. If the rise in certain food prices is entirely due to a fall in the value of silver, all it tells us is that the American mines have been productive. The country's real wealth — the annual output of its land and labor — might still be declining (as in Portugal and Poland) or advancing (as in most of the rest of Europe). But if the price rise is due to an increase in the real value of the land that produces those foods — because the land has become more fertile, or because improved farming has made it suitable for growing grain — then it provides the clearest possible evidence that the country is prospering and advancing. Land makes up by far the greatest, most important, and most durable part of every large country's wealth. Surely it's worth something — or at least satisfying — to have such decisive proof that this most important part of the nation's wealth is increasing in value.

This distinction can also help the public in setting the pay of its lower-level employees. If the rise in certain food prices is due to a fall in the value of silver, then the money wages of these employees — assuming they weren't too high to begin with — should certainly be increased proportionally. If they're not, these workers' real compensation will obviously shrink. But if the price rise reflects the increased value of the land producing those foods, it becomes a much trickier question whether — or by how much — to increase their pay.

Here's why it's complicated. As farming improves and more land comes under cultivation, the price of animal foods generally rises relative to grain, while the price of plant-based foods falls. Animal food gets more expensive because much of the land that previously supported livestock gets converted to grain production, and must now earn the landlord and farmer the rents and profits of grain land. Plant food gets cheaper because the land becomes more productive and yields more abundantly. Agricultural improvements also introduce new plant foods that require less land and no more labor than grain, so they come to market much cheaper. Potatoes and maize are the two most important examples — perhaps the most valuable improvements that European agriculture (or Europe itself) has received from the great expansion of its trade and navigation. Many other plant foods that were once confined to kitchen gardens and grown only with a spade eventually get introduced into regular farm fields and grown with the plow — things like turnips, carrots, and cabbages.

So as economic development proceeds, the real price of one type of food necessarily rises while another necessarily falls, and it becomes quite tricky to judge how far the rise in one is offset by the fall in the other. Once the real price of butcher's meat has reached its peak — which, for most types of meat except perhaps pork, seems to have happened across much of England more than a century ago — any further rise in the price of other animal foods can't much affect the living conditions of ordinary workers. The circumstances of the poor across much of England surely can't be hurt as much by any rise in the price of poultry, fish, wild game, or venison as they're helped by the falling price of potatoes.

In the current period of scarcity, high grain prices undoubtedly cause real hardship for the poor. But in times of normal abundance, when grain is at its average price, the natural rise in the price of other raw agricultural products can't hurt them much. They probably suffer more from the artificial price increases caused by taxes on manufactured goods like salt, soap, leather, candles, malt, beer, and ale.

The natural effect of economic progress is to gradually reduce the real price of almost all manufactured goods. The cost of the manufacturing labor itself decreases in every case without exception. Thanks to better machinery, greater skill, and more efficient division and organization of work — all natural consequences of economic progress — far less labor is needed to produce any given item. Even if the real price of labor rises considerably as the economy flourishes, the enormous reduction in the amount of labor needed will generally more than compensate for even the biggest increase in its price.

There are, admittedly, a few types of manufacturing where the rising real price of raw materials outweighs all the advantages that improved production methods can offer. In carpentry, joinery, and the coarser kinds of furniture-making, the inevitable rise in the real price of timber — as more land gets developed — will more than cancel out the gains from the best machinery, the greatest skill, and the most efficient organization of work.

But in every case where the real price of raw materials either doesn't rise at all, or doesn't rise very much, the price of the finished product falls significantly.

This price decline has been most dramatic, over the current and previous centuries, in goods made from the cheaper metals. A better watch movement than you could have bought for twenty pounds around the middle of the last century can now probably be had for twenty shillings. In the work of cutlers and locksmiths, in all the small metal goods and trinkets, and in everything commonly known as "Birmingham and Sheffield ware," prices have dropped enormously during the same period — though not quite as much as for watches. The reduction has been striking enough to astonish craftsmen across the rest of Europe, who in many cases admit they can't produce work of equal quality for double or even triple the price. There are perhaps no industries where the division of labor can be taken further, or where the machinery used allows for a greater variety of improvements, than those working with the cheaper metals.

In the clothing industry, there has been no such dramatic price reduction during the same period. The price of the finest cloth has actually risen somewhat over the past twenty-five or thirty years relative to its quality, reportedly because of a considerable increase in the price of its raw material, which is entirely Spanish wool. The price of Yorkshire cloth, which is made entirely from English wool, is said to have fallen a good deal relative to its quality over the course of the present century. But quality is such a subjective matter that I consider all claims of this kind somewhat uncertain. In the clothing industry, the division of labor is roughly the same as it was a century ago, and the machinery hasn't changed very much. There may, however, have been some small improvements in both, which could account for some reduction in price.

But the price reduction becomes much more obvious and undeniable when we compare present-day manufacturing costs with those from a much earlier period — say, toward the end of the fifteenth century, when labor was probably far less specialized and machinery far more primitive than it is now.

In 1487, during the reign of Henry VII, a law was passed declaring that anyone who sold a broad yard of the finest scarlet or other dyed cloth above sixteen shillings would forfeit forty shillings for every yard sold. Sixteen shillings then contained about the same amount of silver as twenty-four shillings of today's money, and this was considered a reasonable price for the finest cloth. Since this was a law aimed at curbing luxury spending, the cloth had probably usually sold for even more. Today, a guinea — twenty-one shillings — would be considered the top price. So even if we assume the quality is equal (and modern cloth is almost certainly superior), the money price of the finest cloth has dropped considerably since the end of the fifteenth century. And its real price has dropped even more dramatically. At the time, six shillings and eightpence was the average price of a quarter of grain. So sixteen shillings would have bought two quarters and more than three bushels of grain. At today's price of twenty-eight shillings per quarter, the real price of a yard of fine cloth back then would have equaled at least three pounds, six shillings, and sixpence in today's money. The buyer would have been giving up the equivalent purchasing power of that sum — a very substantial amount.

The reduction in the real price of coarser cloth, though significant, hasn't been as great as for fine cloth.

In 1463, during the reign of Edward IV, a law declared that no farm laborer, common worker, or servant to any craftsman living outside a city or borough could wear cloth costing more than two shillings per broad yard. Two shillings then contained nearly the same amount of silver as four shillings of our present money. But the Yorkshire cloth now sold at four shillings a yard is probably far superior to anything made back then for the poorest class of common workers. So even the money price of their clothing may, relative to quality, be somewhat cheaper now than in those ancient times. The real price is certainly much cheaper. Back then, tenpence was considered the moderate and reasonable price for a bushel of grain. Two shillings, therefore, would have bought two bushels and nearly two pecks of grain, which at today's price of three shillings and sixpence per bushel would be worth about eight shillings and ninepence. For a yard of this cloth, the poor worker had to give up the purchasing power equivalent of eight shillings and ninepence in today's money. And since this too was a law capping luxury spending by the poor, their clothing had normally been even more expensive than that.

The same law prohibited these workers from wearing stockings costing more than fourteenpence a pair, equal to about twenty-eightpence in today's money. But fourteenpence back then would have bought a bushel and nearly two pecks of grain, which at three and sixpence a bushel today would cost about five shillings and threepence. We'd consider that a very high price for a pair of stockings for a worker of the poorest class. Yet that's what they really had to pay.

In Edward IV's time, the art of knitting stockings was probably unknown anywhere in Europe. Their "hose" were made of woven cloth, which may explain part of the high cost. The first person in England to wear knitted stockings is said to have been Queen Elizabeth, who received them as a gift from the Spanish ambassador.

In both coarse and fine wool manufacturing, the machinery used in those early times was far more primitive than it is today. Three major improvements have been made since then, along with probably many smaller ones. The three big ones are: First, the replacement of the hand-held rock and spindle with the spinning wheel, which does more than twice the work with the same amount of labor. Second, the invention of several ingenious machines that greatly speed up the winding of yarn and the arrangement of the warp and weft before they go on the loom — operations that previously were extremely tedious. Third, the use of the fulling mill for thickening cloth, instead of the old method of treading it in water. No wind or water mills of any kind existed in England before the beginning of the sixteenth century, nor, as far as I know, anywhere else in Europe north of the Alps. They had been introduced in Italy somewhat earlier.

These developments help explain why the real price of both coarse and fine cloth was so much higher in those early times than it is today. It took far more labor to bring these goods to market. And since more labor went into them, they naturally had to sell for a price that could command a correspondingly larger amount of labor in return.

The coarser cloth was probably produced in those early times the same way it always has been in countries where manufacturing is still in its infancy: as a household activity, where different family members pitched in on different parts of the work whenever they had nothing else to do, but never as their main source of income. Work done this way, as I've noted before, always comes to market much cheaper than work done by people who depend on it for their livelihood. The fine cloth, on the other hand, wasn't produced in England at all in those days, but in the rich and commercially advanced region of Flanders, and it was probably made then just as it is now — by people who earned their entire living from it. It was also a foreign import and had to pay some duty, at least the traditional customs of tonnage and poundage, to the king. This duty probably wasn't very large. The policy in Europe at that time wasn't to discourage imports of foreign manufactured goods with high tariffs, but rather to encourage them, so that merchants could supply the wealthy with the comforts and luxuries they wanted and that domestic industry couldn't provide.

These considerations may help explain why, in those earlier times, the real price of coarse cloth was so much lower relative to fine cloth than it is today.

I'll wrap up this very long chapter by observing that every improvement in a society's circumstances tends, either directly or indirectly, to raise the real rent of land — that is, to increase the real wealth of landlords and their power to purchase other people's labor or the products of that labor.

The expansion of farming and land cultivation tends to raise rent directly. The landlord's share of the output necessarily grows as the total output grows.

The rise in the real price of certain raw agricultural products — which is first an effect of expanding cultivation and then becomes a cause of further expansion — also tends to raise the rent of land directly, and by an even greater proportion. Take the rise in the price of cattle as an example. The real value of the landlord's share — his real command over other people's labor — doesn't just rise with the real value of the output. His proportion of the total output rises too. After the real price goes up, it takes no more labor to harvest the same output than before. So a smaller fraction is needed to cover the costs of the capital employed, along with its usual profit. A larger fraction, therefore, goes to the landlord.

All improvements in the productive power of labor that tend to reduce the real price of manufactured goods also tend, indirectly, to raise the real rent of land. The landlord trades the portion of his raw output that he doesn't consume himself — or, what amounts to the same thing, the money from selling it — for manufactured goods. Whatever reduces the real price of manufactured goods raises the real value of raw output. The same amount of raw output now buys a greater amount of manufactured goods, so the landlord can afford more of the comforts, decorations, and luxuries he wants.

Every increase in a society's real wealth — every increase in the quantity of useful labor employed within it — tends indirectly to raise the real rent of land. A certain proportion of this labor naturally flows to the land. More workers and more livestock are employed in cultivation, the output increases with the capital invested in producing it, and the rent increases with the output.

The opposite circumstances — the neglect of farming and improvement, a fall in the real price of any raw agricultural product, a rise in the real price of manufactured goods due to the decay of manufacturing skill and industry, a decline in the real wealth of society — all tend to lower the real rent of land, to reduce the real wealth of landlords, and to diminish their power to purchase other people's labor or its products.

The entire annual output of every country's land and labor, or what amounts to the same thing, the total price of that annual output, naturally divides itself — as I've already noted — into three parts: the rent of land, the wages of labor, and the profits of capital. These provide income to three different classes of people: those who live by rent, those who live by wages, and those who live by profit. These are the three great, original, and fundamental classes of every civilized society, and every other class ultimately derives its income from one of these three.

The interest of the first of these great classes — the landlords — is tightly and inseparably connected to the general interest of society. Whatever promotes or obstructs one necessarily promotes or obstructs the other. When the public is debating some regulation of trade or policy, the landlords can never mislead it by pushing their own class interest — at least not if they have any reasonable understanding of that interest. The problem is, they're all too often lacking in that understanding. They are the only one of the three classes whose income costs them neither labor nor effort. It comes to them, as it were, on its own, without any plan or initiative on their part. That indolence — the natural result of their easy and secure position — too often makes them not just ignorant but incapable of the kind of mental effort needed to foresee and understand the consequences of any public regulation.

The interest of the second class — those who live by wages — is just as tightly connected to society's general interest as the landlords'. As I've already shown, wages are never so high as when the demand for labor is continually rising, or when the number of workers employed is increasing substantially every year. When a society's real wealth stops growing, wages quickly fall to what's barely enough to support a family — to what's needed just to keep the labor force going. When the society is actually declining, wages fall even below that. The landlord class may gain more from prosperity than the working class, but no class suffers as cruelly from decline.

Yet even though the workers' interest is closely tied to society's interest, the typical worker is unable either to understand that interest or to see how it connects to his own. His circumstances leave him no time to get the necessary information, and his education and habits generally make him unfit to judge even if he were fully informed. In public deliberations, therefore, his voice is seldom heard and even less often heeded — except on certain occasions when his protests are encouraged, organized, and supported by his employers, not for the workers' benefit but for the employers' own purposes.

The employers make up the third class — those who live by profit. It's capital deployed for profit that drives most of the useful labor in every society. The plans and projects of employers direct all the most important operations of labor, and profit is the goal of every one of those plans and projects. But the rate of profit doesn't behave like rent and wages — it doesn't rise with prosperity and fall with decline. On the contrary, it's naturally low in rich countries and high in poor ones, and it's always highest in countries that are heading fastest toward ruin. The interest of this third class, therefore, doesn't have the same connection to society's general interest as the other two.

Merchants and master manufacturers are the two groups within this class who typically command the largest amounts of capital and who, through their wealth, attract the greatest share of public attention. Because they spend their whole lives immersed in plans and projects, they often have sharper minds than most country gentlemen. But since their thinking is usually focused on the interests of their own particular line of business rather than on the interests of society as a whole, their judgment — even when offered with complete honesty (which it isn't always) — is much more reliable about the former than the latter. Their advantage over the country gentleman isn't that they understand the public interest better, but that they understand their own interest better than he understands his. And it's through this superior knowledge of their own interest that they've so often taken advantage of his good nature, persuading him to sacrifice both his own interest and the public's — based on the simple but sincere belief that their interest, not his, was the public interest.

The interest of business owners in any particular industry is always, in some ways, different from — and even opposed to — the public interest. To expand the market and narrow the competition is always in the interest of business owners. Expanding the market may often be good for the public too. But narrowing the competition is always against the public interest. It can only serve to let these business owners raise their profits above their natural level, effectively imposing an absurd tax on the rest of their fellow citizens for their own benefit.

Any proposal for a new law or regulation of trade that comes from this class should always be received with the greatest caution. It should never be adopted without long and careful examination — scrutinized not just thoroughly, but with the most suspicious attention. It comes from a class of people whose interest is never exactly the same as the public's, who generally have an interest in deceiving and even oppressing the public, and who have in fact, on many occasions, both deceived and oppressed it.

[Smith's original text includes extensive historical wheat price tables from Windsor Market and other sources, covering the years 1202 through 1764, organized in twelve-year averages. These tables document the price of a quarter of grain (nine bushels of wheat) at various dates, providing the empirical foundation for his analysis of silver's value over time. The key findings from this data are already woven into Smith's discussion in the preceding sections of this chapter: that grain prices in the first sixty-four years of the eighteenth century were generally lower than in the last sixty-four years of the seventeenth century, and that the apparent price trends across centuries largely reflect changes in the supply of silver rather than changes in real prosperity.]

Book II: Of the Nature, Accumulation, and Employment of Capital

Introduction

In a primitive society with no division of labor, where people rarely trade with each other and everyone provides for their own needs directly, there's no need for anyone to accumulate a stockpile of goods in advance. Everyone just relies on their own efforts to meet their needs as they come up. When you're hungry, you go to the forest to hunt. When your coat wears out, you make a new one from the skin of the first large animal you kill. When your shelter starts falling apart, you patch it up as best you can with whatever trees and turf are nearby.

But once the division of labor has been fully established, the products of your own labor can supply only a tiny fraction of your needs. The vast majority of what you need comes from other people's labor, which you purchase with your own products — or, what amounts to the same thing, with the money you get from selling them. But you can't buy anything until your own products have been not only completed but sold. So you need a stockpile of goods stored up somewhere — enough to keep you alive and to supply you with materials and tools — until both of those things happen. A weaver can't devote himself entirely to his specialized work unless there is already stored up somewhere, either in his own possession or someone else's, enough to support him and supply him with materials and tools until he has not only finished his cloth but sold it. Clearly, this accumulation has to come before he can commit himself to such specialized work for any extended period.

Since accumulating capital must come before the division of labor, labor can only be further subdivided in proportion to how much capital has already been accumulated. As labor gets more specialized, the same number of workers can process a much larger quantity of materials. And as each worker's tasks are reduced to greater and greater simplicity, all sorts of new machines get invented to speed up and simplify those tasks. So as the division of labor advances, keeping the same number of workers constantly employed requires not only the same amount of provisions as before, but a larger stock of materials and tools than would have been needed in a more primitive state. The number of workers in every industry generally increases along with the division of labor in that industry — or rather, it's the increase in their numbers that allows them to organize and specialize in this way.

Just as accumulating capital is a prerequisite for these great improvements in labor's productive power, that accumulation naturally leads to these improvements. The person who invests his capital in employing workers naturally wants to get as much output as possible. He therefore tries to organize the most efficient distribution of tasks among his workers and to equip them with the best machines he can either invent or afford to buy. His ability to do both of these things generally depends on the size of his capital — that is, on the number of people it can employ. So the quantity of industry in every country doesn't just increase with the capital that employs it. Thanks to that increase, the same amount of industry also produces a much greater quantity of output.

These, in general, are the effects of increasing capital on industry and its productive power.

In the following book, I've tried to explain the nature of capital, the effects of its accumulation into different kinds, and the effects of the different ways it can be employed. This book is divided into five chapters. In the first chapter, I've tried to show how the total stock of either an individual or a whole society naturally divides itself into different parts or categories. In the second, I've tried to explain the nature and function of money, considered as a particular branch of the general stock of society. Capital may either be employed by its owner directly, or it may be lent to someone else. In the third and fourth chapters, I've tried to examine how it works in both of these situations. The fifth and final chapter deals with the different effects that different uses of capital immediately produce on the quantity of national industry and on the annual output of land and labor.

Chapter I: Of the Division of Stock

When a person's total stock is only enough to support him for a few days or weeks, he rarely thinks about earning a return on it. He spends it as carefully as he can and tries, through his labor, to replace what he's used up before it runs out entirely. His income, in this case, comes solely from his labor. This is the situation of the great majority of working poor in every country.

But when someone has enough stock to support himself for months or years, he naturally tries to earn a return on most of it, keeping only enough on hand for his immediate needs until that return starts coming in. His total stock, therefore, divides into two parts. The part he expects to yield a return is called his capital. The other part covers his immediate consumption. This second part consists of some combination of three things: first, whatever portion of his total stock he originally set aside for this purpose; second, his income as it gradually comes in, from whatever source; and third, things purchased with either of the first two in previous years that haven't yet been fully used up — such as his wardrobe, household furniture, and the like. The stock that people typically set aside for their own immediate consumption consists of one, or several, or all of these three categories.

There are two different ways capital can be employed to yield a return or profit to its owner.

First, it can be used to buy or produce goods and sell them again at a profit. Capital employed this way yields no return while it stays in the owner's possession or remains in the same form. The merchant's goods earn him nothing until he sells them for money, and the money earns him nothing until it's exchanged for goods again. His capital is constantly leaving him in one form and returning in another, and it's only through this circulation — this series of exchanges — that it can earn him any profit. Capital of this kind can quite properly be called circulating capital.

Second, it can be invested in improving land, purchasing useful machines and equipment, or other things that yield a return without changing hands or circulating further. Capital of this kind can quite properly be called fixed capital.

Different occupations require very different proportions of fixed and circulating capital.

A merchant's capital, for example, is entirely circulating. He needs no machines or equipment — unless you count his shop or warehouse as such.

Every master craftsman or manufacturer has some of his capital fixed in the tools of his trade. But the amount varies enormously. A master tailor needs nothing more than a set of needles. A master shoemaker's tools are a little — though only a very little — more expensive. A weaver's equipment costs considerably more than a shoemaker's. But for all such master craftsmen, the vast majority of their capital circulates — either as wages paid to their workers or as the cost of materials, both of which are repaid with a profit when the finished work is sold.

In other industries, much more fixed capital is required. In a large ironworks, for example, the blast furnace, the forge, and the slitting mill are equipment that can't be built without enormous expense. In coal mines and other types of mining, the machinery needed for pumping out water and other operations is often even more expensive.

For the farmer, the portion of capital invested in agricultural equipment is fixed capital, while the portion spent on the wages and upkeep of his laborers is circulating capital. He profits from the first by keeping it in his possession, and from the second by parting with it. His working livestock — draft animals, for example — represent fixed capital in the same way as his farm equipment: he profits from keeping them. Their feed and maintenance, however, are circulating capital, just like his workers' wages: he profits from spending it. Cattle bought and fattened not for work but for sale are circulating capital entirely — both their purchase price and their feed. The farmer profits by selling them. But a flock of sheep or a herd of cattle in a breeding region, bought neither for labor nor for immediate sale but to earn a profit through their wool, their milk, and their offspring, is fixed capital. The profit comes from keeping them. Their maintenance is circulating capital — the profit comes from spending it. And that spending comes back to the farmer with both its own profit and the profit on the full value of the animals, in the form of wool, milk, and new livestock. Even seeds are properly a kind of fixed capital. Though they move back and forth between the field and the granary, they never change owners and so don't truly circulate. The farmer profits not from selling his seed but from its increase.

The total stock of any country or society, like that of an individual, naturally divides itself into the same three categories, each with its own distinct function.

The First is the portion set aside for immediate consumption. Its defining feature is that it produces no revenue or profit. It consists of the food, clothing, household furniture, and similar goods that have been bought by their final consumers but not yet fully used up. The entire stock of residential housing in a country at any given time is also part of this first category. The money invested in a house, if it's going to be the owner's own home, ceases from that moment to function as capital or to earn any return for its owner. A home you live in contributes nothing to your income. It's certainly very useful to you — but so are your clothes and furniture, and those count as expenses, not income.

Now, if the house is rented out to a tenant, the house itself produces nothing on its own. The tenant must always pay the rent from some other source of income — from labor, capital, or land. So while a house may function as capital for its owner and earn him a return, it can never function as capital for society as a whole. The income of the entire population can never be increased even slightly by it.

Clothes and household furniture work the same way — they can sometimes function as capital for particular individuals. In countries where masquerade balls are popular, it's a business to rent out masquerade costumes for the night. Upholsterers frequently rent out furniture by the month or year. Undertakers rent out funeral furnishings by the day or week. Many people rent out furnished houses and collect payment not just for the use of the house but for the furniture in it. But the revenue earned from all such things must ultimately come from some other source of income.

Of everything set aside for immediate consumption, whether by an individual or a society, what's invested in houses is consumed most slowly. A wardrobe might last several years. Furniture might last half a century or a century. But well-built and well-maintained houses can last for many centuries. However long they take to wear out, though, they are still just as much a stock reserved for consumption as clothes or furniture.

The Second of the three categories is fixed capital. Its defining feature is that it earns a return without circulating or changing hands. It consists mainly of four things:

First, all useful machines and equipment that make labor easier and more productive.

Second, all profitable buildings that earn revenue not just for the owner who rents them out, but for the person who rents and uses them — shops, warehouses, factories, farmhouses, and all their associated buildings like stables, barns, and so on. These are very different from mere residential homes. They are a kind of productive equipment and should be thought of in the same way.

Third, improvements to the land — everything profitably invested in clearing, draining, fencing, fertilizing, and otherwise preparing land for farming. An improved farm can fairly be regarded in the same light as a useful machine: it allows the same amount of circulating capital to produce a much greater return. An improved farm is just as advantageous as any such machine and far more durable, often requiring no maintenance beyond the profitable use of the farmer's capital in cultivating it.

Fourth, the acquired skills and useful abilities of all the members of society. Acquiring such talents always costs real money — spent on the person's maintenance during their education, training, or apprenticeship. This investment becomes, in effect, a kind of capital fixed in that person. Those skills are part of their personal wealth, and they're also part of the wealth of the society they belong to. A skilled worker's improved abilities can be thought of in exactly the same way as a machine that makes labor easier and more productive: it costs a certain amount to develop, but it repays that cost with a profit.

The Third and final category is circulating capital. Its defining feature is that it earns a return only by circulating — by changing hands. It too consists of four parts:

First, money — the medium through which all the other three categories are circulated and distributed to their proper users.

Second, the stock of provisions in the hands of butchers, livestock dealers, farmers, grain merchants, brewers, and others, from whose sale they expect to earn a profit.

Third, raw materials and partially finished goods — the materials for clothing, furniture, and buildings that haven't yet been made into their final form, but are still in the hands of growers, manufacturers, cloth merchants, drapers, timber dealers, carpenters, joiners, brickmakers, and others.

Fourth and finally, finished goods that are complete but still in the hands of the merchant or manufacturer, not yet sold to the final consumer — the kind of ready-made goods you see in the shops of blacksmiths, cabinetmakers, goldsmiths, jewelers, and china merchants. Circulating capital, then, consists of the provisions, materials, and finished goods of all kinds in the hands of their various dealers, plus the money needed to move and distribute these goods to the people who will ultimately use or consume them.

Of these four components of circulating capital, three — provisions, materials, and finished goods — are regularly drawn out of it, either annually or over shorter or longer periods, and placed into either fixed capital or the stock reserved for immediate consumption.

Every piece of fixed capital was originally created from circulating capital, and needs circulating capital to keep it going. All useful machines and equipment were originally built using circulating capital, which supplied both the materials they're made from and the wages of the workers who built them. They also require ongoing circulating capital for constant repairs.

No fixed capital can earn any return without circulating capital. The most useful machines in the world will produce nothing without the circulating capital that provides the materials they work on and the wages of the workers who operate them. Land, no matter how well improved, will yield no return without the circulating capital that supports the laborers who cultivate it and harvest its produce.

The sole purpose of both fixed and circulating capital is to maintain and increase the stock reserved for immediate consumption. This is the stock that feeds, clothes, and shelters people. Whether they're rich or poor depends on how generously these two forms of capital can supply that stock.

Since so much of the circulating capital is constantly being drawn out of it and placed into the other two categories, it must be continually replenished, or it would soon run dry. These supplies come principally from three sources: the produce of land, of mines, and of fisheries. These provide a constant stream of provisions and raw materials, some of which are then worked up into finished goods, replacing the provisions, materials, and finished goods that are constantly being withdrawn from the circulating capital. Mines also supply what's needed to maintain and replenish the money supply. Money isn't regularly withdrawn from circulation and placed into the other two categories the way provisions, materials, and finished goods are. But it does wear out, get lost, or get sent abroad, and so it too requires a continuous — though much smaller — flow of replacements.

Land, mines, and fisheries all require both fixed and circulating capital to be worked. And their produce replaces, with a profit, not only these capitals but all the others in society. The farmer annually replaces the provisions that the manufacturer consumed and the raw materials he worked up the previous year. The manufacturer annually replaces the finished goods that the farmer used up during the same period. This is the real exchange that takes place between these two classes of people every year — though it rarely happens through direct barter. The farmer seldom sells his grain, cattle, flax, and wool to the very same person from whom he buys his clothes, furniture, and tools. Instead, he sells his raw produce for money and then uses that money to buy manufactured goods wherever they're available. Land even partly replaces the capital used in fisheries and mines. It's the produce of the land that feeds the fishermen who bring in the catch, and it's the produce of the earth's surface that supports the miners who extract its minerals.

The output of land, mines, and fisheries, when their natural fertility is equal, is proportional to the amount and proper application of the capital invested in them. When the capitals are equal and equally well applied, the output is proportional to their natural fertility.

In every country with reasonable security, any person of ordinary common sense will try to put whatever stock he has to work — either for present enjoyment or future profit. If it's devoted to present enjoyment, it's part of the stock reserved for immediate consumption. If it's devoted to future profit, that profit must come either from keeping the asset or from parting with it. In the first case, it's fixed capital; in the second, it's circulating capital. A person would have to be completely irrational not to employ all the stock at his command — whether his own or borrowed — in one of these three ways, as long as there's reasonable security.

In unfortunate countries where people are constantly afraid of violence from their rulers, they often bury and hide a large part of their wealth, keeping it ready to grab and flee with in case of disaster. This is reportedly a common practice in Turkey, India, and I believe most other Asian governments. It seems to have been common among our own ancestors too, during the violent era of feudal government. "Treasure trove" — treasure found hidden in the ground, with no identifiable owner — was in those times a significant source of revenue for even the greatest rulers in Europe. It was always considered to belong to the sovereign, not to the finder or the landowner, unless the landowner had been specifically granted the right to it by charter. It was treated the same way as gold and silver mines, which were never assumed to be included in a general land grant without a specific clause saying so — though mines of lead, copper, tin, and coal were, being considered less important.

Chapter II: Of Money Considered as a Particular Branch of the General Stock of the Society

In Book I, I showed that the price of most goods breaks down into three parts: one pays the wages of labor, another covers the profits on capital, and a third goes to the rent on the land used to produce and bring those goods to market. Some goods have prices made up of only two of these parts — labor wages and capital profits. A very few consist entirely of labor wages alone. But the price of every commodity necessarily breaks down into one, two, or all three of these parts. Whatever portion doesn't go to rent or wages is necessarily profit for someone.

Since this is true for every individual commodity taken separately, it must also be true for all commodities combined — the entire annual output of every country's land and labor taken together. The total price or exchange value of that annual output must break down into the same three parts and get distributed among the country's inhabitants as either wages for their labor, profits on their capital, or rent on their land.

Now, although the entire value of a country's annual output is divided this way among its inhabitants and forms their income, we need to make a distinction. Just as with a private estate we distinguish between gross rent and net rent, we can do the same with the income of an entire country.

The gross rent of a private estate is everything the tenant farmer pays. The net rent is what's left over for the landlord after deducting the costs of management, repairs, and all other necessary expenses. It's what he can afford to spend on personal consumption — his table, his carriage, his home furnishings, his entertainment and amusements — without damaging his estate. His real wealth is proportional not to his gross rent but to his net rent.

Similarly, the gross income of all a country's inhabitants includes the entire annual output of their land and labor. The net income is what's left after deducting the cost of maintaining, first, their fixed capital and, second, their circulating capital. It's what they can put toward personal consumption — spending on their basic needs, comforts, and amusements — without eating into their capital. Their real wealth, too, is proportional not to their gross income but to their net income.

The entire cost of maintaining fixed capital must clearly be excluded from society's net income. Neither the raw materials needed to keep useful machines and work equipment in good repair, nor the labor needed to shape those materials into usable form, can ever count as part of net income. The wages of the workers who do that maintenance work can count as part of it, since those workers may spend their entire wages on personal consumption. But in other types of labor, both the wages and the product go toward consumption — the wages to the workers themselves, and the product to other people whose basic needs, comforts, and amusements are enhanced by that labor.

The purpose of fixed capital is to boost the productive power of labor — to enable the same number of workers to get a much greater quantity of work done. On a farm where all the necessary buildings, fences, drainage, and roads are in top condition, the same number of workers and draft animals will produce a much greater harvest than on a farm of equal size and equally good soil but lacking those improvements. In manufacturing, the same number of workers equipped with the best machinery will turn out a much greater quantity of goods than those using inferior tools. Money properly invested in fixed capital always pays back with substantial profit, increasing annual output by far more than the cost of maintaining those improvements. Still, that maintenance does require a certain share of output. A certain quantity of materials, and the labor of a certain number of workers — both of which could have been directly used to increase food, clothing, and shelter — get diverted to a different purpose. It's a highly beneficial purpose, certainly, but a different one nonetheless.

This is why any improvement in technology that lets the same number of workers do the same amount of work with cheaper and simpler machinery is always seen as a gain for society. Materials and labor that were previously devoted to supporting more complex and expensive equipment can now be redirected to increasing the quantity of work that the machinery helps perform. A manufacturer who spends a thousand pounds a year maintaining his machinery, and who finds a way to cut that expense to five hundred, will naturally invest the other five hundred in additional materials and additional workers. The output his machinery helps produce will naturally increase, along with all the benefits society derives from that output.

The cost of maintaining fixed capital in a large country is very much like the cost of repairs on a private estate. Repairs may be necessary to maintain the estate's output, and therefore both its gross and net rent. But when better management can reduce repair costs without reducing output, the gross rent stays the same while the net rent necessarily increases.

Now, although the entire cost of maintaining fixed capital must be excluded from society's net income, the same is not true for maintaining circulating capital. Circulating capital has four components: money, food and provisions, raw materials, and finished goods. As I've already explained, the last three are regularly withdrawn from circulating capital and placed either into fixed capital or into the pool reserved for immediate consumption. Whatever portion of these consumable goods isn't used to maintain fixed capital goes entirely to consumption and becomes part of society's net income. Maintaining these three components of circulating capital therefore takes nothing away from net income beyond what's needed for fixed capital upkeep.

A society's circulating capital differs from an individual's in this respect. An individual's circulating capital is entirely excluded from his net income, which consists only of his profits. But while every individual's circulating capital forms part of society's total circulating capital, it isn't thereby excluded from society's net income. The entire inventory in a merchant's shop certainly can't be counted as his own personal consumption fund. But it can be counted as other people's consumption fund — people who, from income derived from other sources, regularly pay back the merchant the value of those goods plus his profit, without diminishing either his capital or theirs.

Money, therefore, is the only component of society's circulating capital whose maintenance actually reduces net income.

Fixed capital and the money portion of circulating capital bear a strong resemblance to each other in how they affect society's income.

First, just as machines and work equipment require a certain expense to build and then to maintain — expenses that, while part of gross income, are deductions from net income — so the money supply circulating in any country requires a certain expense to assemble and then to maintain. Both of these expenses, while part of gross income, are likewise deductions from net income. A certain quantity of very valuable materials — gold and silver — and a great deal of skilled labor, instead of adding to the pool of goods for immediate consumption (people's basic needs, comforts, and amusements), get used up supporting that great but expensive instrument of commerce through which every person in society receives their share of those very needs, comforts, and amusements.

Second, just as machines and equipment — fixed capital — don't count as part of either gross or net income, so money, the mechanism through which all of society's income gets distributed to its members, doesn't itself count as part of that income. The great wheel of circulation is entirely different from the goods it circulates. Society's income consists entirely of those goods, not of the wheel that moves them around. When calculating either the gross or net income of any society, we must always deduct the entire value of the money from the total annual circulation of money and goods. Not a single penny of it can ever form part of either gross or net income.

It's only the ambiguity of language that makes this seem doubtful or paradoxical. Once you understand it properly, it's almost self-evident.

When we talk about a particular sum of money, we sometimes mean nothing more than the metal coins themselves. Other times, we're vaguely referring to the goods those coins can buy — the purchasing power they represent. So when we say England's circulating money has been estimated at eighteen million pounds, we're simply expressing the amount of metal coins that various writers have calculated (or guessed) are circulating in the country. But when we say a man is worth fifty or a hundred pounds a year, we usually mean not just the coins paid to him annually, but the value of goods he can buy or consume each year. We're really trying to describe his standard of living — the quantity and quality of necessities and comforts he can reasonably enjoy.

When we use a sum of money to refer not just to the coins but also, vaguely, to the goods those coins can buy, the wealth or income we're really talking about equals only one of those two values — and the goods more than the coins. The money's worth, not the money itself.

Think of it this way. If a man receives a guinea a week as a pension, he can buy a certain quantity of necessities, comforts, and amusements with it over the course of that week. His real wealth — his real weekly income — is greater or smaller depending on how much that guinea can buy. His weekly income is certainly not equal to both the guinea and what the guinea can purchase. It equals only one of those two values, and the latter more than the former — the guinea's worth rather than the guinea itself.

If this person's pension were paid not in gold but in a weekly note worth a guinea, his income would surely consist not in the piece of paper but in what he could get for it. A guinea can be thought of as a note redeemable for a certain quantity of necessities and comforts from all the tradespeople in the neighborhood. The person's income doesn't really consist in the gold coin but in what the coin can be exchanged for. If it couldn't be exchanged for anything, it would be worth no more than a check drawn on a bankrupt — just a useless piece of paper.

Although everyone's weekly or yearly income may be paid in money, their real wealth — the real weekly or yearly income of all of them combined — must always be proportional to the quantity of consumable goods they can collectively purchase with that money. Their total income clearly isn't equal to both the money and the consumable goods, but only to one or the other — and to the goods more than to the money.

So while we often describe a person's income by the coins paid to him annually, that's only because the amount of those coins determines his purchasing power — the value of goods he can afford to consume each year. We still think of his income as consisting in that purchasing power, not in the coins that convey it.

If this is clear enough for an individual, it's even more obvious for a whole society. The coins paid to an individual often exactly equal his income, making them a convenient shorthand for its value. But the total coins circulating in a society can never equal the total income of all its members. Since the same guinea that pays one man's pension today may pay another man's tomorrow and a third man's the day after, the total amount of coins in annual circulation must always be far less than the total money incomes paid with them. But the purchasing power of all those incomes — the goods that can be successively bought as those coins pass from hand to hand — is always precisely equal to the incomes themselves. Income, therefore, cannot consist in the coins (whose total is so much smaller than the total income they distribute) but in the purchasing power — in the goods that can be successively bought with them.

Money, then — the great wheel of circulation, the great instrument of commerce — though it forms a part, and a very valuable part, of society's capital, forms no part of society's income. The metal coins, as they circulate throughout the year distributing to each person the income that belongs to him, themselves form no part of that income.

Third and finally, machines and work equipment (fixed capital) bear one more resemblance to money (the money portion of circulating capital): just as any savings in the cost of building and maintaining machines — savings that don't reduce labor's productive power — improve society's net income, so does any savings in the cost of assembling and maintaining the money supply. The improvement is of exactly the same kind.

It should be obvious enough — and I've partly explained this already — how savings on fixed capital maintenance improve society's net income. Every business owner's total capital is necessarily divided between fixed and circulating capital. As long as his total capital stays the same, the smaller one portion is, the larger the other must be. It's circulating capital that supplies the materials and wages of labor and keeps industry running. So any savings on fixed capital maintenance that don't reduce productive capacity must increase the fund that keeps industry going — and consequently increase the annual output of land and labor, the real income of every society.

Replacing gold and silver money with paper replaces a very expensive instrument of commerce with one that's much less costly and sometimes just as convenient. Circulation gets carried on by a new wheel that costs less to build and maintain than the old one. But exactly how this works, and how it tends to increase either gross or net income, isn't entirely obvious and may need some further explanation.

There are several different types of paper money, but the circulating notes of banks and bankers are the best known and seem best suited for this purpose.

When the people of a country have enough confidence in a particular banker's financial strength, honesty, and good judgment to believe he'll always pay cash on demand for any of his promissory notes that are presented to him, those notes come to circulate just like gold and silver money — precisely because people trust they can always be converted into coin.

Here's how it works. Suppose a banker lends his customers his own promissory notes totaling a hundred thousand pounds. Since those notes serve all the purposes of money, his borrowers pay him the same interest as if he'd lent them actual cash. This interest is the source of his profit. Although some notes are continually coming back to him for payment, others continue circulating for months or even years. So even though he generally has notes worth a hundred thousand pounds in circulation, keeping just twenty thousand pounds in gold and silver on hand may be enough to meet the occasional demands for payment. Through this operation, twenty thousand pounds in gold and silver do the work that a hundred thousand would otherwise have had to do. The same volume of transactions can take place, the same quantity of consumable goods can be circulated and delivered to consumers, using his promissory notes worth a hundred thousand pounds, as could have been done with an equal value of gold and silver coin. Eighty thousand pounds in gold and silver can therefore be freed from the country's circulation. And if many different banks and bankers carry on similar operations at the same time, the entire circulation might be conducted with only a fifth of the gold and silver that would otherwise have been needed.

Let me walk through an example. Suppose the total circulating money of a particular country amounts to one million pounds sterling — enough to circulate the country's entire annual output. Now suppose that, some time later, various banks and bankers issue promissory notes (payable to the bearer) totaling one million pounds, while keeping two hundred thousand pounds in their vaults to meet demands for payment. That would leave eight hundred thousand pounds in gold and silver still in circulation, plus one million in bank notes — a total of one million eight hundred thousand pounds in paper and coin combined. But the country's annual output still only requires one million to circulate it. Banking operations don't instantly increase a country's output. So one million will still be sufficient after the banks are established. The goods being bought and sold are exactly the same as before; the same amount of money will handle all the transactions.

The channel of circulation — if I may use that expression — remains exactly the same size. We assumed one million was enough to fill it. Whatever gets poured in beyond that amount can't flow through it; it must overflow. One million eight hundred thousand pounds have been poured in. Eight hundred thousand must overflow — that's how much is beyond what the country's circulation can absorb. But although this surplus can't be put to work at home, it's far too valuable to sit idle. It will therefore be sent abroad to find the profitable employment it can't find domestically. Paper money can't go abroad, however, because far from the issuing banks and the country where it's legally redeemable, nobody will accept it as payment. So gold and silver worth eight hundred thousand pounds will be sent abroad, and the domestic channel of circulation will be filled with one million in paper instead of the million in metal that filled it before.

Now, we shouldn't imagine this gold and silver is sent abroad for nothing — that its owners are making a gift to foreign countries. They'll exchange it for foreign goods of one kind or another, either to supply consumption in some other foreign country or in their own.

If they use it to buy goods in one foreign country and sell them in another — what's called the carrying trade — whatever profit they make is a net addition to their own country's income. It's like a new fund created to support a new line of business. Domestic commerce is now handled by paper money, and the gold and silver have been converted into capital for this new international trade.

If they use it to buy foreign goods for domestic consumption, they might buy one of two types. First, they might buy luxury goods likely to be consumed by idle people who produce nothing — foreign wines, foreign silks, and so on. Second, they might buy additional raw materials, tools, and provisions to maintain and employ additional productive workers, who will reproduce the full value of what they consume — and then some.

To the extent the freed-up gold and silver are used the first way, they promote wastefulness. They increase spending and consumption without increasing production, without establishing any permanent fund to support that spending. This is harmful to society in every respect.

To the extent they're used the second way, they promote industry. They do increase consumption, but they provide a permanent fund to support that consumption, because the workers involved reproduce, with a profit, the entire value of what they consume each year. Society's gross income — the annual output of land and labor — increases by the full value those workers add to the materials they work with. And net income increases by whatever remains after deducting the cost of their tools and equipment.

Now, most of the gold and silver that banking operations push abroad, and that gets used to buy foreign goods for home consumption, will naturally be spent on the second type of goods. Here's why. Although some individuals may sometimes increase their spending dramatically without any increase in their income, no entire class or group of people ever does so. The principles of ordinary prudence don't always govern every individual's behavior, but they always influence the majority of any class. And the income of idle people, considered as a class, can't be increased at all by banking operations. So their spending in general can't be much increased either, even if some individuals among them do spend more. Since idle people's demand for foreign goods stays roughly the same, only a tiny share of the money pushed abroad by banking will go toward buying goods for their consumption. The vast majority will naturally be directed toward employing industry, not maintaining idleness.

When we calculate how much industry a society's circulating capital can support, we should only count the portions consisting of provisions, materials, and finished goods. The money portion — which merely circulates the other three — must always be subtracted. To set industry in motion, three things are necessary: materials to work with, tools to work with, and the wages that motivate the work. Money is neither a material to work on nor a tool to work with. And although wages are commonly paid in money, a worker's real income, like everyone else's, consists not in the money but in the money's worth — not in the metal coins but in what those coins can buy.

The amount of industry any capital can support is obviously determined by the number of workers it can supply with materials, tools, and suitable wages. Money may be needed to purchase the materials, tools, and workers' maintenance. But the amount of industry the total capital can support is certainly not equal to both the money that does the purchasing and the materials, tools, and maintenance that are purchased. It equals only one of those two values — and the latter more than the former.

When paper replaces gold and silver money, the quantity of materials, tools, and provisions that the entire circulating capital can provide may be increased by the full value of the gold and silver that used to be needed. The entire value of the great wheel of circulation gets added to the goods that the wheel circulates. The effect resembles what happens when a factory owner, thanks to some technological improvement, replaces his old machinery with cheaper equipment and adds the cost savings to his circulating capital — the fund that supplies materials and wages to his workers.

What proportion does a country's circulating money bear to the total value of the annual output it helps circulate? It's perhaps impossible to determine exactly. Various authors have estimated it at a fifth, a tenth, a twentieth, or even a thirtieth of total output. But however small the proportion, since only a part (often a small part) of that output is ever set aside for maintaining industry, money must always represent a very significant fraction of that industrial fund. So when paper money reduces the gold and silver needed for circulation to perhaps a fifth of its former quantity, and the value of most of the other four-fifths gets added to the funds supporting industry, it must make a very substantial addition to the amount of industry — and consequently to the value of the annual output of land and labor.

Something like this has happened in Scotland over the past twenty-five or thirty years, through the establishment of new banking companies in almost every sizable town and even some country villages. The effects have been exactly what I've described. Scottish business is now almost entirely conducted through the paper notes of these various banking companies. Purchases and payments of all kinds are commonly made with them. Silver rarely appears except as change for a twenty-shilling bank note, and gold appears even less often. Although the conduct of all these companies hasn't been beyond reproach — and has required an Act of Parliament to regulate it — the country has clearly derived great benefit from their operations. I've heard it claimed that Glasgow's trade doubled in about fifteen years after the first banks were established there, and that Scotland's overall trade has more than quadrupled since the founding of the two public banks in Edinburgh: the Bank of Scotland, established by Act of Parliament in 1695, and the Royal Bank, established by royal charter in 1727. Whether the trade of Scotland generally, or Glasgow in particular, has really increased by that much in so short a time, I won't claim to know. If either has, it seems like too large an effect to attribute solely to banking. But that Scotland's trade and industry have increased considerably during this period, and that the banks have contributed significantly to this growth, can't be doubted.

The silver coin circulating in Scotland before the union with England in 1707, which was brought into the Bank of Scotland immediately afterward for recoining, amounted to 411,117 pounds, 10 shillings, and 9 pence sterling. No records were kept of the gold coin, but ancient accounts from Scotland's mint show that the value of gold coined annually somewhat exceeded that of silver. Many people, distrustful of being repaid, didn't bring their silver to the bank at all, and some English coin wasn't called in either. So the total gold and silver circulating in Scotland before the union couldn't have been less than a million pounds sterling. This seems to have constituted nearly the entire money supply, because although the Bank of Scotland (which then had no competitor) had a significant circulation, it appears to have been only a small fraction of the whole. In the present day, Scotland's total money supply can't be estimated at less than two million, of which the gold and silver portion probably doesn't reach half a million. So even though Scotland's circulating gold and silver has dropped dramatically during this period, the country's real wealth and prosperity clearly haven't suffered. On the contrary — its agriculture, manufacturing, and trade, the annual output of its land and labor, have obviously grown.

Banks and bankers mostly issue their promissory notes by discounting bills of exchange — that is, by advancing money on them before they come due. They always deduct the legal interest for the period until the bill matures. When the bill comes due, the payment repays the bank for the amount advanced, plus a clear profit from the interest. A banker who advances not gold and silver but his own promissory notes to the merchant whose bill he discounts has the advantage of being able to discount a greater total amount — by the full value of whichever notes he finds, from experience, are typically in circulation at any given time. He thereby earns interest on a much larger sum.

Scotland's commerce, which isn't very large today, was even smaller when the first two banking companies were established. Those companies would have had very little business if they'd limited themselves to discounting bills of exchange. So they invented another method of issuing their notes: granting what they called cash accounts. This meant extending a line of credit — for, say, two or three thousand pounds — to any individual who could find two people of solid credit and good landed property to guarantee that whatever was advanced to him, up to the credit limit, would be repaid on demand with legal interest. Credit arrangements like this exist, I believe, at banks all over the world. But the easy repayment terms offered by the Scottish banking companies are, as far as I know, unique to them — and have probably been the main reason both for the companies' large volume of business and for the benefits the country has received from it.

Here's how it works. Someone with a cash account at one of these companies borrows a thousand pounds, for example. He can repay it in installments — twenty or thirty pounds at a time — with the company deducting a proportional share of the interest on the total loan from the date each partial payment is made, until the whole amount is repaid. Virtually all merchants and business people find it convenient to maintain such accounts. This gives them a strong incentive to promote these companies' business by readily accepting their notes as payment and encouraging everyone they deal with to do the same.

When their customers need money, the banks generally advance it in their own promissory notes. The merchants pay these to manufacturers for goods. The manufacturers pay them to farmers for raw materials and provisions. The farmers pay them to landlords for rent. The landlords pay them back to merchants for the comforts and luxuries the merchants supply. And the merchants return them to the banks to settle their cash accounts or repay what they've borrowed. In this way, almost the entire monetary business of the country is transacted through these notes. That's why these companies have such enormous volume of business.

Thanks to these cash accounts, every merchant can prudently carry on a larger business than he otherwise could. Consider two merchants — one in London, one in Edinburgh — with equal capital in the same line of trade. The Edinburgh merchant can safely operate on a larger scale and employ more people than the London merchant. The London merchant must always keep a substantial sum of money on hand — either in his own vault or at his banker's (who pays no interest on it) — to meet the constant stream of payment demands for goods he's bought on credit. Suppose this cash reserve typically amounts to five hundred pounds. The value of goods in his warehouse must always be five hundred pounds less than it would be if he didn't have to keep that sum idle. Suppose he turns over his entire inventory once a year. By having to maintain that idle reserve, he sells five hundred pounds' worth less goods annually than he otherwise might. His annual profits are reduced by whatever he could have earned on selling five hundred pounds more in goods, and the number of people employed in preparing his goods for market is fewer by however many that additional five hundred pounds of capital could have supported.

The Edinburgh merchant, on the other hand, keeps no money sitting idle for such purposes. When payment demands arrive, he draws on his cash account at the bank and gradually repays the borrowed amount with the money or notes that come in from selling his goods. With the same total capital, he can therefore prudently keep a larger quantity of goods in his warehouse at all times. He can make a greater profit himself and provide steady employment to more productive workers who prepare those goods for market. This is the great benefit the country has derived from this system.

You might think that the ease of discounting bills of exchange gives English merchants an equivalent advantage to the Scottish merchants' cash accounts. But remember: Scottish merchants can discount bills of exchange just as easily as English merchants — and they have the additional convenience of their cash accounts on top of that.

The total paper money of any kind that can easily circulate in a country can never exceed the value of the gold and silver it replaces — that is, the amount that would circulate if there were no paper money at all (assuming the same volume of commerce). If twenty-shilling notes are the smallest paper denomination in Scotland, for example, then the total paper currency that can easily circulate there cannot exceed the amount of gold and silver that would otherwise be needed for all transactions of twenty shillings and above. If the circulating paper ever exceeds that amount, the excess — which can neither be sent abroad nor absorbed by domestic circulation — must immediately flow back to the banks to be exchanged for gold and silver. Many people would quickly realize they have more paper than they need for domestic business. Since they can't send it abroad, they'd immediately demand payment from the banks. Once converted to gold and silver, they could easily use it by sending it overseas, but they can find no use for it as paper. There would therefore be an immediate run on the banks for the full amount of the surplus paper — and if the banks showed any reluctance to pay, the run would be much larger, because the alarm itself would make things worse.

Beyond the expenses common to every type of business — rent, salaries for servants, clerks, and accountants, and so on — the expenses peculiar to a bank consist mainly of two things. First, the cost of always keeping a large sum of cash in its vaults to meet holders' occasional demands for payment, on which it earns no interest. Second, the cost of refilling those vaults as fast as they're emptied by meeting those demands.

A bank that issues more paper than the country's circulation can absorb — paper that keeps flowing back for redemption — needs to increase the cash it keeps on hand, not merely in proportion to the excess circulation, but by a much greater proportion. The notes come flooding back much faster than the mere amount of the excess would suggest. Such a bank must therefore increase its first category of expense not just in proportion to its forced expansion of business, but by a much greater amount.

The vaults of such a bank, even though they should be much fuller, will empty much faster than if the bank had kept its operations within reasonable bounds. Refilling them requires not only more spending but constant, uninterrupted spending. The coin being continually drained from their vaults in such large quantities can't be put to use in domestic circulation either. It's replacing paper that was already in excess of what circulation could absorb, so the coin is excess too. But since that coin won't be allowed to sit idle, it must be sent abroad to find profitable use. This continual export of gold and silver, by making it harder to find replacement metal, necessarily drives up the bank's cost of refilling its vaults. Such a bank must therefore increase its second category of expense even more than its first, in proportion to the forced expansion of its business.

Here's a concrete example. Suppose a particular bank's paper that the country's circulation can easily absorb amounts to exactly forty thousand pounds, and the bank needs to keep ten thousand pounds in gold and silver on hand to meet occasional demands. If this bank tries to circulate forty-four thousand pounds, the extra four thousand — beyond what circulation can absorb — will come flowing back almost as fast as they're issued. To meet demands, this bank would then need to keep not eleven thousand pounds but fourteen thousand in its vaults. It gains nothing from the interest on the four thousand pounds of excess circulation, and it loses the entire cost of continually collecting four thousand pounds in gold and silver, which drain out of its vaults as fast as they're brought in.

If every bank had always understood and acted in its own interest, the circulation would never have been overstocked with paper money. But not every bank has understood or acted in its own interest, and the circulation has frequently been overstocked.

By issuing far too much paper — the excess continually returning to be exchanged for gold and silver — the Bank of England was for many years forced to coin gold at a rate of between eight hundred thousand and a million pounds a year, or an average of about eight hundred and fifty thousand pounds. For this enormous amount of coinage, the Bank (because of the worn and degraded state of the gold coin in recent years) frequently had to buy gold bullion at the high price of four pounds per ounce, only to issue it as coin at 3 pounds, 17 shillings, and 10.5 pence per ounce — losing between two and a half and three percent on this massive coinage operation. So even though the Bank paid no minting fee and the government covered the cost of coinage, this government generosity didn't fully spare the Bank from expense.

The Scottish banks, suffering from the same kind of excess, were all forced to maintain agents in London to collect money for them, at a cost of at least one and a half to two percent. This money was sent north by wagon, insured by the carriers at an additional three-quarters of a percent, or fifteen shillings per hundred pounds. These agents couldn't always refill their employers' vaults as fast as they were being emptied. When that happened, the banks' recourse was to draw bills of exchange on their London correspondents for the amount they needed. When those correspondents later drew on the Scottish banks for repayment — with interest and a commission — some of these banks, driven to desperation by their excessive circulation, had no way to pay except by drawing a second set of bills on the same or different London correspondents. The same sum — or rather, bills for the same sum — would sometimes make two or three round trips, with the debtor bank paying interest and commission on the entire accumulated amount each time. Even Scottish banks that never became known for extreme recklessness were sometimes forced to resort to this ruinous practice.

The gold coin paid out by the Bank of England or the Scottish banks in exchange for their excess paper — coin that was itself in excess of what domestic circulation needed — was sometimes sent abroad as coin, sometimes melted down and exported as bullion, and sometimes melted and sold back to the Bank of England at the high price of four pounds per ounce. Only the newest, heaviest, and best coins were carefully picked out of circulation and either sent abroad or melted down. At home, while they remained in the form of coin, these heavy pieces were worth no more than the light, worn ones. But abroad, or when melted into bullion, they were worth more. The Bank of England, despite its massive annual coinage operations, was astonished to find that every year brought the same coin shortage as the year before. Despite the enormous quantity of good new coin issued by the Bank each year, the state of the coinage got worse and worse instead of better. Every year the Bank found itself needing to coin nearly as much gold as the previous year, and because the continual wearing and clipping of coins kept driving up the price of gold bullion, the expense of this huge annual coinage grew ever larger.

It's important to understand that by keeping its own vaults supplied with coin, the Bank of England was indirectly required to supply the entire kingdom, into which coin flowed constantly from those vaults through a great variety of channels. Whatever coin was needed to support this excessive circulation of both Scottish and English paper money — whatever gaps this excessive circulation created in the kingdom's necessary coin supply — the Bank of England was forced to fill them. The Scottish banks, no doubt, all paid dearly for their own recklessness and carelessness. But the Bank of England paid even more dearly — not only for its own mistakes but for the far greater mistakes of nearly all the Scottish banks.

The overtrading of some bold speculators in both parts of the United Kingdom was the original cause of this excessive circulation of paper money.

What a bank can properly advance to a merchant or business owner of any kind is not their entire capital, or even any large part of it, but only that portion they would otherwise have to keep sitting idle in ready cash to meet occasional demands. If the paper money a bank advances never exceeds this amount, it can never exceed the gold and silver that would have circulated had there been no paper money — it can never exceed what the country's circulation can easily absorb and employ.

When a bank discounts a genuine bill of exchange — drawn by a real creditor on a real debtor, who actually pays it when it comes due — the bank is simply advancing to the merchant a portion of the value he would otherwise have had to keep sitting idle in ready cash. When the bill comes due, the payment repays the bank for its advance plus interest. The bank's vaults, as long as its dealings are limited to such customers, resemble a water pond: although a stream is constantly flowing out, another stream constantly flows in that fully matches it. Without any special effort or attention, the pond stays always equally full, or very nearly so. Little or no expense is needed to keep such a bank's vaults replenished.

A merchant who isn't overextending himself may frequently need ready cash even when he has no bills to discount. When a bank, besides discounting his bills, also advances money on his cash account on such occasions — accepting repayment in installments as money comes in from selling his goods, on the easy terms of the Scottish banking companies — it completely frees him from needing to keep any part of his capital sitting idle as a cash reserve. When payment demands arrive, he can meet them from his cash account.

The bank, however, should carefully observe whether, over a reasonably short period — four, five, six, or eight months, say — the total repayments it receives from a given customer are roughly equal to the total advances it makes to him. If repayments from certain customers usually match the advances over such periods, the bank can safely continue dealing with them. The stream constantly flowing out of its vaults may be large, but the stream flowing in is at least equally large, so the vaults are likely to remain full without any extraordinary effort. But if repayments from certain other customers consistently fall far short of the advances made to them, the bank cannot safely continue dealing with such customers — at least not on these terms. The outgoing stream is much larger than the incoming one, and unless the vaults are refilled by constant, strenuous effort, they'll soon be completely exhausted.

The Scottish banking companies accordingly took great care, for a long time, to require frequent and regular repayments from all their customers. They wouldn't deal with anyone, regardless of their wealth or credit, who didn't maintain what they called "frequent and regular operations" with them. Besides largely eliminating the extraordinary expense of refilling their vaults, this practice gave them two other significant advantages.

First, it enabled them to form a reasonable judgment about whether their borrowers' financial situations were improving or declining, without needing to investigate beyond their own account books. People are generally either regular or irregular in their repayments depending on whether their affairs are prospering or deteriorating. A private individual who lends to half a dozen or a dozen borrowers can personally (or through agents) constantly and carefully monitor each one's conduct and situation. But a banking company lending to perhaps five hundred different people, with its attention continually occupied by very different concerns, can have no regular information about most of its borrowers' circumstances beyond what its own books reveal. By requiring frequent and regular repayments, the Scottish banking companies probably had this monitoring advantage in view.

This is the only portion of anyone's capital that, over moderate periods, continually returns to them as money (whether paper or coin) and continually leaves them in the same form. If the bank's advances had exceeded this amount, the customer's repayments couldn't have kept pace with the bank's advances over any reasonable time period. The incoming stream to the bank's vaults couldn't have matched the outgoing stream. By exceeding the gold and silver the customer would otherwise have needed for occasional demands, the bank's paper advances could quickly exceed the total gold and silver that would have circulated in the country without paper money — and therefore exceed what the country's circulation could absorb. The excess paper would have immediately flowed back to the bank demanding exchange for gold and silver. This second advantage, though equally real, was perhaps not as well understood by all the Scottish banking companies as the first.

Once the convenience of discounting bills and cash accounts has freed respectable traders from the need to keep any capital sitting idle in ready cash, those traders can reasonably expect no further assistance from banks and bankers. At that point, banks cannot — consistent with their own interest and safety — go any further. A bank cannot safely advance to a trader the whole, or even the greater part, of the circulating capital he uses in his business. That capital does continually return to him as money and leave him in the same form, but the full cycle of returns takes too long compared to the outflows. Repayments couldn't match advances within the short time periods that suit a bank's operations.

Even less could a bank advance any significant part of a trader's fixed capital — the capital that the owner of an iron forge, for example, invests in building the forge itself, the smelting house, workshops, warehouses, and workers' housing; the capital a mine owner invests in sinking shafts, installing pumps, and building roads and rail tracks; the capital a land developer invests in clearing, draining, fencing, fertilizing, and plowing uncultivated fields, and in building farmhouses with all their outbuildings, stables, and granaries. Fixed capital comes back far more slowly than circulating capital. Such investments, even when made with the greatest prudence and judgment, rarely pay for themselves in under many years — a timeframe far too long for a bank.

Business owners may certainly, and quite properly, finance a large share of their projects with borrowed money. But in fairness to their creditors, their own capital should be large enough to serve as a kind of insurance for their creditors' capital — making it extremely unlikely that those creditors would suffer any loss, even if the project falls far short of expectations. And even with this safeguard, money that won't be repaid for several years shouldn't be borrowed from a bank. It should be borrowed through bonds or mortgages from private individuals who plan to live off the interest on their money without bothering to invest it themselves, and who are therefore willing to lend their capital to creditworthy people likely to hold it for several years. A bank that lends money without the expense of legal documents or attorneys' fees, and that accepts the easy repayment terms of the Scottish banking companies, would certainly be a very convenient creditor for such borrowers. But such borrowers would be very inconvenient debtors for such a bank.

It has now been more than twenty-five years since the paper money issued by Scotland's various banking companies reached — or rather slightly exceeded — what the country's circulation could absorb and employ. These companies had therefore long ago given Scottish traders all the assistance that banks can properly provide. They had actually gone a bit too far. They had slightly overextended themselves and had incurred the losses, or at least the reduced profits, that always follow even the slightest degree of overextension in this business.

But having received so much help from banks, these traders wanted still more. The banks, they seemed to think, could extend their credit to whatever amount was needed, at no greater cost than a few reams of paper. They complained about the narrow vision and cowardly spirit of the bank directors, who refused, they said, to expand credit in proportion to the country's growing trade. What they really meant by "growing trade," of course, was the expansion of their own projects beyond what they could finance either with their own capital or with what they could borrow from private lenders in the usual way. The banks, they seemed to believe, were honor-bound to make up the difference and provide them with all the capital they wanted to trade with.

The banks saw things differently. When the banks refused to extend more credit, some of these traders resorted to a scheme that served their purpose for a time — at much greater cost, but just as effectively as the most generous bank credit could have done. This scheme was the well-known practice of drawing and redrawing — the desperate tactic that failing traders sometimes turn to when they're on the brink of bankruptcy. This practice had long been known in England, and during the recent war, when high wartime profits were a powerful temptation to overextend, it reportedly became very widespread. From England it was imported to Scotland, where — given Scotland's much more limited trade and modest capital — it was soon carried on to an even greater extent than it had ever reached in England.

The practice of drawing and redrawing is so familiar to business people that it might seem unnecessary to explain it. But since this book may reach many readers who aren't in business, and since the effects of this practice on banking aren't perhaps fully understood even by business people themselves, I'll try to explain it as clearly as I can.

The customs of merchants — which were established back when the crude laws of Europe didn't enforce commercial contracts, and which have since been adopted into the laws of every European nation — give bills of exchange such extraordinary legal privileges that money is more readily lent against them than against any other type of obligation. This is especially true when the bills are payable within two or three months. If the person who accepted the bill doesn't pay it when it comes due, he immediately becomes a bankrupt. The bill is formally protested and falls back on the person who drew it, who also becomes bankrupt if he doesn't pay immediately. If the bill has passed through several other hands along the way — each person having advanced its value in money or goods to the next, and each having endorsed it (written their name on the back) to show they'd received and passed on the value — then each endorser becomes liable in turn, and any who can't pay also become bankrupts. Even if the drawer, acceptor, and every endorser are all people of questionable credit, the short timeframe gives the bill's holder some security. All of them might well go bankrupt eventually, but the odds are against them all going bankrupt within just two or three months. "The building is rickety," a weary traveler says to himself, "and won't stand much longer. But it probably won't collapse tonight, so I'll risk sleeping in it."

Here's how drawing and redrawing works. Trader A in Edinburgh draws a bill on B in London, payable in two months. In reality, B in London owes A in Edinburgh nothing. But B agrees to accept A's bill on the condition that, before the payment date, B will draw a new bill on A in Edinburgh for the same amount plus interest and a commission, also payable in two months. B does this before the first two months are up. Then, before those next two months expire, A draws a second bill on B in London, again due in two months. And before those two months are up, B draws yet another bill on A. This has sometimes gone on not just for months but for years, with the bill always returning to A in Edinburgh carrying the accumulated interest and commission from all previous bills. Interest ran at five percent per year, and the commission was never less than half a percent on each transaction. Since this commission was charged more than six times a year, whatever money A raised this way must have cost him more than eight percent annually — and sometimes much more, when the commission rate rose or when he had to pay compound interest on the accumulated interest and commissions of earlier bills. This practice was called "raising money by circulation."

In a country where normal business profits were thought to run between six and ten percent, a project would have to be spectacularly successful for its returns not only to cover the enormous borrowing costs but also to leave a handsome surplus profit for the entrepreneur. Many vast and ambitious projects were nevertheless launched and carried on for several years with no source of funding other than money raised at this ruinous expense. The entrepreneurs, no doubt, had the most vivid visions of enormous profits in their golden dreams. But when they woke up — either at the end of their projects or when they could no longer keep them going — they very rarely, I believe, had the good fortune to actually find those profits.

Here's what happened to the banking system. The bills that A in Edinburgh drew on B in London were regularly discounted, two months before they came due, at some Scottish bank. And the bills that B in London redrew on A in Edinburgh were regularly discounted at the Bank of England or some other London banker. Whatever was advanced against these circulating bills was advanced in Edinburgh as Scottish bank notes, and in London (when discounted at the Bank of England) as that bank's paper. Although each individual bill was repaid when it came due, the value advanced on the very first bill was never truly returned to the banks. Before each bill matured, another bill — always for a slightly larger amount — had already been drawn, and discounting this new bill was essential for paying the one about to come due. The payment was entirely fictional. The stream that these circulating bills had opened from the banks' vaults was never replenished by any genuine stream flowing back in.

The paper issued against these circulating bills of exchange often amounted to the entire capital for some vast project of agriculture, commerce, or manufacturing — not merely to the small portion that the entrepreneur would have needed to keep in ready cash. The greater part of this paper was therefore in excess of the gold and silver that would have circulated without paper money. It exceeded what the country's circulation could absorb, and so it immediately flowed back to the banks to be exchanged for gold and silver — which the banks then had to find however they could. This was capital that these entrepreneurs had very cleverly contrived to extract from the banks, not only without their knowledge or deliberate consent, but for some time perhaps without their having the slightest suspicion that they'd actually advanced it.

When two people who are continually drawing and redrawing on each other always discount their bills at the same bank, the banker quickly figures out what's going on. He can see clearly that they're trading not with any capital of their own but with capital he has advanced to them. But the discovery is much harder when they discount their bills sometimes at one bank and sometimes at another, and when the same two people don't always draw on each other but instead rotate through a whole network of speculators who find it in their mutual interest to help each other raise money this way — making it as difficult as possible to tell a genuine bill of exchange from a fictitious one. A genuine bill is drawn by a real creditor on a real debtor; a fictitious bill has no real creditor except the bank that discounted it, and no real debtor except the speculator who used the money.

Even when a banker did figure this out, he might discover it too late — finding that he'd already discounted so many of these speculators' bills that refusing to discount more would bankrupt them all, and that ruining them might well ruin himself. For his own safety, he might find it necessary, in this extremely dangerous situation, to keep going for a while longer, gradually pulling back by making discounting increasingly difficult in order to force the speculators to turn to other banks or other sources of funding, so he could extract himself from the circle as soon as possible.

The increasing reluctance of the Bank of England, the principal London bankers, and even the more cautious Scottish banks to continue discounting — after all of them had already gone too far — not only alarmed these speculators but infuriated them. Their own financial distress, which was obviously and directly caused by the banks' prudent and necessary restraint, they called the distress of the country. And this distress of the country, they declared, was entirely due to the ignorance, cowardice, and mismanagement of the banks, which refused to give sufficiently generous support to the bold enterprises of men working to beautify, improve, and enrich the nation. It was the duty of the banks, they seemed to believe, to lend for as long a time and as large an amount as borrowers might wish. The banks, however, by refusing more credit to people they'd already lent far too much to, were taking the only course that could now save either their own credit or the nation's.

In the middle of this uproar, a new bank was established in Scotland for the express purpose of relieving the country's financial distress. The intention was generous, but the execution was reckless, and the nature and causes of the distress it aimed to relieve were perhaps not well understood. This bank was more generous than any before it, both in granting cash accounts and in discounting bills of exchange. On the latter, it seems to have made barely any distinction between genuine bills and circulating bills, discounting all of them equally. Its avowed principle was to advance, against any reasonable security, the entire capital needed for investments with the slowest and most distant returns — such as land improvements. Promoting such improvements was even said to be the chief public-spirited purpose for which the bank was founded.

Through its generous cash accounts and bill discounting, it naturally issued enormous quantities of bank notes. But since most of these notes exceeded what the country's circulation could absorb, they came flooding back to be exchanged for gold and silver as fast as they were issued. Its vaults were never adequately filled. The capital subscribed to this bank in two rounds of fundraising amounted to 160,000 pounds, of which only eighty percent was actually paid in. This was supposed to come in several installments. But many shareholders, when they paid their first installment, opened cash accounts with the bank. The directors, feeling obliged to treat their own shareholders with the same generosity they showed everyone else, allowed many of them to borrow on their cash accounts the amounts due for their subsequent installments. These payments, then, only put money into one pocket what had just been taken out of another.

But even if the bank's vaults had been well filled, its excessive note circulation would have emptied them faster than any method could replenish them — except the ruinous one of drawing bills on London and, when those bills came due, paying them with more bills on the same place, along with accumulated interest and commission. Since its vaults had been so poorly filled to begin with, the bank reportedly resorted to this practice within just a few months of opening for business.

The shareholders' estates were worth several millions, and their signatures on the bank's founding agreement were effectively pledged as security for all the bank's obligations. This enormous backing gave the bank enough credit to keep operating for more than two years despite its reckless management. When it was finally forced to close, it had about 200,000 pounds in bank notes still in circulation. To support those notes — which were continually flooding back as fast as they were issued — the bank had been constantly drawing bills of exchange on London, in ever-increasing numbers and amounts. When it closed, these bills totaled more than 600,000 pounds.

This bank had therefore, in just over two years, advanced more than 800,000 pounds to various borrowers at five percent interest. On the 200,000 pounds circulating as bank notes, the five percent might be considered clear profit, after deducting only management expenses. But on the 600,000-plus pounds for which it was continually drawing bills on London, it was paying over eight percent in interest and commission — and consequently losing more than three percent on more than three-quarters of its total business.

This bank's operations produced effects exactly opposite to what its founders intended. They seem to have meant to support the "bold enterprises" (as they considered them) underway in various parts of the country, and at the same time to capture all the banking business for themselves by displacing the other Scottish banks — particularly the Edinburgh banks, whose reluctance to discount bills of exchange had caused some resentment.

The new bank did give these speculators temporary relief, enabling them to keep their projects going for about two years longer than they could have managed otherwise. But it only helped them sink deeper into debt, so that when ruin finally came, it hit them and their creditors that much harder. Instead of relieving the distress, the bank's operations actually made things worse in the long run for the speculators and for the country. It would have been much better for everyone — the speculators themselves, their creditors, and their country — if most of them had been forced to stop two years sooner.

The temporary relief this bank gave the speculators, however, proved a real and permanent relief to the other Scottish banks. All the dealers in circulating bills — the very people the established banks had become so cautious about — flocked to the new bank, where they were received with open arms. The established banks were therefore able to extricate themselves easily from the dangerous circle they couldn't otherwise have escaped without significant losses and probably some damage to their reputations.

In the long run, then, this bank's operations increased the real distress of the country it was meant to help, while effectively rescuing the rival banks it was meant to destroy.

When the bank first opened, some people believed that however fast its vaults emptied, it could easily refill them by raising money against the assets of its borrowers. Experience, I believe, quickly proved that this approach was far too slow. Vaults that had been so poorly filled from the start, and that emptied so rapidly, couldn't be replenished by any means except the ruinous practice of drawing bills on London and paying them, when due, with more bills carrying accumulated interest and commission.

But even if this method could have raised money as fast as needed, every such transaction would have produced a loss rather than a profit, eventually ruining the bank as a commercial enterprise — though perhaps not quite as quickly as the even more expensive practice of drawing and redrawing. The bank could never have profited from the interest on paper that, being in excess of what the country's circulation could absorb, came flooding back for gold and silver as fast as it was issued — gold and silver the bank itself had to constantly borrow to provide. On the contrary, the entire expense of this borrowing — hiring agents to find willing lenders, negotiating terms, and drawing up legal documents — fell entirely on the bank as a dead loss.

The idea of refilling their vaults this way can be compared to a man who has a water pond from which a stream is constantly flowing out but into which no stream flows in. He proposes to keep it always full by hiring people to carry water in buckets from a well several miles away.

But even if this scheme had proved not only workable but profitable for the bank as a business, the country still would have gotten no benefit from it — and would actually have suffered considerable harm. This operation couldn't have increased the total amount of money available for lending by a single penny. It would merely have turned this bank into a kind of central loan office for the entire country. People wanting to borrow would have come to this bank instead of going to the private individuals who had lent it their money. But a bank that lends to perhaps five hundred different people, about most of whom its directors know very little, is not likely to choose its borrowers any more wisely than a private individual who lends to a few people he knows personally and whose sober and frugal character he has good reason to trust.

The borrowers of a bank like the one I've been describing were likely, for the most part, to be dreamers and schemers — the drawers and redrawers of circulating bills — who would pour the money into extravagant ventures that, even with every assistance, they'd probably never be able to complete. And if completed, these projects would never repay what they actually cost — never generate enough income to sustain as much employment as had been devoted to them. The sober and frugal borrowers of private lenders, by contrast, would be more likely to invest in sensible enterprises proportioned to their capital. These projects might lack the grand and spectacular quality of the others, but they would have more of the solid and profitable about them. They'd repay the investment handsomely and generate enough income to sustain far more employment than had been devoted to them. So even if the scheme had worked perfectly, it wouldn't have increased the country's capital by a single penny. It would merely have transferred a large part of that capital from prudent and profitable investments to reckless and unprofitable ones.

The belief that Scottish industry was held back by a shortage of money was the opinion of the famous John Law. By establishing a bank of a special kind — which he seems to have imagined could issue paper money equal to the entire value of all the land in the country — he proposed to remedy this money shortage. The Scottish Parliament, when he first proposed the plan, declined to adopt it. It was later adopted, with some modifications, by the Duke of Orleans, then regent of France. The idea that paper money could be multiplied almost without limit was the real foundation of what became known as the Mississippi Scheme — perhaps the most extravagant project of banking and stock market speculation the world has ever seen. I won't go into the details of this scheme here; they've been fully and clearly explained by other writers. The principles behind it were laid out by Law himself in a treatise on money and trade that he published in Scotland when he first proposed his plan. The dazzling but impractical ideas set forth in that work and in similar writings based on the same principles continue to impress many people, and have perhaps partly contributed to the excessive banking that has lately been complained of in both Scotland and elsewhere.

The Bank of England is the largest bank of circulation in Europe. It was incorporated by royal charter dated July 27, 1694, under authority of an Act of Parliament. It initially advanced the government 1,200,000 pounds in return for an annuity of 100,000 pounds: 96,000 pounds in interest at eight percent, and 4,000 pounds for management expenses. The credit of the new government established by the Glorious Revolution must have been very low indeed when it had to borrow at such a high rate.

In 1697, the Bank was permitted to increase its capital by 1,001,171 pounds and 10 shillings, bringing its total capital to 2,201,171 pounds and 10 shillings. This increase was said to be for "the support of public credit." In 1696, government debt instruments called tallies had been trading at forty, fifty, and sixty percent discounts, and bank notes at twenty percent. During the great silver recoinage then underway, the Bank had suspended payment on its notes, which naturally destroyed their creditworthiness.

Under the 7th Anne, chapter 7, the Bank advanced an additional 400,000 pounds to the Exchequer, bringing its total government advances to 1,600,000 pounds on its original annuity of 96,000 pounds interest plus 4,000 for management. By 1708, then, the government's credit was as good as that of private borrowers, since it could borrow at six percent — the standard legal and market rate of the time. Under the same act, the Bank retired government Exchequer bills worth 1,775,027 pounds, 17 shillings, and 10.5 pence at six percent interest, and was simultaneously allowed to take in subscriptions to double its capital. By 1708, therefore, the Bank's capital amounted to 4,402,343 pounds, and it had advanced 3,375,027 pounds, 17 shillings, and 10.5 pence to the government.

Through a call of fifteen percent in 1709, an additional 656,204 pounds, 1 shilling, and 9 pence was paid in and converted to stock. Through another call of ten percent in 1710, another 501,448 pounds, 12 shillings, and 11 pence. After these two calls, the Bank's total capital stood at 5,559,995 pounds, 14 shillings, and 8 pence.

Under the 3rd George I, chapter 8, the Bank surrendered two million pounds in Exchequer bills for cancellation. It had by then advanced 5,375,027 pounds, 17 shillings, and 10 pence to the government. Under the 8th George I, chapter 21, the Bank purchased 4,000,000 pounds in stock from the South Sea Company. In 1722, after taking in subscriptions to finance this purchase, its capital stock increased by 3,400,000 pounds. At that point, the Bank had advanced 9,375,027 pounds, 17 shillings, and 10.5 pence to the public, while its capital stock stood at only 8,959,995 pounds, 14 shillings, and 8 pence. This was the first time the Bank's advances to the government exceeded its capital stock — the sum on which it paid dividends to its shareholders. In other words, the Bank now had an "undivided capital" in addition to its divided one, and it has continued to have such an undivided capital ever since. By 1746, the Bank had advanced 11,686,800 pounds to the government on various occasions, while its divided capital had been raised through various calls and subscriptions to 10,780,000 pounds. These two figures have remained the same since then. Under the 4th George III, chapter 25, the Bank agreed to pay the government 110,000 pounds for the renewal of its charter, without interest or repayment. This sum therefore didn't increase either of the other two amounts.

The Bank's dividend has varied over time, depending on changes in the interest rate it received on its government advances and on other circumstances. That interest rate has gradually been reduced from eight to three percent. For some years now, the Bank's dividend has been five and a half percent.

The stability of the Bank of England is equal to that of the British government itself. Everything the Bank has advanced to the government would have to be lost before the Bank's creditors could suffer any loss. No other banking company in England can be established by Act of Parliament, or can have more than six members. The Bank of England acts not only as an ordinary bank but as a great engine of the state. It receives and pays the greater part of the annuities owed to the government's creditors. It circulates Exchequer bills. It advances the annual land and malt taxes to the government, which are frequently not paid up until some years later. In carrying out these various functions, its duty to the public may sometimes have obliged it, through no fault of its directors, to flood the circulation with excess paper money. It also discounts merchant bills and has, on several occasions, propped up the credit of major financial houses — not only in England but in Hamburg and Holland. On one occasion in 1763, it reportedly advanced about 1,600,000 pounds in a single week for this purpose, much of it in bullion. I won't vouch for either the exact sum or the precise timeframe, though. On other occasions, this great institution has been reduced to the humiliation of making payments in sixpences.

It's not by increasing the country's capital, but by making a greater proportion of that capital active and productive, that the wisest banking operations boost a country's industry. The portion of capital that a businessman must keep idle in ready cash to meet occasional demands is dead capital. As long as it sits there, it produces nothing — neither for him nor for his country. Smart banking lets him convert this dead capital into active, productive capital: into materials to work with, tools to work with, and provisions and wages for workers — into capital that produces something for both himself and his country.

The gold and silver money circulating in any country, which annually distributes the output of its land and labor to consumers, is in the same way all dead capital. It's a very valuable part of the country's capital, but it produces nothing for the country. Smart banking, by substituting paper for a large part of this gold and silver, enables the country to convert a great deal of this dead capital into active, productive capital — capital that actually generates output.

A country's gold and silver money can be compared to a highway: while it circulates and carries all the country's grain and grass to market, it doesn't itself produce a single blade of either. Smart banking, by providing — if I may be allowed so bold a metaphor — a sort of aerial highway, enables the country to convert much of its road surface into productive pastures and grain fields, thereby considerably increasing the annual output of its land and labor.

The country's commerce and industry, however, can never be quite as secure when they're suspended, as it were, on the Daedalian wings of paper money as when they travel on the solid ground of gold and silver. Beyond the risks created by unskillful management of paper money, there are other dangers that no amount of prudence or skill can prevent.

An unsuccessful war, for example, in which the enemy seized the capital city and the treasure backing the paper currency, would cause far greater chaos in a country where the entire money supply was paper than in one where most of it was gold and silver. With the normal medium of exchange worthless, all transactions would have to be conducted through barter or credit. With all taxes normally paid in paper, the government would have no way to pay its troops or stock its supplies, and the country's situation would be far more desperate than if most of its money had been gold and silver. A ruler anxious to keep his country always in the best condition to defend itself ought therefore to guard not only against the excessive creation of paper money that ruins the very banks issuing it, but even against the level of expansion that fills most of the country's circulation with paper.

A country's money circulation can be thought of as having two branches: circulation among dealers (wholesalers and businesses), and circulation between dealers and consumers. Although the same coins or notes may be used in both, since both are constantly going on simultaneously, each requires its own supply of money. The value of goods circulating among dealers can never exceed the value of goods circulating between dealers and consumers, since everything dealers buy is ultimately destined for sale to consumers. But dealer-to-dealer circulation, being conducted wholesale, generally involves large sums per transaction. Dealer-to-consumer circulation, being mainly retail, often involves tiny amounts — a shilling or even a halfpenny may suffice. Small sums circulate much faster than large ones. A shilling changes hands more often than a guinea, and a halfpenny more often than a shilling. So although consumers' total annual purchases are at least as large as dealers' total annual purchases, the consumer side can be handled with much less money — the same coins doing the work of many more transactions through faster circulation.

Paper money can be designed to confine itself mostly to dealer-to-dealer circulation, or to extend into much of the dealer-to-consumer circulation as well. Where no bank notes circulate below ten pounds — as in London — paper stays mostly in the wholesale channel. When a consumer gets a ten-pound note, he's generally forced to break it at the first shop where he buys five shillings' worth of goods, so the note often returns to a dealer before the consumer has spent even a fortieth of the note's value. Where bank notes are issued for sums as small as twenty shillings — as in Scotland — paper extends into a considerable portion of the retail circulation. Before the Act of Parliament that banned ten-shilling and five-shilling notes, paper filled an even larger share of retail transactions. In the North American colonies, paper was commonly issued for sums as small as a shilling and filled nearly the entire circulation. In some paper currencies in Yorkshire, notes were issued for as little as sixpence.

Where the issuing of bank notes for such tiny amounts is permitted and common, many people of very modest means are both enabled and encouraged to set up as bankers. A person whose promissory note for five pounds — or even twenty shillings — would be rejected by everyone can get his sixpence note accepted without question. But the frequent bankruptcies that such undercapitalized bankers must inevitably suffer can cause serious hardship, and sometimes outright catastrophe, for the many poor people who've accepted their notes as payment.

It would probably be better if no bank notes were issued anywhere in the kingdom for less than five pounds. Paper money would then likely confine itself everywhere, as it does now in London, mostly to dealer-to-dealer circulation. Five pounds is, in most parts of the country, a sum that — while it buys perhaps only half as much as ten pounds — is treated with the same respect, and spent all at once just as rarely, as ten pounds is amid the extravagant spending habits of London.

Notice that where paper money is mostly confined to the wholesale circulation between dealers, as in London, gold and silver are always plentiful. Where paper extends into a large share of the retail circulation, as in Scotland and even more so in North America, it drives gold and silver almost entirely out of the country. Nearly all ordinary domestic transactions end up being handled by paper. The banning of ten-shilling and five-shilling notes somewhat relieved Scotland's gold and silver shortage, and banning twenty-shilling notes would probably help even more. Gold and silver are said to have become more abundant in America since some of their paper currencies were suppressed, and are said to have been more abundant before those currencies were created in the first place.

Even if paper money were confined mostly to the wholesale circulation, banks and bankers could still provide nearly as much support to industry and commerce as they did when paper filled almost the entire money supply. The ready cash a businessman keeps on hand for occasional demands is entirely devoted to dealer-to-dealer circulation. He has no need to keep cash for his transactions with consumers, since consumers bring ready money to him rather than taking it from him. So even if paper money were restricted to denominations large enough to keep it in the wholesale channel, banks could still — through discounting genuine bills and lending on cash accounts — relieve most businessmen of the need to keep any significant capital sitting idle in ready cash. They could still provide the maximum assistance that banks can properly offer to traders of every kind.

Now, someone might object that restraining private citizens from accepting a banker's promissory notes for any amount, large or small, when they're perfectly willing to accept them — or restraining a banker from issuing such notes when all his neighbors are happy to take them — is a clear violation of the natural liberty that law should support, not restrict. And such regulations may indeed be considered, in one sense, a violation of natural liberty. But when the exercise of natural liberty by a few individuals might endanger the security of the entire society, it is and ought to be restrained by the laws of every government — the freest as well as the most authoritarian. The requirement that buildings have fireproof party walls to prevent fires from spreading is a violation of natural liberty of exactly the same kind as the banking regulations I'm proposing here.

Paper money that consists of bank notes issued by people of unquestionable credit, payable on demand without any conditions, and in practice always promptly paid when presented, is in every respect equal in value to gold and silver money — since gold and silver can always be obtained for it. Whatever is bought or sold for such paper must necessarily be bought or sold at the same price as it would be for gold and silver.

Some have argued that increasing paper money, by expanding the total quantity of currency and thereby reducing its value, necessarily drives up the prices of goods. But since the amount of gold and silver withdrawn from circulation always equals the amount of paper added to it, paper money doesn't necessarily increase the total currency at all. From the beginning of the last century to the present, food prices were never lower in Scotland than in 1759 — even though, with ten-shilling and five-shilling notes still in circulation, there was more paper money in the country then than now. The ratio between Scottish and English food prices is the same now as it was before the great expansion of Scottish banking companies. Grain is usually just as cheap in England as in France, even though England has a great deal of paper money and France has hardly any. In 1751 and 1752, when David Hume published his Political Discourses — shortly after the great expansion of paper money in Scotland — there was a noticeable rise in food prices. But this was probably due to bad harvests, not to the expansion of paper money.

Things would be different, of course, with paper money whose immediate payment depended on the issuer's goodwill, or on some condition the holder might not always be able to meet, or that wasn't redeemable for a number of years and paid no interest in the meantime. Such paper money would naturally trade below the value of gold and silver, falling further below depending on how difficult or uncertain immediate payment was, or how distant the redemption date.

Some years ago, the various Scottish banking companies used to include in their bank notes what they called an Optional Clause. This promised payment to the bearer either on demand or, at the directors' option, six months later with legal interest. The directors of some banks sometimes invoked this clause, and sometimes threatened to invoke it against anyone demanding gold and silver for a large number of notes — unless the person would accept partial payment. Since these promissory notes made up the vast majority of Scotland's currency at the time, this payment uncertainty naturally pushed their value below that of gold and silver. During the worst of this abuse — mainly in 1762, 1763, and 1764 — while the exchange rate between London and Carlisle was at par, the rate between London and Dumfries was sometimes four percent against Dumfries, even though Dumfries is barely thirty miles from Carlisle. The difference was simple: in Carlisle, bills were paid in gold and silver, while in Dumfries they were paid in Scottish bank notes, and the uncertainty of converting those notes to coin had devalued them by four percent. The same Act of Parliament that banned ten-shilling and five-shilling notes also abolished the Optional Clause, restoring the exchange rate between England and Scotland to whatever the natural course of trade warranted.

In the paper currencies of Yorkshire, payment of sums as small as sixpence sometimes depended on the condition that the note's holder bring change for a guinea to the person who had issued the note — a condition that holders might often find very hard to meet, and that necessarily depressed this currency below the value of gold and silver. An Act of Parliament accordingly declared all such conditions unlawful and suppressed all promissory notes payable to the bearer for under twenty shillings.

The paper currencies of North America were not bank notes payable on demand, but government-issued paper that wasn't redeemable for several years after issue. Although the colonial governments paid no interest to holders of this paper, they declared it legal tender at its full face value. But even assuming the colonial government's promise was perfectly reliable, a hundred pounds payable fifteen years in the future, in a country where interest runs at six percent, is worth little more than forty pounds in ready money. To force a creditor to accept this as full payment for a hundred-pound debt actually paid in cash was an act of violent injustice that has perhaps rarely been attempted by any government claiming to be free. It bears the obvious marks, as the honest and blunt Doctor Douglas assures us, of being exactly what it was: a scheme by fraudulent debtors to cheat their creditors.

The government of Pennsylvania, when it first issued paper money in 1722, did try to make its paper equal in value to gold and silver by enacting penalties against anyone who charged different prices depending on whether they were paid in colonial paper or in gold and silver. This was an equally tyrannical regulation, but far less effective than the one it was meant to support. A law can declare that a shilling is legal tender for a guinea, directing courts to release any debtor who makes such a tender. But no law can force a seller — who is free to sell or not as he pleases — to accept a shilling as equivalent to a guinea in the price of his goods. Despite such regulations, it was clear from exchange rates with Great Britain that a hundred pounds sterling was sometimes considered equivalent to 130 pounds in some colonies' paper currency, and in others to as much as 1,100 pounds — the difference depending on how much paper each colony had issued and how distant and uncertain the date of its final redemption.

No law, therefore, could have been more fair than the Act of Parliament — so bitterly complained of in the colonies — that declared no paper currency issued there in the future could serve as legal tender for payment.

Pennsylvania was always more moderate in issuing paper money than any other colony. Its paper currency reportedly never fell below the value of the gold and silver that had circulated in the colony before the first paper issue. Before that issue, however, the colony had already inflated the official value of its coins, ordering by assembly act that five shillings sterling should pass in the colony for six shillings and threepence, and later for six shillings and eightpence. So a pound of colony currency, even when it was gold and silver, was already more than thirty percent below the value of a pound sterling. When that currency was converted to paper, it was rarely much more than thirty percent below sterling. The stated reason for inflating the coin values was to prevent the export of gold and silver — by making equal amounts of those metals worth more as currency in the colony than in the mother country. It turned out, however, that prices of all imported goods rose in exact proportion to the coin inflation, and gold and silver were exported just as fast as before.

Since each colony's paper was accepted for provincial tax payments at full face value, it necessarily derived some additional value from this use — over and above whatever value it had from the expected distance of its redemption date. This additional value was greater or smaller depending on how much the paper issued exceeded what was needed for tax payments in that particular colony. In every colony, it was far more than needed for this purpose.

A ruler who declared that a certain proportion of his taxes had to be paid in a particular type of paper money could give that paper a certain value — even if the date of its final redemption depended entirely on his own will. If the bank issuing this paper was careful to keep the quantity somewhat below what could be used for tax payments, the demand might be strong enough to make it trade at a premium — selling for somewhat more than the amount of gold or silver currency for which it was issued.

Some people explain the so-called Agio of the Bank of Amsterdam this way — the premium that bank money commands over ordinary currency. They claim that bank money cannot be withdrawn from the Bank at the depositor's will. Most foreign bills of exchange must be paid in bank money — that is, by a transfer in the Bank's books — and the directors, they say, are careful to keep the total quantity of bank money below what this requirement creates demand for. This, they argue, is why bank money sells at a premium, or Agio, of four or five percent above the same face value of the country's gold and silver currency. But this account of the Bank of Amsterdam, as I'll show later, is largely fictional.

A paper currency that trades below the value of gold and silver coin doesn't thereby reduce the value of those metals or cause them to buy fewer goods. The relative value of gold and silver compared to other goods depends not on the nature or quantity of paper money circulating in any particular country, but on the richness or poverty of the mines that supply the world market with those metals at any given time. It depends on the proportion between the labor needed to bring a certain quantity of gold and silver to market and the labor needed to bring a certain quantity of any other goods to market.

As long as bankers are prohibited from issuing circulating notes for less than a certain amount, and are required to pay those notes immediately and unconditionally on demand, their business can — with complete safety to the public — be left entirely free in all other respects. The recent proliferation of banking companies in both parts of the United Kingdom — an event that has alarmed many people — actually increases rather than decreases public security. It forces every bank to be more careful in its operations. By not extending their note circulation beyond its proper proportion to their cash reserves, they protect themselves against the hostile runs that so many competitors are always ready to launch. Competition confines each bank's circulation to a narrower area and reduces the number of its circulating notes. By dividing the total circulation among more banks, the failure of any single one — an accident that must sometimes happen — matters less to the public. Free competition also forces banks to be more generous in their dealings with customers, for fear their rivals will steal them away. In general, if any branch of trade or division of labor benefits the public, the freer and more widespread the competition, the greater the benefit will always be.

Chapter III: Of the Accumulation of Capital, or of Productive and Unproductive Labor

There are two kinds of labor. One adds to the value of the thing it's applied to; the other doesn't. The first kind, since it produces value, can be called productive labor. The second can be called unproductive labor.

A factory worker's labor, for example, generally adds to the value of the materials he works on — enough to cover both his own wages and his employer's profit. A household servant's labor, by contrast, adds value to nothing. Although the factory worker's wages are advanced by his employer, the worker really costs his employer nothing in the end, because the value of those wages is recovered, with a profit, in the increased value of the finished product. But the cost of maintaining a household servant is never recovered. A person grows rich by employing many factory workers; he grows poor by maintaining many household servants.

The labor of the servant, however, has its value and deserves its pay just as much as the factory worker's. But the factory worker's labor becomes embedded in some specific, sellable product that lasts for at least some time after the work is done. It's like a certain quantity of labor stored up, ready to be put to use on some other occasion if needed. That product — or equivalently, its price — can afterward set in motion a quantity of labor equal to what originally produced it. The household servant's labor, by contrast, doesn't become embedded in any specific, sellable product. His services generally vanish the instant they're performed, rarely leaving any trace of value behind for which an equal quantity of service could later be obtained.

The labor of some of society's most respected groups is, like that of household servants, unproductive of any value. It doesn't become embedded in any lasting, sellable commodity that endures after the labor is done. The head of state, for example, along with all the officials of justice and the military who serve under him — the entire army and navy — are unproductive laborers. They are public servants, maintained by a portion of the annual output of other people's industry. Their service, however honorable, useful, or necessary, produces nothing for which an equal quantity of service could afterward be obtained. This year's protection, security, and defense of the nation won't pay for next year's protection, security, and defense.

The same category must include some of the most serious and important professions alongside some of the most trivial: clergy, lawyers, doctors, writers of all kinds, actors, comedians, musicians, opera singers, ballet dancers, and so on. The labor of the humblest of these has a value, determined by the same principles that govern every other type of labor. And the labor of the most distinguished and most useful produces nothing that could afterward purchase an equal quantity of labor. Like an actor's performance, an orator's speech, or a musician's tune, the work of all of them perishes the instant it's produced.

Productive workers, unproductive workers, and people who don't work at all are all equally sustained by the annual output of the country's land and labor. This output, however large, can never be infinite — it has definite limits. So the larger the share employed in any given year to maintain unproductive workers, the less remains for productive ones, and the following year's output will be smaller accordingly. After all, the entire annual output (setting aside what the earth produces spontaneously) is the result of productive labor.

Although a country's entire annual output is ultimately intended to supply its inhabitants' consumption and provide them with income, when it first comes from the ground or from the hands of productive workers, it naturally splits into two parts. One part — often the larger — goes first to replacing capital: replenishing the provisions, materials, and finished goods that had been withdrawn from someone's capital. The other part forms someone's income, either as profit on their capital or as rent on their land. On a farm, for instance, one part of the harvest replaces the farmer's capital; the other pays his profit and the landlord's rent. In a large manufacturing operation, similarly, one part (always the largest) replaces the business owner's capital, while the other pays his profit.

The portion of annual output that goes to replacing capital is never immediately used to maintain anyone except productive workers. It pays productive labor only. The portion that goes directly to forming income — as either profit or rent — can support either productive or unproductive workers indiscriminately.

Whatever part of his capital a person invests as capital, he always expects to get it back with a profit. He therefore uses it to maintain productive workers only. After serving as his capital, it becomes their income. Whenever he uses any part of it to support unproductive workers, that amount is immediately withdrawn from his capital and placed in his fund for personal consumption.

Unproductive workers, and people who don't work at all, are maintained entirely by income. This comes from two sources. First, from that portion of annual output originally designated as someone's income — whether as rent on land or profits on capital. Second, from the portion that was originally meant to replace capital and maintain productive workers only, but which, once it reaches those workers' hands, includes an amount beyond what they need for basic subsistence. This surplus can be spent on maintaining either productive or unproductive workers. So not just the great landlord or the wealthy merchant, but even the ordinary worker, if his wages are high enough, might employ a household servant. Or he might occasionally attend a play or a puppet show, contributing his share to the support of one group of unproductive workers. Or he might pay taxes, helping to maintain another group — more honorable and useful, certainly, but equally unproductive.

However, no portion of the annual output originally meant to replace capital is ever diverted to supporting unproductive workers until after it has first set in motion its full complement of productive labor — all the productive labor it could set in motion given how it was employed. The worker must have earned his wages through work done before he can spend any of them this way. And the amount he can spare is generally small. Productive workers rarely have much surplus income, though they usually have some. And when it comes to paying taxes, the large number of productive workers can partly compensate for the small size of each one's contribution.

Rent on land and profits on capital are therefore everywhere the main sources of support for unproductive workers. These are the two types of income whose owners generally have the most to spare. They could use it to support either productive or unproductive workers, but they seem to have a preference for the latter. The spending of a great lord generally feeds more idle people than industrious ones. The wealthy merchant, though he employs only productive workers with his capital, tends to spend his personal income feeding the same kind of idle people as the great lord.

The proportion between productive and unproductive workers in any country depends heavily on the split between, on one hand, the portion of annual output devoted to replacing capital (as soon as it comes from the ground or from productive workers) and, on the other, the portion designated as income — either rent or profit. This split is very different in rich countries than in poor ones.

In today's wealthy European countries, a very large share of agricultural output — often the largest — goes to replacing the capital of the substantial, independent farmer. The rest pays his profit and the landlord's rent. But in earlier times, under feudalism, only a tiny share of the harvest was needed to replace the capital used in farming. That capital typically amounted to a few miserable cattle, fed entirely on the natural growth of uncultivated land and really just part of that natural growth. It usually belonged to the landlord, who advanced it to the people working the land. All the rest of the output belonged to the landlord too, whether as rent or as profit on this paltry capital. The people who worked the land were generally serfs, whose persons and possessions were the landlord's property. Those who weren't serfs were tenants at will. Although the rent they nominally paid was often little more than a token payment, it effectively amounted to the land's entire output. The lord could command their labor in peacetime and their military service in wartime. Though they might live far from his manor house, they were as dependent on him as the retainers who lived under his roof. The entire output of the land belongs, after all, to whoever can command the labor and service of everyone that output sustains.

In modern Europe, the landlord's share rarely exceeds a third, sometimes not even a fourth, of the total agricultural output. Yet rents in all the improved parts of the country have tripled and quadrupled since feudal times. This third or fourth of today's output is, it seems, three or four times greater than the entire output used to be. As agriculture improves, rent increases in absolute amount but decreases as a proportion of total output.

In today's wealthy European countries, enormous amounts of capital are invested in trade and manufacturing. In earlier times, the little trade that existed and the few crude manufactures that were carried on required very small amounts of capital. These must, however, have yielded very high profits, since the interest rate was never below ten percent, and profits had to be high enough to cover such interest. Today, the interest rate in the more developed parts of Europe is nowhere above six percent and in some of the most advanced countries is as low as four, three, or even two percent. Although total income from profits on capital is always much greater in rich countries than in poor ones, this is because the total capital is much greater. Relative to the amount of capital, profit rates are generally much lower.

The portion of annual output devoted to replacing capital is therefore not only much larger in rich countries than in poor ones, but also represents a much greater share relative to the portion going directly to income as rent or profit. The funds for maintaining productive labor are not only much larger in wealthy countries but also represent a much greater proportion compared to those funds that, while they could support either productive or unproductive workers, tend to favor the latter.

The balance between these different funds inevitably shapes the general character of a country's population — their industriousness or their idleness. We are more hardworking than our ancestors because the funds dedicated to supporting industry are now much larger, relative to those likely to support idleness, than they were two or three centuries ago. Our ancestors were idle because they lacked sufficient incentive to be industrious. As the proverb says: better to play for nothing than to work for nothing.

In commercial and manufacturing towns, where the working class is mainly supported by the employment of capital, people are generally hardworking, sober, and prosperous — as in many English towns and most Dutch ones. In towns that depend mainly on the presence of a royal court, where the working class is primarily supported by the spending of income, people are generally idle, dissolute, and poor — as in Rome, Versailles, Compiegne, and Fontainebleau.

Apart from Rouen and Bordeaux, there is little trade or industry in any of the parliamentary towns of France. The working class, sustained mainly by the spending of court officials and the litigants who appear before them, is generally idle and poor. The thriving trade of Rouen and Bordeaux seems to be entirely the result of their geographic advantages. Rouen is inevitably the hub for nearly all goods imported from abroad or from France's coastal provinces for consumption in Paris. Bordeaux is similarly the hub for wines grown along the banks of the Garonne and its tributaries — one of the world's richest wine-producing regions, seemingly producing wines best suited for export and most pleasing to foreign tastes. Such advantageous locations naturally attract large amounts of capital by offering so much scope for its employment. And the employment of this capital is what drives the industry of these two cities. In France's other parliamentary towns, barely any capital seems to be employed beyond what's needed for local consumption — the bare minimum.

The same can be said of Paris, Madrid, and Vienna. Of the three, Paris is by far the most industrious. But Paris itself is the main market for all the goods manufactured there, and its own consumption is the primary object of all its trade. London, Lisbon, and Copenhagen are perhaps the only three cities in Europe that are both permanent royal residences and genuine trading cities — cities that trade not just for their own consumption but for that of other cities and countries. All three have extremely advantageous locations that naturally make them hubs for a large share of goods destined for distant markets.

In a city where a great deal of income is spent, it's probably harder to profitably invest capital for any purpose beyond supplying local consumption than in a city where working people depend entirely on the employment of capital for their livelihood. The idleness of most people maintained by the spending of income probably corrupts the industriousness of those who should be maintained by the employment of capital, making it less profitable to invest there than elsewhere.

There was little trade or industry in Edinburgh before the Union with England. When the Scottish Parliament no longer met there, and when it ceased to be the necessary residence of Scotland's principal nobility and gentry, it became a city of some trade and industry. It still serves as the seat of Scotland's principal courts of justice, customs boards, and tax authorities, so considerable income is still spent there. But in trade and industry it remains far inferior to Glasgow, whose inhabitants are mainly supported by the employment of capital. It has sometimes been observed that the inhabitants of a large village, after making considerable progress in manufacturing, have become idle and poor after a great lord took up residence in their neighborhood.

The ratio of capital to income, therefore, seems everywhere to determine the ratio of industry to idleness. Wherever capital predominates, industry prevails. Wherever income predominates, idleness prevails. Every increase or decrease in capital therefore naturally tends to increase or decrease the real quantity of industry, the number of productive workers, and consequently the exchange value of the country's annual output — the real wealth and income of all its inhabitants.

Capital is increased by thrift and decreased by extravagance and mismanagement.

Whatever a person saves from his income, he adds to his capital. He either invests it himself in employing additional productive workers, or enables someone else to do so by lending it at interest — that is, for a share of the profits. Just as an individual's capital can grow only through what he saves from his annual income or earnings, so a nation's capital — which is simply the combined capital of all its members — can grow only in the same way.

Thrift, not industry, is the immediate cause of capital growth. Industry does provide the material that thrift accumulates. But no matter how much industry might produce, if thrift didn't save and store it up, capital would never grow.

Thrift, by increasing the funds available for maintaining productive workers, tends to increase the number of workers whose labor adds value to whatever they work on. It therefore tends to increase the exchange value of the country's annual output. It sets additional industry in motion, which adds additional value to the annual output.

Here's a crucial point: what is annually saved is consumed just as surely as what is annually spent, and at nearly the same pace too — but it's consumed by a different group of people. The portion of income that a rich man spends each year is mostly consumed by idle guests and household servants, who leave nothing behind to show for their consumption. The portion he saves each year, being immediately invested as capital for the sake of profit, is consumed in the same way and at nearly the same pace, but by a different group: by laborers, manufacturers, and skilled workers who reproduce, with a profit, the full value of what they consume.

Suppose his income is paid in money. If he had spent it all, the food, clothing, and shelter the whole amount could have bought would have been distributed among idle consumers. By saving a part of it and immediately investing it as capital (either himself or through someone else), the food, clothing, and shelter that this saved portion can buy is necessarily reserved for productive workers instead. The total consumption is the same, but the consumers are different.

What a frugal person saves each year doesn't just provide maintenance for additional productive workers for that year or the next. Like the founder of a public workshop, he effectively establishes a permanent fund for maintaining an equal number of productive workers in perpetuity. This perpetual fund isn't always protected by any formal law, trust, or legal restriction. But it is always protected by a very powerful force: the clear and obvious self-interest of every individual who owns any share of it. No part of it can ever afterward be diverted from productive to unproductive hands without an obvious loss to the person who makes the diversion.

The spendthrift makes exactly this diversion. By failing to keep his spending within his income, he eats into his capital. Like someone who diverts the revenues of a charitable endowment to worldly purposes, he pays the wages of idleness with funds that the thrift of earlier generations had, in a sense, consecrated to the maintenance of industry. By shrinking the funds available for productive employment, he necessarily shrinks — as far as it depends on him — the quantity of labor that adds value, and consequently the value of the country's entire annual output, the real wealth and income of all its inhabitants. If the extravagance of some weren't offset by the frugality of others, every spendthrift, by feeding the idle with bread meant for the industrious, would tend not only to bankrupt himself but to impoverish his country.

Even if the spendthrift bought only domestically produced goods and nothing from abroad, the effect on the country's productive capacity would be the same. Every year, a certain quantity of food and clothing that should have maintained productive workers would instead maintain unproductive ones. Every year, the value of the country's annual output would be somewhat less than it would otherwise have been.

Now, someone might point out that spending on domestic goods, unlike spending on foreign goods, doesn't cause any export of gold and silver — so the same amount of money stays in the country. True. But if the food and clothing consumed by those unproductive workers had instead been given to productive workers, those productive workers would have reproduced, with a profit, the full value of what they consumed. The same amount of money would have remained in the country, and there would have been an equal value of consumable goods reproduced as well. There would have been two values instead of one.

Besides, the same quantity of money can't long remain in a country whose annual output is declining. Money's only use is to circulate consumable goods — to buy and sell provisions, materials, and finished products and distribute them to consumers. The amount of money a country can employ must therefore be determined by the value of consumable goods it circulates annually. These goods consist either of the country's own output or of things purchased with that output. Their value must decline as the country's output declines, and with it the amount of money needed to circulate them.

But the money thrown out of domestic circulation by this annual decline in output won't be left sitting idle. Whoever holds it has an interest in putting it to work. Finding no employment at home, it will be sent abroad — despite any laws or prohibitions — to purchase consumable goods of some use at home. This annual export of gold and silver will for a while add something to the country's consumption beyond its own annual output. What had been saved from that output in prosperous times and used to buy gold and silver will help support consumption for a while during decline. The export of gold and silver in such cases is not the cause of the decline but its effect, and may even soften the blow for a time.

Conversely, as the value of a country's annual output increases, the quantity of money must naturally increase too. Greater value in consumable goods circulating within the country will require more money to circulate them. Part of the increased output will therefore naturally be used to purchase whatever additional gold and silver is needed. The increase in those metals will be the effect, not the cause, of public prosperity. Gold and silver are purchased the same way everywhere. The food, clothing, and shelter — the income and maintenance — of everyone whose labor or capital is employed in bringing them from the mine to the market is the price paid for them, in Peru as in England. The country that can pay this price will never long lack the quantity of those metals it needs, and no country will long hold on to a quantity it doesn't need.

So whether we define a country's real wealth and income as the value of its annual output (as plain reason suggests) or as the quantity of precious metals circulating within it (as popular prejudice supposes), in either case every spendthrift is a public enemy, and every frugal person is a public benefactor.

The effects of mismanagement are often the same as those of extravagance. Every poorly conceived and unsuccessful project in agriculture, mining, fishing, trade, or manufacturing tends in the same way to diminish the funds available for productive employment. In every such project, although the capital is consumed by productive workers only, because those workers are employed so badly that they don't reproduce the full value of what they consume, there must always be some reduction in what would otherwise have been society's productive funds.

It rarely happens, however, that the extravagance or mismanagement of private individuals can seriously affect a great nation. The wastefulness or bad judgment of some people is almost always more than offset by the frugality and good judgment of others.

As for extravagance: the impulse that drives spending is the desire for immediate enjoyment — a passion that, though sometimes overwhelming and hard to resist, is generally only momentary and occasional. But the impulse that drives saving is the desire to improve our condition — a desire that, though generally calm and quiet, is born with us and never leaves us until the grave. In the entire span between those two moments, there is perhaps hardly a single instant when any person is so perfectly satisfied with their situation as to have no wish for any change or improvement whatsoever. Increasing their wealth is the means by which most people aim to improve their condition. It's the most common and obvious means. And the surest way to increase their wealth is to save and accumulate some part of what they earn, either regularly or on special occasions. So although the urge to spend prevails in almost all people on some occasions, and in some people on almost all occasions, in the majority of people, taking the whole course of their lives on average, the instinct for frugality not only predominates — it predominates by a very wide margin.

As for mismanagement: the number of sensible and successful ventures everywhere greatly exceeds the number of foolish and failing ones. Despite all our complaints about the frequency of bankruptcies, the unlucky people who suffer this fate make up a very small fraction of everyone engaged in business of all kinds — perhaps no more than one in a thousand. Bankruptcy is perhaps the greatest and most humiliating disaster that can befall an innocent person. Most people are therefore careful enough to avoid it. Some, admittedly, don't avoid it — just as some don't avoid the gallows.

Great nations are never impoverished by private extravagance and mismanagement, though they sometimes are by public extravagance and mismanagement. Nearly the entire public revenue in most countries is spent maintaining unproductive workers: the people who make up a large and lavish royal court, an elaborate religious establishment, vast navies and armies — people who produce nothing in peacetime and acquire nothing in wartime that can compensate the cost of maintaining them, even while the war lasts. Since they produce nothing themselves, they're all maintained by other people's labor. When their numbers grow unnecessary large, they may in a single year consume such a great share of the country's output that not enough remains to maintain the productive workers who need to reproduce it the following year. Next year's output will therefore be smaller, and if the same pattern continues, the year after that will be smaller still. These unproductive workers, who should be supported by only a portion of people's surplus income, may consume such a large share of the country's entire income that many people are forced to eat into their capital — the funds meant to maintain productive labor. When this happens, all the private frugality and good judgment in the world may not be enough to offset the waste and destruction caused by this violent encroachment.

But on most occasions, experience shows that private frugality and good judgment are sufficient to offset not only the private extravagance and mismanagement of individuals, but the public extravagance of government as well. The steady, constant, and uninterrupted effort of every person to improve their own condition — the force from which both public and private prosperity ultimately springs — is frequently powerful enough to keep things moving toward improvement despite both the extravagance of government and the worst errors of administration. Like some mysterious principle of animal vitality, it frequently restores health and vigor to the body despite not only the disease itself, but the absurd prescriptions of the doctor.

A nation's annual output can be increased in value by only two means: increasing either the number of its productive workers or the productive powers of workers already employed. The number of productive workers obviously can't increase much without an increase in capital — the funds for maintaining them. The productive powers of existing workers can't increase without either improvements to the machines and tools that make labor easier and more efficient, or a better division and organization of work. In either case, additional capital is almost always needed. It's only through additional capital that a business owner can either equip his workers with better machinery or organize their work more efficiently. When a job consists of many different parts, keeping each worker constantly employed on just one part requires much more capital than when every worker occasionally does every different part.

When we compare a nation at two different points in time and find that its annual output is obviously greater at the later date — its lands better cultivated, its manufacturing more extensive and more flourishing, its trade broader — we can be sure that its capital increased during the interval. More must have been added to it by the good management of some people than was taken from it by the private mismanagement of others or the public extravagance of government.

This has been the case in nearly every nation during all reasonably peaceful times, even nations that haven't had the most prudent or frugal governments. To judge this accurately, however, we need to compare the country's condition at points fairly far apart. Progress is often so gradual that over short periods, improvement isn't just hard to detect — the decline of certain industries or certain regions (which sometimes occurs even when the country as a whole is thriving) can actually create the false impression that the nation's wealth and industry are declining overall.

England's annual output, for example, is certainly much greater now than it was just over a century ago, at the Restoration of Charles II. Though few people today would doubt this, hardly five years have passed during this period without some book or pamphlet being published — written skillfully enough to gain some authority with the public — claiming to demonstrate that the nation's wealth was rapidly declining, the countryside depopulating, agriculture neglected, manufacturing decaying, and trade ruined. Nor have these all been partisan propaganda, the miserable products of dishonesty and corruption. Many were written by very honest and very intelligent people who wrote nothing they didn't believe, and for no other reason than that they believed it.

England's annual output at the Restoration was certainly much greater than it had been roughly a hundred years earlier, at the accession of Elizabeth. At that point too, the country was almost certainly more advanced than it had been a century before that, near the end of the Wars of the Roses between the houses of York and Lancaster. Even then, it was probably better off than at the Norman Conquest, and at the Norman Conquest better than during the chaos of the Saxon Heptarchy. Even in that early period, it was certainly more developed than when Julius Caesar invaded, when its inhabitants were in roughly the same condition as the indigenous peoples of North America.

In every one of these periods, however, there was not only a great deal of private and public waste, many expensive and unnecessary wars, and a massive diversion of annual output from productive to unproductive uses — but sometimes, in the chaos of civil war, such outright destruction of capital as might be expected not only to slow down (as it certainly did) the natural accumulation of wealth, but to leave the country poorer at the end of the period than at the beginning.

Consider even the happiest and most fortunate of these periods — the years since the Restoration. How many disasters and disruptions have occurred that, if anyone had foreseen them, would have led people to predict not merely the impoverishment but the complete ruin of the country! The Great Fire and the Great Plague of London; two wars with the Dutch; the upheavals of the Glorious Revolution; the war in Ireland; four expensive wars with France in 1688, 1702, 1742, and 1756; and the two Jacobite rebellions of 1715 and 1745. In those four French wars alone, the nation accumulated more than 145 million pounds of debt, on top of all the other extraordinary annual expenses the wars caused — bringing the total to no less than 200 million pounds.

An enormous share of the country's annual output has therefore, since the Glorious Revolution, been devoted to maintaining extraordinarily large numbers of unproductive workers. Had those wars not diverted so much capital to this purpose, most of it would naturally have been used to employ productive workers — workers whose labor would have reproduced, with a profit, the entire value of what they consumed. The annual output would have grown considerably each year, and each year's growth would have accelerated the next. More houses would have been built, more land improved, and previously improved land better cultivated. More manufacturing enterprises would have been established, and existing ones expanded. To what heights the nation's real wealth and income might have risen by now is perhaps not easy even to imagine.

But although government extravagance has undoubtedly slowed England's natural progress toward wealth and improvement, it hasn't been able to stop it. The annual output of England's land and labor is undoubtedly much greater now than at either the Restoration or the Glorious Revolution. The capital employed in cultivating that land and supporting that labor must likewise be much greater. In the midst of all the government's demands, this capital has been silently and gradually accumulated through the private frugality and good judgment of individuals — through their universal, continuous, and uninterrupted effort to improve their own condition.

It is this effort — protected by law and given liberty to pursue what's most advantageous — that has maintained England's progress toward prosperity in virtually all past eras, and will hopefully continue to do so in all future ones. England, however, has never been blessed with a particularly frugal government, and thrift has at no time been the defining virtue of its people. It is therefore the height of arrogance and presumption for kings and ministers to imagine they should supervise the household budgets of private citizens and restrain their spending through sumptuary laws or by banning the import of foreign luxuries. They themselves are always, without exception, the biggest spendthrifts in society. Let them watch their own spending, and they can safely trust private people with theirs. If their own extravagance doesn't ruin the nation, that of their subjects never will.

Just as frugality increases and extravagance decreases the public capital, the behavior of those whose spending exactly equals their income — neither accumulating nor encroaching — neither increases nor decreases it. Some kinds of spending, however, seem to contribute more to public prosperity than others.

An individual may spend his income on things consumed immediately — where one day's spending neither helps nor supports the next — or on more durable things that can be accumulated, where each day's spending can build on the last. A wealthy man, for example, might spend his income on lavish banquets and a large staff of servants, dogs, and horses. Or, content with a modest table and few attendants, he might spend most of it decorating his house or country estate, on useful or decorative buildings, on useful or decorative furniture, on collecting books, statues, and paintings, or on more frivolous things — jewels, trinkets, and curiosities of various kinds. Or, most trivially of all, he might amass a vast wardrobe of fine clothes, like the favorite minister of a great prince who died a few years ago.

If two men of equal wealth spent their income differently — one mainly on the first type of expenditure and the other mainly on the second — the splendor of the man who spent on durable goods would constantly increase, each day's spending adding to and enhancing what came before. The other's would be no greater at the end than at the beginning. The first man would also end up richer. He'd have an accumulation of goods that, while perhaps not worth everything he paid for them, would always be worth something. Of the second man's spending, no trace would remain. The effects of ten or twenty years of extravagant entertaining would be as completely gone as if they had never existed.

Just as one type of spending is more favorable to an individual's wealth, it's more favorable to a nation's wealth as well. The houses, furniture, and clothing of the rich eventually become available to the middle and lower classes. These groups can afford to buy them when their superiors tire of them, and the general standard of living gradually improves as this pattern becomes universal among the wealthy. In countries that have been rich for a long time, you'll frequently find ordinary people living in houses and using furniture that are perfectly good but clearly weren't built or made for people of their station. What was once a seat of the Seymour family is now an inn on the Bath road. The marriage bed of James I of Great Britain, which his queen brought from Denmark as a gift fit for one sovereign to give another, was a few years ago the showpiece of a tavern in Dunfermline.

In some old cities that have either stagnated or declined, you'll hardly find a single house that could have been built for its current occupants. Go inside these houses and you'll often find many excellent, if old-fashioned, pieces of furniture still perfectly serviceable, and clearly never made for the present residents. Noble palaces, magnificent country houses, great collections of books, statues, paintings, and other treasures are frequently an ornament and an honor not just to their neighborhood but to the entire country. Versailles is an ornament and honor to France; Stowe and Wilton to England. Italy still commands a certain reverence for the sheer number of such cultural monuments it possesses, even though the wealth that produced them has faded and the creative genius that designed them seems to have been extinguished — perhaps from lack of the same opportunities.

Spending on durable goods is favorable not only to accumulation but to frugality itself. If someone overspends on durable goods, they can easily cut back without public embarrassment. But drastically reducing your staff of servants, changing from lavish dinners to simple meals, or giving up your carriage after once having one — these are changes your neighbors can't help noticing, and they're assumed to be an admission of previous financial irresponsibility. Few people who have once launched into this kind of extravagant living have the courage to reform voluntarily. They keep going until ruin and bankruptcy force their hand. But if someone has spent too much on building, furniture, books, or paintings, no irresponsibility is implied by a change of course. These are things where past spending often makes further spending unnecessary. When a person stops, he appears to do so not because he's exceeded his means but because he's satisfied his taste.

Besides, spending on durable goods generally supports a greater number of people than even the most lavish hospitality. Of the two or three hundred pounds' weight of food that might be served at a grand feast, perhaps half gets thrown away, and a great deal more is wasted. But if the cost of that feast had instead been spent employing masons, carpenters, upholsterers, and other skilled workers, an equal value in food would have been distributed among an even larger number of people, who would have bought it in small, careful quantities and not wasted a single ounce. Moreover, one type of spending supports productive workers while the other supports unproductive ones. One therefore increases the exchange value of the country's annual output; the other doesn't.

I wouldn't, however, want anyone to think that spending on durable goods always reflects a more generous spirit than spending on hospitality. When a wealthy man spends his income mainly on entertaining, he shares most of it with his friends and companions. But when he spends it on durable goods, he often spends the entire amount on himself, giving nothing to anyone without getting something in return. The latter type of spending, especially when directed toward frivolous objects — little ornaments for clothing and furniture, jewels, trinkets, and knickknacks — often indicates not just a trivial disposition but a selfish one. All I mean to say is that spending on durable goods, since it always results in some accumulation of valuable property, since it's more favorable to private frugality and therefore to the growth of public capital, and since it supports productive rather than unproductive workers, contributes more than the other kind to the growth of public prosperity.

Chapter IV: Of Stock Lent at Interest

Capital lent at interest is always treated as an investment by the lender. He expects to get it back eventually, and in the meantime the borrower pays him a yearly fee — the interest — for the use of it. The borrower may use it either as productive capital or as a fund for immediate personal consumption.

If he uses it as capital, he employs it to maintain productive workers who reproduce its value with a profit. In that case, he can both repay the capital and pay the interest without cutting into any other source of income. If he uses it as a fund for personal consumption, he's acting as a spendthrift — spending on the maintenance of idle people what was meant to support industrious ones. In that case, he can neither repay the capital nor pay the interest without selling off other assets or eating into some other source of income, such as property or land rents.

Capital lent at interest is no doubt sometimes used both ways, but it's used productively far more often than it's consumed. The person who borrows to spend will soon be ruined, and the person who lends to him will generally regret his folly. Borrowing or lending for such a purpose is therefore, in all cases where outright loan-sharking isn't involved, contrary to both parties' interests. It does happen sometimes, of course, but given how strongly everyone cares about their own interests, it can't happen nearly as often as we sometimes imagine. Ask any wealthy person of ordinary prudence whether he's lent most of his capital to people who will use it profitably or to people who will spend it idly, and he'll laugh at you for even asking. Even among borrowers, then — not the group most famous for frugality — the frugal and industrious considerably outnumber the extravagant and idle.

The only people to whom capital is commonly lent without the expectation that they'll use it profitably are country gentlemen who borrow against their land. But even they almost never borrow simply in order to spend. What they borrow has, you might say, already been spent before they borrow it. They've typically run up such large bills with shopkeepers and tradesmen, buying goods on credit, that they find it necessary to borrow at interest to pay off those debts. The borrowed capital replaces the capital of those shopkeepers and tradesmen — capital that the country gentleman couldn't have replaced from his land rents. So the money isn't really borrowed to be spent; it's borrowed to replace capital that has already been spent.

Almost all loans at interest are made in money, whether paper or gold and silver. But what the borrower really wants, and what the lender really provides, isn't the money itself but the money's worth — the goods it can buy. If the borrower wants it for immediate consumption, it's those goods he'll consume. If he wants it as capital for employing workers, it's from those goods that workers will be supplied with the tools, materials, and provisions they need. Through the loan, the lender effectively assigns to the borrower his right to a certain portion of the country's annual output, to be used however the borrower sees fit.

The total amount of capital available to be lent at interest in any country is therefore not determined by the value of the money — paper or coin — that serves as the medium for these loans. It's determined by the value of that portion of the annual output which, as soon as it comes from the ground or from the hands of productive workers, is set aside to replace capital — specifically, capital whose owners don't want the trouble of investing it themselves. Since such capital is typically lent out and repaid in money, it constitutes what's called the "moneyed interest." This is distinct not only from the "landed interest" but from the trading and manufacturing interests, whose owners invest their own capital directly.

Even within the moneyed interest, money is really just the deed of transfer — the mechanism that conveys capital from one person to another when the owners don't want to invest it themselves. The capital conveyed can be vastly larger than the money used to convey it, because the same coins or notes serve for many different loans, just as they serve for many different purchases.

For example: A lends W a thousand pounds. W immediately uses it to buy a thousand pounds' worth of goods from B. B, having no need for the money himself, lends those same coins to X, who immediately buys a thousand pounds' worth of goods from C. C, in the same way and for the same reason, lends them to Y, who buys goods from D. In this way, the same coins or notes may, in just a few days, serve as the instrument of three separate loans and three separate purchases, each equal in value to the full amount of those coins. What the three lenders A, B, and C assign to the three borrowers W, X, and Y is the purchasing power. That purchasing power is both the value and the purpose of the loans. The total capital lent by the three lenders equals the value of the goods that can be bought with it — three times the value of the money used to make the purchases. These loans may all be perfectly safe, as long as the goods purchased by the borrowers are employed in ways that, in due time, bring back their full value with a profit. And just as the same coins can serve as the instrument of loans equal to three times — or, for the same reason, thirty times — their value, they can likewise serve as the instrument of repayment.

Capital lent at interest can therefore be thought of as an assignment from the lender to the borrower of a substantial portion of the annual output, on the condition that the borrower will annually assign back a smaller portion (the interest), and at the end, an equally substantial portion (the repayment of principal). Although money generally serves as the deed of assignment for both the interest and the principal, the money itself is entirely different from what it assigns.

As the portion of annual output set aside for replacing capital increases in any country, the moneyed interest naturally increases with it. As the economy's total capital grows, the particular category of capital whose owners prefer to earn a return by lending it out, rather than taking the trouble to invest it themselves, naturally grows too. In other words, as capital increases, the quantity of capital available to be lent at interest grows steadily larger.

As the quantity of capital available for lending increases, the interest rate — the price that must be paid for using that capital — necessarily falls. This happens not only for the usual reason that the market price of anything tends to fall as its supply increases, but also for reasons specific to this case. As capital accumulates in any country, the profits that can be earned by investing it necessarily decline. It becomes harder and harder to find profitable uses for new capital within the country. A competition arises among different pools of capital, each owner trying to secure the business that another currently holds. But he can usually only displace his competitor by offering better terms. He must not only sell his goods somewhat cheaper, but sometimes buy his inputs at higher prices to secure supplies. The growing funds available for employing labor push up the demand for workers. Workers find jobs easily, but capital owners find it hard to find workers to employ. This competition drives wages up and pushes profits down. And when profits are squeezed from both ends, the price that can be paid for the use of capital — the interest rate — must necessarily fall with them.

John Locke, John Law, Montesquieu, and many other writers seem to have believed that the increase of gold and silver following the discovery of the Americas was the real cause of falling interest rates across most of Europe. Since those metals had become less valuable, they argued, the use of any particular amount of them must also have become less valuable, and so the price paid for that use must have fallen too. This idea, which seems so plausible at first glance, has been so thoroughly refuted by David Hume that it may be unnecessary to say more about it. But the following short and simple argument may help explain more clearly the mistake that misled these thinkers.

Before the discovery of the Americas, ten percent seems to have been the common interest rate across most of Europe. Since then, it has fallen in various countries to six, five, four, and three percent. Let's suppose that in every country, the value of silver fell by exactly the same proportion as the interest rate — so that in countries where interest dropped from ten to five percent, the same quantity of silver now buys only half as many goods as before. This assumption isn't actually true anywhere, but it's the most favorable possible scenario for the theory we're examining. And even under this assumption, it's completely impossible that the declining value of silver could have had the slightest tendency to lower the interest rate.

Here's why. If a hundred pounds are now worth no more than fifty pounds were then, ten pounds now must be worth no more than five pounds were then. Whatever causes reduced the value of the capital must necessarily have reduced the value of the interest by exactly the same proportion. The ratio between capital and interest would have stayed the same even if the interest rate had never changed. But by actually lowering the rate from ten to five percent, the ratio between these two values is altered. If a hundred pounds now is worth no more than fifty pounds was then, five pounds now can be worth no more than two pounds and ten shillings was then. By cutting the interest rate from ten to five percent, we're paying for the use of capital that's supposedly worth only half its former value, an interest payment that's only one-quarter of the former interest's value.

Any increase in the quantity of silver, while the quantity of goods circulated by means of it stayed the same, could only reduce the value of that metal. The nominal prices of all goods would rise, but their real value would remain exactly the same. They'd exchange for more pieces of silver, but the amount of labor they could command — the number of people they could maintain and employ — would be unchanged. The country's capital would be the same, even though more coins might be needed to transfer any given portion of it from one person to another. The deeds of transfer would be more unwieldy, like the documents of a long-winded lawyer, but the thing being transferred would be exactly the same and could produce only the same effects.

The funds for maintaining productive labor being the same, the demand for it would be the same. Wages, though nominally higher, would be the same in real terms. Workers would be paid in more pieces of silver but could buy only the same quantity of goods. Profits on capital would be the same both nominally and in reality. Wages are usually measured by the amount of silver paid, so when that amount increases, wages appear to rise even when they haven't really. But profits are not measured by the number of coins received; they're measured by the proportion those coins bear to the total capital invested. In a particular country, five shillings a week might be the standard wage, and ten percent the standard profit rate. But if the country's total capital remains the same, the competition among its various owners will remain the same too. They'll all trade with the same advantages and disadvantages. The normal ratio between capital and profit would therefore be unchanged, and so would the normal interest rate — since what can be paid for the use of money is necessarily determined by what can be earned through the use of it.

Now consider the opposite case: an increase in the quantity of goods produced annually, while the amount of money in circulation stays the same. This would produce many important effects beyond simply raising the value of money. The country's capital, though it might nominally look the same, would actually have grown. The same quantity of money would command a greater quantity of labor. The productive workforce it could support would be larger, and demand for labor would therefore increase. Wages would naturally rise with demand, even though they might appear to fall. Workers might be paid in fewer coins, but those fewer coins could buy more goods than the larger amount had bought before.

Profits on capital would fall both in reality and in appearance. With the country's total capital having grown, competition among capital owners would naturally intensify. They'd be forced to accept a smaller share of the output produced by the workers their capital employed. The interest rate, always tracking profits, could in this way fall substantially — even though the value of money, or the quantity of goods any given sum could buy, had increased greatly.

In some countries, interest on loans has been prohibited by law. But since money can be put to profitable use everywhere, something ought to be paid for the use of it everywhere. Experience has shown that this kind of prohibition, far from preventing excessive interest charges, actually makes them worse. The borrower ends up paying not only for the use of the money but for the risk the lender takes by accepting payment in violation of the law. The borrower is forced, so to speak, to insure his lender against the penalties for charging interest.

In countries where interest is permitted, the law usually sets a maximum rate to prevent predatory lending. This legal maximum should always be set somewhat above the lowest market rate — the rate charged to borrowers who can offer the best possible security. If the legal rate is set below the lowest market rate, the effect is nearly the same as a total ban on interest. Lenders won't lend for less than the use of their money is worth, and borrowers will have to compensate lenders for the legal risk. If it's set exactly at the lowest market rate, it destroys — for honest people who obey the law — the credit of everyone who can't offer absolutely first-rate security, driving them to loan sharks. In a country like Great Britain, where money is lent to the government at three percent and to private individuals with good security at four to four and a half percent, the current legal maximum of five percent is probably about right.

The legal maximum, it should be noted, should be somewhat above but not far above the lowest market rate. If Britain's legal interest rate were set as high as eight or ten percent, the majority of lending would flow to spendthrifts and speculators — the only people willing to pay such rates. Sensible people, who won't pay more for the use of money than a portion of what they expect to earn with it, wouldn't enter the bidding. A large share of the country's capital would end up in the hands most likely to waste and destroy it, instead of the hands most likely to use it productively and profitably.

When the legal rate is set just slightly above the lowest market rate, on the other hand, sensible borrowers are universally preferred over spendthrifts and speculators. The lender earns nearly as much interest from sensible borrowers as he would dare charge the reckless ones, and his money is much safer. A large share of the country's capital thus ends up in the hands most likely to use it to good advantage.

No law can push the common interest rate below the lowest ordinary market rate at the time the law is enacted. Despite the edict of 1766, by which the French king tried to reduce the interest rate from five to four percent, money continued to be lent in France at five percent, the law being evaded in various ways.

The ordinary market price of land, it should be noted, depends everywhere on the ordinary market rate of interest. A person with capital who wants to earn a return without the trouble of investing it himself has to choose between buying land and lending money at interest. The greater security of land, along with other advantages that landholding almost everywhere enjoys, will generally make him willing to accept a lower return from land than he could get from lending. These advantages are enough to offset a certain difference in returns — but only a certain difference. If land rents fall too far below the interest rate on money, nobody will buy land, which will soon drive its price down. If land's advantages more than compensate for the difference, everybody will want to buy land, which will drive its price up.

When interest rates were at ten percent, land typically sold for ten to twelve years' worth of rent. As interest rates fell to six, five, and four percent, land prices rose to twenty, twenty-five, and thirty years' rent. The market interest rate is higher in France than in England, and land prices are correspondingly lower. In England, land typically sells for thirty years' rent; in France, for twenty.

Chapter V: Of the Different Employment of Capitals

Although all capital is ultimately directed toward maintaining productive labor, the amount of productive labor that equal amounts of capital can set in motion varies enormously depending on how it's used. So does the value it adds to the annual output of the country's land and labor.

Capital can be employed in four different ways. First, in obtaining the raw materials that society needs for use and consumption each year. Second, in manufacturing and processing those raw materials into finished goods ready for use. Third, in transporting either raw or finished goods from places where they're abundant to places where they're in demand. Fourth, in breaking bulk — dividing particular quantities of either raw or finished goods into the small portions that individual buyers need.

The first type includes everyone who invests in improving or cultivating land, mines, or fisheries. The second includes all manufacturing business owners. The third includes all wholesale merchants. The fourth includes all retailers. It's hard to think of any use of capital that doesn't fall into one of these four categories.

Each of these four uses is essential — either to the existence or expansion of the other three, or to the general convenience of society.

Without capital invested in producing raw materials in sufficient quantity, neither manufacturing nor trade of any kind could exist.

Without capital invested in processing the raw materials that require significant preparation before they're fit for use, those materials either wouldn't be produced (because there'd be no demand for them) or, if they grew naturally, would have no exchange value and add nothing to society's wealth.

Without capital invested in transporting raw and finished goods from where they're plentiful to where they're needed, no more could be produced in any area than what the local population consumed. The merchant's capital exchanges the surplus output of one place for that of another, encouraging industry and increasing enjoyment in both.

Without capital invested in breaking and dividing raw or finished goods into the small quantities that individual buyers need, everyone would have to purchase far more of each item than they actually needed at the moment. If there were no butchers, for example, everyone would have to buy a whole ox or a whole sheep at a time. This would be inconvenient for the rich and disastrous for the poor. If a poor worker had to buy a month's or six months' provisions at once, a large part of the capital he uses for his tools and equipment — capital that earns him a return — would have to be diverted to buying food in bulk, earning him nothing. Nothing could be more convenient for such a person than being able to buy his food day by day, or even hour by hour, as he needs it. This allows him to keep almost all his resources working as productive capital. He can produce more valuable work, and the additional profits he earns more than compensate for the markup the retailer adds to the goods.

The prejudice that some political writers hold against shopkeepers and tradesmen is completely unfounded. Far from needing to be taxed or have their numbers restricted, retailers can never multiply enough to harm the public — though they can certainly multiply enough to harm each other. The quantity of groceries, for example, that can be sold in a particular town is limited by local demand. The capital that can be employed in the grocery business therefore can't exceed what's needed to supply that demand. If this capital is split between two grocers, their competition will tend to make both sell cheaper than if one grocer had a monopoly. Split it among twenty, and the competition is that much greater, while the chance of them colluding to raise prices is that much smaller. Their competition might ruin some of them, but that's their concern, and they can safely be trusted to manage it themselves. Competition can never hurt consumers or producers. On the contrary, it forces retailers to sell cheaper and buy at higher prices than if the trade were monopolized by one or two people.

Some retailers may occasionally trick a gullible customer into buying something he doesn't need. But this evil is too trivial to warrant government attention, and restricting the number of retailers wouldn't prevent it anyway. It's not the large number of pubs that causes widespread drunkenness among ordinary people. It's the disposition toward drunkenness, arising from other causes, that creates the demand for a large number of pubs.

The people whose capital is employed in any of these four ways are themselves productive laborers. Their labor, when properly directed, becomes embedded in the product they work on and generally adds to its price at least the value of their own maintenance and consumption. The profits of the farmer, the manufacturer, the wholesale merchant, and the retailer all come from the price of the goods that the first two produce and the last two buy and sell. But equal amounts of capital employed in each of these four ways will set in motion very different quantities of productive labor, and will increase the value of the country's annual output in very different proportions.

The retailer's capital, along with its profits, replaces the capital of the wholesale merchant from whom he buys goods, enabling the merchant to continue his business. The retailer himself is the only productive worker his capital directly employs. His profits represent the entire value that his capital's employment adds to the country's annual output.

The wholesale merchant's capital, along with its profits, replaces the capital of the farmers and manufacturers from whom he buys raw and finished goods, enabling them to continue their businesses. It's mainly through this service that the merchant indirectly supports the productive labor of society and increases the value of its annual output. His capital also employs the sailors and transport workers who move his goods from one place to another, and it adds to the price of those goods the value of not only his profits but their wages as well. This is all the productive labor his capital directly sets in motion, and all the value it directly adds to the annual output. In both respects, though, its contribution is considerably greater than the retailer's capital.

Part of the manufacturer's capital is invested as fixed capital in tools and equipment, which replaces (with a profit) the capital of other craftsmen who made those tools. Part of his circulating capital goes to purchasing materials, replacing (with their profits) the capital of the farmers and miners who supplied them. But a large portion is always, either annually or more frequently, distributed among the workers he employs. It increases the value of those materials by the amount of their wages, plus the owner's profits on the whole investment in wages, materials, and equipment. Manufacturing capital therefore directly sets in motion a much greater quantity of productive labor, and adds a much greater value to the annual output, than an equal amount of wholesale merchant's capital.

But no equal amount of capital sets as much productive labor in motion as the farmer's. Not only his workers but his working animals are productive laborers. In agriculture, moreover, nature labors alongside humans. Although nature's labor costs nothing, its output has just as much value as that of the most expensive workers. The most important agricultural operations seem intended not so much to increase the fertility of nature (though they do that too) as to direct it toward producing the plants most useful to humans. A field overgrown with thorns and brambles may produce as much vegetation as the best-cultivated vineyard or grain field. Planting and tilling regulate nature's active fertility more than they create it. After all the farmer's labor, a great part of the work is always left for nature to finish.

The workers and draft animals employed in agriculture therefore don't just cause the reproduction of a value equal to their own consumption (or to the capital that employs them, plus the owner's profits) in the way that manufacturing workers do. They cause the reproduction of a much greater value. Over and above the farmer's capital and all its profits, they regularly generate enough to pay the landlord's rent. This rent can be thought of as the produce of nature's powers, the use of which the landlord lends to the farmer. It's larger or smaller depending on the extent of those natural powers — in other words, depending on the land's natural or improved fertility. It represents the work of nature that remains after deducting everything that can be attributed to human effort. It's rarely less than a fourth, and often more than a third, of the total output. No equal investment in manufacturing can ever generate such a large total return. In manufacturing, nature does nothing; humans do everything, and the output must always be proportional to the effort that produces it.

Capital employed in agriculture therefore not only sets in motion a greater quantity of productive labor than an equal capital in manufacturing, but in proportion to the productive labor it employs, it adds a much greater value to the annual output — to the country's real wealth and income. Of all the ways capital can be used, it is by far the most beneficial to society.

The capital employed in a country's agriculture and retail trade must always remain within that country. These uses are tied to a specific location — the farm, the shop. This capital must also generally (with some exceptions) belong to residents of that country.

A wholesale merchant's capital, by contrast, has no fixed or necessary home. It may wander from place to place, following wherever it can buy cheap or sell at a profit.

A manufacturer's capital must of course be located where the manufacturing takes place, but where that is isn't always predetermined. The factory may be far from both the source of its raw materials and the market for its finished goods. Lyon is very far from both the places that supply its manufacturing materials and the places that consume its products. The fashionable people of Sicily wear silks made in other countries from materials Sicily itself produces. Part of Spain's wool is manufactured in Great Britain, and some of that cloth is then shipped back to Spain.

Whether the merchant who exports a country's surplus output is a native or a foreigner matters very little. If he's a foreigner, the country's productive workforce is smaller by exactly one person, and the value of its annual output is reduced by that one person's profits. The sailors and transport workers he employs may belong indifferently to his own country, to the producing country, or to some third country, just as if he were a native. A foreign merchant's capital adds value to the surplus output just as effectively as a native's, by exchanging it for something in demand at home. It replaces the capital of the producer just as effectively, enabling him to continue his business — the chief way in which a wholesale merchant's capital supports productive labor and increases the value of a society's annual output.

It matters more that a manufacturer's capital should be located within the country, since it necessarily employs more productive labor and adds more value to the annual output. Still, even foreign manufacturing capital can be very useful. The British manufacturers who process flax and hemp imported annually from the Baltic coast are surely very useful to the countries that produce those materials. Those raw materials are part of those countries' surplus output — output that, if not regularly exchanged for something in demand there, would have no value and would soon stop being produced. The merchants who export them replace the capital of the producers, encouraging continued production. And the British manufacturers replace the capital of those merchants.

A country, like an individual person, may frequently lack the capital to do everything at once — to improve and cultivate all its land, to manufacture and process all its raw materials for consumption, and to transport the surplus (whether raw or manufactured) to the distant markets where it can be exchanged for goods in demand at home. The inhabitants of many parts of Great Britain don't have the capital to improve and cultivate all their land. Much of the wool from southern Scotland is, for want of local manufacturing capital, carried overland on very bad roads to be manufactured in Yorkshire. Many small manufacturing towns in Britain lack the capital to transport their products to distant markets with demand for them. If such towns have any merchants at all, those merchants are really just agents for wealthier merchants based in the larger commercial cities.

When a country's capital isn't sufficient for all three purposes, the greater the share devoted to agriculture, the greater the quantity of productive labor it sets in motion within the country, and the greater the value it adds to the annual output. After agriculture, manufacturing capital sets the most productive labor in motion and adds the most value. Capital employed in the export trade has the least effect of the three.

Of course, a country that lacks sufficient capital for all three purposes hasn't yet reached the level of prosperity it seems naturally destined for. But trying prematurely to do all three with insufficient capital is certainly not the fastest way for a society to build up that capital — any more than it would be for an individual. A nation's total capital has limits just like an individual's and can accomplish only so much. National capital grows the same way an individual's does: by people continually accumulating and adding to it whatever they save from their income. It will therefore grow fastest when employed in the way that generates the greatest income for the country's inhabitants, since that's what enables them to save the most. And the income of all a country's inhabitants is necessarily proportional to the value of their annual output.

This is the principal reason why the American colonies have progressed so rapidly toward wealth and greatness: almost all their capital has so far been employed in agriculture. They have no manufacturing to speak of, apart from the basic household production that naturally accompanies agricultural development — the work of women and children in every family. The greater part of America's export and coastal trade is carried on with the capital of merchants based in Great Britain. Even the retail stores and warehouses in some provinces, particularly Virginia and Maryland, belong to merchants living in the mother country — one of the few examples of a country's retail trade being conducted with the capital of non-residents.

If the Americans were to stop importing European manufactures — whether through collective action or any other kind of force — and divert a significant share of their capital into manufacturing by giving a monopoly to their own countrymen, they would slow rather than accelerate the growth of their annual output, and obstruct rather than promote their country's progress toward real wealth and greatness. This would be even more true if they tried to monopolize their entire export trade.

The course of human prosperity, indeed, seems rarely to have lasted long enough to allow any great country to accumulate enough capital for all three purposes — unless perhaps we credit the extraordinary accounts of the wealth and development of China, ancient Egypt, and ancient India. Even those three countries, the wealthiest by all accounts that ever existed, are primarily renowned for their superiority in agriculture and manufacturing. They don't appear to have been notable for foreign trade. The ancient Egyptians had a superstitious aversion to the sea. A similar attitude prevails among the Indians. And the Chinese have never excelled in foreign commerce. The greater part of these three countries' surplus output seems to have always been exported by foreigners, who gave in exchange whatever was in demand locally — often gold and silver.

This is how the same amount of capital will, in any country, set a greater or smaller quantity of productive labor in motion and add greater or lesser value to the annual output, depending on how it's divided among agriculture, manufacturing, and wholesale trade. The differences are also very large depending on the type of wholesale trade involved.

All wholesale trade — all buying in order to sell again in bulk — can be divided into three types: the domestic trade, the foreign trade of consumption, and the carrying trade. The domestic trade involves buying the output of one part of the country and selling it in another, encompassing both inland and coastal trade. The foreign trade of consumption involves buying foreign goods for domestic use. The carrying trade involves handling the commerce of foreign countries — carrying the surplus output of one country to another.

Capital employed in buying the output of one part of the country to sell in another generally replaces, with each transaction, two separate capitals that had been invested in the country's agriculture or manufacturing, enabling them to continue operating. When it sends out a certain value of goods from the merchant's home base, it generally brings back at least an equal value of other goods. When both are domestic products, every such transaction necessarily replaces two domestic capitals that had both been supporting productive labor. The capital that sends Scottish manufactures to London and brings back English grain and manufactures to Edinburgh necessarily replaces, with every transaction, two British capitals that had both been invested in British agriculture or manufacturing.

Capital employed in buying foreign goods for home consumption, when the purchase is made with domestic products, also replaces two distinct capitals with each transaction — but only one of them supports domestic industry. The capital that sends British goods to Portugal and brings back Portuguese goods replaces only one British capital with each transaction. The other is Portuguese. So even if the foreign trade of consumption turns over as quickly as the domestic trade, the capital invested in it gives only half the boost to domestic industry and productive labor.

But the foreign trade of consumption almost never turns over as quickly as the domestic trade. Domestic trade returns generally come in within the year, and sometimes three or four times a year. Foreign trade returns seldom come in before year-end, and sometimes not for two or three years. A capital employed in domestic trade may therefore complete twelve full cycles — being sent out and returned twelve times — before a capital employed in foreign trade completes a single one. If the two capitals are equal, the domestic one gives twenty-four times more support and encouragement to the country's industry.

Foreign goods for domestic consumption may sometimes be purchased not with domestic products but with other foreign goods. Those other foreign goods, however, must themselves have been purchased either directly with domestic output or with something else that was. (War and conquest are the only exceptions — foreign goods can never be acquired except in exchange for something produced at home, either directly or through a chain of trades.) The effects of capital employed in such a roundabout foreign trade of consumption are therefore the same as those of the most direct version, except that the final returns are likely to be even more distant, depending on the returns of two or three separate foreign trades.

If the flax and hemp of Riga are purchased with Virginia tobacco, which had been purchased with British manufactures, the merchant must wait for the returns from two separate foreign trades before he can use the same capital to buy another batch of British goods. If the Virginia tobacco had been purchased not with British manufactures but with Jamaican sugar and rum (which had been purchased with British manufactures), he must wait for the returns from three. Whether these two or three foreign trades are handled by one merchant or by two or three different ones makes no difference to the country, though it may to the individual merchants. Three times as much capital must be employed to exchange a certain value of British manufactures for a certain quantity of flax and hemp through this roundabout route as would be needed if the manufactures and the flax and hemp had been exchanged directly. Capital employed in roundabout foreign trade will therefore generally give less support to a country's productive labor than an equal capital in a more direct trade.

Whatever foreign commodity is used to purchase foreign goods for domestic consumption, it makes no essential difference to the nature of the trade or to the support it gives to the producing country's productive labor. If the purchase is made with Brazilian gold or Peruvian silver, that gold and silver — like Virginia tobacco — must have been bought with something that was either domestic output or was purchased with domestic output. The foreign trade conducted through gold and silver therefore has all the advantages and disadvantages of any equally roundabout foreign trade, and replaces the capital supporting productive labor just as quickly or slowly.

It actually has one advantage over other equally roundabout trades: gold and silver, because of their small bulk and great value, are cheaper to transport than almost any other foreign goods of equal value. Their shipping costs are lower, their insurance no higher, and no goods are less likely to be damaged in transit. An equal quantity of foreign goods can therefore often be purchased with less domestic output when gold and silver serve as the intermediate step. The country's demand may frequently be satisfied more completely and more cheaply this way. Whether the continual export of these metals is likely to impoverish the country in any other way is a question I'll examine at length later.

The portion of any country's capital employed in the carrying trade is entirely withdrawn from supporting that country's productive labor and devoted to supporting the productive labor of foreign countries. Although each carrying-trade transaction may replace two separate capitals, neither of those capitals belongs to the carrying country. The capital of a Dutch merchant who carries Polish grain to Portugal and brings Portuguese fruit and wine back to Poland replaces two capitals with each transaction — but neither had been supporting Dutch productive labor. One supported Polish production and the other Portuguese. Only the profits return regularly to Holland, and those profits are the entire addition this trade makes to Holland's annual output.

When a country's carrying trade is conducted with its own ships and sailors, the portion of capital that pays for shipping is distributed among, and employs, a certain number of the country's productive workers. In fact, nearly every nation with a significant carrying trade has conducted it this way. The trade probably gets its name from this practice — such countries being the "carriers" for other nations. But this isn't essential to the trade's nature. A Dutch merchant could, for example, carry goods between Poland and Portugal using not Dutch but British ships. And presumably he does so on some occasions.

This is why the carrying trade has been thought to be especially beneficial for a country like Great Britain, whose defense depends on the size of its navy and merchant fleet. But the same capital could employ just as many sailors and ships in the foreign trade of consumption, or even in coastal domestic trade, as in the carrying trade. The number of sailors and ships any given capital can employ depends not on the type of trade but partly on the bulk of goods relative to their value, and partly on the distance between ports — primarily the former. The coal trade from Newcastle to London, for example, employs more shipping than all of England's carrying trade, even though the ports aren't far apart. Subsidizing the carrying trade to attract a larger share of the country's capital into it won't necessarily increase the country's shipping.

To sum up: capital employed in a country's domestic trade generally supports more productive labor and increases the value of annual output more than an equal capital in the foreign trade of consumption. And capital in the foreign trade of consumption has a similar advantage over an equal capital in the carrying trade.

A country's wealth — and its power, insofar as power depends on wealth — must always be proportional to the value of its annual output, the fund from which all taxes must ultimately be paid. The great objective of every country's economic policy should therefore be to increase its wealth and power. Policy should give no preference or special encouragement to the foreign trade of consumption over domestic trade, or to the carrying trade over either of the other two. It should neither force nor entice into either of those channels a larger share of the country's capital than would naturally flow there on its own.

Each of these different branches of trade, however, is not only beneficial but necessary and unavoidable when the natural course of events introduces it without any government interference.

When the output of any particular industry exceeds what domestic demand requires, the surplus must be sent abroad and exchanged for something in demand at home. Without such exports, that productive labor would have to stop, and the value of the country's annual output would decline. Great Britain generally produces more grain, woolens, and hardware than the domestic market requires. The surplus must therefore be exported and exchanged for goods in demand at home. Only through export can this surplus acquire a value sufficient to justify the labor and expense of producing it. This is why locations near the coast or along navigable rivers are advantageous for industry — they make it easy to export surplus output and exchange it for something more needed.

When the foreign goods purchased with surplus domestic output exceed domestic demand, the excess must be re-exported and exchanged for something the home market does want. About ninety-six thousand hogsheads of tobacco are purchased annually in Virginia and Maryland with part of Britain's surplus industrial output. But Britain's domestic demand requires perhaps no more than fourteen thousand. If the remaining eighty-two thousand couldn't be sent abroad and exchanged for goods in demand at home, those tobacco imports would have to stop entirely — and with them, the productive labor of all those British workers currently employed in making the goods used to buy those eighty-two thousand hogsheads. Those goods, being part of Britain's output but having no market either at home or abroad, would stop being produced. The most roundabout foreign trade can therefore sometimes be just as necessary for supporting a country's productive labor and the value of its annual output as the most direct.

When a country's capital grows so large that it can't all be employed in supplying domestic consumption and supporting domestic productive labor, the surplus naturally spills over into the carrying trade, performing the same functions for other countries. The carrying trade is the natural effect and symptom of great national wealth, but it doesn't seem to be its cause. Statesmen who've tried to encourage it with special subsidies seem to have confused the effect with the cause.

Holland, by far the richest country in Europe relative to its territory and population, accordingly has the largest share of Europe's carrying trade. England, perhaps the second-richest European country, is also thought to have a considerable share — though what commonly passes for England's carrying trade will often turn out to be merely a roundabout foreign trade of consumption. This largely describes the trades that bring goods from the East Indies, West Indies, and America to various European markets. Those goods are generally purchased either directly with British industrial output or with something else bought with that output, and the final proceeds are generally used or consumed in Britain. The trade conducted by British ships between different Mediterranean ports, and some similar trade by British merchants between different ports in India, probably constitute the main branches of what is truly Britain's carrying trade.

The potential size of the domestic trade is necessarily limited by the value of surplus output from all the different parts of the country that need to trade with each other. The potential size of the foreign trade of consumption is limited by the value of the entire country's surplus plus what can be purchased with it. The potential size of the carrying trade is limited by the value of the surplus output of every country in the world. Its possible scale is therefore practically infinite compared to the other two, and it's capable of absorbing the greatest amounts of capital.

The only thing that determines how a capital owner invests — whether in agriculture, manufacturing, or some branch of wholesale or retail trade — is his own private profit. The different quantities of productive labor these investments set in motion, and the different amounts of value they add to the country's annual output, never cross his mind.

In countries where agriculture is the most profitable line of business, and where farming and land improvement are the most direct paths to wealth, individual capital will naturally flow into the uses most beneficial to society as a whole. But agricultural profits don't seem to have any advantage over other investments anywhere in Europe. In recent years, promoters in every corner of Europe have dazzled the public with spectacular claims about the profits to be made from cultivating and improving land. Without examining their calculations in detail, one simple observation proves them wrong. We see every day the most spectacular fortunes built in a single lifetime through trade and manufacturing, often starting from very small capital and sometimes from none at all. But not a single example of such a fortune built through farming in the same timeframe, from similar beginnings, has perhaps occurred anywhere in Europe during the present century. Yet across all the great European countries, much good land still lies uncultivated, and most of what is cultivated is far from being improved to its full potential. Agriculture is therefore nearly everywhere capable of absorbing far more capital than has ever been invested in it.

What circumstances in European policy have given urban trades such an advantage over rural ones — so that private individuals frequently find it more profitable to invest their capital in the most distant carrying trades of Asia and America than in improving and cultivating the most fertile fields in their own neighborhood? This is the question I'll attempt to answer fully in the two books that follow.

Book III: Of the Different Progress of Opulence in Different Nations

Chapter I: Of the Natural Progress of Opulence

The most important trade in every civilized society is the one between city and country. It consists of exchanging raw materials for manufactured goods — either directly, or through money, or through some form of paper that represents money. The country supplies the city with food and raw materials for production. The city repays this by sending a portion of its manufactured goods back to the people in the countryside. Since the city doesn't — and can't — reproduce raw materials on its own, it's fair to say that the city gets its entire wealth and sustenance from the country.

But don't let that fool you into thinking the city's gain is the country's loss. The gains run both ways. The division of labor here, as in all other cases, benefits everyone involved. Country people can buy far more manufactured goods — with a much smaller amount of their own labor — than if they tried to make those goods themselves. Meanwhile, the city provides a market for the country's surplus production — everything beyond what's needed to feed the farmers themselves. That's where rural people trade their surplus for things they actually want.

The bigger and wealthier the city, the bigger the market it offers to the countryside — and a bigger market is always better for more people. The grain grown within a mile of a city sells for the same price as grain brought in from twenty miles away. But the price of that distant grain has to cover not just the cost of growing it, but the cost of hauling it to market, plus a reasonable profit for the farmer. So farmers near the city pocket extra profit — they get the same selling price but without the transportation costs, and they save on shipping costs for goods they buy too. Just compare the farms near any major city with those in remote areas, and you'll see immediately how much the countryside benefits from urban commerce. Among all the ridiculous theories people have floated about the "balance of trade," nobody has ever seriously argued that the country loses from its trade with the city, or the city from its trade with the country that feeds it.

Since food and basic necessities obviously have to come before luxuries and comforts, the industries that produce necessities must naturally develop before those that provide luxuries. Farming and land improvement — which provide our subsistence — must therefore come before the growth of cities, which only provide comforts and luxuries. Cities can only be sustained by the surplus that the countryside produces beyond what the farmers themselves need. So cities can only grow as that surplus grows. Of course, a city doesn't always get its food from the nearby countryside, or even from its own country — it might import from very distant places. But that's not really an exception to the general rule; it has simply caused wealth to develop at different rates in different times and places.

This natural order — where necessity leads the way — isn't just imposed by circumstances. It's also promoted by natural human inclination. If human institutions had never interfered with these natural tendencies, cities would never have grown beyond what the farming in their surrounding territory could support — at least not until every bit of that territory was fully cultivated and improved.

Here's the thing: given equal or roughly equal profits, most people will choose to invest their capital in farming and land improvement rather than in manufacturing or foreign trade. Someone who invests in land can see and control their investment directly, and their fortune is far less vulnerable to disaster than a merchant's, who has to entrust his capital not just to wind and waves, but to the even more unpredictable forces of human foolishness and dishonesty — extending large lines of credit to people in distant countries whose character and circumstances he can barely know. A landowner's capital, tied up in improvements to his land, is about as secure as anything in human affairs can be. On top of that, the beauty of the countryside, the pleasures of rural life, the peace of mind it offers, and — wherever unjust laws don't interfere — the real independence it provides, have a charm that attracts almost everyone. Since farming was humanity's original occupation, people at every stage of civilization seem to retain a special fondness for it.

Of course, farming can't be carried on without the help of skilled workers — not without great inconvenience and constant interruption. Blacksmiths, carpenters, wheelwrights, plow-makers, masons, bricklayers, tanners, shoemakers, and tailors are all people a farmer regularly needs. And these craftsmen need each other's services too. Since they're not tied to a specific plot of land the way a farmer is, they naturally settle near one another, forming a small town or village. The butcher, the brewer, and the baker soon join them, along with many other craftsmen and shopkeepers who supply their various needs — further growing the town.

The people of the town and those of the country are really servants to one another. The town is a permanent marketplace where country people come to exchange their raw produce for manufactured goods. This trade supplies the townspeople with both the materials for their work and the food they live on. The quantity of finished goods they sell to the countryside determines how much raw material and food they can buy. So their employment and livelihood can only grow in proportion to the countryside's growing demand for finished goods — and that demand can only grow as farming expands and improves. If human institutions had never disrupted the natural course of things, the growth and wealth of cities would always have been a direct consequence of — and proportional to — the improvement and cultivation of the surrounding countryside.

You can see this in our North American colonies, where uncultivated land is still available on easy terms. No large-scale manufacturing for distant markets has ever been established in any of their towns. When a craftsman there accumulates a bit more capital than he needs for his own business serving the local area, he doesn't try to start a factory for selling goods far away. Instead, he uses it to buy and improve uncultivated land. He goes from being a craftsman to being a planter. Neither the high wages nor the comfortable living that the colonies offer to craftsmen can convince him to keep working for other people rather than for himself. He feels that a craftsman is the servant of his customers, dependent on them for his living — but a planter who cultivates his own land and feeds his family from his own labor is truly his own master, independent of the whole world.

In countries where there's either no uncultivated land available, or none that can be had at a reasonable price, things work differently. A craftsman who accumulates more capital than he can use doing odd jobs for the local area tries to produce goods for more distant markets. The blacksmith sets up some kind of ironworks; the weaver starts a linen or wool operation. Over time, these different industries gradually subdivide, improve, and refine themselves in all sorts of ways — which is easy enough to imagine and doesn't need further explanation.

When it comes to investing capital, manufacturing is naturally preferred over foreign trade — given equal or nearly equal profits — for the same reason that farming is naturally preferred over manufacturing. Just as a farmer's capital is more secure than a manufacturer's, a manufacturer's capital — which is always within his sight and control — is more secure than a foreign merchant's. In every period of every society, whatever surplus of raw and manufactured goods isn't wanted domestically has to be sent abroad and exchanged for something that is wanted at home. But it matters very little whether the capital that carries this surplus abroad belongs to a domestic or a foreign trader. If a society doesn't yet have enough capital both to fully cultivate all its land and to fully manufacture all its raw produce, there's actually a real advantage in having foreigners export the raw surplus — so the society's own capital can be put to more productive use. The wealth of ancient Egypt, China, and India demonstrates well enough that a nation can become enormously prosperous even when foreigners handle most of its export trade. And our North American and West Indian colonies would have grown much more slowly if no foreign capital had been invested in exporting their surplus produce.

So according to the natural course of things, the bulk of a growing society's capital flows first into agriculture, then into manufacturing, and finally into foreign trade. This order is so natural that I believe it has been observed, to some degree, in every society that had any territory at all. Some land had to be cultivated before any significant cities could develop, and some basic manufacturing had to take place in those cities before anyone could think of engaging in foreign trade.

But here's the twist: although this natural order must have been followed to some extent in every society, in all the modern nations of Europe it has been, in many ways, completely reversed. Foreign trade in their cities introduced all the finer manufactures — the kind of goods suitable for selling to distant markets. And manufacturing and foreign trade together gave rise to the major improvements in agriculture. The customs and practices left over from their original feudal governments — which persisted long after those governments had substantially changed — forced European nations into this unnatural, backward order of development.

Chapter II: Of the Discouragement of Agriculture in the Ancient State of Europe After the Fall of the Roman Empire

When the Germanic and Scythian nations overran the western provinces of the Roman Empire, the chaos that followed such a massive upheaval lasted for centuries. The looting and violence these invaders inflicted on the existing population destroyed the trade between towns and countryside. The towns were abandoned, the farmland left uncultivated, and the western provinces of Europe — which had enjoyed considerable prosperity under Rome — sank into the deepest poverty and disorder.

During all this chaos, the chiefs and leading warlords of the invading nations seized most of the land. Much of it went uncultivated, but none of it — whether farmed or not — was left without an owner. It was all grabbed up, and most of it ended up in the hands of a few powerful landlords.

This original land grab, while a major problem, might have been only a temporary one. The great estates could have been broken up over time, divided through inheritance or sold off in pieces. But two legal institutions prevented that. The law of primogeniture stopped estates from being divided through inheritance. And the introduction of entails prevented them from being broken up through sale.

When land is thought of simply as a source of income and enjoyment — the way we think of personal property — the natural rule of inheritance divides it equally among all the children. After all, a father presumably cares equally about the well-being of each child. This was how the Romans did it: they made no distinction between older and younger children, or between sons and daughters, when it came to inheriting land — just as we make no distinction when dividing personal property today.

But when land was seen as a source not just of income but of power and protection, people decided it was better for it to pass undivided to a single heir. In those lawless times, every great landlord was essentially a petty prince. His tenants were his subjects. He was their judge and, in some ways, their lawmaker in peacetime and their military commander in wartime. He waged war at his own discretion — frequently against his neighbors, sometimes against his king. The security of a landed estate, and the protection its owner could offer everyone living on it, depended on its size. To divide it was to destroy it, leaving every part vulnerable to being attacked and swallowed up by neighboring lords.

So the law of primogeniture gradually took hold for landed estates, for the same reason it's generally been adopted for monarchies (though not always from the very start). To keep the power — and therefore the security — of a monarchy from being weakened by division, it has to pass intact to one child. And which child gets this enormous advantage has to be settled by some general rule based not on the debatable question of personal merit, but on some obvious, indisputable difference. Among children of the same family, the only indisputable differences are sex and age. Males are universally preferred over females, and when everything else is equal, the older child takes precedence over the younger. That's the origin of primogeniture and what's called lineal succession.

Laws frequently remain in force long after the circumstances that created them — the only circumstances that ever made them reasonable — have completely disappeared. In modern Europe, the owner of a single acre is just as secure in his possession as the owner of a hundred thousand acres. Yet primogeniture is still respected, and since no institution is better suited to propping up family pride and aristocratic distinctions, it will probably endure for centuries to come. In every other respect, nothing could be more contrary to the real interests of a large family than a rule that enriches one child by impoverishing all the rest.

Entails are the natural offspring of primogeniture. They were created to preserve a specific line of inheritance — the idea that primogeniture first introduced — and to prevent any part of the original estate from leaving the designated family line through gifts, bequests, or sales, whether caused by the foolishness or the bad luck of any of its successive owners. Entails were completely unknown to the Romans. Neither their substitutions nor their fideicommisses bear any resemblance to entails, though some French lawyers have tried to dress up the modern institution in the language and clothing of those ancient Roman ones.

When great estates were essentially small kingdoms, entails might not have been unreasonable. Like the fundamental laws of some monarchies, they may have often prevented the security of thousands from being endangered by the whims or recklessness of one person. But in modern Europe, where small estates are just as well protected by law as great ones, entails are completely absurd. They rest on the most ridiculous assumption imaginable: that each successive generation does not have an equal right to the earth and everything on it, but that the property of the present generation should be controlled and restricted according to the whims of people who died perhaps five hundred years ago.

Yet entails are still respected across most of Europe — especially in countries where noble birth is required for holding civil or military office. Entails are considered necessary for maintaining the nobility's exclusive claim to the top positions. And since this class has already grabbed one unjust advantage over their fellow citizens, the thinking goes that they might as well have another — to keep their poverty from making the whole arrangement look ridiculous. English common law supposedly abhors perpetuities, and entails are accordingly more restricted in England than in any other European monarchy. But even England isn't entirely free of them. In Scotland, more than a fifth — perhaps more than a third — of all the land in the country is currently believed to be under strict entail.

So enormous tracts of uncultivated land were not only seized by particular families, but the possibility of ever dividing those tracts was blocked as completely as possible, forever. It rarely happens, though, that a great landowner is also a great improver of the land. In the chaotic times that gave birth to these feudal institutions, great proprietors were busy enough defending their own territories or expanding their power over their neighbors'. They had no time to worry about farming and land improvement. When the establishment of law and order finally gave them the leisure, they often lacked the inclination, and almost always lacked the necessary skills.

If a great landlord's household expenses equaled or exceeded his income — as they very frequently did — he had no capital to invest in improvement. If he was economical, he usually found it more profitable to use his savings to buy more land rather than improve what he already had. Improving land profitably, like any business venture, requires careful attention to small savings and small gains — something a person born to great wealth, even a naturally frugal one, is rarely capable of. Such a person's situation naturally inclines him to focus on elegance that pleases his eye rather than profit he doesn't really need. The refinement of his clothes, his carriages, his house, and his furniture — these are things he's been trained to care about since childhood. That mindset follows him when he turns to land improvement. He'll beautify four or five hundred acres around his mansion at ten times what the land is worth after all his improvements — and then realize that if he tried to improve his whole estate the same way (and he has no taste for any other approach), he'd go bankrupt before finishing a tenth of it.

There are still estates in both England and Scotland that have remained in the same families unbroken since the age of feudal chaos. Compare the condition of those estates with the land of small proprietors in their neighborhood, and you won't need any other evidence to see how badly vast inherited estates hold back agricultural improvement.

If little improvement could be expected from the great landlords, even less could be hoped from the people who actually worked the land under them. In ancient Europe, the people who occupied and farmed the land were all tenants at the landlord's pleasure. They were all, or nearly all, slaves — though their slavery was milder than what the ancient Greeks and Romans practiced, or what existed in the West Indian colonies. These serfs were considered to belong more to the land than to their master personally. They could be sold with the land, but not separately. They could marry — with their master's consent — and he couldn't dissolve the marriage afterward by selling the husband and wife to different people. If he maimed or killed one of them, he faced some penalty, though usually a small one. But they couldn't own property. Anything they acquired belonged to their master, and he could take it whenever he pleased.

Whatever farming and improvement was carried out by such slaves was really done by their master. It was at his expense — the seed, the livestock, and the farming tools all belonged to him. It was for his benefit. The slaves got nothing but their daily food. So it was really the proprietor himself who farmed his own land, using his own bondsmen as labor. This form of slavery still existed in Russia, Poland, Hungary, Bohemia, Moravia, and other parts of Germany. Only in the western and southwestern provinces of Europe has it been gradually abolished entirely.

Even if big improvements rarely come from great proprietors, they're least likely of all when those proprietors use slaves as their workers. The experience of every age and nation demonstrates, I believe, that work done by slaves — though it appears to cost only their food and housing — is actually the most expensive labor of all. A person who can never own anything has no motivation except to eat as much as possible and work as little as possible. Any work he does beyond what's needed to keep himself alive can only be extracted through force, not through any self-interest. In ancient Italy, both Pliny and Columella noted how much grain farming declined, and how unprofitable it became for the master, once it fell under slave management. In Aristotle's time, things weren't much better in ancient Greece. Discussing the ideal republic described in the laws of Plato, Aristotle calculated that supporting five thousand idle men (the number of warriors supposedly needed for defense), along with their women and servants, would require a territory of boundless size and fertility — like the plains of Babylon.

Human pride makes people love to dominate, and nothing humiliates a person more than having to stoop to persuading those beneath him. So wherever the law allows it and the nature of the work can bear the cost, people will generally prefer slave labor to free labor. Sugar and tobacco plantations can afford the expense of slave cultivation. Growing grain, it seems, cannot — at least not in modern times. In the English colonies where grain is the main crop, the great majority of the work is done by free workers. The recent decision of the Quakers in Pennsylvania to free all their enslaved people is proof enough that the number couldn't have been very large. Had slaves made up a significant share of their property, they never could have agreed to such a resolution. In the sugar colonies, by contrast, all the work is done by slaves, and in the tobacco colonies a very large share of it. The profits of a sugar plantation in any of our West Indian colonies are generally much higher than those of any other type of farming known in either Europe or America. And the profits of tobacco, though lower than sugar, are higher than those of grain, as I've already noted. Both can cover the expense of slave labor, but sugar can afford it more easily than tobacco. The ratio of enslaved Black people to white people is accordingly much higher in the sugar colonies than in the tobacco colonies.

The slave cultivators of ancient times were gradually replaced by a type of farmer known in France as metayers — in Latin, coloni partiarii. They've been out of use in England for so long that I don't know of any English name for them. The landlord provided the seed, livestock, and farming tools — in short, all the capital needed to work the farm. The harvest was split equally between the landlord and the farmer, after setting aside enough to maintain the capital, which was returned to the landlord when the farmer left or was evicted.

Land worked by such tenants was cultivated at the landlord's expense, just like land worked by slaves. But there was one crucial difference. These tenants, being free people, could own property. And since they received a fixed share of the harvest, they had a clear incentive to make the total harvest as large as possible, so that their own share would be larger. A slave, by contrast, who can never own anything beyond his daily food, serves his own comfort by making the land produce as little as possible beyond what feeds him.

It was probably partly because of this advantage of the metayer system, and partly because kings — always jealous of the great lords — gradually encouraged serfs to assert themselves against their masters' authority, that serfdom eventually became more trouble than it was worth and gradually faded away across most of Europe. The exact time and manner in which this hugely important revolution happened is one of the most obscure questions in modern history. The Catholic Church claims great credit for it. And it's true that as early as the twelfth century, Pope Alexander III issued a decree for the general emancipation of slaves. But it seems to have been more of a pious suggestion than a law that demanded strict obedience. Slavery continued almost universally for several more centuries, until it was gradually abolished by the combined pressure of two interests: the landlords' (who found free tenants more productive) and the kings' (who wanted to weaken the lords). A serf who was freed but allowed to stay on the land, having no capital of his own, could only farm using what the landlord provided — and so he naturally became a metayer.

But even metayers had no reason to invest any of their own savings in improving the land, because the landlord — who invested nothing — took half of whatever it produced. If a tithe, which is only a tenth of the harvest, is a serious obstacle to improvement, then a tax amounting to half the harvest must have been an absolute barrier to it. A metayer might have an incentive to get as much as possible out of the land using the capital the landlord provided. But he had no incentive whatsoever to invest his own money in it.

In France, where five-sixths of the entire country is said to still be farmed by metayers, landlords complain that their tenants use the master's cattle for hauling goods rather than for farming — because they keep all the profits from hauling, but have to share farming profits with the landlord. This type of tenancy still exists in some parts of Scotland, where they're called steel-bow tenants. The ancient English tenants that legal authorities like Chief Baron Gilbert and Dr. Blackstone described as being more like the landlord's property managers than true farmers were probably the same sort of arrangement.

This system was gradually — very gradually — replaced by real farmers in the modern sense: people who farmed with their own capital and paid a fixed rent to the landlord. When such farmers had a lease for a set number of years, they sometimes found it worthwhile to invest some of their capital in improving the farm, since they could expect to recoup the investment, with a good profit, before the lease expired.

But even these farmers' position was extremely insecure for a long time, and still is in many parts of Europe. Before their lease expired, they could be legally evicted by anyone who bought the property — and in England, even through a legal fiction called a "common recovery." If they were illegally evicted through the landlord's brute force, the legal remedy available to them was deeply inadequate. It didn't always restore them to the land but merely awarded damages that never came close to covering the real loss.

Even in England — the country in Europe where independent farmers have always been most respected — it wasn't until around the time of Henry VII that the legal action of ejectment was invented. This gave the tenant the right to recover not just damages but actual possession of the land, through a process that didn't depend on the uncertain verdict of a single hearing. This remedy proved so effective that in modern practice, when a landlord needs to sue for possession, he rarely uses the legal actions that technically belong to him as landlord (the writ of right or the writ of entry) but instead sues in his tenant's name through the writ of ejectment.

In England, therefore, a tenant's legal security is equal to a property owner's. What's more, an English lease for life worth forty shillings a year or more counts as a freehold and entitles the leaseholder to vote for a member of Parliament. Since a large portion of independent farmers hold freeholds of this kind, the whole class of small farmers commands respect from their landlords because of the political influence this gives them. I don't believe there's anywhere else in Europe where a tenant would build on land he had no lease for, trusting only in his landlord's honor not to take advantage of such an important improvement. These laws and customs, so favorable to independent farmers, have probably contributed more to England's current greatness than all its much-celebrated trade regulations put together.

The law that protects the longest leases against all subsequent owners is, as far as I know, unique to Great Britain. It was introduced in Scotland as early as 1449 by a law of James II. Its beneficial effects, however, have been severely undermined by entails — since heirs under entail are generally forbidden from granting long leases, often limited to no more than one year. A recent act of Parliament has somewhat loosened these restrictions, though they're still far too tight. In Scotland, moreover, since no leasehold gives a right to vote for Parliament, the farming class commands less respect from their landlords than in England.

In other parts of Europe, even after it was recognized as useful to protect tenants against both heirs and new purchasers, lease security was still limited to very short periods. In France, for example, it was just nine years from the start of the lease. It has recently been extended to twenty-seven years — a period still too short to encourage tenants to make the most important improvements.

The landowners were originally the lawmakers throughout Europe. The laws regarding land were therefore all designed for what they imagined was the landlord's interest. They believed it served the landlord's interest that no lease granted by a predecessor should prevent him from collecting the full market value of his land. Greed and injustice are always shortsighted: they didn't foresee how much this would obstruct improvement and, in the long run, actually hurt the landlord's real interests.

Farmers were also anciently required to perform a huge number of services for the landlord — services that were rarely specified in the lease or governed by any clear rule, but dictated by the custom of the manor. Since these obligations were almost entirely arbitrary, they subjected the tenant to endless hassles and abuses. In Scotland, the abolition of all services not precisely stated in the lease has, over just a few years, dramatically improved the condition of the farming class.

The public duties imposed on farmers were no less arbitrary than the private ones. Building and maintaining the public roads — an obligation that still exists everywhere, I believe, though with varying degrees of burden in different countries — was not the only one. When the king's troops, his household, or his officials of any kind passed through an area, the local farmers were required to provide horses, carriages, and supplies at prices set by the royal purchasing agent. Great Britain is, I believe, the only monarchy in Europe where this form of oppression — known as purveyance — has been entirely abolished. It still exists in France and Germany.

The public taxes farmers faced were as irregular and oppressive as the labor obligations. The ancient feudal lords, while extremely reluctant to grant any financial aid to the king from their own pockets, happily let him levy taxes on their tenants. They didn't have enough understanding to see how this would ultimately affect their own income.

The taille, which still exists in France, is a good example of these ancient taxes. It's a tax on the farmer's estimated profits, calculated based on the capital he appears to have on the farm. So naturally, the farmer's incentive is to look as poor as possible, to invest as little as possible in farming, and nothing at all in improvement. Should a French farmer manage to accumulate any savings, the taille is practically a ban on ever investing those savings in the land.

This tax also carries social disgrace. It degrades whoever pays it — placing him below not just a gentleman but even a town merchant. And anyone who rents someone else's land becomes subject to it. No gentleman, and no merchant with capital, will submit to this humiliation. So the taille doesn't just prevent farmers' own savings from being invested in the land — it actively drives all other capital away from farming as well. The old English tenths and fifteenths, common in earlier times, seem to have been taxes of the same sort, at least as far as they applied to land.

Under all these obstacles, very little improvement could be expected from the people who actually worked the land. Even with all the liberty and legal security in the world, this class of people must always face significant disadvantages in making improvements. A farmer compared to a landowner is like a merchant who trades with borrowed money compared to one who trades with his own capital. Both may grow their wealth, but the one trading with borrowed money — even with equally good management — must always grow more slowly, because so much of his profit goes to paying interest on the loan. In the same way, land cultivated by a tenant must always improve more slowly than land cultivated by the owner, because so much of the produce goes to rent — money that, if the farmer were the owner, could be reinvested in further improvement.

Besides all this, a farmer's social status is inherently lower than a landowner's. Throughout most of Europe, independent farmers are considered inferior even to the better class of merchants and craftsmen, and everywhere they rank below the great merchants and manufacturers. So it rarely happens that someone with significant capital would leave a higher-status occupation to become a farmer. Even today in Europe, therefore, little capital flows from other professions into land improvement through farming. More does so in Great Britain than anywhere else, perhaps — though even there, the large amounts of capital sometimes invested in farming have generally been accumulated through farming itself, which is probably the slowest trade of all for building wealth.

After small landowners, though, wealthy and successful farmers are the most important improvers of the land in every country. There are probably more of them in England than in any other European monarchy. In the republican governments of Holland and of Bern in Switzerland, the farmers are said to be just as good as England's.

On top of all this, Europe's ancient policies were hostile to land improvement and cultivation in two additional ways — whether the farming was done by the owner or by a tenant. First, there was a general ban on exporting grain without a special license, which seems to have been a nearly universal rule. Second, there were severe restrictions on the domestic grain trade — and on trade in almost every other farm product — through absurd laws against people who "monopolized," "resold at a markup," or "bought before goods reached the market," along with the special privileges granted to fairs and designated markets.

I've already explained how the ban on grain exports, combined with encouragement for importing foreign grain, ruined farming in ancient Italy — naturally the most fertile country in Europe and at that time the seat of the greatest empire in the world. It's hard to even imagine how much such restrictions on both domestic and foreign grain trade must have held back farming in countries that were less fertile and less favorably situated.

Chapter III: Of the Rise and Progress of Cities and Towns, After the Fall of the Roman Empire

After the fall of the Roman Empire, the people living in cities and towns were no better off than those in the countryside. And they were a very different kind of people from the original inhabitants of the ancient Greek and Italian city-states. Those ancient cities were founded mainly by landowners, who divided the public territory among themselves and found it convenient to build their houses near one another, surrounded by a wall for mutual defense.

After Rome fell, by contrast, landowners generally lived in fortified castles on their own estates, surrounded by their tenants and dependents. The towns were inhabited mainly by tradespeople and craftsmen, who in those days were essentially — or very nearly — in a condition of servitude. The special privileges we find granted by ancient charters to the inhabitants of some of Europe's major towns tell us a great deal about what life was like before those grants. When people receive, as a special privilege, the right to give away their own daughters in marriage without their lord's permission, or the right to have their own children — rather than their lord — inherit their property, or the right to dispose of their belongings by will, they must have previously been in essentially the same condition of serfdom as the people who worked the land in the countryside.

They seem, in fact, to have been a pretty poor and lowly group of people who traveled around with their goods from place to place and fair to fair, much like the peddlers and hawkers of today. Throughout Europe at that time — just as in several of the Tatar governments of Asia today — taxes were levied on travelers and their goods: when they passed through certain estates, crossed certain bridges, carried goods from place to place at a fair, or set up a booth or stall to sell from. In England these various taxes went by names like passage, pontage, lastage, and stallage.

Sometimes the king, and sometimes a great lord who apparently had the authority to do so, would grant particular traders — especially those living on their own lands — a general exemption from these taxes. These traders, though still essentially in a condition of servitude in other respects, were on this account called "free traders." In return, they usually paid their protector a sort of annual head tax. In those days, protection was rarely granted without a price, and this tax was probably considered compensation for what the patron gave up by exempting them from other taxes.

At first, both the taxes and the exemptions were entirely personal — they applied only to specific individuals during their lifetimes, or for as long as their protector chose. In the very incomplete records that have been published from the Domesday Book for several English towns, there are frequent mentions of the tax that individual townspeople paid — to the king or some other lord — for this kind of protection.

However lowly the original condition of the townspeople may have been, it's clear that they achieved liberty and independence much earlier than the people who worked the land in the countryside. The portion of the king's revenue that came from head taxes in any particular town was usually farmed out for a set number of years at a fixed rent — sometimes to the county sheriff, sometimes to other individuals. Eventually, the townspeople themselves gained enough credibility to be allowed to farm the tax revenues of their own town, with all of them jointly and individually responsible for the total amount.

Leasing out tax revenues this way was perfectly consistent with how rulers across Europe typically operated. Kings frequently leased entire manors to all the tenants collectively, with everyone jointly responsible for the total rent. In return, the tenants were allowed to collect it themselves, pay it into the king's treasury through their own representative, and — most importantly — free themselves entirely from the bullying of the king's tax collectors. In those days, that was considered enormously important.

At first, the tax farm of a town was probably leased to the townspeople for a limited number of years, just as it had been to other tax farmers. Over time, however, it became common practice to grant it to them permanently — in perpetuity — at a fixed rent that could never be increased. Once the payment became permanent, the exemptions it paid for naturally became permanent too. These exemptions were no longer personal privileges belonging to individuals, but rights belonging to the citizens of a particular town — which, for this reason, was called a "free borough," just as its citizens had been called "free burghers" or "free traders."

Along with this grant, the townspeople generally received those crucial privileges I mentioned earlier: the right to marry off their own daughters, the right to have their children inherit from them, and the right to dispose of their property by will. Whether such privileges had previously been granted to individual free traders, I don't know. I think it's plausible, though I can't prove it. But regardless, with the main features of serfdom and slavery removed, these people were now at last truly free in our modern sense of the word.

And that wasn't all. They were also typically organized into a corporation with the privilege of having their own magistrates and town council, making their own bylaws, building their own defensive walls, and organizing their inhabitants into a kind of military force — obliged to "watch and ward," meaning to guard and defend those walls against attack, day and night. In England, they were generally exempt from the jurisdiction of the local hundred and county courts. All disputes among townspeople — except serious criminal cases reserved for the Crown — were left to their own magistrates. In other countries, they were often granted even broader legal powers.

It was probably necessary to give towns that farmed their own tax revenues some kind of legal authority to compel their own citizens to pay up. In those disorderly times, leaving them to seek justice from some other court would have been extremely inconvenient. But it must seem extraordinary that the rulers of every European country voluntarily gave up — for a fixed rent that could never be raised — a revenue stream that was probably, of all their income sources, the most likely to grow naturally over time, without any effort or expense on their part. And that on top of this, they essentially created a set of independent republics right in the heart of their own kingdoms.

To understand why they did this, you have to remember that in those days, hardly any European ruler could protect, across the full extent of his territory, the weaker people among his subjects from the oppression of the great lords. Those whom the law couldn't protect, and who weren't strong enough to defend themselves, had to either seek the protection of some powerful lord — becoming his serfs or vassals in exchange — or band together with others in a league of mutual defense. Individual townspeople had no power to defend themselves. But by forming defensive alliances with their neighbors, they could put up a fight that was not to be dismissed lightly.

The feudal lords despised the townspeople, viewing them not just as a different class but as a bunch of liberated slaves — practically a different species. The wealth of the townspeople never failed to provoke their envy and outrage, and they robbed them at every opportunity without mercy or remorse. The townspeople naturally hated and feared the lords. The king hated and feared the lords too. But while the king might look down on the townspeople, he had no reason to hate or fear them.

Mutual interest therefore led the townspeople to support the king, and the king to support them — against the lords. They were the enemies of his enemies, and it was in his interest to make them as secure and independent of those enemies as he possibly could. By granting them their own magistrates, the right to make their own laws, the right to build defensive walls, and the right to organize their people into a militia, he gave them every tool for security and independence from the barons that he had the power to give. Without some organized form of government, without some authority that could compel their citizens to act together according to a plan, no voluntary mutual defense league could have provided lasting security or given the king any meaningful support.

By granting them the tax farm of their town permanently, he removed from those he wanted as his friends — his allies, really — any reason to suspect he might later oppress them by raising the rent or handing their town's revenues to someone else.

The kings who were on the worst terms with their barons seem accordingly to have been the most generous in granting such privileges to their towns. King John of England, for example, was an enormously generous benefactor to his towns. Philip I of France lost all authority over his barons. Toward the end of his reign, his son Louis — later known as Louis the Fat — consulted with the bishops of the royal domains, according to the historian Father Daniel, about the best way to restrain the violence of the great lords. Their advice consisted of two proposals: first, to create a new system of local government by establishing magistrates and a town council in every significant town on royal lands; and second, to form a new militia by having the townspeople, under their own magistrates' command, march out to assist the king when needed. According to French historians, this is the period from which we should date the founding of city governments in France. It was during the troubled reigns of the princes of the House of Swabia that most of the free cities of Germany received their first grants of privileges, and that the famous Hanseatic League first became a formidable force.

The city militias of those times seem to have been no weaker than the rural forces, and since they could be assembled much more quickly in an emergency, they frequently had the advantage in disputes with neighboring lords. In countries like Italy and Switzerland — where, because of distance from the central government, the natural defensibility of the terrain, or other reasons, the monarch eventually lost all authority — the cities generally became independent republics. They conquered the nobility in their surrounding areas, forced them to tear down their country castles, and compelled them to come live in the city like other peaceful citizens.

This is essentially the history of the Republic of Bern, and of several other Swiss cities. With the exception of Venice, whose story is somewhat different, it's the history of all the major Italian republics — the astonishing number of them that rose and fell between the end of the twelfth century and the beginning of the sixteenth.

In countries like France and England, where royal authority — though often very weak — was never completely destroyed, the cities never had the chance to become fully independent. But they did become powerful enough that the king couldn't impose any tax on them beyond the established rent of the town without their consent. They were therefore called upon to send representatives to the general assembly of the kingdom, where they could join with the clergy and the barons in granting extraordinary aid to the king when needed. Since they generally favored royal power more than the lords did, their representatives seem to have been sometimes used by the king as a counterweight to the authority of the great lords in those assemblies. This is the origin of town representation in the national assemblies — the parliaments — of all the great European monarchies.

In this way, order, good government, and along with them the liberty and security of individuals, were established in the cities at a time when the people working the land in the countryside were still exposed to every kind of violence and oppression.

But people in such a defenseless state naturally settle for bare subsistence — because acquiring more would only tempt their oppressors to rob them. By contrast, when people are secure in their ability to enjoy the fruits of their work, they naturally push to better their condition and to acquire not just the necessities but the comforts and luxuries of life. Industry aimed at something beyond mere survival, therefore, took root in cities long before it became common in the countryside.

If a poor farmer, crushed under the weight of serfdom, managed to scrape together a little savings, he would naturally hide it carefully from his master — who would otherwise take it — and seize the first chance to run away to a town. The law at that time was so favorable to townspeople, and so eager to weaken the lords' authority over rural workers, that if a runaway serf could hide in a town for a year without being caught, he was free forever. Whatever savings the hardworking people of the countryside managed to accumulate therefore naturally fled to the cities — the only places where a person could actually keep what they had earned.

City people, of course, must always ultimately get their food and raw materials from the countryside. But a city located on the seacoast or on a navigable river isn't limited to the countryside nearby. It has a much wider reach and can draw its supplies from the most remote corners of the world — either by trading its manufactured goods or by serving as a middleman between distant countries, exchanging the products of one for those of another. A city could grow to great wealth and splendor this way, even while not only the countryside around it but all the countries it traded with remained poor and wretched. Each of those countries, taken individually, might supply only a small fraction of the city's food or business. But all of them taken together could provide both abundantly.

There were, however, within the limited trading world of those times, some wealthy and industrious regions. The Byzantine Empire was one, as long as it lasted. So was the Saracen Empire under the Abbasid dynasty. So was Egypt until the Turkish conquest, and parts of the North African coast, and all the Spanish provinces under Moorish rule.

The Italian cities seem to have been the first in Europe to achieve any significant wealth through trade. Italy sat at the center of what was then the developed and civilized part of the world. The Crusades, too — though they must have slowed down most of Europe through the enormous waste of capital and destruction of lives they caused — were extremely beneficial to certain Italian cities. The massive armies that marched from all over Europe to conquer the Holy Land created extraordinary demand for the shipping of Venice, Genoa, and Pisa — sometimes for transport, always for supplies. These cities were essentially the logistics contractors of those armies. The most destructive madness that ever swept the European nations was a source of wealth for these Italian republics.

The merchants of trading cities, by importing the refined manufactures and expensive luxuries of wealthier countries, fed the vanity of the great landowners, who eagerly bought them up with vast quantities of the raw produce from their own estates. The trade of most of Europe in those times consisted mainly of exchanging raw domestic produce for the manufactured goods of more advanced nations. English wool, for example, was traded for French wines and the fine cloth of Flanders — just as Polish grain is still traded today for French wines and brandies, and for the silks and velvets of France and Italy.

A taste for these finer manufactured goods was introduced through foreign trade into countries where no such production existed. But once this taste became widespread enough to create significant demand, merchants naturally tried to save on shipping costs by establishing similar manufactures in their own countries. This is the origin of the first industries for export that seem to have been established in the western provinces of Europe after the fall of Rome.

Now, I should note that no large country has ever existed or could exist without some kind of manufacturing. When we say a country "has no manufactures," we always mean no refined or improved ones — nothing suitable for selling to distant markets. In every large country, the vast majority of people produce their own clothing and household goods. This is actually even more true in poor countries that are said to "have no manufactures" than in rich ones said to be full of them. In wealthy nations, you'll generally find a much larger share of foreign-made products in the clothing and furniture of even the poorest people than you would in poor nations.

Manufactures suitable for distant markets seem to have been introduced into different countries in two different ways.

The first way was through the deliberate effort — the "forced transplant," if you will — of particular merchants and entrepreneurs who set up shops imitating some foreign manufacture. These industries are the children of foreign trade. The ancient silk, velvet, and brocade manufacturers that flourished in Lucca during the thirteenth century seem to have been of this type. They were driven out by the tyranny of one of Machiavelli's heroes, Castruccio Castracani. In 1310, nine hundred families were expelled from Lucca. Thirty-one of them went to Venice and offered to establish a silk industry there. Their offer was accepted, they were given generous privileges, and they started the operation with three hundred workers.

The fine cloth manufactures that once flourished in Flanders and were later introduced into England at the beginning of Elizabeth's reign seem to have been the same type. So are the modern silk industries of Lyon and London's Spitalfields district. Manufactures introduced this way typically use foreign raw materials, since they're imitations of foreign industries. When the Venetian silk manufacture was first established, all the materials came from Sicily and the eastern Mediterranean. Lucca's earlier manufacture likewise ran on imported materials. The cultivation of mulberry trees and the breeding of silkworms don't seem to have been common in northern Italy before the sixteenth century. These practices weren't introduced into France until the reign of Charles IX. The Flemish cloth industry ran mainly on Spanish and English wool. Spanish wool was the material — not of England's first wool manufacture, but of the first one that produced goods fit for export. Even today, more than half the raw material used in the Lyon silk manufacture is imported. When it was first established, virtually all of it was. And none of the raw material for the Spitalfields manufacture is ever likely to come from England. The location of such transplanted industries — since they're generally started by the plans of a few entrepreneurs — ends up being a coastal city or an inland town, depending on whatever those founders' interests, judgment, or whim happen to dictate.

The second way is quite different: manufactures for distant sale grow up naturally, almost on their own, through the gradual refinement of the basic, coarse manufacturing that must exist in even the poorest and most primitive countries. These industries typically use locally produced materials and seem to have first developed and improved in inland regions — not on the coast or near waterways, but at a considerable distance from them.

Here's the logic. A naturally fertile, easily cultivated inland region produces a large food surplus beyond what the farmers need. But because of the expense of overland transport and the difficulties of river navigation, it's often hard to ship that surplus anywhere. Abundance therefore makes food cheap, which attracts lots of workers to settle in the area. They find that their labor buys them more of life's necessities and comforts there than elsewhere. They work up the local raw materials, and they exchange their finished products — or the money from selling them — for more materials and provisions.

This creates new value from the surplus raw produce by eliminating the cost of hauling it to a port or distant market. The workers supply the farmers with useful or desirable goods on better terms than the farmers could have gotten before. The farmers get a better price for their surplus and can buy other goods more cheaply. They're both encouraged and able to increase their surplus through further improvement and better farming. The fertility of the land gave birth to the manufacture, and the progress of the manufacture in turn feeds back into the land, increasing its fertility still further.

These manufacturers first supply the local area. Then, as their work improves and refines, they reach more distant markets. Raw produce and coarse manufactures can barely support the cost of long-distance overland shipping. But refined, improved manufactures easily can. In a small package, they often contain the value of an enormous quantity of raw produce. A piece of fine cloth weighing just eighty pounds contains the value not only of eighty pounds of wool, but sometimes of several thousand pounds of grain — representing the food consumed by all the workers and their employers during production. The grain that could hardly have been shipped abroad in its natural form is, in effect, exported in the form of the finished cloth, and can easily be sent to the most remote corners of the world.

This is how the manufactures of Leeds, Halifax, Sheffield, Birmingham, and Wolverhampton grew up — naturally and almost of their own accord. These industries are the children of agriculture. In modern European history, their growth and improvement has generally come after the industries born of foreign trade. England was famous for manufacturing fine cloth from Spanish wool more than a century before any of these home-grown manufacturing towns were producing goods fit for export. The growth and improvement of these local industries could only happen as a consequence of the growth and improvement of agriculture — which is itself the last and greatest effect of foreign trade and the imported manufactures it first introduced. This is what I'll now go on to explain.

Chapter IV: How the Commerce of the Towns Contributed to the Improvement of the Country

The growth and wealth of commercial and manufacturing cities contributed to the improvement and cultivation of the surrounding countryside in three different ways.

First, by providing a large, ready market for the countryside's raw produce, they encouraged its cultivation and further improvement. This benefit wasn't even limited to the country where the city was located — it extended, to some degree, to every country the city traded with. The city offered all of them a market for some portion of their raw or manufactured goods, and thereby encouraged industry and improvement everywhere. But the city's own country, being closest, naturally benefited most. Since its raw produce didn't have to be hauled as far, traders could pay local farmers a better price while still offering consumers goods as cheaply as those from more distant places.

Second, the wealth that city people accumulated was frequently used to buy land — much of it uncultivated. Merchants have always been eager to become country gentlemen, and when they do, they're generally the best improvers of all. A merchant is used to putting his money into profitable ventures, while a typical country gentleman is used to spending his on personal expenses. The merchant watches his money go out and come back with a profit. The gentleman, once he parts with his money, rarely expects to see it again. These different habits naturally shape their approach to every kind of business. A merchant is typically a bold investor; a country gentleman, a timid one. The merchant isn't afraid to invest a large sum in improving his land all at once, when there's a good chance of raising its value in proportion to the expense. The gentleman, if he has any capital at all — which isn't always the case — rarely dares to use it this way. If he improves at all, it's usually not with capital but with whatever he can save from his annual income. Anyone who has lived in a trading town surrounded by unimproved countryside will have noticed how much more energetically merchants tackled land improvement compared to the traditional gentry. Besides, the habits of discipline, economy, and careful attention that business naturally develops in a merchant make him far better equipped to carry out any improvement project profitably and successfully.

Third, and most importantly, commerce and manufacturing gradually introduced order and good government — and with them, the liberty and security of individuals — among people in the countryside who had previously lived in almost constant warfare with their neighbors and servile dependence on their lords. This, though it has been the least noticed, is by far the most important of all these effects. David Hume is the only writer who, as far as I know, has previously drawn attention to it.

In a country with no foreign trade and no fine manufactures, a great landowner has nothing to exchange for the huge surplus his land produces beyond what it takes to feed the farmers. He has no choice but to consume it all through open-handed hospitality at home. If his surplus can feed a hundred or a thousand people, the only thing he can do with it is feed a hundred or a thousand people. He is therefore always surrounded by a crowd of dependents and followers who, having nothing to give in return for their food except their loyalty, must obey him — for the same reason soldiers obey the commander who pays them.

Before commerce and manufacturing spread through Europe, the hospitality of the wealthy — from the king all the way down to the smallest baron — was on a scale that's hard for us to even imagine today. Westminster Hall was the dining room of William Rufus, and it may not always have been big enough for his company. It was considered a mark of magnificence when Thomas Becket spread fresh hay or rushes on the floor of his hall in season, so that the knights and squires who couldn't find seats wouldn't ruin their fine clothes sitting on the floor to eat. The great Earl of Warwick is said to have fed thirty thousand people every day at his various estates. The number may be exaggerated, but it must have been enormous to even allow for such exaggeration. A similar kind of hospitality was practiced not long ago in many parts of the Scottish Highlands. It seems to be common among all peoples who have little experience of commerce and manufacturing. "I have seen," says Dr. Pococke, "an Arabian chief dine in the streets of a town where he had come to sell his cattle, and invite all passersby, even common beggars, to sit down with him and share his feast."

The people who worked the land were in every way as dependent on the great proprietor as his household retainers. Even those who weren't technically serfs were tenants at the landlord's pleasure, paying rent that came nowhere near the value of what the land produced for them. A crown, half a crown, a sheep, a lamb — these were common rents in the Scottish Highlands not long ago for land that could support an entire family. In some places, it's still the case. In a country where the surplus produce of a great estate has to be consumed on the estate itself, the proprietor often finds it more convenient to have some of it consumed at a distance from his own house — as long as the people consuming it are just as much under his control as his household servants. This spares him the hassle of maintaining too many people under one roof. A tenant at will, occupying land that supports his family for little more than a token rent, is as dependent on the landlord as any servant or retainer, and must obey him just as unquestioningly. Just as the lord feeds his servants and retainers at his own table, he feeds his tenants on their farms. The livelihood of both depends entirely on his generosity — and its continuation depends entirely on his mood.

The power of the ancient barons rested on this authority over their tenants and retainers. They inevitably became the judges in peacetime and the military commanders in wartime for everyone living on their estates. They could maintain order and enforce the law within their territories because each of them could mobilize the entire population against anyone who stepped out of line. Nobody else had enough authority to do this — certainly not the king. In those ancient times, the king was little more than the biggest landowner in the realm, to whom the other great landowners showed certain courtesies for the sake of mutual defense against common enemies. For the king to have enforced payment of a small debt on a great lord's land — where all the inhabitants were armed and accustomed to backing each other up — would have required almost as much effort as putting down a civil war. The king was therefore forced to leave the administration of justice across most of the country to those who were actually capable of administering it, and for the same reason, to leave command of the local militia to those whom the militia would actually obey.

It's a mistake to think these territorial jurisdictions originated from feudal law. The highest civil and criminal courts, the power to raise troops, mint coins, and even make local laws were all rights that great landowners held by their own authority — centuries before anyone in Europe had even heard the name "feudal law." The power and jurisdiction of the Saxon lords in England were just as great before the Norman Conquest as those of any Norman lord afterward. But feudal law supposedly didn't become the common law of England until after the Conquest. And it's an established fact that in France, the most extensive powers were held by great lords on their own authority long before feudal law was introduced there.

All this power flowed inevitably from the conditions of property and social life I've just described. Without going back to remote antiquity, we can find proof in much more recent times. It was not thirty years ago that Mr. Cameron of Lochiel, a gentleman of Lochaber in Scotland — without any legal authority whatsoever, not being a lord of regality or even a tenant-in-chief but merely a vassal of the Duke of Argyll, and not even a justice of the peace — nevertheless exercised the highest criminal jurisdiction over his own people. He's said to have done so with great fairness, though without any legal formalities. And it's quite plausible that conditions in that part of the country at the time made it necessary for him to assume this authority to keep the peace. This gentleman, whose rent never exceeded five hundred pounds a year, took eight hundred of his own people with him into the 1745 rebellion.

The introduction of feudal law, far from extending the power of these great landowners, should be seen as an attempt to limit it. It established a regular chain of authority, with an elaborate system of duties and obligations running from the king down to the smallest landowner. During a landowner's minority, his rent and the management of his lands fell to his immediate superior — and for all the great landowners, that meant the king, who was responsible for the education and upbringing of the heir and who, as guardian, was considered to have the right to arrange the young person's marriage, so long as it was appropriate to their rank.

But although feudalism was designed to strengthen royal authority and weaken the great lords, it couldn't accomplish either goal well enough to establish order and good government in the countryside. It couldn't sufficiently change the conditions of property and society from which the disorder arose. Government remained, as before, too weak at the center and too strong at the local level — and the excessive strength of the local lords was precisely what made the center weak. Even after feudalism was introduced, the king was as incapable of restraining the great lords' violence as before. They continued to wage war at their own discretion — almost constantly against each other and frequently against the king. And the open countryside remained a scene of violence, plunder, and chaos.

But what all the force of feudal institutions could never accomplish, the quiet, invisible workings of foreign trade and manufacturing gradually brought about. Commerce provided the great landowners, for the first time, with something they could exchange for the entire surplus produce of their lands — something they could enjoy entirely by themselves, without sharing it with tenants or retainers.

"All for ourselves, and nothing for other people" seems to have been the contemptible motto of the powerful in every age. As soon as they found a way to consume the full value of their rents by themselves, they had no interest in sharing with anyone else. For a pair of diamond shoe buckles, perhaps — or for something equally frivolous and useless — they traded away the maintenance of a thousand men for a year, and with it all the power and authority that came from supporting those men. But the buckles were entirely theirs, and no other person on earth had any claim to them. Under the old system of spending, they would have had to share with at least a thousand people. To the judges making this choice — the landowners themselves — that difference was absolutely decisive. And so, to satisfy the most childish, the pettiest, and the most contemptible of all vanities, they gradually bartered away their entire power and authority.

In a country with no foreign trade and no fine manufactures, a man with an income of ten thousand pounds a year can only spend it by maintaining perhaps a thousand families — all of whom are necessarily at his command. In modern Europe, a man with the same income can spend every penny of it — and usually does — without directly supporting twenty people, or being able to command more than ten footmen hardly worth commanding.

Indirectly, of course, he may support as many people as before, or even more. The luxury goods on which he spends his entire income may be small in quantity, but the number of workers involved in producing and preparing them must be very large. Their high price comes mainly from the wages of those workers and the profits of their employers. By paying that price, he indirectly pays all those wages and profits, and thus indirectly supports all those workers and their employers. But he contributes only a tiny fraction to any one person's income — perhaps a tenth for some, a hundredth for many, a thousandth or even a ten-thousandth for others. Since each of these people can be supported without him, they are all more or less independent of him.

When great landowners spend their rents feeding their own tenants and retainers, each lord maintains all of his people entirely. But when they spend those same rents buying goods from tradespeople and craftsmen, all the lords together may support just as many people as before — or even more, given the waste that comes with open-handed hospitality. Yet each individual lord contributes only a tiny share to any one worker's livelihood. Each tradesman or craftsman makes a living not from one customer but from a hundred or a thousand different ones. Though somewhat obligated to all of them, he isn't absolutely dependent on any single one.

As the great landowners' personal spending gradually increased in this way, the number of their retainers inevitably shrank — until they were eventually dismissed entirely. The same process gradually led them to get rid of unnecessary tenants too. Farms were consolidated and enlarged. The number of people on the land — despite complaints about depopulation — was reduced to what was actually needed to farm it, given the state of agriculture at the time.

By eliminating the extra mouths and demanding the full market value of the farm in rent, the landlord obtained a larger surplus — which the merchants and manufacturers quickly showed him how to spend on himself. As this process continued, he wanted to raise rents even higher than his land could currently justify. His tenants would only agree to this on one condition: that they be guaranteed secure possession for enough years to recover, with a profit, whatever they invested in further improving the land. The landlord's expensive vanity made him willing to accept this condition. And that's the origin of long-term leases.

Even a tenant at will who pays the full value of his land isn't entirely dependent on the landlord. The financial benefits each receives from the other are mutual and equal, and such a tenant won't risk his life or fortune in the landlord's service. If he has a lease for many years, he's completely independent — and his landlord can't expect from him even the smallest favor beyond what's explicitly stated in the lease or required by the ordinary law of the land.

Once the tenants had become independent and the retainers had been sent away, the great landlords were no longer able to obstruct justice or disturb the peace. Having sold their birthright — not like Esau, for a bowl of stew in a time of hunger and need, but in the reckless extravagance of plenty, for trinkets and baubles more fit to be children's toys than serious pursuits — they became as politically insignificant as any ordinary merchant or tradesman in a city. A regular government was established in the countryside just as in the city, and nobody had enough power to disrupt it in one place any more than in the other.

This may not strictly relate to my present subject, but I can't help noting that very old families — those that have passed down a considerable estate from father to son for many generations — are extremely rare in commercial countries. In countries with little commerce, on the contrary, such as Wales or the Scottish Highlands, they're very common. Arab histories seem to be full of genealogies, and there's a history written by a Tatar khan that has been translated into several European languages and contains hardly anything else — proof that ancient families are very common among those peoples.

In countries where a rich man can only spend his income by feeding as many people as it will feed, he's not likely to go broke. His generosity, it seems, is rarely so extreme as to try to support more people than he can afford. But where he can spend the largest income entirely on himself, his spending frequently knows no bounds — because his vanity, or his self-indulgence, frequently knows no bounds. In commercial countries, therefore, great fortunes rarely stay in the same family for long, despite the most aggressive legal measures to prevent their dispersal. Among simpler peoples, by contrast, they often do — without any such legal protections. Among pastoral nations like the Tatars and Arabs, the perishable nature of their wealth makes such protections impossible anyway.

A revolution of the greatest importance to public well-being was in this way brought about by two groups of people who had not the slightest intention of serving the public. Satisfying the most childish vanity was the sole motive of the great landowners. The merchants and craftsmen, rather less absurd, acted purely out of self-interest, following the humble shopkeeper's principle of turning a profit wherever a profit could be found. Neither group had any knowledge of, or foresight about, the great revolution that the foolishness of the one and the industriousness of the other was gradually bringing about.

This is how, across most of Europe, the commerce and manufacturing of cities — instead of being the result of agricultural improvement — became its cause.

This order, however, being the reverse of the natural course of things, was inevitably slow and uncertain. Compare the sluggish progress of those European countries whose wealth depends heavily on commerce and manufacturing with the rapid advances of our North American colonies, whose wealth is founded entirely on agriculture. Throughout most of Europe, the population supposedly takes five hundred years to double. In several of our North American colonies, it doubles in twenty or twenty-five years.

In Europe, the law of primogeniture and various forms of entail prevent the breakup of great estates and thereby block the multiplication of small landowners. Yet a small landowner — who knows every inch of his little territory, who looks at it with the affection that property, especially small property, naturally inspires, and who takes pleasure not just in cultivating it but in beautifying it — is generally the most hardworking, the most intelligent, and the most successful improver of all.

These same regulations also keep so much land off the market that there's always more capital looking to buy land than there is land for sale. Whatever does come to market therefore sells at an inflated price. The rent never pays a decent return on the purchase price, and the buyer also faces repair costs and other expenses that someone investing the same money elsewhere wouldn't have to worry about. Buying land is, everywhere in Europe, just about the worst investment a person with modest capital can make. For the sake of security, a person of moderate means retiring from business may choose to put a small sum into land. A professional whose income comes from another source may do the same with his savings. But a young person who, instead of going into business or a profession, invested two or three thousand pounds in buying and cultivating a small piece of land could certainly expect to live very happily and very independently — but would have to say goodbye forever to any hope of great wealth or great distinction, which a different use of the same capital might have provided.

Such a person, moreover, while unable to aspire to being a landowner on a large scale, will often consider it beneath him to be a mere tenant farmer. So the small quantity of land that comes to market, and the high price it fetches, prevents a great deal of capital from flowing into farming and improvement that would otherwise have gone there.

In North America, by contrast, fifty or sixty pounds is often enough to start a farm. Buying and improving uncultivated land is the most profitable use of both the smallest and the largest amounts of capital, and the most direct road to whatever fortune and distinction can be won in that country. Such land in North America can be had for almost nothing, or at a price far below the value of what it naturally produces — something impossible in Europe, where all land has long been private property.

If, however, landed estates were divided equally among all the children when any owner with a large family died, the estate would generally have to be sold. So much land would come to market that it could no longer command inflated prices. The rental income would come closer to paying a reasonable return on the purchase price, and a small amount of capital could be invested in land as profitably as in anything else.

England, thanks to the natural fertility of its soil, its extensive coastline relative to its total area, and its many navigable rivers that bring water transport deep into the interior, is perhaps as well suited by nature as any large country in Europe for foreign trade, export manufacturing, and all the improvements these bring. Since the beginning of Elizabeth's reign, English lawmakers have been particularly attentive to the interests of commerce and manufacturing, and in reality there's no country in Europe — not even Holland — whose laws are more favorable to this kind of industry on the whole.

Commerce and manufacturing have accordingly been advancing continuously throughout this entire period. The cultivation and improvement of the countryside has no doubt been advancing too — but it seems to have followed slowly, at a distance, behind the more rapid progress of commerce and manufacturing. Most of the country must have been under cultivation before Elizabeth's time, and yet a very large part still remains uncultivated, with most of the rest farmed far below its potential.

English law, however, does favor agriculture — not only indirectly through the protection of commerce, but through several direct measures. Except in times of scarcity, grain can be freely exported and is even encouraged by a subsidy. In times of moderate abundance, the import of foreign grain is taxed so heavily it amounts to a ban. The import of live cattle, except from Ireland, is prohibited entirely, and even from Ireland it was only recently allowed. Farmers therefore have a domestic monopoly on the two largest and most important agricultural products: bread and meat. These protections, though ultimately perhaps illusory — as I'll try to show later — at least demonstrate the legislature's good intentions toward agriculture.

But what matters far more than any of these measures is that England's independent farmers are made as secure, as independent, and as respectable as the law can make them. No country where primogeniture prevails, where tithes are paid, and where entails — though contrary to the spirit of the law — are permitted in some cases, can do more to encourage agriculture than England does.

And yet look at the state of English farming. What would it have been if the law had given no direct encouragement to agriculture beyond what flows indirectly from commercial progress, and if farmers had been left in the same condition as in most other European countries? It's now more than two hundred years since Elizabeth's reign began — about as long as human prosperity usually lasts.

France seems to have had a significant share of foreign trade nearly a century before England became known as a commercial country. The French navy was considerable, by the standards of the time, before the expedition of Charles VIII to Naples. Yet France's cultivation and improvement overall remain inferior to England's. French law has never given the same direct encouragement to agriculture.

Spain and Portugal carry on significant foreign trade with the rest of Europe, though mostly in foreign ships. Their colonial trade, conducted in their own vessels, is even larger, thanks to the vast size and wealth of their colonies. But this trade has never led to the development of any significant export manufacturing in either country, and most of both nations remains uncultivated. Portugal's foreign trade is older than that of any other major European country, except Italy.

Italy is the only large country in Europe that seems to have been cultivated and improved in every part through foreign trade and export manufacturing. Before the invasion of Charles VIII, according to the historian Guicciardini, Italy was cultivated no less intensively in its most mountainous and barren areas than in its flattest and most fertile ones. Italy's advantageous location and the great number of independent states that existed there at the time probably contributed considerably to this general cultivation. It's not impossible, though — despite this sweeping statement from one of the most judicious and cautious of modern historians — that Italy at that time was no better cultivated than England is today.

However, capital acquired through commerce and manufacturing is always a precarious and uncertain possession until some of it has been secured and anchored in the cultivation and improvement of land. A merchant, as has been rightly said, is not necessarily the citizen of any particular country. It makes little difference to him where he conducts his business, and even a minor annoyance may cause him to move his capital — and with it all the industry it supports — from one country to another. None of that capital can truly be said to belong to a particular country until it has been spread across the land in the form of buildings or permanent agricultural improvements.

Hardly a trace remains today of the great wealth supposedly possessed by most of the Hanseatic cities, except in the obscure histories of the thirteenth and fourteenth centuries. It's not even certain where some of them were located, or which modern European towns the Latin names given to some of them refer to.

But although the catastrophes that struck Italy in the late fifteenth and early sixteenth centuries severely damaged the commerce and manufacturing of the Lombard and Tuscan cities, those regions still remain among the most populous and best-cultivated in Europe. The civil wars of Flanders and the Spanish rule that followed drove away the great commerce of Antwerp, Ghent, and Bruges. But Flanders is still one of the richest, best-farmed, and most densely populated provinces in Europe.

The ordinary upheavals of war and government easily dry up the sources of wealth that come from commerce alone. But the wealth that comes from solid agricultural improvements is far more durable. It can only be destroyed by the most violent catastrophes — the kind of devastation inflicted by hostile, barbarous nations continuing for a century or two, like what happened in the western provinces of Europe in the centuries before and after the fall of the Roman Empire.

Book IV: Of Systems of Political Economy

Introduction

Political economy, considered as a branch of the science of governing, has two goals. First, to provide the people with a good income and a comfortable living — or more precisely, to enable them to provide these things for themselves. Second, to supply the government with enough revenue to fund public services. The aim is to enrich both the people and the state.

The different paths that wealth has taken in different eras and nations have given rise to two different systems of political economy — two different theories about how to make a country prosperous. One can be called the commercial system; the other, the agricultural system. I'll try to explain both as fully and clearly as I can, beginning with the commercial system. It's the modern system, and it's best understood in our own country and in our own times.

Chapter I: Of the Principle of the Commercial or Mercantile System

The idea that wealth consists of money — of gold and silver — is a popular notion that arises naturally from money's two functions: it's the tool of commerce and the measure of value.

Because money is the tool of commerce, having money lets us get whatever else we need more easily than having any other commodity. The big challenge, everyone knows, is getting money. Once you have it, buying anything else is easy. And because money is the measure of value, we judge the worth of everything else by how much money it will exchange for. We say a rich person "is worth" a great deal of money, and a poor person "is worth" very little. A thrifty person, or someone eager to get rich, is said to "love money." A careless, generous, or extravagant person is said to be "indifferent about" money. To get rich means to get money, and in everyday language, wealth and money are treated as the same thing.

A rich country, just like a rich person, is assumed to be a country overflowing with money. And piling up gold and silver is assumed to be the quickest way to make it rich. For some time after the discovery of America, the first question the Spaniards asked when they arrived on any unknown coast was: is there gold or silver in the area? Their answer determined whether the place was worth settling — or worth conquering.

Plano Carpini, a monk sent as ambassador from the king of France to one of the sons of the famous Genghis Khan, reported that the Tatars frequently asked him whether there were plenty of sheep and cattle in France. Their question had the same purpose as the Spaniards'. They wanted to know if the country was rich enough to be worth conquering. Among the Tatars, as among all pastoral peoples who are generally unfamiliar with money, cattle serve as the tool of commerce and the measure of value. Wealth, to them, consists of cattle, just as to the Spaniards it consists of gold and silver. Of the two views, the Tatars' was probably closer to the truth.

John Locke noted a distinction between money and other movable property. All other movable goods, he pointed out, are so perishable that the wealth they represent can't be relied on. A nation overflowing with them one year might, without exporting a single item — merely through waste and extravagance — be desperately short of them the next. Money, on the other hand, is a steady friend: though it may travel from hand to hand, as long as you can keep it from leaving the country, it isn't easily wasted or consumed. Gold and silver, according to Locke, are therefore the most solid and substantial part of a nation's movable wealth, and multiplying those metals should be the chief goal of economic policy.

Others concede that if a nation could be entirely cut off from the rest of the world, it would make no difference how much or how little money circulated within it. The goods that money helps circulate would simply be exchanged for more or fewer coins, and the real wealth or poverty of the country would depend entirely on the abundance or scarcity of those goods. But it's different, they argue, for countries connected to foreign nations — countries that must fight foreign wars and maintain armies and navies overseas. This can only be done by sending money abroad to pay for these things, and a nation can't send much money abroad unless it has a lot at home. Every such nation, therefore, must try to stockpile gold and silver during peacetime so it has the resources to fight wars when needed.

Driven by these popular ideas, every nation in Europe has tried — with little success — to accumulate gold and silver by every possible means. Spain and Portugal, which own the main mines supplying Europe with these metals, either banned their export under the harshest penalties or imposed heavy export duties. Similar bans seem to have been part of the policy of most other European nations in earlier times. You can even find them — where you'd least expect — in some old Scottish acts of Parliament that forbid, under heavy penalties, carrying gold or silver out of the kingdom. The same policy existed in both France and England.

When these countries became commercial nations, their merchants found these bans extremely inconvenient. They could frequently buy foreign goods more cheaply with gold and silver than with any other commodity. So they argued against the bans, claiming they were harmful to trade.

Their first argument was that exporting gold and silver to buy foreign goods didn't necessarily reduce the country's supply of those metals. On the contrary, it could actually increase it — because if the imported goods weren't all consumed domestically, they could be re-exported to other countries and sold at a large profit, bringing back far more gold and silver than was originally sent out. Thomas Mun compared this to farming: "If we only watch the farmer at sowing time, when he throws good grain into the ground, we'd think him a madman rather than a farmer. But when we see the harvest — the end result of his efforts — we find the value and plentiful increase of his actions."

Their second argument was that export bans couldn't actually prevent gold and silver from leaving the country. Because of their high value relative to their small size, these metals could easily be smuggled out. The only way to prevent the outflow, the merchants argued, was by paying attention to what they called the "balance of trade." When a country exported more than it imported, other nations owed it a balance that had to be paid in gold and silver, increasing the country's supply. When it imported more than it exported, the opposite happened — it owed a balance to other nations, which drained its gold and silver. In that case, banning exports wouldn't stop the outflow; it would only make it more dangerous and therefore more expensive.

The merchants went on to argue that export bans worsened the exchange rate against the country that owed the balance, because the merchant buying a bill of exchange on a foreign country had to compensate the banker not just for the normal costs of sending money abroad, but for the extra risk created by the prohibition. The worse the exchange rate became, they said, the worse the trade balance got. English money would be worth less compared to Dutch money, English goods would sell cheaper in Holland, Dutch goods would cost more in England — all of which would further drain gold and silver from England.

These arguments were partly sound and partly misleading. They were sound in claiming that exporting gold and silver could frequently benefit a country. They were sound too in arguing that no ban could prevent the export when private individuals found it profitable. But they were misleading in assuming that maintaining or increasing the quantity of gold and silver required more government attention than maintaining or increasing the quantity of any other useful commodity — which free trade, without any government attention, never fails to supply in the right amount.

They were also probably misleading in claiming that a bad exchange rate necessarily increased the so-called unfavorable balance of trade and caused more gold and silver to leave the country. A bad exchange rate was certainly a problem for merchants who had debts to pay abroad — they paid more for their bills of exchange. But while the extra costs of smuggling money around the prohibition might add some expense to bankers, it wouldn't necessarily send any more money out of the country. Those costs were generally spent domestically, on the smuggling operation itself, and would rarely cause the export of a single extra sixpence beyond the exact amount being transferred. The high cost of exchange would also naturally motivate merchants to keep their exports and imports roughly in balance, to minimize the amount they had to transfer. And the high exchange rate would effectively function as a tax on foreign goods, raising their price and reducing consumption — thereby tending not to increase but to decrease the so-called unfavorable balance of trade and the export of gold and silver.

Flawed as they were, however, these arguments convinced their audience — because of who was making them and who was listening. They were made by merchants speaking to parliaments and royal councils — to nobles and country gentlemen. That is, by people who were supposed to understand trade, to people who were painfully aware they knew nothing about it.

Everyone — nobles, gentlemen, and merchants alike — could see from experience that foreign trade made the country richer. But how it did so, none of them really understood. The merchants knew perfectly well how foreign trade enriched themselves — it was their business to know. But how it enriched the country was no part of their concern. That question only came up when they needed to lobby for changes in trade laws. On those occasions, they had to say something about the beneficial effects of foreign trade and how the existing laws were obstructing those effects. To the lawmakers who had to judge the matter, it seemed perfectly convincing when they were told that foreign trade brought money into the country, but that the current laws prevented it from bringing as much as it otherwise would.

These arguments produced the desired result. The ban on exporting gold and silver in France and England was limited to domestic coins. Exporting foreign coins and uncoined bullion was made legal. In Holland and some other places, the freedom was extended even to domestic coins. Government attention shifted from trying to prevent the export of gold and silver to monitoring the balance of trade — supposedly the only thing that could cause those metals to increase or decrease. From one pointless obsession, they moved to another one far more complicated, far more confusing, and equally pointless.

The title of Mun's book — England's Treasure by Foreign Trade — became a fundamental principle of economic policy, not just in England but in every commercial country. Domestic trade — the most important of all, the trade in which an equal amount of capital generates the most income and creates the most employment — was treated as merely secondary to foreign trade. Domestic trade neither brought money into the country nor sent any out, people said. So the country could never become richer or poorer through it, except insofar as it indirectly affected foreign trade.

A country with no gold or silver mines obviously has to get its gold and silver from abroad — just as a country with no vineyards has to get its wine from abroad. But it's no more necessary for the government to worry about one than the other. A country that can afford to buy wine will always get the wine it needs. And a country that can afford to buy gold and silver will never run short of those metals. They're bought for a certain price, like all other commodities. And just as gold and silver are the price of all other goods, all other goods are the price of gold and silver. We trust with complete confidence that free trade, without any government intervention, will always supply us with the wine we need. We can trust with equal confidence that it will always supply us with all the gold and silver we can afford to buy or put to use — whether for circulating our goods as coins or for any other purpose.

The quantity of any commodity that human industry can buy or produce naturally adjusts itself in every country to match the effectual demand — the demand of those willing to pay the full cost of producing and bringing it to market. And no commodities adjust more easily or precisely to effectual demand than gold and silver. Because of their small size and great value, no commodities are easier to transport from where they're cheap to where they're expensive, from where they exceed demand to where they fall short of it.

If England needed more gold, for example, a single mail boat could bring fifty tons from Lisbon or wherever else it was available — enough to be coined into more than five million guineas. But if England needed the same value in grain, importing it would require, at five guineas a ton, a million tons of shipping — a thousand ships of a thousand tons each. The entire Royal Navy wouldn't be enough.

When the amount of gold and silver imported into any country exceeds the effectual demand, no amount of government vigilance can prevent their export. All the brutal penalties of Spain and Portugal can't keep their gold and silver at home. The continual flow from Peru and Brazil exceeds what those countries can use and pushes the price of those metals below the level in neighboring countries.

Conversely, if gold and silver in any country fell short of demand, driving up their price above the level in neighboring countries, the government wouldn't need to do anything to import them. Even if it tried to prevent their importation, it couldn't. When the Spartans finally had something to trade for gold and silver, those metals broke through every barrier that the laws of Lycurgus had set up to keep them out of Sparta. All the harsh customs laws in the world can't prevent the smuggling of tea from the Dutch and Swedish East India companies, because their tea is somewhat cheaper than the British company's. And yet a pound of tea is about a hundred times bulkier than the same value in silver, and more than two thousand times bulkier than the same value in gold — making it that many times harder to smuggle.

It's partly because gold and silver are so easy to transport from where they're abundant to where they're scarce that their price doesn't fluctuate wildly the way most other commodities do — commodities that their sheer bulk prevents from moving quickly when a market is over- or under-supplied. The price of gold and silver isn't completely stable, but the changes it undergoes are generally slow, gradual, and steady. In Europe, for example, these metals are believed — perhaps without much justification — to have been gradually declining in value over the past century or two, because of the continuous flow from the Spanish colonies in the Americas. But to cause a sudden, dramatic change in the price of gold and silver — one that would noticeably raise or lower the money price of everything else overnight — would take a commercial revolution on the scale of the discovery of America.

If, despite all this, a country that can afford gold and silver ever does run short, there are more ways to substitute for money than for almost any other commodity. If raw materials for manufacturing run out, industry has to stop. If food runs out, people starve. But if money runs short, barter can fill the gap — inconveniently, yes, but it can. Buying and selling on credit, with dealers settling up with each other once a month or once a year, fills the gap with less inconvenience. And a well-regulated paper currency fills it with no inconvenience at all — and in some cases, with actual advantages.

On every count, therefore, government attention has never been so pointlessly employed as when it's been directed at monitoring the supply of money in a country.

Yet no complaint is more common than the complaint of a "shortage of money." Money, like wine, will always seem scarce to those who can neither afford to buy it nor get anyone to lend it to them. Those who have the means to buy or borrow will rarely find themselves short of either the money or the wine they need.

But the complaint about money shortages isn't always confined to reckless spendthrifts. Sometimes it's heard throughout an entire commercial town and its surrounding area. The usual cause is overtrading. Sensible businesspeople whose projects have outrun their capital are just as likely to find themselves unable to buy or borrow money as extravagant people whose spending has outrun their income. Before their projects can pay off, their capital is gone, and their credit with it. They rush around everywhere trying to borrow, and everyone tells them there's nothing to lend.

Even these widespread complaints of a money shortage don't necessarily mean there are fewer gold and silver coins circulating than usual. They just mean that many people want money who have nothing to give for it. When trade profits are higher than normal, overtrading becomes a general problem — among both large and small dealers. They don't necessarily send more money abroad than usual. But they buy on credit, both at home and abroad, an unusual quantity of goods, which they ship to some distant market hoping the returns will arrive before the bills come due. The bills arrive first, and they have nothing on hand to pay with or to use as collateral for loans. It's not a shortage of gold and silver — it's the difficulty that these overextended people have in borrowing, and that their creditors have in getting paid, that produces the general complaint of a "money shortage."

It would be too absurd to seriously try to prove that wealth doesn't consist of money, or gold and silver, but of what money buys — and that money is valuable only because of what it can purchase. Money is certainly part of a nation's total capital, but as I've already shown, it's generally a small part, and always the least productive part.

It's not because wealth consists more of money than of goods that a merchant finds it easier to buy goods with money than to buy money with goods. It's because money is the established, universally accepted medium of exchange. Everything is readily given in exchange for money, but money isn't always as readily obtained in exchange for everything. Most goods are also more perishable than money, so a merchant may suffer greater losses by holding onto them. And while his warehouse is full of unsold goods, he's more vulnerable to cash demands he can't meet. On top of all this, his profit comes more directly from selling than from buying, so he's always much more eager to turn his goods into money than his money into goods.

But while an individual merchant with a warehouse full of unsold goods may be ruined if he can't sell them in time, a whole nation isn't exposed to the same risk. A merchant's entire capital often consists of perishable goods waiting to be sold for money. But only a very small portion of a country's total annual output is ever destined for buying gold and silver from other nations. The vast majority is circulated and consumed domestically. And even the surplus sent abroad is mostly used to buy other foreign goods, not gold and silver.

So even if gold and silver couldn't be obtained for the goods intended to buy them, the nation wouldn't be ruined. It might suffer some inconvenience and be forced to use some of those substitute methods of doing business without money. But the annual output of the country would remain the same, or very nearly so, because the same productive capital would still be at work.

And here's the key point: while goods don't always attract money as readily as money attracts goods, in the long run they attract it more reliably. Goods can serve many purposes besides buying money, but money can serve no purpose except buying goods. Money, therefore, necessarily chases after goods — but goods don't always or necessarily chase after money. A buyer doesn't always intend to sell again; he often means to use or consume what he buys. But a seller always means to buy again. The buyer may have completed his whole transaction; the seller has only finished half of his. People don't want money for its own sake — they want it for what they can buy with it.

"But consumable goods are quickly used up," the argument goes, "while gold and silver are durable. Without this constant exportation, they could be accumulated for ages, enormously increasing the nation's real wealth. Nothing, therefore, could be more harmful than trade that exchanges such lasting commodities for such perishable ones."

But we don't consider the trade that exchanges English hardware for French wine to be harmful — even though hardware is quite durable and could, without exportation, "be accumulated for ages, enormously increasing the country's supply of pots and pans." The absurdity is obvious: the number of pots and pans in any country is naturally limited by how many are needed. It would be ridiculous to have more pots and pans than needed for cooking the food people actually eat. And if the amount of food increased, the number of pots and pans would automatically increase with it — some of the extra food being used to pay for them or to support additional workers who make them.

It should be equally obvious that the quantity of gold and silver in every country is limited by the uses for those metals. Their uses consist of circulating goods (as coins) and providing a form of luxury goods (as silverware and gold plate). The quantity of coins is determined by the value of the goods to be circulated: increase that value, and some money will immediately be sent abroad to purchase whatever additional coins are needed. The quantity of plate is determined by the number and wealth of families who choose to indulge in that kind of luxury: increase their number and wealth, and some of that increased wealth will naturally go toward buying more plate.

Trying to increase a country's wealth by forcing more gold and silver into it, or preventing it from leaving, is just as absurd as trying to improve a family's cooking by making them keep an unnecessary number of kitchen utensils. Just as the expense of buying unneeded utensils would reduce rather than improve the family's food budget, the expense of accumulating unnecessary gold and silver must, in every country, reduce the wealth that feeds, clothes, and houses people — the wealth that supports and employs them.

Gold and silver, whether as coins or as plate, are utensils — just as much as kitchen equipment. Increase the demand for them — increase the goods to be circulated, managed, and processed through them — and you'll automatically increase their quantity. But if you try to increase their quantity by artificial means, you'll just as surely reduce both their usefulness and ultimately their quantity too, which can never be greater than what actual use requires. If gold and silver were ever accumulated beyond this point, they're so easy to transport, and the cost of having them sit idle is so high, that no law could prevent them from being immediately shipped out of the country.

Nor is it always necessary to stockpile gold and silver in order to fight foreign wars and maintain armies overseas. Armies and navies aren't maintained with gold and silver — they're maintained with consumable goods. A nation that can produce enough domestic output to buy those goods in distant countries can sustain foreign wars there.

A nation can pay and provision an army in a distant country in three ways: by sending abroad some of its accumulated gold and silver; by sending some of its manufactured goods; or by sending some of its raw produce.

The gold and silver that can properly be called a country's accumulated stockpile falls into three categories: the circulating money supply, the silver and gold plate of private families, and the treasure that rulers may have saved up over many years.

Rarely can much be drawn from the circulating money supply, because there's rarely much excess in it. The value of goods bought and sold in a country requires a certain amount of money to keep things moving, and it won't support any more than that. The channels of circulation naturally draw in just enough money to fill them, and never take on more. Some money does get freed up during foreign wars, though. With so many people being supported abroad, fewer are supported at home, fewer goods circulate domestically, and less money is needed to circulate them. Large quantities of paper money — exchequer notes, navy bills, bank bills, and the like — are also typically issued during wartime. By replacing circulating gold and silver, this paper frees up metal currency for export. But all of this would be a poor resource for funding a major war lasting several years.

Melting down the silverware of private families has been tried on every occasion and found to be an even more insignificant source. At the beginning of the last war, the French gained so little from this measure that it didn't even cover the loss of the craftsmanship.

The accumulated treasures of rulers were once a much greater and more lasting resource. But today, with the possible exception of the King of Prussia, stockpiling treasure doesn't seem to be part of any European ruler's strategy.

The wars of the current century — perhaps the most expensive in history — were clearly not funded primarily by exporting circulating money, melting family silver, or spending royal treasure. The recent war with France cost Great Britain upward of ninety million pounds, including not just the seventy-five million in new debt but also the additional land tax of two shillings per pound and annual borrowings from the sinking fund. More than two-thirds of this was spent in distant countries: Germany, Portugal, America, Mediterranean ports, the East and West Indies.

The English kings had no stockpiled treasure. We never heard of any large quantity of plate being melted down. The country's circulating gold and silver was estimated at no more than eighteen million pounds — though since the recent recoining of gold, this is thought to have been a significant underestimate. Let's suppose, then, using the most exaggerated estimate I've seen, that gold and silver together amounted to thirty million pounds.

If the war had been funded entirely by exporting money, the entire money supply would have had to leave the country and return at least twice over a period of six or seven years. If that actually happened, it would be the most powerful argument imaginable for how pointless it is for the government to worry about preserving the money supply — since all of the country's money would have left and returned twice in such a short time without anyone noticing. And indeed, the money supply never appeared any more depleted during the war than usual. Few people who could afford money had trouble getting it.

Foreign trade profits were actually higher than normal throughout the war, especially toward its end. This produced what it always produces: a wave of overtrading across all British ports, which produced the familiar complaint of a money shortage — a complaint that always follows overtrading. Many people couldn't find money because they had neither the means to buy it nor the credit to borrow it. Because debtors couldn't borrow, creditors couldn't collect. But gold and silver were generally available to anyone who had something of value to offer for them.

The enormous expense of the recent war, therefore, must have been paid for primarily not by exporting gold and silver, but by exporting British goods of various kinds. When the government or its agents contracted with a merchant to transfer money to a foreign country, the merchant would naturally try to pay his foreign correspondent — on whom he'd drawn a bill — by shipping goods rather than gold and silver. If British goods weren't in demand in that particular country, he'd ship them somewhere else where he could buy a bill on the country he needed.

Shipping goods suited to their market always yields a significant profit, while shipping gold and silver almost never does. When gold and silver are sent abroad to buy foreign goods, the merchant's profit comes from selling those goods when they arrive, not from the transaction of sending the metal. But when they're sent merely to pay a debt, there's no return cargo and therefore no profit. A merchant will naturally use every bit of his ingenuity to pay foreign debts by exporting goods rather than gold and silver. The massive quantity of British goods exported during the recent war without bringing back any direct return has been noted by the author of The Present State of the Nation.

In addition to the three forms of gold and silver already mentioned, there's always a good deal of uncoined bullion being imported and exported in every major trading country for the purposes of international commerce. This bullion, circulating among different commercial countries in the same way that domestic coins circulate within each one, can be thought of as the currency of the great international trading community. Domestic coins are directed by the flow of goods within each country; this international money is directed by the flow of goods between countries. Both serve to facilitate exchange — one between individuals in the same nation, the other between nations.

Some of this international money may have been, and probably was, used to fund the recent war. During a major war, it's natural that this money would flow differently than in peacetime — circulating more around the war zone, being used to buy supplies and pay soldiers in the surrounding area. But whatever portion of this money Britain used in this way had to be purchased, year by year, with British goods or with something bought with British goods. This always brings us back to the same conclusion: it was goods — the annual output of the country's land and labor — that were the ultimate resource enabling us to fight the war.

It makes sense that such enormous annual spending could only be sustained by enormous annual production. The expense in 1761, for example, exceeded nineteen million pounds. No stockpile could have supported such yearly outlays. There isn't enough gold and silver produced in the entire world each year to cover it. All the gold and silver imported annually into Spain and Portugal together, by the best estimates, rarely much exceeds six million pounds sterling — which in some years would barely have covered four months' worth of the war's expenses.

The goods best suited for shipping to distant countries to buy military supplies — or to buy some of the international currency that could then be used to buy those supplies — are the finer, more refined manufactures. These contain great value in small bulk and can therefore be shipped long distances cheaply. A country whose industry produces a large annual surplus of such goods, which are normally exported, can sustain a very expensive foreign war for many years without exporting much gold or silver — or even having much to export. A considerable portion of the surplus manufactures must, in this case, be shipped abroad without bringing back any goods in return to the country (though the merchant does get paid through government bills of exchange on foreign countries). Some of the surplus, however, may continue to be traded normally.

During wartime, manufacturers face a double demand: they must produce goods to be shipped abroad as payment for military bills, and they must also produce goods to buy the usual foreign imports consumed at home. In the middle of the most destructive foreign war, therefore, many manufacturing industries may actually flourish — and conversely, they may decline when peace returns. They can thrive amid their country's ruin and begin to decay with the return of prosperity. The varying fortunes of many different branches of British manufacturing during the recent war, and for some time after the peace, illustrate this perfectly.

No major foreign war of any length could conveniently be funded by exporting a country's raw agricultural produce. The cost of shipping enough of it to a foreign country to pay and supply an army would be prohibitive. Few countries produce much more raw food than their own population needs. Sending large quantities abroad would mean sending away part of the people's necessary food supply. It's different with manufactured goods: the workers who make them are fed at home, and only the surplus product of their labor is exported.

David Hume frequently notes the inability of England's medieval kings to sustain any foreign war for long without interruption. In those days, the English had nothing to pay and provision their armies abroad except raw produce — of which little could be spared from domestic consumption — or a few extremely crude manufactures, which, like raw produce, were too expensive to ship. This inability didn't arise from a shortage of money. Buying and selling were conducted with money in England then just as they are now. The quantity of circulating money must have been proportional to the volume of transactions — or actually larger than today's proportion, since paper money, which now handles much of the work that gold and silver used to do, didn't yet exist.

Among peoples with little commerce and manufacturing, the ruler can rarely draw much financial support from his subjects in an emergency — for reasons I'll explain later. In such countries, therefore, rulers generally try to accumulate a personal treasure as their only resource against crises. And their simple way of life naturally disposes them to the thrift needed for accumulation. In that basic state of society, even a ruler's spending isn't driven by the vanity that delights in the glittering extravagance of a court, but goes toward generosity to his tenants and hospitality to his followers. And generosity and hospitality very rarely lead to ruinous spending — though vanity almost always does.

Every Tatar chief, accordingly, has a personal treasure. The treasures of Mazepa, chief of the Cossacks in Ukraine and the famous ally of Charles XII of Sweden, were said to be very large. The French kings of the Merovingian dynasty all had treasures. When they divided their kingdoms among their children, they divided their treasures too. The Saxon princes and the first English kings after the Norman Conquest likewise seem to have stockpiled treasure. The first act of every new reign was typically to seize the previous king's treasure — the most essential step in securing the succession.

The rulers of advanced commercial nations face no such necessity to accumulate treasure, because they can generally extract extraordinary contributions from their subjects in extraordinary times. And they're less inclined to save anyway. They naturally — perhaps inevitably — follow the fashions of their age, and their spending comes to be driven by the same extravagant vanity that rules the other great proprietors in their kingdoms. The meaningless pageantry of their courts grows more dazzling every day, and the cost not only prevents any saving but frequently eats into the funds meant for essential purposes. What Dercyllidas said of the Persian court could be applied to several European monarchs: he saw there much splendor but little strength — many servants but few soldiers.

The importation of gold and silver is not the main benefit — let alone the only one — that a nation gets from foreign trade. Every country engaged in foreign trade derives two distinct benefits from it. First, it carries away the surplus output that isn't wanted domestically and brings back something that is wanted. It creates value from what would otherwise go to waste, by exchanging it for something that satisfies people's needs and increases their enjoyment. Second — and just as importantly — by opening a broader market for whatever output exceeds domestic consumption, foreign trade removes the constraint that a small home market places on the division of labor. It encourages people to improve their productivity and push their annual output as high as possible, thereby increasing the real income and wealth of the society.

These are the great and vital services that foreign trade continuously performs for every country involved. All of them benefit, though the country where the merchant resides generally benefits most, since he's typically more occupied with supplying the needs and exporting the surplus of his own country than of any other. Importing gold and silver into countries that have no mines is certainly one function of foreign trade. But it's a completely trivial one. A country that conducted foreign trade only for this purpose would hardly need to send a ship once a century.

It's not by importing gold and silver that the discovery of America enriched Europe. The abundance of the American mines made those metals cheaper. A set of silverware can now be bought for about a third of the grain, or a third of the labor, it would have cost in the fifteenth century. With the same annual expenditure of labor and goods, Europe can now buy about three times the quantity of silverware it could have then.

But when a commodity drops to a third of its former price, it doesn't just mean that previous buyers can buy three times as much. It also brings the price within reach of a far larger number of buyers — perhaps ten, perhaps twenty or more times the former number. So today there may be not just three times but twenty or thirty times as much silverware in Europe as there would have been, even at its current level of development, if the American mines had never been discovered.

Europe has certainly gained a real convenience from this — though a very minor one. The cheapness of gold and silver actually makes those metals slightly less suitable as money than they were before. To make the same purchases, we have to carry around more of them — a shilling in our pocket where a groat would once have sufficed. It's hard to say which is more trivial: this inconvenience, or the opposite convenience. Neither could have made any real difference to the state of Europe.

The discovery of America, however, certainly made an enormous difference — but not because of its gold and silver. By opening a vast, inexhaustible new market for all of Europe's products, it created opportunities for new divisions of labor and improvements in production that the narrow confines of the old trading world could never have supported, for lack of a market big enough to absorb the output. The productive power of labor improved, and output increased in every European country, along with the real income and wealth of their populations.

European goods were almost all new to America, and many American goods were new to Europe. An entirely new set of exchanges began — exchanges that should naturally have been just as beneficial to the new continent as they certainly were to the old. The brutal injustice of the Europeans turned an event that should have benefited everyone into one that was ruinous and destructive to many of those unfortunate countries.

The discovery of a sea route to the East Indies via the Cape of Good Hope, which happened around the same time, opened up a trading range that was perhaps even more extensive than America's, despite the greater distance. In America, there were only two civilizations in any way more advanced than the most basic level of social organization, and these were destroyed almost as soon as they were discovered. The rest of the inhabitants were at a very early stage of development. But the empires of China, India, Japan, and several others in the East Indies — without having richer gold or silver mines — were in every other way far wealthier, better cultivated, and more advanced in arts and manufacturing than either Mexico or Peru. And that's true even if we accept the exaggerated accounts of the Spanish writers about those American empires, which plainly deserve no credit.

Rich, civilized nations can always trade with each other at far greater value than with peoples at earlier stages of development. And yet Europe has so far derived much less benefit from its trade with the East Indies than from its trade with America. The Portuguese monopolized the East India trade for about a century, and other European nations could only send or receive goods from that part of the world through them. When the Dutch began to encroach on this monopoly at the start of the seventeenth century, they placed their entire East India trade in the hands of an exclusive company. The English, French, Swedes, and Danes all followed suit. So no major European nation has ever enjoyed the benefits of free trade with the East Indies.

No other explanation is needed for why the East India trade has never been as profitable as trade with America — which, between almost every European nation and its own colonies, is open to all citizens. The exclusive privileges of these East India companies, their vast wealth, and the enormous political favor and protection that wealth has bought them from their governments have provoked intense envy. This envy has frequently led people to condemn the entire trade as harmful, because of the large quantities of silver it exports every year.

The companies have replied that their trade might tend to impoverish Europe in general by exporting silver, but not the particular country conducting it — because by re-exporting some of the return goods to other European countries, they annually bring home far more silver than they sent out. Both the objection and the reply are based on the same popular fallacy I've been examining here, and neither deserves further attention.

The annual export of silver to the East Indies probably makes silverware somewhat more expensive in Europe and may cause coined silver to buy a slightly larger quantity of labor and goods. The first effect is a very small loss; the second, a very small gain — both far too insignificant to deserve any public attention. The real benefit of the East India trade is that by opening a market for European goods — or equivalently, for the gold and silver bought with those goods — it tends to increase the annual production and real wealth of Europe. That it has so far increased them relatively little is probably due to the monopolistic restrictions under which it everywhere operates.

I thought it necessary, at the risk of being tedious, to examine this popular notion — that wealth consists of money, or gold and silver — at full length. In everyday language, as I've noted, "money" often just means "wealth." This ambiguity has made the idea so familiar that even people who know it's wrong keep forgetting their own principles. In the course of their reasoning, they slip back into treating it as an obvious and undeniable truth. Some of the best English writers on trade begin by observing that a country's wealth consists not only of gold and silver but of its land, houses, and consumable goods of every kind. But as their arguments develop, the land, houses, and consumable goods seem to slip their minds, and the whole thrust of their reasoning assumes that all wealth is gold and silver, and that multiplying those metals is the supreme goal of national industry and trade.

Once these two principles were established — that wealth consists of gold and silver, and that countries without mines can only acquire those metals through a favorable balance of trade (exporting more than they import) — it naturally followed that the supreme goal of economic policy should be to reduce imports of foreign goods for domestic consumption as much as possible, and to increase exports of domestic products as much as possible.

The two great tools for enriching the country, then, were restrictions on imports and encouragements for exports.

Import restrictions took two forms. First, restrictions on importing foreign goods for domestic consumption that could be produced at home, regardless of where they came from. Second, restrictions on importing goods of almost all kinds from specific countries with which the trade balance was considered unfavorable.

These restrictions consisted sometimes of high tariffs and sometimes of outright bans.

Exports were encouraged in four ways: through tariff rebates on re-exported goods, through subsidies, through favorable trade treaties with foreign nations, and through the establishment of colonies in distant countries.

Tariff rebates were granted in two situations. When domestically manufactured goods were subject to any tax or excise, all or part of it was often refunded when they were exported. And when foreign goods subject to import duties were brought in only to be re-exported, all or part of the import duty was sometimes refunded on re-export.

Subsidies were given to encourage either new industries just getting started or other kinds of production deemed to deserve special support.

Through trade treaties, special privileges were secured for a country's goods and merchants in some foreign nation — advantages beyond what was granted to traders from other countries.

Through the establishment of colonies, not just special privileges but outright monopolies were frequently secured for the goods and merchants of the colonizing country.

These two types of import restrictions, together with the four methods of encouraging exports, make up the six main tools by which the mercantile system proposed to increase a country's gold and silver by tipping the balance of trade in its favor. I'll examine each of them in a separate chapter. Without spending much more time on whether they actually bring money into the country, I'll focus mainly on what their likely effects are on the country's annual output. Insofar as they tend to increase or decrease the value of that annual output, they must obviously tend to increase or decrease the real wealth and income of the country.

By imposing either heavy duties or outright bans on importing goods from foreign countries that could be produced domestically, the government more or less hands the home market as a monopoly to the domestic industries that produce those goods. For example, the ban on importing live cattle or salt-cured meat from abroad guarantees British cattle ranchers a monopoly on the domestic market for butcher's meat. The heavy duties on importing grain — which during times of reasonable plenty effectively amount to a ban — give the same kind of advantage to grain growers. The ban on importing foreign woolens is equally favorable to British woolen manufacturers. The silk industry, even though it works entirely with foreign raw materials, has recently gained the same advantage. The linen industry hasn't gotten there yet, but it's making rapid progress. Many other kinds of manufacturers have similarly obtained either a complete or near-complete monopoly against their fellow countrymen in Great Britain. The variety of goods whose import into Great Britain is banned — either absolutely or under certain circumstances — far exceeds what anyone would guess unless they're intimately familiar with customs law.

Nobody doubts that this home-market monopoly often gives a big boost to whichever industry enjoys it, frequently directing a larger share of both the labor and capital of society toward that industry than would naturally flow there. But whether it actually increases the overall productivity of society, or directs it in the most beneficial way — that's not nearly so obvious.

A society's total industry can never exceed what its total capital can support. Just as the number of workers any individual employer can keep busy must be proportional to his capital, the number of workers that an entire society can continuously employ must be proportional to its total capital — and can never exceed that proportion. No trade regulation can increase the total amount of industry in any society beyond what its capital can sustain. All it can do is divert part of that industry into a direction it might not otherwise have gone. And it is by no means certain that this artificial redirection will benefit society more than whatever direction things would have taken on their own.

Every individual is constantly working to find the most profitable use for whatever capital he controls. It's his own advantage he has in mind, of course, not society's. But pursuing his own advantage naturally — or rather, necessarily — leads him to prefer the use of his capital that is most beneficial to society as well.

First, every individual tries to invest his capital as close to home as he can, and therefore supports domestic industry as much as possible — provided he can earn the usual rate of profit, or close to it.

So when profits are equal or nearly equal, every wholesale merchant naturally prefers domestic trade to foreign trade, and foreign trade to the carrying trade. In domestic trade, his capital is never out of his sight for very long, as it frequently is in foreign trade. He knows the character and circumstances of the people he deals with better, and if something goes wrong, he's more familiar with the laws he'd need to rely on for a remedy. In the carrying trade, the merchant's capital is essentially split between two foreign countries, with no part of it necessarily coming home or staying under his direct control. Consider an Amsterdam merchant who carries grain from Konigsberg to Lisbon, and fruit and wine from Lisbon to Konigsberg. Half his capital is generally sitting in Konigsberg and the other half in Lisbon. None of it needs to ever come to Amsterdam. Logically, such a merchant should live in either Konigsberg or Lisbon — only very unusual circumstances would make him prefer Amsterdam. But the anxiety he feels at being so far from his capital usually drives him to route some of the Konigsberg goods destined for Lisbon, and some of the Lisbon goods destined for Konigsberg, through Amsterdam. Even though this means paying for double loading and unloading, plus extra duties and customs charges, he willingly accepts these extra costs just to keep part of his capital where he can see it and manage it. This is exactly how every country with a significant carrying trade becomes a general hub and marketplace for the goods of all the countries whose trade it handles. To save himself a second round of loading and unloading, the merchant always tries to sell as much as possible from all these different countries' goods in the home market. In this way, he works to convert his carrying trade into a foreign trade for domestic consumption. Similarly, a merchant engaged in importing goods for resale will always prefer, given equal or nearly equal profits, to sell as much as possible at home. He saves himself the risk and hassle of exporting. In this way he converts his foreign trade into domestic trade. Home, in this sense, is the center around which every country's capital constantly orbits, always gravitating back even when particular circumstances temporarily push it toward more distant ventures. And as I've already shown, capital employed in domestic trade necessarily puts a greater amount of domestic industry into motion and provides income and employment to more of the country's inhabitants than an equal amount of capital employed in foreign trade. Foreign trade capital, in turn, has the same advantage over capital in the carrying trade. So when profits are equal or nearly equal, every individual naturally tends to invest his capital in the way that supports the most domestic industry and provides income and employment to the greatest number of his fellow citizens.

Second, every individual who invests his capital in domestic industry naturally tries to direct that industry so that its output will be as valuable as possible.

The output of industry is what it adds to the raw materials it works with. The greater the value of this output, the greater the employer's profit. But profit is the only reason anyone invests capital in industry, so he will always try to direct it toward the kind of production whose output is likely to be worth the most — that is, the kind that can be exchanged for the greatest amount of money or other goods.

Now, the annual income of every society is always exactly equal to the exchange value of the total annual output of its industry — or rather, it is precisely the same thing as that exchange value. Since every individual therefore tries both to invest his capital in domestic industry and to direct that industry so its output has the greatest possible value, every individual necessarily works to make the annual income of the society as large as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring to support domestic industry over foreign industry, he intends only his own security; and by directing that industry so that its output may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

What kind of domestic industry his capital can be used in, and which kind is likely to produce the most valuable output — every individual can obviously judge far better from his own local knowledge than any politician or lawmaker could judge for him. The politician who tries to tell private people how to invest their capital would not only be taking on an utterly unnecessary task, but claiming an authority that could not safely be entrusted to any single person, nor to any council or legislature whatsoever — an authority that would be most dangerous in the hands of someone foolish and presumptuous enough to think himself qualified to wield it.

Granting the domestic monopoly of the home market to any particular trade or industry is, in effect, telling private people how to invest their capital, and it must almost always be either a useless or a harmful regulation. If domestic products can be brought to market as cheaply as foreign ones, the regulation is obviously useless. If they can't, it's generally harmful. It's the basic rule of every sensible household: never try to make at home what will cost more to make than to buy. The tailor doesn't try to make his own shoes — he buys them from the shoemaker. The shoemaker doesn't try to make his own clothes — he hires a tailor. The farmer doesn't try to do either — he employs these different craftsmen. They all find it in their interest to focus their efforts on what they do best, and to buy everything else they need with part of their output, or with the money they earn from it.

What's sensible for every individual household can hardly be foolish for a great nation. If a foreign country can supply us with a product cheaper than we can make it ourselves, we're better off buying it from them with some of the output of our own industries — industries where we have the advantage. The country's total industry, being always proportional to the capital that supports it, won't shrink because of this. It will simply be redirected toward its most productive uses. Industry is certainly not being used to best advantage when it's aimed at producing something it could buy more cheaply. The value of the country's annual output is reduced whenever it's diverted away from producing more valuable goods toward producing less valuable ones. By our own assumption, the product in question could be bought from abroad with only part of the output — or the value of only part of the output — that an equal amount of capital would have produced at home, if left to follow its natural course. So the country's industry gets redirected from a more profitable use to a less profitable one, and the total value of its annual output, instead of increasing as the lawmakers intended, must necessarily shrink with every such regulation.

True, protective regulations can sometimes help a country develop a particular industry sooner than it otherwise would have, and eventually that industry might produce goods as cheaply or even more cheaply than foreign competitors. But even though industry may be channeled into a particular direction sooner than it otherwise would have been, it doesn't follow that the total amount of industry or income will be any larger because of such regulation. A society's industry can only grow as its capital grows, and its capital can only grow from what gets saved out of its income. But the immediate effect of every such regulation is to reduce income — and anything that reduces income is certainly not likely to increase capital faster than it would have grown on its own, if both capital and industry had been left to find their natural paths.

Even if a society never develops the targeted industry because there are no protective regulations, it wouldn't necessarily be any poorer at any point in time. At every stage, all its capital and industry could still have been employed — just on different things — in whatever way was most profitable at the time. Its income at every point could have been the largest its capital could support, and both capital and income could have been growing as fast as possible.

The natural advantages one country has over another in producing particular goods are sometimes so enormous that the whole world acknowledges it's pointless to fight them. Using greenhouses, heated beds, and heated walls, you can grow perfectly good grapes in Scotland, and even make perfectly good wine from them — at roughly thirty times the cost of importing equally good wine from abroad. Would it be reasonable to ban all foreign wine imports just to promote the production of claret and burgundy in Scotland? But if it would be obviously absurd to direct thirty times more capital and labor toward producing something than it would cost to simply buy it from abroad, then there must be an absurdity of exactly the same kind — if not quite so glaring — in directing even a thirtieth, or a three-hundredth, more of either toward any such purpose. Whether one country's advantage over another is natural or acquired makes no difference here. As long as one country has the advantage and the other doesn't, the one without it will always be better off buying from the one that has it. After all, the advantage one craftsman has over his neighbor in a different trade is merely an acquired one, yet they both find it more profitable to buy from each other rather than try to do what the other does.

Merchants and manufacturers are the people who benefit most from this home-market monopoly. The bans on importing foreign cattle and salt-cured meat, along with the heavy duties on foreign grain that effectively amount to a ban during times of moderate plenty, aren't nearly as beneficial to British ranchers and farmers as similar regulations are to merchants and manufacturers. Manufactured goods — especially the finer kinds — are far more easily shipped from one country to another than grain or cattle. That's why foreign trade mainly involves manufactured goods. In manufacturing, even a small cost advantage lets foreigners undersell domestic producers, even in the home market. In raw agricultural products, it would take an enormous advantage. So if we allowed the free import of foreign manufactured goods, several domestic manufacturers would probably suffer, and some might go bankrupt entirely. A significant amount of capital and labor currently employed in those industries would have to find new uses. But completely free import of raw agricultural products would barely affect the country's agriculture.

Take the import of foreign cattle, for example. Even if it were made completely free, so few could actually be imported that it would barely affect the British cattle industry. Live cattle are perhaps the only commodity that's more expensive to transport by sea than by land. On land, they walk themselves to market. By sea, you have to carry not just the cattle but their food and water too — at considerable cost and inconvenience. The short sea crossing between Ireland and Great Britain does make importing Irish cattle somewhat easier. But even if permanent free import were allowed (recently it was permitted only temporarily), it couldn't significantly affect British cattle ranchers. The parts of Great Britain that border the Irish Sea are all grazing country. Irish cattle couldn't be brought in for local use — they'd have to be driven through these vast grazing regions at considerable cost and trouble before reaching their proper market. Fat cattle couldn't be driven that far. So only lean cattle could be imported, and that would affect not the fattening operations (for which it would actually be beneficial, by lowering the price of lean cattle) but only the breeding regions. The small number of Irish cattle that have actually been imported since the ban was lifted, together with the continued strong prices for lean cattle, seem to prove that even British breeding regions have nothing to fear from free imports. The common people of Ireland are said to have sometimes violently opposed the export of their cattle. But if the exporters had found great profit in the trade, they could easily have overcome this unruly opposition when the law was on their side.

Besides, fattening regions must always be highly developed land, while breeding regions are generally uncultivated. The high price of lean cattle, by raising the value of uncultivated land, actually discourages agricultural improvement — it works like a subsidy against development. For any highly developed country, it would be more advantageous to import lean cattle than to breed them. The province of Holland reportedly does exactly this. The mountains of Scotland, Wales, and Northumberland are not capable of much improvement and seem naturally destined to be Britain's breeding grounds. The freest possible import of foreign cattle would have no effect other than to prevent these breeding regions from exploiting the rest of the kingdom's growing population and prosperity, jacking up their prices to outrageous levels, and imposing what amounts to a real tax on all the more developed and cultivated parts of the country.

Similarly, free import of salt-cured meat would barely affect British ranchers. Salt provisions are not only bulky but, compared to fresh meat, they're inferior in quality and more expensive (because they require more labor). They could never compete with fresh meat, only with domestically salt-cured provisions. They might be used for provisioning ships on long voyages and similar purposes, but could never become a significant part of the population's diet. The small amount of salt provisions imported from Ireland since the ban was lifted is experimental proof that ranchers have nothing to fear. The price of butcher's meat doesn't appear to have been noticeably affected.

Even the free import of foreign grain could barely affect British farmers. Grain is far bulkier than meat. A pound of wheat at a penny is as expensive, pound for pound, as butcher's meat at fourpence. The small amount of foreign grain imported even in the worst shortages should reassure farmers that they have nothing to fear from the freest possible imports. According to the very well-informed author of the tracts on the grain trade, the average annual import amounts to only 23,728 quarters of all sorts of grain — less than one five-hundred-and-seventy-first of annual consumption. But since the grain subsidy causes greater exports in years of plenty, it must also cause greater imports in years of scarcity than would otherwise occur. The abundance of one year doesn't compensate for the scarcity of another. As the average quantity exported is necessarily increased by the subsidy, so too must the average quantity imported. Without the subsidy, as less grain would be exported, probably less would be imported, year over year, than at present. The grain merchants — the middlemen who move grain between Britain and foreign countries — would have much less business and might suffer considerably. But the landowners and farmers would barely notice. It's the grain merchants, in fact, not the landowners and farmers, in whom I've noticed the greatest anxiety about renewing and continuing the subsidy.

Landowners and farmers are, to their great credit, the people least susceptible to the wretched spirit of monopoly. The owner of a large factory sometimes gets alarmed if a competitor sets up within twenty miles of him. The Dutch owner of the woolen factory at Abbeville stipulated that no similar operation could be established within thirty leagues of the city. Farmers and landowners, on the other hand, are generally inclined to encourage rather than obstruct the development of their neighbors' farms and estates. They have no trade secrets like most manufacturers do, and they're actually eager to share any new technique they've found beneficial. As old Cato said: "Farming is the most stable, least envied of occupations, and those who pursue it harbor the fewest ill intentions." Farmers and landowners, scattered across the countryside, can't easily band together the way merchants and manufacturers can. The latter, concentrated in towns and accustomed to the exclusive, guild-like mentality that prevails there, naturally try to obtain the same exclusive privileges over all their fellow citizens that they generally hold over the inhabitants of their own towns. They appear to have been the original inventors of these import restrictions that secure for them the monopoly of the home market. It was probably in imitation of them — trying to level the playing field against people they felt were oppressing them — that British landowners and farmers so far forgot the generosity natural to their station as to demand the exclusive privilege of supplying their countrymen with grain and meat. They perhaps didn't stop to consider how much less their interests would be affected by free trade than the interests of the people whose example they were following.

To permanently ban the import of foreign grain and cattle is, in reality, to decree that the country's population and industry shall never exceed what the raw produce of its own soil can support.

There seem, however, to be two cases where it's generally beneficial to place some burden on foreign goods in order to encourage domestic industry.

The first is when a particular industry is necessary for national defense. The defense of Great Britain, for example, depends heavily on its number of sailors and ships. The Navigation Act therefore quite properly tries to give British sailors and shipping a monopoly on their own country's trade — in some cases through outright bans, in others through heavy burdens on foreign shipping. Here are the main provisions of that act.

First, all ships whose owners, masters, and three-fourths of the crew aren't British subjects are prohibited from trading to British settlements and colonies, or from engaging in Britain's coastal trade, on pain of forfeiting both ship and cargo.

Second, many of the bulkiest imported goods can only be brought into Britain either in ships meeting those requirements, or in ships belonging to the country that produced the goods (with the owners, masters, and three-fourths of the crew from that country). Even when imported in the latter type of ship, they're subject to double the normal duties for foreign ships. Importing in ships of any other country means forfeiting both ship and goods. When this act was passed, the Dutch were — as they still are — the great freight carriers of Europe. This regulation effectively shut them out of carrying goods to Britain, or importing to Britain the goods of any other European country.

Third, many of the bulkiest imported goods are prohibited from being brought into Britain, even in British ships, from any country other than where they were produced, on pain of forfeiting ship and cargo. This regulation was also probably aimed at the Dutch. Holland was then, as now, the great emporium for all European goods, and this rule prevented British ships from loading up in Holland with other European countries' products.

Fourth, all fish, whale products, oil, and blubber not caught and processed by British vessels face double foreign duties when imported into Britain. The Dutch, who were then the only European nation that tried to supply foreign markets with fish, and who remain the principal one, were thus hit with a very heavy burden on any fish they might supply to Britain.

When the Navigation Act was passed, England and Holland weren't actually at war, but the most intense hostility simmered between the two nations. This animosity had begun during the Long Parliament, which first drafted the act, and it erupted into the Dutch Wars during the Protectorate and the reign of Charles II. It's entirely possible, therefore, that some of the act's regulations were driven by national grudge rather than policy. But they're as wise as if they'd been crafted by the most careful deliberation. National hostility at that particular time happened to aim at the very same objective that the wisest policy would have recommended: reducing the naval power of Holland, the only naval power that could threaten England's security.

The Navigation Act is not favorable to foreign commerce, or to the growth of the prosperity that comes from it. A nation's interest in foreign trade is the same as a merchant's interest in dealing with his customers: to buy as cheaply and sell as dearly as possible. A nation is most likely to buy cheaply when, through completely free trade, it encourages all nations to bring their goods to its shores. For the same reason, it's most likely to sell dearly when its markets are flooded with the greatest number of buyers. The Navigation Act, it's true, doesn't burden foreign ships that come to buy British goods. Even the old duties on exports that foreign merchants used to pay have mostly been removed. But if foreigners are prevented by bans or heavy duties from coming to sell, they can't always afford to come to buy either — because coming without cargo means losing the freight cost from their own country to Britain. By reducing the number of sellers, we necessarily reduce the number of buyers, and end up not only buying foreign goods at higher prices but selling our own at lower ones, compared to what would happen under truly free trade. However, since defense is far more important than prosperity, the Navigation Act is perhaps the wisest of all England's commercial regulations.

The second case where it's generally beneficial to place some burden on foreign goods is when a tax has been imposed on the equivalent domestic product. In that situation, it seems reasonable to impose an equal tax on the corresponding foreign product. This wouldn't give domestic industry a monopoly on the home market, or direct a larger share of capital and labor toward it than would naturally flow there. It would simply prevent the domestic tax from driving capital away to other uses, keeping the competition between foreign and domestic industry as close as possible to where it was before the tax. In Britain, whenever such a tax is placed on domestic products, it's standard practice — to silence the loud complaints of merchants and manufacturers that they'll be undercut at home — to slap a much heavier duty on imports of the same kind.

According to some people, this second limitation on free trade should sometimes extend much further — not just to the specific foreign goods that compete with taxed domestic ones. When the necessities of life are taxed in any country, they argue, it becomes appropriate to tax not only similar imported necessities but all foreign goods that compete with anything produced domestically. The cost of living, they say, necessarily rises because of such taxes, and the price of labor must always rise with the cost of workers' subsistence. Every domestically produced commodity, even if not directly taxed, becomes more expensive because the labor that produces it costs more. Such taxes, they claim, effectively amount to a tax on every domestically produced commodity. Therefore, to keep domestic industry on an even footing with foreign competition, it becomes necessary to impose a duty on every foreign good equal to this increase in the price of domestic goods.

Whether taxes on necessities of life — such as those in Britain on soap, salt, leather, candles, and so on — actually raise the price of labor and consequently of all other goods, I'll examine later when I discuss taxes. But suppose for now that they do have this effect (and they undoubtedly do). This general increase in all prices due to higher labor costs differs from a particular price increase caused by a specific tax in two important ways.

First, you can always calculate precisely how much a specific tax raises the price of a specific product. But you could never determine with any reasonable accuracy how much a general increase in labor costs affects the price of every different product that labor is used to produce. It would therefore be impossible to accurately calibrate a tax on each foreign good to match this general price increase across all domestic goods.

Second, taxes on necessities of life have essentially the same effect on people's circumstances as poor soil and a bad climate. They make provisions more expensive, just as if it required extraordinary labor and expense to produce them. Just as it would be absurd, when nature makes farming difficult because of poor soil and harsh weather, to dictate to people how they should use their capital and labor — it's equally absurd to do so when the difficulty comes from artificial scarcity created by taxes. In both cases, the obviously best policy is to let people adapt their industry to their situation as best they can, and find whatever pursuits give them some advantage, whether in the domestic or foreign market. To pile on new taxes because people are already overburdened with taxes, because they already pay too much for the necessities of life, to make them also pay too much for most other goods — that is certainly the most absurd way of trying to make it up to them.

Such taxes, when they pile up high enough, become a curse as devastating as barren earth and brutal weather. And yet it's in the richest and most industrious countries that they've been imposed most heavily. No other countries could survive such a burden. Just as only the strongest bodies can stay healthy on a terrible diet, only the nations with the greatest natural and acquired advantages in every kind of industry can survive and prosper under such taxes. Holland is the country in Europe where these taxes are most abundant, and it continues to prosper — from its own peculiar circumstances — not because of them, as has been absurdly suggested, but in spite of them.

Just as there are two cases where it's generally beneficial to burden foreign goods to encourage domestic industry, there are two others where it may sometimes be worth deliberating: in one case, whether to continue allowing free import of certain foreign goods; in the other, how best to restore free imports after they've been interrupted for some time.

The case where it may be worth deliberating about continuing free imports arises when a foreign nation restricts our manufactures with heavy duties or bans. The natural instinct here is revenge — retaliation — imposing similar duties and bans on their products. Nations almost always do retaliate in this way. The French have been especially aggressive in favoring their own manufacturers by blocking competing foreign goods. This was a major part of the policy of Colbert, who — despite his great abilities — seems to have been taken in by the self-serving arguments of merchants and manufacturers, who are always demanding monopoly at the expense of their fellow citizens. The most knowledgeable people in France today believe his policies of this kind did not benefit the country. In 1667, Colbert imposed very heavy duties on a wide range of foreign manufactures. When he refused to reduce them for the Dutch, they retaliated in 1671 by banning French wines, brandies, and manufactures. The war of 1672 seems to have been caused in part by this commercial dispute. The Peace of Nijmegen ended it in 1678 by moderating some duties for the Dutch, who in turn lifted their ban. Around the same time, France and England began mutually strangling each other's industries with similar duties and bans — the French apparently having started it. The hostility between the two nations has so far prevented either side from backing down. In 1697, England banned the import of bone lace, a Flemish product. The Flemish government, then under Spanish rule, retaliated by banning English woolens. In 1700, the English ban on bone lace was lifted on the condition that English woolens would once again be admitted to Flanders on the same terms as before.

There may be good strategy in such retaliatory measures when there's a reasonable chance they'll force the other side to repeal its duties or bans. Regaining a major foreign market will generally more than compensate for the temporary inconvenience of paying higher prices for some goods in the short term. But judging whether retaliation is likely to produce this result may not really fall within the science of the legislator, whose deliberations should be guided by general principles that are always the same. It belongs more to the skill of that sly and crafty creature commonly known as a politician, whose decisions are shaped by the shifting circumstances of the moment. When there's no prospect of getting the offending measures repealed, it seems a poor way to compensate certain injured groups among our people by inflicting yet another injury — not just on those groups but on nearly all others as well. When a neighbor bans one of our products, we typically ban not just the same product of theirs (which alone would barely affect them) but some other product entirely. This may encourage a particular group of our own workers, and by eliminating some of their competitors, allow them to raise their prices at home. But the workers who were hurt by the neighbor's ban won't benefit from ours at all. On the contrary, they and nearly all other citizens will have to pay more for certain goods. Every such law imposes a real tax on the whole country — not to help the workers injured by the original ban, but to help some entirely different group.

The other case where deliberation is warranted involves how best to restore free imports after they've been blocked for some time — specifically, when protective duties or bans have allowed particular industries to grow so large that they employ vast numbers of people. Basic decency may require that free trade be restored only gradually, with considerable caution and care. If all those high duties and bans were removed overnight, cheaper foreign goods of the same kind might flood the home market so fast as to throw many thousands of people out of their jobs and their means of support. The disruption this would cause might be very considerable. But in all probability, it would be much less severe than people commonly imagine, for two reasons.

First, all industries that routinely export some of their output to other European countries without any subsidy would barely be affected by the freest possible imports. Those products already have to be sold abroad at prices as low as competing foreign goods, which means they must be sold at home for even less. They would therefore still dominate the home market. Some fashion-conscious eccentric might occasionally prefer foreign goods simply because they're foreign, over cheaper and better domestic alternatives — but this folly would be too rare to make any real dent in overall employment. A large share of our woolen products, tanned leather, and hardware is routinely exported to other European countries without any subsidy, and these are the industries that employ the most workers. Silk might be the industry that would suffer most from free trade, and linen after it — though linen much less.

Second, even if free trade did suddenly throw a large number of people out of work, it wouldn't necessarily deprive them of all employment or means of support. When the army and navy were downsized at the end of the last war, more than a hundred thousand soldiers and sailors — a number equal to the workforce of the largest industries — were all at once thrown out of their regular employment. Though they undoubtedly suffered some hardship, they weren't left destitute. Most of the sailors probably drifted gradually into the merchant marine as they found openings. Meanwhile, both they and the soldiers were absorbed into the general population and found work in a wide variety of occupations. No major upheaval resulted — not even any noticeable disruption — from this massive change in the circumstances of over a hundred thousand men, all accustomed to bearing arms and many of them to plunder. The number of vagrants barely increased anywhere, and as far as I've been able to determine, wages didn't fall in any occupation except merchant shipping. Now, if we compare the habits of a soldier with those of any kind of factory worker, the worker's habits are much less likely to make him unfit for a new trade than the soldier's are to make him unfit for any trade at all. The factory worker has always depended on his labor for a living; the soldier has always expected to live off his pay. Hard work and discipline are second nature to one; idleness and dissipation to the other. And it's surely much easier to redirect someone's labor from one kind of work to another than to transform idleness and dissipation into productive activity. Besides, as I've already pointed out, most manufacturing workers can easily transfer to related industries of a similar nature. Most of them also do occasional agricultural work. The capital that employed them in one industry will still remain in the country to employ an equal number of people in some other way. If the country's total capital stays the same, demand for labor will stay the same — or very nearly so — even if it shifts to different places and occupations. Discharged soldiers and sailors, after all, are free to practice any trade in any town in Great Britain or Ireland. Let the same natural liberty — the freedom to pursue whatever honest industry they choose — be restored to all His Majesty's subjects, just as it is to soldiers and sailors. In other words: break up the exclusive privileges of guilds, repeal the apprenticeship laws (both of which are real infringements on natural liberty), and add to these the repeal of the laws of settlement, so that a poor worker thrown out of a job in one trade or one place can seek work in another trade or another place without fear of prosecution or forced removal. Then neither the public nor individuals will suffer much more from occasionally disbanding certain industries than from disbanding soldiers. Our manufacturers certainly have great merit with their country, but they can't have more merit than those who defend it with their blood, nor do they deserve to be treated with more delicacy.

To expect that truly free trade will ever be fully established in Great Britain is as absurd as expecting a Utopia to be built here. Not only do public prejudices oppose it, but far more powerfully, so do the private interests of powerful individuals. If army officers opposed any reduction in troop numbers with the same zeal and unanimity that factory owners deploy against every law that might increase their competition at home — if officers whipped up their soldiers the same way owners incite their workers to violently attack the proposers of any such regulation — then reducing the army would be as dangerous as it has now become to chip away at the monopoly our manufacturers have established against us. This monopoly has so expanded the ranks of certain industrial groups that, like an overgrown standing army, they've become formidable to the government itself, and on many occasions they intimidate the legislature. The member of parliament who supports every proposal to strengthen this monopoly is guaranteed not only a reputation for understanding trade, but great popularity and influence with a class of men whose numbers and wealth make them enormously important. The member who opposes them — and especially one with enough authority to actually block them — will find that neither the most spotless integrity, nor the highest rank, nor the greatest public service can protect him from the most vicious slander, personal insults, and sometimes even real physical danger from the raging fury of thwarted monopolists.

The owner of a large factory who is suddenly exposed to foreign competition and forced to shut down would certainly suffer considerably. The working capital he'd normally use to buy materials and pay workers could probably find other uses without too much difficulty. But the fixed capital tied up in buildings and equipment could hardly be salvaged without significant loss. A fair concern for his interests requires that changes of this kind never be introduced suddenly, but slowly, gradually, and with very long advance notice. Ideally — if the legislature's deliberations could always be guided by a broad view of the general good rather than by the loud demands of special interests — it should be especially careful never to establish any new monopolies of this kind, and never to extend the ones that already exist. Every such regulation introduces a real disorder into the nation's economic constitution, one that's difficult to cure later without causing yet another disorder.

How far it may be appropriate to impose tariffs on imports not to prevent them but to raise government revenue, I'll consider later when I discuss taxation. Taxes designed to prevent or reduce imports are obviously as destructive to customs revenue as they are to free trade.

Chapter II: Of Restraints upon the Importation from Foreign Countries

Slapping extraordinary restrictions on imports from particular countries where the balance of trade is supposedly against us is the second method by which the mercantile system proposes to increase the national stock of gold and silver. Here's how it works in practice: in Britain, Silesian linens can be imported for domestic use by paying certain duties. But French cambrics and linens are banned from import except into the port of London, where they must be warehoused for re-export only. Higher duties are charged on French wines than on those of Portugal — or indeed of any other country. Under the so-called impost of 1692, a duty of 25 percent was levied on the value of all French goods, while goods from other nations mostly faced much lighter duties, rarely exceeding 5 percent. French wine, brandy, salt, and vinegar were exceptions — they were already subject to other heavy duties under different laws or specific clauses of the same law. In 1696, since the first 25 percent wasn't considered discouragement enough, a second 25 percent duty was imposed on all French goods except brandy, along with a new duty of twenty-five pounds per ton on French wine and fifteen pounds per ton on French vinegar. French goods have never been exempted from any of the general subsidies — the 5 percent duties that have been imposed on all or most of the goods listed in the official tariff book. Counting the one-third and two-third subsidies as making up one full subsidy between them, there have been five such general subsidies. So before the current war, 75 percent could be considered the minimum duty on most French goods. On the greater part of those goods, this effectively amounts to a ban. The French, for their part, have treated our goods and manufactures just as harshly — though I'm not as familiar with the specific burdens they've imposed. These mutual restrictions have killed off almost all legitimate trade between the two nations, and smugglers are now the principal importers — of British goods into France, and of French goods into Britain. The principles I examined in the previous chapter grew out of private self-interest and the spirit of monopoly. The ones I'm about to examine here grow out of national prejudice and hostility. They are, as you might expect, even more unreasonable — and they're unreasonable even on the mercantile system's own terms.

First, even if it were certain that free trade between France and England would produce a balance in France's favor, it wouldn't follow that such trade would be bad for England, or that England's overall trade balance would turn more against it. If French wines are better and cheaper than Portuguese ones, and French linens better and cheaper than German ones, it would be more advantageous for Britain to buy both its wine and its foreign linen from France rather than from Portugal and Germany. Although the value of annual imports from France would increase significantly, the value of total annual imports would actually decrease, since French goods of the same quality are cheaper than those from the other two countries. This would hold true even if all the French goods were consumed in Britain.

Second, a large portion of those French goods could be re-exported to other countries, where they could be sold at a profit and bring back goods equal in value — perhaps — to the total original cost of all the French imports. What's frequently been said about the East India trade might well be true of the French trade: although most East Indian goods were initially purchased with gold and silver, re-exporting part of them to other countries brought back more gold and silver than the total original cost. One of the most important branches of Dutch trade today consists of carrying French goods to other European countries. Some of the French wine consumed in Britain is actually smuggled in from Holland and Zealand. If there were either free trade between France and England, or if French goods could be imported at the same duties as other European goods (with refunds on re-export), England could share in a trade that the Dutch find so profitable.

Third, and finally, there's no reliable way to determine which side of the "balance" between any two countries actually comes out ahead, or which exports more in value. National prejudice and hostility — always stoked by the self-interest of particular merchants — are the principles that generally guide our judgment on such questions. Two criteria have been commonly used: customs records and exchange rates. Customs records, it's now generally acknowledged, are a very unreliable guide, because most goods are valued inaccurately in them. Exchange rates are perhaps almost equally unreliable.

When the exchange between two cities, like London and Paris, is at par, it supposedly means the debts London owes Paris are balanced by those Paris owes London. When a premium must be paid in London for a bill drawn on Paris, it supposedly means London's debts to Paris exceed Paris's debts to London, so the difference must be sent in cash — the premium compensating for the risk, trouble, and cost of shipping money. The normal state of debts and credits between two cities is supposedly determined by the normal course of their trade with each other. When neither imports more from the other than it exports, their debts and credits should balance out. When one imports more than it exports, it necessarily owes the other more, the debts and credits don't balance, and money must be sent from the place whose debts exceed its credits. The normal exchange rate, then, is supposedly an indicator of the normal balance of debts and credits, which in turn supposedly reflects the normal balance of imports and exports.

But even if the normal exchange rate were a reliable indicator of the normal state of debts and credits, it still wouldn't follow that the balance of trade favors the country with the favorable credit balance. The normal balance of debts and credits between any two places isn't determined solely by their trade with each other; it's often influenced by their trade with many other places. For example, if English merchants typically pay for goods bought in Hamburg, Danzig, and Riga with bills drawn on Holland, then the debt-and-credit relationship between England and Holland isn't governed solely by trade between those two countries — it's influenced by England's trade with all those other places. England might have to send money to Holland every year even though its annual exports to Holland far exceed its imports, and even though the so-called balance of trade strongly favors England.

Furthermore, the way exchange rates have traditionally been calculated makes the normal course of exchange an unreliable indicator even of the debt-and-credit position. In other words, the real exchange rate may be — and in fact often is — very different from the computed one, so you can't draw reliable conclusions from the latter about the former.

Here's how it works: when you pay a sum of money in England containing (according to the English mint standard) a certain number of ounces of pure silver, and receive a bill for a sum in France containing (according to the French mint standard) an equal number of ounces of pure silver, exchange is said to be at par. If you pay more, you're supposedly paying a premium, and exchange is said to be against England and in favor of France. If you pay less, you supposedly get a premium, and exchange is said to be against France and in favor of England.

But, first, you can't always judge the value of different countries' currency by the standard of their mints. In some countries, the coins are more worn, clipped, or otherwise degraded than in others. A country's actual currency is worth not what its coins should contain in pure silver, but what they actually contain. Before the silver coinage was reformed under King William, the exchange between England and Holland, calculated the usual way from their respective mint standards, was 25 percent against England. But the actual value of English coins at the time was more than 25 percent below their standard value. So the real exchange may actually have been in England's favor, even though the computed exchange was heavily against it. A smaller number of ounces of pure silver actually paid in England may have bought a bill for a greater number of ounces to be paid in Holland. The party that appeared to be paying the premium may actually have been receiving it. Before the recent reform of English gold coins, French currency was much less worn than English — perhaps two or three percent closer to its standard. So if the computed exchange with France was no more than two or three percent against England, the real exchange might actually have been in England's favor. Since the gold coin reform, the exchange has been consistently in favor of England and against France.

Second, in some countries the government pays for minting coins; in others, private individuals pay when they bring bullion to the mint, and the government even earns a little revenue from it. In England, the government pays. If you bring a pound of standard silver to the mint, you get back sixty-two shillings containing a pound of standard silver. In France, an 8 percent fee is deducted for minting, which not only covers the cost but provides the government a small revenue. In England, since minting is free, the current coins can never be worth much more than the bullion they contain. In France, the craftsmanship adds value, just as it does for silverware. A given amount of French money containing a certain weight of pure silver is therefore worth more than an equal weight of English money, and requires more bullion or goods to purchase it. So even if both countries' coins were equally close to their mint standards, a sum of English money still couldn't buy a sum of French money containing the same weight of pure silver. If the extra amount paid simply covered France's minting costs, the real exchange could be at par even though the computed exchange looked like it favored France. If even less was paid, the real exchange could actually favor England while the computed rate favored France.

Third, in some financial centers — Amsterdam, Hamburg, Venice, and others — foreign bills of exchange are paid in what's called bank money. In others — London, Lisbon, Antwerp, Livorno — they're paid in the ordinary currency of the country. Bank money is always worth more than the same face value in ordinary currency. A thousand guilders in the Bank of Amsterdam, for example, are worth more than a thousand guilders in Amsterdam's regular currency. The difference between them is called the bank's "agio" (its premium), which in Amsterdam generally runs about 5 percent. Suppose two countries' currencies are equally close to their mint standards, but one pays foreign bills in ordinary currency while the other pays in bank money. The computed exchange may favor the bank-money country even though the real exchange actually favors the other — for the same reason that the computed exchange may favor whichever country pays in better money, even if the real exchange favors the other. Before the gold coin reform, the computed exchange was generally against London when compared with Amsterdam, Hamburg, Venice, and probably all other places that pay in bank money. But the real exchange may not have been against London at all. Since the reform, it's been in London's favor even with those cities. The computed exchange has generally favored London versus Lisbon, Antwerp, Livorno, and (except for France) most other parts of Europe that pay in ordinary currency — and the real exchange was probably in London's favor as well.

A Digression on Banks of Deposit, Especially the Bank of Amsterdam

The currency of a large state like France or England consists almost entirely of its own coins. If this currency becomes worn, clipped, or otherwise degraded below standard, the state can effectively restore it by reforming its coinage. But the currency of a small state like Genoa or Hamburg can rarely consist entirely of its own coins. It must largely be made up of coins from all the neighboring countries with which its inhabitants constantly do business. Such a state, therefore, can't always fix its currency just by reforming its own coinage. If foreign bills of exchange are paid in this patchwork currency, the uncertain value of any sum in what is inherently uncertain money makes the exchange rate always very unfavorable for such a state, since its currency is inevitably valued abroad at less than it's worth.

To remedy the disadvantage this unfavorable exchange imposed on their merchants, these small states — when they began paying attention to trade — often enacted that foreign bills of exchange above a certain value had to be paid not in ordinary currency but by a transfer in the books of a certain bank. These banks were established under the credit and protection of the state, and were always required to pay out in good, standard-weight money. The banks of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg all seem to have been originally founded for this purpose, though some were later put to other uses. Because bank money was better than ordinary currency, it naturally commanded a premium — larger or smaller depending on how much the regular currency had deteriorated. The premium on the Bank of Hamburg, for example, which is generally about 14 percent, represents the supposed difference between the state's good standard money and the clipped, worn, and degraded currency pouring in from all the neighboring states.

Before 1609, the enormous quantity of clipped and worn foreign coins that Amsterdam's extensive trade attracted from across Europe had driven the value of its currency about 9 percent below good money fresh from the mint. Such good money, as soon as it appeared, was immediately melted down or carried away — as always happens in such circumstances. Merchants, despite having plenty of currency, couldn't always find enough good money to pay their bills of exchange. The value of those bills, despite several regulations meant to prevent it, became highly uncertain.

To fix these problems, a bank was established in 1609 under the guarantee of the city. This bank accepted both foreign coins and the light, worn domestic coins at their real intrinsic value in good standard money, deducting only enough to cover minting costs and other necessary expenses. For the remaining value, it gave a credit in its books. This credit was called bank money, which — because it represented money exactly matching the mint standard — was always worth the same real amount and was intrinsically worth more than ordinary currency. At the same time, a law was passed requiring that all bills drawn on or negotiated in Amsterdam worth 600 guilders or more be paid in bank money. This immediately eliminated all uncertainty about those bills' value. Every merchant had to maintain a bank account to pay his foreign bills, which naturally created demand for bank money.

Bank money, beyond its inherent superiority over regular currency and the additional value this demand gave it, had other advantages too. It was safe from fire, robbery, and other accidents. The city of Amsterdam stood behind it. It could be transferred by a simple bookkeeping entry, without the trouble of counting coins or the risk of transporting them from place to place. Thanks to all these advantages, bank money seems to have always commanded a premium. It's generally believed that all the money originally deposited in the bank was simply left there, since nobody wanted to withdraw a deposit they could sell at a premium in the market. By withdrawing from the bank, the owner of bank credit would lose this premium. Just as a freshly minted shilling buys no more goods in the market than a worn one, good money pulled out of the bank's vaults and mixed into general circulation would be worth no more than ordinary currency — since it could no longer be easily distinguished from it. While it sat in the bank's vaults, its superior quality was known and guaranteed. Once in private hands, that superiority couldn't be verified without more effort than the difference was worth. Besides, money withdrawn from the bank lost all the other advantages of bank money — its security, easy transferability, and usefulness for paying foreign bills. On top of all this, as will become clear shortly, it couldn't be withdrawn without first paying a storage fee.

These coin deposits — which the bank was bound to return in coin — constituted the bank's original capital: the total value represented by bank money. Today they're believed to make up only a very small part of it. To facilitate the bullion trade, the bank has for many years given credit in its books for deposits of gold and silver bullion. This credit is generally about 5 percent below the mint price of such bullion. The bank simultaneously issues what's called a receipt, entitling the depositor (or the bearer) to withdraw the bullion at any time within six months — provided they transfer back to the bank the same amount of bank money that was credited when the deposit was made, and pay one-quarter percent for storage if the deposit was silver, or one-half percent if gold. But if this payment isn't made by the expiration date, the deposit belongs to the bank at the price at which it was received. This storage fee is essentially warehouse rent. Various reasons have been offered for why gold storage costs more than silver. Gold's purity is harder to verify, it's been said. Fraud is easier and the losses greater with the more precious metal. And since silver is the standard metal, the state supposedly wants to encourage silver deposits more than gold.

Bullion deposits are mostly made when prices are somewhat below normal; they're withdrawn when prices rise. In Holland, the market price of bullion is generally above the mint price, for the same reason it used to be in England before the gold coin reform. The difference is said to run from about six to sixteen stivers per mark (eight ounces of silver, eleven parts fine and one part alloy). The bank price — the credit given for deposits of well-known foreign silver coins like Mexican dollars — is 22 guilders per mark. The mint price is about 23 guilders, and the market price runs from 23 guilders 6 stivers to 23 guilders 16 stivers — two to three percent above the mint price. The same proportions roughly hold for gold bullion. A person can generally sell his receipt for the difference between the mint price and the market price of bullion. Since a receipt is almost always worth something, people very rarely let their receipts expire or allow their bullion to be forfeited to the bank. This does happen occasionally, though — more often with gold than silver, because of the higher storage fee.

The depositor who obtains both a bank credit and a receipt pays his bills of exchange as they come due with his bank credit, and either sells or keeps his receipt depending on whether he expects bullion prices to rise or fall. The receipt and the bank credit rarely stay with the same person for long, and there's no reason they should. Someone with a receipt who wants to withdraw bullion can always find plenty of bank credits to buy at the going rate. Someone with bank money who wants to withdraw bullion can always find receipts just as easily.

The owners of bank credits and the holders of receipts are two different types of creditors of the bank. A receipt holder can't withdraw the bullion it covers without transferring back to the bank the amount of bank money originally credited for it. If he doesn't have enough bank money of his own, he buys it from someone who does. A bank-money owner can't withdraw bullion without presenting the corresponding receipt. If he doesn't have one, he buys one from someone who does. The receipt holder, when he buys bank money, is buying the right to withdraw bullion whose mint price is 5 percent above the bank price. So the roughly 5 percent premium he pays isn't for something imaginary — it's for real value. The bank-money owner, when he buys a receipt, is buying the right to withdraw bullion whose market price is typically two to three percent above the mint price. What he pays is likewise for real value. Together, the price of the receipt and the price of bank money make up the full value of the bullion.

For deposits of ordinary domestic coins, the bank also issues both receipts and credits — but these receipts are frequently worthless on the market. Take ducatoons, for example, which pass in regular circulation at three guilders three stivers each. The bank gives only three guilders credit — 5 percent below their face value — and issues a receipt entitling the bearer to reclaim them within six months upon paying one-quarter percent storage. This receipt will often fetch nothing on the market. Three guilders of bank money typically sell for three guilders three stivers — the full face value of the ducatoons if withdrawn from the bank. But before they can be withdrawn, the one-quarter percent storage fee must be paid, which would be a pure loss for the receipt holder. However, if the bank's premium ever dropped to 3 percent, such receipts might become worth something — about one and three-quarter percent. But since the premium currently runs around 5 percent, these receipts are usually allowed to expire — or as they put it, "fall to the bank." Receipts for gold ducat deposits expire even more frequently, since the higher storage fee of one-half percent must be paid before withdrawal. The 5 percent the bank gains when deposits of either coin or bullion are forfeited can be considered warehouse rent for permanent storage.

The total bank money for which receipts have expired must be considerable. It includes the bank's entire original capital, which is generally believed to have been left there since it was first deposited, since neither renewing the receipt nor withdrawing the deposit could be done without loss. But whatever this amount may be, it's thought to represent only a very small proportion of total bank money. The Bank of Amsterdam has for many years been Europe's great bullion warehouse, and receipts on bullion very rarely expire. The vast majority of bank money — the credits in the bank's books — is believed to have been created by the continuous deposits and withdrawals of bullion dealers.

No withdrawals can be made from the bank without presenting a receipt. The smaller pool of bank money for which receipts have expired is mixed in with the much larger pool for which receipts are still active. So although there's a considerable amount of bank money with no corresponding receipt, there's no specific portion of it that can't be claimed by someone at any time. The bank can't owe the same money to two people. A bank-money owner without a receipt can't demand payment until he buys one. In normal, quiet times, he can easily find one at market price, which generally matches the price at which he could sell the coin or bullion the receipt entitles him to withdraw.

Things might be different during a public emergency — an invasion, for example, like the French attack in 1672. If all the bank-money owners rushed to withdraw their funds at once, demand for receipts could drive their price sky-high. Receipt holders might demand half the bank-money value as their price, instead of the usual two or three percent. An invading enemy, understanding how the bank works, might even buy up all the receipts to prevent the treasure from being removed. In such emergencies, the bank would presumably break its normal rule of paying only receipt holders. Receipt holders without bank money would have received within two or three percent of their deposit's full value. The bank would reportedly not hesitate to pay the full credited value to bank-money owners who couldn't get receipts, while paying receipt holders without bank money two or three percent — representing the full remaining value that could fairly be attributed to them.

Even in ordinary times, it's in the interest of receipt holders to push the premium down — so they can buy bank money (and therefore the bullion their receipts would let them withdraw) more cheaply, or sell their receipts for a higher price. Conversely, it's in the interest of bank-money owners to push the premium up — so they can sell their bank money for more, or buy receipts more cheaply. To prevent the market manipulation that these opposing interests might cause, the bank has in recent years resolved to always sell bank money for currency at a 5 percent premium, and to buy it back at 4 percent. As a result, the premium can never rise above 5 percent or fall below 4 percent, keeping the market price of bank money relative to ordinary currency very close to the ratio of their intrinsic values. Before this policy was adopted, the market premium on bank money sometimes rose as high as 9 percent and sometimes fell to zero, depending on which side happened to be driving the market.

The Bank of Amsterdam officially claims it lends out none of what's deposited with it — that for every guilder credited in its books, it keeps the equivalent value in money or bullion in its vaults. That it keeps all the money and bullion covered by active receipts — for which it can be called upon at any time, and which is in fact continuously flowing in and out — can hardly be doubted. But whether it does the same for the portion of its capital where the receipts expired long ago, where it can't normally be asked for payment, and where the money is likely to stay permanently (or at least as long as the Dutch Republic exists) — that's perhaps more uncertain. In Amsterdam, however, no article of faith is more firmly established than the belief that for every guilder circulating as bank money, there's a corresponding guilder in gold or silver in the bank's vaults. The city guarantees it. The bank is managed by the four ruling mayors, who change every year. Each new group of mayors inspects the treasure, compares it with the books, receives it under oath, and passes it on with the same solemn ceremony to their successors. In that sober and religious country, oaths are not yet taken lightly. This rotation alone seems sufficient security against any impropriety that couldn't withstand public scrutiny. Through all the political upheavals that factionalism has ever caused in Amsterdam's government, the winning party has never accused its predecessors of mismanaging the bank. No accusation could have done more damage to the reputation and fortune of the losing side, and if such a charge could have been substantiated, we can be sure it would have been made. In 1672, when the French king was at Utrecht, the Bank of Amsterdam paid out so readily that no one doubted the faithfulness with which it had honored its commitments. Some of the coins brought out from its vaults showed signs of scorching from a fire that had struck the town hall shortly after the bank was established. Those coins, therefore, must have been sitting there since that time.

What the bank's total treasure amounts to is a question that has long fascinated the curious. Only guesses can be offered. It's generally estimated that about two thousand people maintain accounts with the bank. Assuming an average balance of fifteen hundred pounds sterling per account (a very generous estimate), the total bank money — and therefore the total treasure — would be about three million pounds sterling, or thirty-three million guilders at eleven guilders to the pound. That's a large sum, certainly enough to support very extensive financial operations — but vastly below the extravagant figures some people have imagined.

The city of Amsterdam earns considerable revenue from the bank. Besides the warehouse rent already described, each person pays a fee of ten guilders to open an account, three guilders three stivers for each new account, two stivers for each transfer (six stivers if the transfer is under 300 guilders, to discourage small transactions). Anyone who fails to balance their account twice a year forfeits twenty-five guilders. Anyone who orders a transfer exceeding their balance must pay 3 percent on the overdraft, and the order is rejected. The bank also reportedly earns good money from selling expired bullion and coins (which it holds until it can sell at a profit), and from buying bank money at a 4 percent premium and selling it at 5 percent. All these revenue streams add up to considerably more than the cost of salaries and management. The storage fees on bullion alone are estimated to bring in net annual revenue of 150,000 to 200,000 guilders. But public utility, not revenue, was the original purpose of this institution. Its goal was to relieve merchants from the burden of unfavorable exchange rates. The revenue it has generated was unforeseen and can be considered accidental.

But it's time to return from this long digression, into which I was gradually drawn while trying to explain why the exchange between countries that pay in bank money and those that pay in ordinary currency should generally appear to favor the former. Countries paying in bank money pay in a currency whose intrinsic value is always the same and exactly matches their mint standard. Countries paying in ordinary currency pay in money whose intrinsic value constantly fluctuates and is almost always somewhat below standard.

Chapter III: Of the Extraordinary Restraints upon Importation

In the first part of this chapter, I tried to show that even on the mercantile system's own terms, there's no need for extraordinary restrictions on imports from countries where the balance of trade is supposedly unfavorable.

But the whole doctrine of the balance of trade is, in fact, completely absurd — and it's the foundation not only of these restrictions but of almost all other commercial regulations. The doctrine assumes that when two countries trade with each other, if the balance is even, neither one gains or loses. But if it tips to one side at all, one side loses and the other gains in proportion to how far it tips from perfect equilibrium. Both assumptions are wrong. Trade that is artificially forced through subsidies and monopolies may well be — and usually is — disadvantageous to the country it's supposed to benefit, as I'll show later. But trade that happens naturally and freely between two countries is always beneficial to both, though not always equally so.

By "advantage" or "gain," I don't mean an increase in the quantity of gold and silver. I mean an increase in the exchangeable value of the annual output of the country's land and labor — that is, an increase in the annual income of its inhabitants.

If the balance is even and the trade consists entirely of exchanging each country's domestic products, both countries will usually gain, and gain about equally. Each provides a market for part of the other's surplus output. Each replaces a capital that had been used to produce that surplus, a capital that had been distributed among and provided income to a certain number of its inhabitants. Some of each country's inhabitants, therefore, indirectly derive their income and livelihood from the other. Since the traded goods are assumed to be of equal value, the two capitals employed in the trade will usually be equal or nearly equal. Both being used to produce each country's domestic goods, the income they distribute to each country's inhabitants will also be equal or nearly so. This mutual income will be greater or smaller in proportion to the extent of their dealings. If the annual trade amounts to a hundred thousand pounds on each side, or a million, each country would provide annual income of a hundred thousand pounds, or a million, to the inhabitants of the other.

Suppose one country exports only domestic products to the other, while receiving nothing but foreign goods in return. The balance would still be considered even, since goods are being paid for with goods. Both countries would still gain — but not equally. The country exporting only domestic products would gain the most. If England, for example, imported from France nothing but French goods, and — having no French-demanded products of its own — paid for them by sending large quantities of foreign goods (say, tobacco and East Indian goods), this trade would provide some income to both countries' inhabitants. But it would provide more to France's. France's entire capital employed in the trade would be distributed among French people. But only the portion of England's capital used to produce the English goods that purchased those foreign goods would be distributed among English people. The larger portion would be replacing capitals used in Virginia, India, and China — providing income to the inhabitants of those distant countries. So if the capitals were equal, the French capital would increase French income much more than the English capital would increase English income. France would be conducting a direct foreign trade for its own consumption with England, while England would be conducting a roundabout version of the same trade. I've already explained the different effects of direct versus roundabout foreign trade.

In reality, probably no two countries trade entirely in domestic products on both sides, or in domestic products on one side and foreign goods on the other. Almost all countries exchange a mix of both. But the country whose cargo contains the highest proportion of domestic goods and the lowest of foreign goods will always be the bigger winner.

Now suppose England paid for its French imports not with tobacco and East Indian goods but with gold and silver. In that case, the balance would be considered uneven — goods not being paid for with goods but with precious metals. The trade would still, however, provide some income to both countries, but more to France. It would also provide something to England. The capital used to produce the English goods that purchased the gold and silver would be replaced, enabling those English workers and businesses to continue operating. England's total capital would no more be reduced by exporting gold and silver than by exporting any other goods of equal value. On the contrary, it would usually be increased. No goods are sent abroad except those expected to fetch a higher price abroad than at home — and therefore to bring back a more valuable return. If English tobacco worth only a hundred thousand pounds at home could buy French wine worth a hundred and ten thousand in England, the exchange would increase England's capital by ten thousand pounds. If a hundred thousand pounds of English gold could buy French wine worth a hundred and ten thousand in England, the exchange would equally increase England's capital by ten thousand. A merchant with a hundred and ten thousand pounds worth of wine in his cellar is wealthier than one with only a hundred thousand worth of tobacco in his warehouse — and wealthier than one with only a hundred thousand in gold in his coffers. He can put more industry into motion and provide income and employment to more people than either of the other two. Since the nation's total capital equals the combined capitals of all its inhabitants, and the total industry it can sustain equals what all those capitals can maintain, both the nation's capital and its supportable industry must generally be increased by such an exchange. True, it would be even better for England to buy French wine directly with its own hardware and cloth than with Virginia tobacco or Brazilian and Peruvian gold and silver. A direct foreign trade is always more advantageous than a roundabout one. But a roundabout trade conducted with gold and silver isn't any less advantageous than any other roundabout trade. And a country with no mines is no more likely to run out of gold and silver from annual exports of those metals than a country that doesn't grow tobacco is likely to run out of tobacco from annual exports. A country that has the means to buy tobacco will never lack it for long. Neither will a country that has the means to buy gold and silver ever lack them for long.

Some people say that trading with a wine country is like a worker's dealings with a pub — a losing trade. I say the pub trade isn't necessarily a losing trade. By its nature, it's just as beneficial as any other, though perhaps somewhat more susceptible to abuse. Brewing and even retailing alcoholic drinks are necessary divisions of labor, just like any other. It will generally be more economical for a worker to buy from the brewer than to brew his own beer, and if he's a poor worker, it's usually cheaper to buy by the glass from the retailer than by the barrel from the brewer. He can certainly buy too much — just as he can buy too much from the butcher if he's a glutton, or from the tailor if he fancies himself a fashion plate among his friends. It's still beneficial to the general population that all these trades be free, even though that freedom can be abused in any of them. And though individuals may ruin their finances through excessive drinking, there seems to be no risk that an entire nation will. In every country, while some people spend more on drink than they can afford, many more spend less. It's worth noting that, based on actual experience, cheap wine seems to be a cause not of drunkenness but of sobriety. The inhabitants of wine-producing countries are generally the soberest people in Europe — witness the Spanish, the Italians, and the people of southern France. Nobody overindulges in what they drink every day. Nobody tries to show off their generosity and good fellowship by being lavish with a drink that's as cheap as small beer. On the contrary, in countries that produce no grapes — whether because of extreme heat or extreme cold — where wine is therefore expensive and rare, drunkenness is a common vice: the northern nations, all those who live between the tropics, the peoples of the Guinea coast in Africa. When a French regiment stationed in the northern provinces, where wine is somewhat expensive, gets transferred to the south, where it's very cheap, the soldiers are at first seduced by the low cost and novelty of good wine. But after a few months, most of them become as sober as the locals. If the duties on foreign wines and the excise taxes on malt, beer, and ale were all abolished at once, it might trigger a fairly widespread but temporary bout of drunkenness among the middle and lower classes in Britain. This would probably be followed by a permanent and nearly universal sobriety. Currently, drunkenness is by no means a vice of fashionable people, or of those who can easily afford the most expensive drinks. A gentleman drunk on ale has almost never been seen among us. The restrictions on the wine trade in Britain don't really seem designed to keep people out of the pub, so to speak, but to keep them from going where they can buy the best and cheapest drink. They favor Portuguese wine and discourage French. The Portuguese, we're told, are better customers for our manufactures than the French, and should therefore be encouraged. Since they buy from us, supposedly we should buy from them. The petty tactics of small-time shopkeepers are thus elevated into political principles for running a great empire — because only the pettiest shopkeepers make it a rule to patronize mainly their own customers. A serious trader always buys wherever goods are cheapest and best, without regard to such trifling considerations.

Under maxims like these, however, nations have been taught that their interest lies in impoverishing all their neighbors. Each nation has been trained to look with jealous eyes upon the prosperity of every nation it trades with, and to regard their gain as its own loss. Commerce, which should naturally be a bond of friendship among nations, just as it is among individuals, has become the most fertile source of discord and hostility. The capricious ambition of kings and ministers hasn't been more destructive to the peace of Europe, during this century and the last, than the petty jealousy of merchants and manufacturers. The violence and injustice of rulers is an ancient evil for which, I'm afraid, human nature offers little remedy. But the mean greed and monopolizing spirit of merchants and manufacturers — who neither are nor should be the rulers of humanity — though perhaps it can't be eliminated, can certainly be prevented from disturbing anyone's peace but their own.

That the spirit of monopoly originally invented and promoted this entire doctrine cannot be doubted. And the people who first taught it were by no means as foolish as those who believed it. In every country, it's always in the interest of the general public to buy whatever they want from whoever sells it cheapest. This is so obviously true that it seems ridiculous to bother proving it. It could never have been questioned at all if the self-serving arguments of merchants and manufacturers hadn't muddled the common sense of humanity. Their interest is directly opposed to that of the general public. Just as guild members want to prevent other inhabitants from hiring any workers but themselves, so merchants and manufacturers of every country want to secure for themselves the monopoly of the home market. Hence, in Britain and most of Europe, the extraordinary duties on goods imported by foreign merchants. Hence the heavy duties and bans on foreign manufactures that compete with domestic ones. Hence also the extraordinary restrictions on imports from countries against which national hostility happens to be most violently inflamed.

A neighboring nation's wealth, however, though dangerous in war and politics, is certainly advantageous in trade. In wartime, it may help our enemies maintain larger fleets and armies. But in peacetime, it enables them to trade with us on a larger scale and provide a better market for our goods. Just as a rich man is likely to be a better customer for the businesses in his neighborhood than a poor one, so is a rich nation. A rich man who is himself a manufacturer can be a very dangerous competitor to others in the same line. But all the rest of the neighborhood — the vast majority — benefits from the good market his spending creates. They even benefit from his ability to undersell poorer competitors. Similarly, a rich nation's manufacturers may be dangerous rivals to their neighbors. But this very competition benefits the general public, who also gain enormously from the good market that a wealthy nation's spending creates in every other area.

People who want to make their fortune never think of moving to the remote, poor provinces of the country. They head for the capital or the great commercial cities. They know that where little wealth circulates, there's little to be had — but where a great deal of money is in motion, some of it may come their way. The same common sense that guides one, ten, or twenty individuals should guide one, ten, or twenty million, and should lead a whole nation to see its neighbors' prosperity as a likely opportunity to acquire prosperity of its own. A nation that wants to get rich through foreign trade will most likely succeed when its neighbors are all wealthy, industrious, and commercially active. A great nation surrounded on all sides by nomadic peoples and impoverished neighbors might certainly grow rich through cultivating its own land and developing its own domestic commerce — but not through foreign trade. This seems to have been how the ancient Egyptians and the modern Chinese acquired their great wealth. The ancient Egyptians reportedly neglected foreign commerce, and the modern Chinese, as is well known, hold it in the utmost contempt, barely deigning to give it even the basic protection of the law. The modern doctrines of foreign commerce, by aiming to impoverish all our neighbors, tend (insofar as they succeed) to render that very commerce insignificant and worthless.

It's because of these doctrines that trade between France and England has been burdened with so many restrictions in both countries. If those two countries were to consider their real interests, free from both commercial jealousy and national hostility, French trade might be more valuable to Britain than any other country's, and for the same reason, British trade might be more valuable to France. France is Britain's nearest neighbor. In the trade between England's southern coast and the northern and northwestern coasts of France, returns could be expected four, five, or six times a year — just like domestic trade. The capital employed in this trade could therefore keep four, five, or six times as much industry going in each country, and support four, five, or six times as many people, as an equal capital in most other foreign trades. Between the most remote parts of France and Britain, returns could be expected at least once a year, making even that trade at least as advantageous as most other European foreign trade. It would be at least three times more advantageous than the celebrated trade with the North American colonies, where returns rarely came in less than three years, and often took four or five. France, besides, is estimated to have twenty-four million inhabitants. The North American colonies were never thought to have more than three million. And France is a much richer country than North America — though because of the more unequal distribution of wealth, there's far more poverty in one than in the other. France could therefore offer a market at least eight times larger, and — given how much more frequently the returns come in — twenty-four times more profitable than the North American colonies ever did. British trade would be equally valuable to France, and in proportion to each country's wealth, population, and proximity, would have the same superiority over France's trade with its own colonies. Such is the enormous difference between the trade that the wisdom of both nations has chosen to discourage and the trade it has chosen to favor.

But the very circumstances that would make free trade between these two countries so beneficial to both have created the main obstacles to that trade. Being neighbors, they are necessarily enemies. Each one's wealth and power makes it more threatening to the other. What would amplify the benefits of national friendship only intensifies the fury of national hostility. Both are rich and industrious, and the merchants and manufacturers of each dread the skill and energy of those in the other. Commercial jealousy flares up, and it both feeds and is fed by the violence of national animosity. The traders of both countries have proclaimed, with all the passionate conviction of self-interested dishonesty, the certain ruin of each from the unfavorable trade balance they claim would inevitably result from unrestricted commerce with the other.

There is no trading nation in Europe whose imminent ruin has not been repeatedly predicted by the self-appointed experts of this system, citing an unfavorable balance of trade. After all the anxiety they've stirred up, after all the futile attempts of nearly every trading nation to tilt the balance in its own favor and against its neighbors, it doesn't appear that any nation in Europe has actually been impoverished by this cause. Every town and country, on the contrary, has grown richer in proportion to how widely it has opened its ports to all nations. Far from being ruined by free trade, as the mercantile system would predict, they've been enriched by it. Though there are a few European cities that in some respects deserve to be called free ports, there's no country that does. Holland perhaps comes closest, though it's still far from the ideal. And Holland, it's universally acknowledged, derives not only its entire wealth but a great part of its basic necessities from foreign trade.

There is another balance, which I've already explained, that's very different from the balance of trade. According to whether it happens to be favorable or unfavorable, it necessarily determines the prosperity or decline of every nation. This is the balance between annual production and consumption. If the exchangeable value of annual production exceeds annual consumption, the nation's capital must grow each year by the amount of that surplus. The society is living within its income, and what's saved is naturally added to its capital, where it's put to work increasing production further. If annual production falls short of annual consumption, the nation's capital must shrink by the amount of that deficit. The society is spending beyond its income and necessarily eating into its capital. Its capital must therefore decline, and with it the value of its annual output.

This balance of production and consumption is entirely different from the balance of trade. It could exist in a nation with no foreign trade at all — one completely cut off from the rest of the world. It applies to the entire globe, whose wealth, population, and development may be gradually increasing or gradually declining.

The balance of production and consumption may consistently favor a nation even while its balance of trade is consistently unfavorable. A nation may import more than it exports for half a century. All the gold and silver that enters during this time may be immediately sent back out. Its circulating coins may gradually decay, replaced by various forms of paper money. Its debts to other nations may steadily increase. And yet its real wealth — the exchangeable value of its annual production of land and labor — may have been growing at a much faster rate all along. The state of our North American colonies and the trade they conducted with Britain before the start of the current troubles (the American Revolution) may serve as proof that this is by no means an impossible scenario.

Merchants and manufacturers aren't satisfied with just monopolizing the home market — they also want the widest possible foreign sales for their goods. Since their country has no authority over foreign nations, it can rarely secure them a monopoly abroad. They're generally forced, therefore, to settle for asking the government for various encouragements to export.

Of these encouragements, what are called "drawbacks" seem the most reasonable. A drawback is essentially a refund: when goods are exported, the merchant gets back all or part of whatever excise or domestic duty was imposed on them. Allowing this refund can never cause more goods to be exported than would have been exported if no duty had been imposed in the first place. Drawbacks don't redirect a larger share of the country's capital toward any particular industry than would naturally flow there. They simply prevent the duty from driving capital away from where it would naturally go. They don't upset the natural balance among society's various industries — they just prevent it from being upset by the duty. They don't destroy but rather preserve something that's usually advantageous to preserve: the natural division and distribution of labor in society.

The same applies to drawbacks on the re-export of imported foreign goods, which in Britain generally refund the largest portion of the import duty. Under the second rule attached to the act of Parliament that created what's now called the "old subsidy," every merchant — whether English or foreign — could claim back half that duty on export: English merchants if they exported within twelve months, foreigners within nine months. Wines, currants, and worked silks were the only exceptions, having their own more generous refund terms. At the time, these were the only duties on imported foreign goods. The claim window for this and all other drawbacks was later extended to three years.

The duties imposed after the old subsidy are, for the most part, fully refunded on export. This general rule, however, has a great many exceptions, and the whole system of drawbacks has become far more complicated than it was originally.

For certain foreign goods whose imports were expected to far exceed domestic consumption, the full duty is refunded on export — without even holding back half the old subsidy. Before the American colonies revolted, Britain had a monopoly on Maryland and Virginia tobacco. We imported about 96,000 hogsheads annually, while domestic consumption was estimated at only 14,000. To facilitate the massive re-export needed to get rid of the rest, the entire duty was refunded, provided the tobacco was re-exported within three years.

We still have — not quite completely, but very nearly — a monopoly on West Indian sugar. Since sugars re-exported within a year get a full refund of import duties, and those re-exported within three years get back everything except half the old subsidy, the system accommodates the surplus. Though sugar imports exceed domestic consumption by a fair amount, the surplus is far less extreme than it used to be with tobacco.

Some goods that our own manufacturers are particularly anxious about are banned from being imported for domestic use. They can, however, be imported and warehoused for re-export, subject to certain duties. But when they're re-exported, none of those duties are refunded. Our manufacturers are apparently worried that even this limited importation might be too much — afraid that some of these goods might be stolen from the warehouses and end up competing with their own products. This is the only basis on which we can import worked silks, French cambrics and linens, dyed calicoes, and so on.

We're so unwilling to be the carriers of French goods that we'd rather give up a profit for ourselves than let those we consider our enemies make any profit through us. Not only half the old subsidy but the second 25 percent duty is retained on all French goods that are re-exported.

Under the fourth rule attached to the old subsidy, the drawback on wine exports was considerably more than half the import duties then in effect. It seems the legislature at that time wanted to give special encouragement to the carrying trade in wine. Several other duties — the additional duty, the new subsidy, the one-third and two-third subsidies, the impost of 1692, and the coinage duty on wine — were also fully refundable on export. However, since all these duties except the additional duty and the 1692 impost had to be paid in cash on import, the interest cost on such a large sum made a profitable carrying trade in wine impractical. Therefore, only part of the wine impost, and none of the twenty-five pounds per ton on French wines, nor the duties imposed in 1745, 1763, and 1778, were refundable on export. The two 5 percent surcharges imposed in 1779 and 1781 on all existing customs duties were allowed to be fully drawn back on all exports, including wine. The most recent wine duty, from 1780, is also fully refundable — an indulgence that, given how many heavy duties are retained, could probably never cause even a single additional ton of wine to be exported. These rules apply to all legal export destinations except the British colonies in America.

The act of Charles II known as the Act for the Encouragement of Trade had given Britain a monopoly on supplying the colonies with all European goods, including wines. In colonies spread along such an extensive coast as North America and the West Indies — where British authority was always quite thin and where colonists were allowed to ship their non-controlled goods first to all of Europe, and later to all of Europe south of Cape Finisterre — it's unlikely this monopoly was ever well enforced. The colonists probably always found ways to bring back cargo from the countries they were allowed to trade with. They seem to have had some difficulty importing European wines directly from the source, and they couldn't easily get them from Britain, where wines were loaded with heavy duties that were largely not refunded on re-export. Madeira wine, however, wasn't classified as a European product. It could be imported directly into America and the West Indies, which enjoyed free trade with the island of Madeira on all their non-controlled goods. These circumstances probably explain the widespread taste for Madeira wine that British officers found established throughout the colonies at the start of the war in 1755, a taste they brought back with them to the mother country, where Madeira hadn't previously been fashionable. After the war ended in 1763, all duties except three pounds ten shillings were made refundable on wines exported to the colonies — except French wines, which national prejudice would permit no encouragement of whatsoever. But the period between this concession and the American Revolution was probably too short for it to significantly change colonial habits.

The same act that so generously favored the colonies on wine drawbacks actually treated them much less favorably on most other goods. For exports to other countries, half the old subsidy was normally refunded. But this law decreed that no part of that duty would be refunded on exports to the colonies for any European or East Indian goods, except wines, white calicoes, and muslins.

Drawbacks were probably originally created to encourage the carrying trade, which — because foreign shippers frequently pay freight in cash — was thought to be especially good for bringing gold and silver into the country. The carrying trade doesn't deserve any special encouragement, and the original reasoning behind the institution was arguably quite foolish. But the institution itself is reasonable enough. Drawbacks can't force more capital into the carrying trade than would naturally flow there if there were no import duties. They simply prevent duties from shutting it out entirely. The carrying trade doesn't deserve preferential treatment, but it shouldn't be blocked either — it should be left free, like all other trades. It's a necessary outlet for capital that can't find employment in agriculture, manufacturing, or either the domestic or foreign consumption trades.

Customs revenue actually benefits from drawbacks, thanks to the portion of the duty that's retained. If the full duties had been kept, the affected foreign goods would rarely have been re-exported — and therefore rarely imported either — for lack of a market. The duties that are partially refunded would therefore never have been collected at all.

These arguments sufficiently justify drawbacks, and would justify them even if the full duties on both domestic products and foreign goods were always completely refunded on export. Excise revenue would suffer a bit, and customs revenue more. But the natural balance of industry — the natural division and distribution of labor that duties always disturb to some degree — would be more nearly restored by such a policy.

These arguments, however, only justify drawbacks on exports to countries that are fully foreign and independent — not to countries where our merchants and manufacturers already enjoy a monopoly. A drawback on European goods exported to our American colonies, for example, won't always lead to greater exports than would happen without it. Thanks to the monopoly our merchants and manufacturers enjoy there, the same quantity might well be shipped even if the full duties were kept. In that case, the drawback is a pure loss to tax revenue, without making trade any more extensive. How far such drawbacks can be justified as encouragement for colonial industry, or whether it benefits the mother country to exempt colonists from taxes that all other fellow subjects pay, I'll discuss later when I get to the colonies.

It should always be understood that drawbacks are only useful when the goods they apply to are genuinely exported to a foreign country — not secretly smuggled back into our own. That certain drawbacks, particularly those on tobacco, have frequently been abused this way, enabling frauds that harm both government revenue and honest merchants, is well known.

Chapter IV: Of Drawbacks

Export subsidies (what Smith's era called "bounties") are frequently petitioned for in Britain, and sometimes granted, to the producers of particular domestic industries. By means of these subsidies, it's claimed, our merchants and manufacturers will be able to sell their goods as cheaply or more cheaply than their foreign competitors. More will be exported, the balance of trade will supposedly shift more in our favor. We can't give our workers a monopoly in foreign markets the way we have in the home market. We can't force foreigners to buy their goods the way we've forced our own citizens to. The next best thing, it's been thought, is to pay foreigners to buy. This is how the mercantile system proposes to enrich the whole country and fill everyone's pockets through the balance of trade.

Subsidies, it's conceded, should only be given to trades that can't survive without them. But any trade where the merchant can sell his goods at a price that covers his entire capital plus the normal profit on that capital can obviously operate without a subsidy. Such a trade is on an equal footing with all other unsubsidized trades and doesn't need a subsidy any more than they do. The only trades that need subsidies are ones where the merchant is forced to sell his goods at a price that doesn't cover his capital and normal profit — where he sells for less than it actually costs him to bring goods to market. The subsidy is meant to make up this loss and encourage him to continue (or perhaps begin) a trade where every transaction eats into his capital. If all trades worked this way, there would soon be no capital left in the country.

It's worth noting that trades carried on by means of subsidies are the only ones that can be sustained between two nations over any significant period where one side always and regularly loses — that is, sells its goods for less than it costs to bring them to market. Without the subsidy to cover these losses, the merchant's own self-interest would quickly drive him to invest his capital elsewhere, in some trade where prices cover his costs plus a normal profit. The effect of subsidies, like all other tools of the mercantile system, can only be to force a country's trade into channels far less advantageous than the ones it would naturally follow.

The well-informed author of the tracts on the grain trade has shown very clearly that since the grain export subsidy was first established, the value of grain exported (valued modestly) has exceeded the value of grain imported (valued generously) by much more than the total subsidies paid during that period. On the mercantile system's own principles, he argues, this proves the forced grain trade benefits the nation: the value of exports exceeds imports by much more than the total extraordinary expense the public has incurred to promote those exports. But he fails to consider that the subsidy is the smallest part of what grain exports actually cost society. The farmer's capital used to grow the grain must also be counted. Unless the foreign price covers not only the subsidy but also this capital, together with the normal profit, society loses the difference — its national wealth is diminished by that amount. And the very reason the subsidy was thought necessary is that the price is supposedly insufficient to cover these costs.

It's been said that the average price of grain has fallen considerably since the subsidy was established. That the average price began falling toward the end of the last century and continued falling during the first sixty-four years of the present one, I've already tried to demonstrate. But even assuming this is true, it must have happened in spite of the subsidy, not because of it. The same thing happened in France, where there was not only no subsidy but, until 1764, a general ban on grain exports. This gradual decline in the average price of grain is probably caused by neither regulation but by the gradual, imperceptible rise in the real value of silver across the general European market during this century, as I argued in Book I. It seems altogether impossible that the subsidy could ever have lowered the price of grain.

In years of plenty, as I've already observed, the subsidy encourages extraordinary exports, which necessarily keeps the domestic grain price higher than it would naturally fall to. This was the openly stated purpose of the policy. In years of scarcity, although the subsidy is frequently suspended, the large exports it promotes in good years often prevent the abundance of one year from relieving the shortages of another. So in both good and bad years, the subsidy necessarily tends to push the domestic price of grain higher than it would otherwise be.

That the subsidy must have this effect under the current state of farming, I don't think any reasonable person would dispute. But many people have argued that it encourages farming in two ways: first, by opening a larger foreign market for grain, it supposedly increases demand for and therefore production of grain; second, by guaranteeing the farmer a better price than he'd otherwise get, it encourages him to farm more. This double encouragement, they imagine, must over a long period increase grain production so much that it eventually lowers the domestic price far more than the subsidy raises it.

I answer that whatever expansion of the foreign market the subsidy creates must, in every particular year, come entirely at the expense of the home market. Every bushel of grain exported because of the subsidy — grain that wouldn't have been exported without it — would have stayed in the home market, increasing supply and lowering the price. The grain subsidy, like every other export subsidy, actually imposes two separate taxes on the people. First, the tax they pay to fund the subsidy. Second, the tax that comes from the higher price of grain on the home market. Since everyone buys grain, this second tax falls on the entire population. And this second tax is far heavier than the first. Here's the math: suppose that, averaging one year with another, the subsidy of five shillings per quarter of wheat raises the domestic price by only sixpence per bushel, or four shillings per quarter (a very conservative estimate). The general public, on top of contributing to the tax that funds the five-shilling subsidy on every exported quarter of wheat, must also pay an additional four shillings on every quarter they themselves consume. According to the well-informed author of the grain trade tracts, the average ratio of grain exported to grain consumed domestically is no more than one to thirty-one. So for every five shillings they contribute to the first tax, they must contribute six pounds four shillings to the second. Such a crushing tax on the most basic necessity of life must either reduce the living standards of working people or force their wages up proportionally to the rise in their cost of living. Insofar as it does the first, it reduces working people's ability to raise and educate their children, tending to limit population growth. Insofar as it does the second, it reduces employers' ability to hire as many workers, tending to limit the country's industry. The extraordinary grain exports encouraged by the subsidy, therefore, not only reduce the domestic market in every particular year by exactly as much as they expand the foreign market, but by restraining population and industry, their long-term effect is to stunt the gradual growth of the home market itself. In the long run, the subsidy tends to shrink, rather than expand, the total market and consumption of grain.

But this increase in the price of grain, some argue, must encourage production by making it more profitable for the farmer.

I answer that this would be true only if the subsidy raised the real price of grain — that is, if it enabled the farmer to support a larger number of workers at the same standard of living as other workers in his area are maintained. But the subsidy — nor indeed any human institution — can do any such thing. It's the nominal price, not the real price of grain, that the subsidy can significantly affect. And though the tax it imposes on the entire population may be very burdensome to those who pay it, it provides very little real benefit to those who receive it.

The true effect of the subsidy is not so much to raise the real value of grain as to lower the real value of silver — to make an equal amount of silver exchange for less, not just of grain, but of all other domestically produced goods. This is because the price of grain regulates the price of all other domestic goods.

It regulates the price of labor, which must always be high enough to let the worker buy enough grain to support himself and his family — whether generously, moderately, or barely, according to whether the economy is advancing, standing still, or declining.

It regulates the price of all other raw products of the land, which at every stage of development bear a certain ratio to the price of grain (though the ratio varies across different periods). It regulates, for example, the price of grass and hay, of meat, of horses and their upkeep, and therefore of land transportation — in other words, of most of the country's inland commerce.

By regulating the price of all raw materials, it regulates the cost of materials for nearly all manufacturing. By regulating the price of labor, it regulates the cost of manufacturing skill and effort. And by regulating both, it regulates the price of finished goods. The price of labor, and of everything produced by land or labor, must necessarily rise or fall in proportion to the price of grain.

So even though the subsidy allows the farmer to sell his grain at four shillings per bushel instead of three and sixpence, and to pay his landlord a proportionally higher rent, if that four shillings buys no more domestic goods of any kind than three and sixpence would have bought before, neither the farmer nor the landlord is really better off. The farmer can't cultivate much better; the landlord can't live much better. They might gain a small advantage in buying foreign goods. But in buying domestic goods — which is where almost all the farmer's spending goes, and the great majority of the landlord's — they gain nothing at all.

When the value of silver drops because of increasingly productive mines, and this decline is spread more or less equally across the commercial world, it's a matter of very little consequence to any particular country. The resulting rise in all prices doesn't make people who receive them truly richer, just as it doesn't make them truly poorer. Silverware becomes genuinely cheaper, and everything else stays at exactly the same real value.

But when the value of silver drops because of the political policies of a particular country — something that happens only in that country — it's a matter of great consequence. It tends to make everyone genuinely poorer, not richer. The rise in prices that's unique to that country discourages every kind of domestic industry. It enables foreign nations, who can supply nearly every kind of goods for a smaller quantity of silver than domestic workers can, to undersell them not only in foreign markets but even at home.

Spain and Portugal are in the peculiar position of being the proprietors of gold and silver mines, and therefore the distributors of precious metals to all of Europe. These metals should naturally be somewhat cheaper in Spain and Portugal than anywhere else. But the difference should amount to no more than the cost of freight and insurance — and given the high value and small bulk of precious metals, freight isn't much and insurance is the same as for any other goods of equal value. Spain and Portugal would suffer very little from their situation if they didn't make it worse through their own policies.

Spain by taxing and Portugal by banning the export of gold and silver effectively load that export with the cost of smuggling, raising the value of those metals in other countries above the value in their own by the full amount of that smuggling cost. When you dam up a stream, as soon as the dam is full, the same amount of water flows over it as if there were no dam at all. The export ban can't keep more gold and silver in Spain and Portugal than they can actually use — than their annual production of land and labor allows them to employ in coins, silverware, gilding, and other gold and silver items. Once they have that amount, the dam is full, and everything that flows in afterward must run over. The annual export of gold and silver from Spain and Portugal, by all accounts, is very nearly equal to the entire annual import, despite these restrictions. But just as water is always deeper behind a dam than in front of it, the quantity of gold and silver these restrictions keep in Spain and Portugal must be greater, relative to their annual production, than in other countries. The higher the dam, the greater the depth difference. The heavier the tax, the harsher the penalties enforcing the ban, the more vigilant the police, the greater the gap between the proportion of gold and silver to annual production in Spain and Portugal versus other countries. And this gap is reportedly very large. You frequently find lavish silverware in houses where nothing else would suggest such wealth in other countries.

The cheapness of gold and silver — or, which is the same thing, the high cost of everything else — that results from this excess of precious metals discourages both agriculture and manufacturing in Spain and Portugal. It enables foreign nations to supply them with many raw and nearly all manufactured goods for less silver than they could produce those goods at home. The tax and the ban work in two ways: they not only depress the value of precious metals within Spain and Portugal, but by retaining metals that would otherwise flow to other countries, they keep the value somewhat higher elsewhere. This gives other countries a double advantage in their trade with Spain and Portugal. Open the floodgates and there will soon be less water above and more below the dam, until it reaches the same level in both places. Remove the tax and the ban, and as the quantity of gold and silver decreases in Spain and Portugal, it will increase somewhat elsewhere. The value of precious metals — their ratio to annual production — will soon equalize across all countries. The loss Spain and Portugal would suffer from this export of gold and silver would be entirely nominal and imaginary. The nominal value of their goods and annual production would fall, expressed in smaller quantities of silver. But the real value would be the same — enough to support, command, and employ the same amount of labor. As nominal values fell, the real value of their remaining gold and silver would rise, and a smaller quantity of precious metals would serve all the same purposes of commerce and circulation that a larger quantity had served before. The gold and silver that went abroad wouldn't go for nothing — it would bring back an equal value in goods. Those goods wouldn't all be luxury items consumed by idle people who produce nothing. As the real wealth of the idle wouldn't increase from this extraordinary export, neither would their consumption increase much. A good portion of the imported goods would probably consist of materials, tools, and provisions for employing and maintaining productive workers, who would reproduce the full value of their consumption with a profit. A portion of the nation's dead capital would thus be converted into active capital, putting more industry into motion than before. Annual production would immediately increase somewhat and, within a few years, probably increase a great deal — with industry finally relieved of one of its most oppressive burdens.

The grain export subsidy operates in exactly the same way as this absurd policy of Spain and Portugal. Whatever the current state of farming, it makes our grain somewhat more expensive domestically and somewhat cheaper abroad. Since the average price of grain more or less determines all other prices, it lowers the value of silver considerably in the home market and tends to raise it slightly abroad. It enables foreigners — the Dutch in particular — not only to buy our grain more cheaply than they otherwise could, but sometimes to buy it more cheaply than our own people can, as Sir Matthew Decker, an excellent authority, has assured us. It prevents our own workers from producing goods for as little silver as they otherwise could, while enabling the Dutch to produce theirs for less. It tends to make our manufactured goods somewhat more expensive and theirs somewhat cheaper in every market, giving their industry a double advantage over ours.

Since the subsidy raises the nominal rather than the real price of grain — increasing not the amount of labor a given quantity of grain can support, but only the amount of silver it exchanges for — it discourages our manufacturing without providing any real benefit to either our farmers or landowners. True, it puts a little more money in both their pockets, and it may be difficult to convince most of them that this isn't a very real benefit. But if this money loses as much in purchasing power as it gains in quantity, the benefit is little more than nominal and imaginary.

There is perhaps only one group of people in the entire country to whom the grain subsidy was or could be genuinely useful: the grain merchants — the exporters and importers. In years of plenty, the subsidy necessarily created greater exports than would otherwise have occurred. By preventing the abundance of one year from relieving the scarcity of another, it created larger imports in scarce years than would otherwise have been needed. It increased the grain merchant's business in both directions. In scarce years, it not only let him import larger quantities but sell them at higher prices — and therefore at greater profit — than if the plenty of one year had been allowed to relieve the scarcity of another. It's among grain merchants, accordingly, that I've observed the greatest enthusiasm for continuing or renewing the subsidy.

Our landowners and farmers, when they imposed heavy import duties on foreign grain (duties that effectively ban it during times of moderate plenty) and when they established the export subsidy, seem to have been imitating our manufacturers. Through the first measure they secured a monopoly on the home market; through the second they tried to prevent that market from ever being oversupplied. Through both, they tried to raise the real value of their product, just as manufacturers had raised the real value of various manufactured goods through similar policies. But they failed to appreciate the fundamental difference that nature has established between grain and almost every other kind of goods.

When you enable our woolen or linen manufacturers, through either a home-market monopoly or an export subsidy, to sell their goods at somewhat better prices, you raise not only the nominal but the real price of those goods. You make them equivalent to a greater quantity of labor and subsistence. You increase the real profit, the real wealth and income of those manufacturers, enabling them to live better or to employ more workers. You genuinely encourage those industries and direct more of the country's productive resources toward them than would naturally flow there.

But when you raise the nominal or money price of grain through similar policies, you do not raise its real value. You don't increase the real wealth or real income of farmers or landowners. You don't encourage grain production, because you don't enable them to support and employ more workers in growing it. Nature has stamped a real value on grain that can't be changed by merely altering its money price. No export subsidy, no home-market monopoly, can raise that value. The freest competition can't lower it. Throughout the world, that value equals the amount of labor grain can support. In every particular place, it equals the amount of labor it can support at whatever standard — generous, moderate, or meager — prevails locally. Woolen or linen cloth are not the standard commodities by which the real value of all other goods is ultimately measured. Grain is. The real value of every other commodity is ultimately determined by the ratio of its average money price to the average money price of grain. Grain's real value doesn't fluctuate with the century-to-century changes in its money price. It's the real value of silver that fluctuates.

Export subsidies on any domestically produced commodity face two objections. First, the general objection that applies to every tool of the mercantile system: it forces part of the country's industry into a less advantageous channel than the one it would naturally follow. Second, the specific objection of forcing it into a channel that's not merely less advantageous but actually unprofitable: any trade that can only survive with a subsidy is necessarily a losing trade. The grain export subsidy faces a further objection: it can't possibly promote the production of the very commodity it's supposed to encourage. When our landowners demanded the subsidy, they were imitating our merchants and manufacturers — but without the keen understanding of their own interests that usually guides those other groups. They loaded the public treasury with a very considerable expense. They imposed a very heavy tax on the entire population. But they didn't, in any meaningful way, increase the real value of their own product. By lowering the real value of silver somewhat, they discouraged national industry in general and, instead of advancing, actually retarded the improvement of their own lands, which necessarily depends on the prosperity of the nation as a whole.

If you want to encourage the production of any commodity, a subsidy on production, one would think, would have a more direct effect than one on export. It would also impose only one tax on the people — the tax needed to fund the subsidy — instead of two. Rather than raising prices, it would tend to lower them in the home market, potentially offsetting at least part of the public cost. Yet production subsidies have been very rare. The prejudices of the mercantile system have taught us that national wealth comes more from exporting than from producing. Export has therefore been favored as the more direct means of bringing money into the country. Production subsidies, it's also been said, are more susceptible to fraud than export subsidies. How true this is, I don't know. Export subsidies have certainly been abused for many fraudulent purposes. But it's not in the interest of merchants and manufacturers — the great inventors of all these schemes — to have the home market oversupplied, which a production subsidy might sometimes cause. An export subsidy, by enabling them to ship the surplus abroad and keep domestic prices up, effectively prevents this. Of all the mercantile system's tools, it's the one they love most. I've personally known the operators of certain businesses agree among themselves to fund an export subsidy from their own pockets for a certain proportion of their goods. This scheme worked so well that it more than doubled the domestic price of their goods, despite a considerable increase in output. The grain subsidy must have operated very differently indeed if it actually lowered grain prices.

Something like a production subsidy has, however, been granted on some occasions. The tonnage subsidies given to the white herring and whale fisheries might be considered examples of this kind. They're supposed to make the goods cheaper on the home market than they would otherwise be. But in every other respect, their effects are the same as export subsidies: they channel part of the country's capital into bringing goods to market at prices that don't cover the costs plus a normal profit.

The tonnage subsidies for these fisheries may not contribute to the nation's wealth, but they might be thought to contribute to its defense by increasing the number of its sailors and ships. This, it could be argued, can sometimes be achieved through subsidies at much less cost than by maintaining what might be called a great standing navy, in the same way that a standing army is maintained.

Despite these plausible arguments, the following considerations lead me to believe that in granting at least one of these subsidies, the legislature was badly deceived.

First, the herring boat subsidy seems too generous.

From the start of the 1771 winter fishing season to the end of the 1781 winter season, the tonnage subsidy for the herring boat fishery was thirty shillings per ton. During these eleven years, the entire herring boat fishery of Scotland caught a total of 378,347 barrels. Herrings caught and cured at sea are called "sea sticks." To become merchantable, they have to be repacked with additional salt. Three barrels of sea sticks typically yield two barrels of merchantable herrings. So the eleven-year total of merchantable herrings was only about 252,231. During this period, the tonnage subsidies paid amounted to 155,463 pounds 11 shillings — or eight shillings two and a quarter pence per barrel of sea sticks, and twelve shillings three and three-quarter pence per barrel of merchantable herrings.

The salt used to cure these herrings is sometimes Scottish and sometimes foreign, both provided duty-free to the fish curers. The excise on Scottish salt is currently one shilling sixpence per bushel; on foreign salt, ten shillings. A barrel of herrings requires about one and a quarter bushels of foreign salt. Two bushels is the estimated average for Scottish salt. If the herrings are destined for export, none of this duty is paid. If for domestic consumption, only one shilling per barrel is charged, whether cured with foreign or Scottish salt. (This was the old Scottish duty on a bushel of salt — the amount originally estimated as needed for curing a barrel.) In Scotland, foreign salt is rarely used for anything besides curing fish. But between April 5, 1771, and April 5, 1782, 936,974 bushels of foreign salt were imported (at 84 pounds per bushel), while only 168,226 bushels of Scottish salt (at 56 pounds per bushel) were delivered to fish curers. Foreign salt, then, is clearly the main type used in the fisheries. On top of all this, every barrel of exported herrings receives an additional subsidy of two shillings eightpence, and more than two-thirds of herring-boat catches are exported. Add it all up and you'll find that during these eleven years, every barrel of boat-caught herrings cured with Scottish salt cost the government 17 shillings 11 and three-quarter pence when exported, and 14 shillings 3 and three-quarter pence when sold domestically. Every barrel cured with foreign salt cost the government one pound 7 shillings 5 and three-quarter pence when exported, and one pound 3 shillings 9 and three-quarter pence when sold domestically. The market price of a barrel of good merchantable herrings runs from seventeen or eighteen shillings to twenty-four or twenty-five shillings — about a guinea on average.

Second, the white herring fishery subsidy is a tonnage subsidy — proportional to the size of the ship, not to its diligence or success in fishing. I'm afraid it's been all too common for vessels to be fitted out for the sole purpose of catching not fish but the subsidy. In 1759, when the subsidy was fifty shillings per ton, the entire Scottish boat fishery brought in only four barrels of sea sticks. That year, each barrel of sea sticks cost the government 113 pounds 15 shillings in subsidies alone. Each barrel of merchantable herrings cost 159 pounds 7 shillings sixpence.

Third, the fishing method that the tonnage subsidy rewards — using busses (decked vessels of twenty to eighty tons) — seems better suited to Holland than to Scotland. This system was apparently borrowed from Dutch practice. Holland lies far from the seas where herrings are mainly found and therefore can only fish with decked vessels large enough to carry sufficient water and provisions for a distant voyage. But the Hebrides, the Shetland Islands, and the northern and northwestern coasts of Scotland — the areas where the herring fishery mainly operates — are everywhere carved up by long inlets that reach deep into the land, called "sea-lochs" in the local language. It's to these sea-lochs that herrings mainly come during their seasonal visits (and I'm told these visits, like those of many other fish species, aren't entirely regular or predictable). A small-boat fishery, therefore, seems far better suited to Scotland's geography: fishermen carrying their catch ashore as fast as they make it, to be either cured or eaten fresh. But the generous subsidy of thirty shillings per ton for the buss fishery necessarily discourages the boat fishery, which — receiving no such subsidy — can't compete on price. The boat fishery, which before the buss subsidy was very considerable and reportedly employed as many sailors as the buss fishery employs now, has now almost entirely disappeared. I must admit, though, that I can't claim great precision about the former extent of this now-ruined fishery, since no subsidy was paid for boat fishing, so customs and excise officials kept no records of it.

Fourth, in many parts of Scotland, herrings are an important part of ordinary people's diet during certain seasons. A subsidy that lowered their domestic price could significantly help a great many fellow citizens whose circumstances are far from comfortable. But the herring buss subsidy serves no such purpose. It has destroyed the boat fishery — by far the best type for supplying the home market — and the additional export subsidy of two shillings eightpence per barrel sends more than two-thirds of the buss catch abroad. Thirty or forty years ago, before the buss subsidy was established, sixteen shillings per barrel was reportedly the common price of white herrings. Ten to fifteen years ago, before the boat fishery was completely destroyed, the price is said to have run from seventeen to twenty shillings. Over the last five years, it has averaged twenty-five shillings per barrel. This high price may partly reflect a genuine scarcity of herrings off Scotland's coast. I should also note that the cask or barrel (whose price is included in all the above figures) has roughly doubled since the American war began — from about three shillings to about six. And I must acknowledge that the historical price reports I've received haven't been entirely consistent. One highly accurate and experienced old man assured me that more than fifty years ago, a guinea was the usual price of a barrel of good merchantable herrings, and I believe this is still roughly the average. But by all accounts, the price has not fallen on the domestic market as a result of the buss subsidy.

When fishing operators, after receiving such generous subsidies, continue selling their product at the same or even higher prices than before, you'd expect their profits to be enormous. And some individuals' profits probably have been. But in general, I have every reason to believe they've been the opposite. The usual effect of such subsidies is to encourage reckless entrepreneurs to plunge into a business they don't understand. What they lose through their own negligence and ignorance more than cancels out whatever the government's generosity provides. In 1750, the same act that first gave the thirty-shilling tonnage subsidy for the white herring fishery also created a joint-stock company with a capital of five hundred thousand pounds. Subscribers, in addition to all other incentives (the tonnage subsidy, the export subsidy of two shillings eightpence per barrel, and duty-free salt), were entitled for fourteen years to three pounds per year for every hundred pounds subscribed. Besides this large company (headquartered in London), the law permitted the creation of smaller fishing companies in all the various port cities, provided each raised at least ten thousand pounds in capital, to be managed independently at its own risk and profit. These smaller companies received the same subsidies and incentives as the big one. The main company's subscription was quickly filled, and several smaller fishing companies were established in various ports. Despite all these encouragements, nearly all of them — both large and small — lost either all or most of their capital. Barely a trace of them remains. The white herring fishery is now carried on almost entirely by independent private operators.

If a particular industry were truly necessary for national defense, it might not always be wise to depend on other countries for it. If that industry couldn't otherwise survive at home, it might not be unreasonable to tax all other industries to support it. The subsidies on British-made sailcloth and British-made gunpowder might both be justified on this principle.

But while it can very rarely be reasonable to tax the general public's industry to support some particular group of manufacturers, there is this: in times of great national prosperity, when the government has more revenue than it knows what to do with, giving subsidies to favored industries may be as natural as any other form of extravagant spending. In public finance, as in private life, great wealth may perhaps often be accepted as an excuse for great foolishness. But there must surely be something more than ordinarily absurd about continuing such extravagance in times of general hardship and financial difficulty.

What's called a "bounty" is sometimes really just a drawback, and therefore isn't subject to the same objections as a true subsidy. The subsidy on exported refined sugar, for example, is really a refund of the duties on the raw brown and muscovado sugar it's made from. The subsidy on exported worked silk is a refund of duties on imported raw and thrown silk. The subsidy on exported gunpowder is a refund of duties on imported sulfur and saltpeter. In customs terminology, only those refunds given on goods exported in the same form as they were imported are called "drawbacks." When the form has been altered by manufacturing so that the product falls under a new name, they're called "bounties."

Prizes and premiums given by the public to outstanding artists and craftsmen are not subject to the same objections as subsidies. By encouraging exceptional skill and ingenuity, they keep up healthy competition among workers in those fields. They're not large enough to redirect a bigger share of the country's capital toward any one industry than would naturally flow there. Their purpose is not to upset the natural balance of employment but to make the work done in each field as excellent as possible. The cost of prizes, besides, is very small; the cost of subsidies is very large. The grain subsidy alone has sometimes cost the public more than three hundred thousand pounds in a single year.

Subsidies are sometimes called premiums, just as drawbacks are sometimes called bounties. But we should always focus on the substance, not the label.

Chapter V: Of Bounties

I can't finish this chapter on subsidies without pointing out that the praise heaped on the law establishing the grain export subsidy, and on the whole regulatory system connected with it, is completely undeserved. A careful look at the nature of the grain trade and the main British laws governing it will make this perfectly clear. The enormous importance of this subject must justify the length of this digression.

The grain merchant's trade is made up of four distinct branches, which, though sometimes handled by the same person, are by nature four separate businesses. These are: first, the trade of the inland dealer; second, the trade of the merchant who imports grain for domestic consumption; third, the trade of the merchant who exports domestic grain for foreign consumption; and fourth, the trade of the carrier — the merchant who imports grain in order to re-export it.

I. The Inland Grain Dealer

The interest of the inland grain dealer and that of the general public, however contradictory they may seem at first, are — even in the worst years of scarcity — exactly the same. It's in the dealer's interest to raise the price of his grain as high as the real scarcity of the season warrants, but it can never be in his interest to raise it any higher. By raising the price, he discourages consumption and forces everyone — particularly the lower classes — to economize. If he raises the price too high, he discourages consumption so much that the season's supply will outlast the season's demand and still be around when the next harvest arrives. He then risks not only losing a considerable part of his grain to natural spoilage, but having to sell the remainder for much less than he could have gotten for it months earlier. On the other hand, if he doesn't raise the price high enough, he fails to discourage consumption sufficiently. If the season's supply runs short before the new crop comes in, not only does he lose potential profit, but the people are exposed — instead of the hardships of a shortage — to the dreadful horrors of famine.

It's in the people's interest that their daily, weekly, and monthly consumption be proportioned as precisely as possible to the season's supply. The inland grain dealer's interest is exactly the same. By supplying the public as closely as he can judge in this proportion, he maximizes both his sales price and his profit. His knowledge of the crop's condition and his daily, weekly, and monthly sales records enable him to judge — with more or less accuracy — how closely supply and demand are actually matched. Without intending to serve the public interest, he is necessarily led, by his own self-interest, to treat them even in years of scarcity much as a prudent ship captain sometimes must treat his crew. When the captain foresees that provisions are likely to run short, he puts the crew on reduced rations. If he sometimes does this out of excessive caution when it wasn't strictly necessary, the inconvenience to his crew is minor compared to the danger, misery, and ruin they might face from less careful management. Similarly, even if the grain dealer sometimes raises prices somewhat higher than the scarcity actually warrants out of excessive caution or greed, the inconvenience this causes the public — which at least ensures they won't face famine at the end of the season — is trivial compared to what they might suffer from a more relaxed approach at the beginning. The grain dealer himself is the most likely person to suffer from excessive caution. Not only from the public outrage it provokes, but (even if he escapes that) from the surplus grain he'll inevitably be stuck with at season's end — grain he'll have to sell for much less if the next season turns out to be good.

If it were possible for one great company to gain control of an entire country's grain supply, it might be in their interest to do what the Dutch are said to do with the spices of the Moluccas: destroy or throw away a large part to keep up the price of the rest. But it's virtually impossible — even through the force of law — to establish such a comprehensive monopoly on grain. And wherever the law leaves the trade free, grain is of all commodities the least likely to be monopolized by a few big players buying up most of the supply. Its total value far exceeds what any few private fortunes could purchase. And even if they could afford it, the way grain is produced makes it impractical. In every civilized country, grain is the commodity with the largest annual consumption, and more labor goes into producing it than any other product. When grain first comes from the ground, it's divided among a greater number of owners than any other commodity, and these owners are necessarily scattered across the entire countryside — they can't be gathered in one place like manufacturers. These original owners either sell directly to local consumers or supply inland dealers who sell to consumers. The inland grain trade therefore involves far more participants than the trade in any other commodity, and their dispersed locations make it completely impossible for them to form any kind of collective scheme. If any one dealer finds himself with more grain than he can sell at the current price before the next harvest, he'd never dream of keeping the price artificially high for his own loss and his competitors' benefit. He'd immediately lower his price to clear his inventory before the new crop arrives. The same motives that govern one dealer govern all of them, compelling them to sell at whatever price, in their best judgment, matches the season's actual scarcity or abundance.

Whoever carefully examines the history of the shortages and famines that have afflicted any part of Europe over the past three centuries — of which we have fairly detailed records — will find, I believe, that no shortage has ever been caused by any conspiracy among inland grain dealers, or by anything except a genuine scarcity, usually caused by bad weather (though sometimes, in particular places, by the devastation of war). And no famine has ever been caused by anything except the violence of government attempting, through misguided intervention, to remedy the hardships of a shortage.

In a large grain-producing country with free internal trade and good transportation links, even the worst weather can never cause a scarcity severe enough to produce famine. Even the poorest harvest, if managed with care and economy, can feed the same number of people throughout the year as a moderately good harvest would feed more generously. The worst weather tends to be either extreme drought or extreme rain. But since grain grows on both high and low ground, on land that tends to be too wet and on land that tends to be too dry, the drought or rain that damages one part of the country often helps another. In both wet and dry years, the crop is significantly smaller than in a well-balanced season, but what's lost in one part of the country is partly offset by gains elsewhere.

In rice-growing countries, where the crop requires very wet soil and must be flooded at a certain stage, drought can be far more devastating. Even so, drought is probably never so universal as to necessarily cause famine — not if the government allows free trade. The drought in Bengal a few years ago would probably have caused a very serious shortage. But some misguided regulations — some ill-considered restrictions imposed by East India Company officials on the rice trade — probably helped turn that shortage into a famine.

When a government, trying to deal with a shortage, orders all dealers to sell their grain at what it considers a "reasonable price," it either prevents them from bringing grain to market at all (which can trigger famine even at the start of the season) or, if they do bring it, it enables people to consume it so quickly that famine becomes inevitable before the season ends. The unlimited, unrestricted freedom of the grain trade is not only the most effective preventive of famine but the best way to ease the hardships of a genuine shortage. A real scarcity can't be cured — only eased. No trade deserves the full protection of the law more than the grain trade, and no trade needs it more, because no trade is so exposed to popular hostility.

In years of scarcity, the lower classes blame their suffering on the greed of the grain merchant, who becomes the target of their hatred and fury. Instead of making a profit in such years, he's often in danger of being completely ruined, his warehouses looted and destroyed by mob violence. Yet it's in years of scarcity, when prices are high, that the grain merchant expects to make his main profit. He typically has contracts with farmers to supply him with a certain quantity of grain at a certain price over several years. This contract price is set according to the moderate, reasonable, ordinary average price, which before recent years of scarcity was typically about twenty-eight shillings per quarter of wheat (with other grains proportional). In scarce years, therefore, the grain merchant buys much of his grain at the ordinary price and sells it for much more. That this extraordinary profit is no more than enough to compensate for the risks of the trade — the perishability of the product, the frequent and unpredictable price swings, and the many losses he absorbs in other years — seems clear enough from the fact that great fortunes are as rarely made in the grain trade as in any other. But the public hatred that the trade attracts in scarce years (the only years when it can be very profitable) keeps people of good character and substantial means from entering it. It's left to a lower tier of dealers — millers, bakers, meal processors, and a number of petty traders are almost the only middlemen between grower and consumer in the domestic market.

The old policies of Europe, instead of discouraging this popular hostility toward such a beneficial trade, actually encouraged and legitimized it.

Under a statute of Edward VI, anyone who bought grain with the intent to resell it was legally declared an "engrosser" (a monopolizer) and punished accordingly: for the first offense, two months in prison and forfeiture of the grain's value; for the second, six months in prison and double the value; for the third, the pillory, indefinite imprisonment, and forfeiture of all property. The old policies of most other European countries were no better.

Our ancestors apparently imagined that people would buy grain more cheaply directly from the farmer than from a grain merchant, who — they feared — would demand an exorbitant profit on top of what he paid the farmer. They tried, therefore, to destroy the middleman's trade entirely. They even tried to prevent any kind of middleman from coming between the grower and the consumer. This was the purpose of the many restrictions imposed on those they called "kidders" or carriers of grain — a trade no one could practice without a license certifying their honesty and good character. Under the statute of Edward VI, a license required the authorization of three justices of the peace. Even this was later judged insufficient: under a statute of Elizabeth, the power to grant licenses was restricted to the quarter sessions.

Europe's old policy thus tried to regulate agriculture — the great trade of the countryside — by principles completely different from those it applied to manufacturing — the great trade of the towns. By leaving the farmer no customers except consumers or their immediate agents (the licensed grain carriers), it tried to force him to act not only as a farmer but also as a grain merchant and retailer. Manufacturing policy went the opposite direction: manufacturers were often prohibited from selling their own goods at retail. One law was supposed to promote the general interest by making grain cheap (without any clear understanding of how that would actually work). The other was meant to promote the particular interest of shopkeepers, who would supposedly be ruined if manufacturers were allowed to sell directly to consumers.

The manufacturer, however, even if he'd been allowed to keep a shop and sell at retail, couldn't have undersold the regular shopkeeper. Whatever capital he put into his shop would have been taken out of his manufacturing. To keep up with his competitors, he'd need to earn the usual profit on both his manufacturing and his retail operations. Suppose the normal profit on both manufacturing and retail capital in his town was 10 percent. He'd need to mark up every piece of his own goods sold in his shop by 20 percent. When he moved goods from his workshop to his shop, he'd have to value them at the wholesale price — what he could have gotten from a dealer or shopkeeper buying in bulk. If he valued them lower, he'd be sacrificing the profit on his manufacturing capital. When he then sold them in his shop, if he didn't get the same price a regular shopkeeper would charge, he'd be sacrificing the profit on his retail capital. So although he might appear to be making a double profit on the same goods, since those goods moved through two separate capital accounts, he'd really be making a single profit on his total capital. If he made less than that, he'd be worse off than his neighbors.

What the manufacturer was prohibited from doing, the farmer was essentially required to do: split his capital between two different businesses. He had to keep one part in his barns and storage yards to meet the market's ongoing demand, and put the other into cultivating his land. Since he couldn't afford to use his farming capital for less than the normal farming profit, he equally couldn't afford to use his merchandising capital for less than the normal merchant's profit. Whether the capital doing the grain-merchant's work belonged to the person called a farmer or the person called a grain merchant, the same profit was needed to justify that use of capital, to keep the business competitive with other trades, and to prevent the owner from wanting to switch to something else as quickly as possible. The farmer who was forced to act as grain merchant couldn't afford to sell grain any cheaper than a regular grain merchant would have in a free market.

The specialist dealer who can focus all his capital on one branch of business has the same advantage as the specialist worker who can focus all his labor on one task. Just as the worker develops a skill that lets him produce far more with the same two hands, the specialist dealer develops such quick and easy business methods that the same capital turns over far more business. Just as the skilled worker can usually afford to charge less for his work, the specialist dealer can usually afford to sell his goods cheaper than someone juggling many different activities. Most manufacturers couldn't retail their own goods as cheaply as a dedicated, attentive shopkeeper whose entire business was buying wholesale and selling retail. Farmers could even less afford to retail their own grain, supplying town residents perhaps four or five miles away, as cheaply as a dedicated grain merchant whose entire business was buying grain wholesale, collecting it in a large warehouse, and selling it retail.

The law that banned manufacturers from retail was trying to speed up the natural specialization of business roles. The law that forced farmers to act as grain merchants was trying to slow it down. Both laws were obvious violations of natural liberty, and therefore unjust. Both were also bad policy. Society benefits when specialization is neither forced nor obstructed. A person who spreads his labor or capital across more activities than necessary can never hurt his neighbor by underselling him. He may hurt himself — and generally does. As the proverb says, "Jack of all trades will never be rich." But the law should always trust people to manage their own interests, since in their particular circumstances they can generally judge better than any legislator. The law forcing farmers to act as grain merchants was by far the more harmful of the two.

It obstructed not only the beneficial specialization of business roles but also the improvement and cultivation of the land. By forcing the farmer to split his capital between two businesses, only part of it could go into farming. If he'd been free to sell his entire harvest to a grain merchant as fast as he could thresh it, his whole capital could have flowed immediately back into the land — buying more livestock, hiring more workers, and improving cultivation. But forced to sell his grain at retail, he had to keep a large part of his capital tied up in his barns and storage yards all year. He couldn't farm as well as the same capital would otherwise have allowed. This law, therefore, necessarily obstructed agricultural improvement and, instead of making grain cheaper, tended to make it scarcer and therefore more expensive.

After the farmer's business, the grain merchant's trade is actually the one that, if properly protected and encouraged, would contribute most to increasing the grain supply. It would support the farmer in the same way that the wholesale dealer supports the manufacturer.

The wholesale dealer, by providing a ready market for the manufacturer — taking goods off his hands as fast as he can make them, sometimes even advancing payment before they're made — enables the manufacturer to keep all his capital (and sometimes more) constantly employed in production. He can therefore produce a much greater quantity than if he had to sell everything himself to retail customers. Since the wholesale dealer's capital is typically large enough to replace the capital of many manufacturers, this relationship effectively gives the owner of a large capital an incentive to support many small-capital owners and to help them through the losses and misfortunes that might otherwise ruin them.

A similar universal relationship between farmers and grain merchants would be equally beneficial. Farmers could keep all their capital — and even more — constantly employed in cultivation. When the inevitable accidents struck (and no trade is more accident-prone than farming), they would have in their regular customer, the wealthy grain merchant, someone with both the motivation and the means to support them. They wouldn't be entirely dependent, as they are now, on the indulgence of their landlord or the mercy of his estate manager. If it were possible — as perhaps it isn't — to establish this kind of relationship universally and all at once; if it were possible to redirect all the nation's farming capital entirely to its proper business of cultivating the land, pulling it out of every other use it's been diverted to; and if it were possible to simultaneously assemble another nearly equal pool of capital to support and supplement farming operations — it's hard to imagine how enormous, how far-reaching, and how sudden the improvement to the entire face of the country would be.

The statute of Edward VI, therefore, by trying to eliminate every middleman between grower and consumer, attempted to destroy a trade whose free operation is not only the best way to ease shortages but the best way to prevent famine. After the farmer's own trade, the grain merchant's trade does more to increase the grain supply than any other.

The severity of this law was gradually softened by later statutes, which progressively permitted the buying up of grain at prices where wheat didn't exceed twenty, twenty-four, thirty-two, and forty shillings per quarter. Finally, by the 15th of Charles II, buying grain for resale was declared legal for everyone (except "forestallers" — those who resold in the same market within three months) as long as wheat didn't exceed forty-eight shillings per quarter, with other grains proportional. All the freedom the inland grain trade has ever enjoyed was created by this statute. The recent statute of the current king, which repeals most of the other old laws against monopolizing and forestalling, doesn't repeal this particular statute's restrictions, which therefore remain in force.

This statute, however, effectively endorses two quite absurd popular beliefs.

First, it assumes that when wheat rises above forty-eight shillings per quarter, the grain supply is likely to be cornered by speculators in a way that harms the public. But as I've already argued, grain can never be monopolized by inland dealers in a way that hurts the public at any price. And forty-eight shillings, though it may seem very high, is a price that frequently occurs immediately after harvest in years of scarcity — when barely any of the new crop has been sold and it's impossible even for the most ignorant person to imagine that any of it has been hoarded.

Second, it assumes that there's some price at which grain is likely to be "forestalled" — bought up in order to be resold shortly afterward in the same market to the public's detriment. But if a merchant buys up grain heading to a particular market, or already at that market, intending to resell it soon in the same place, it must be because he judges that the market won't be as well supplied through the rest of the season as it was on that particular day, and that prices will therefore rise. If he's wrong and prices don't rise, he not only loses his entire profit but part of his capital too, through the cost and waste of storing grain. He hurts himself far more than he hurts the people, who may be inconvenienced on that particular market day but can supply themselves just as cheaply on any other. If he's right, instead of hurting the public, he does them an important service. By making them feel the effects of scarcity somewhat earlier than they otherwise would, he prevents them from feeling those effects far more severely later — which they certainly would if artificially low prices had encouraged them to consume faster than the season's real supply could sustain. When scarcity is real, the best thing that can be done for the people is to spread the hardship as evenly as possible across all the months, weeks, and days of the year. The grain merchant's self-interest drives him to do exactly this, as precisely as he can. No one else has the same motivation, the same knowledge, or the same ability to do it as well. This crucial commercial function should be entrusted entirely to him — or, in other words, the grain trade, at least as far as the domestic market is concerned, should be left completely free.

The popular fear of hoarding and forestalling can be compared to the popular terror and suspicion of witchcraft. The unfortunate wretches accused of that crime were no more innocent of the misfortunes blamed on them than those accused of hoarding. The law that ended all prosecutions for witchcraft — that made it impossible for anyone to satisfy a personal grudge by accusing a neighbor of that imaginary crime — seems to have effectively ended those fears and suspicions by removing the main force that sustained them. A law that fully restored freedom to the domestic grain trade would probably be just as effective in ending the popular fear of hoarding and forestalling.

The statute of Charles II, for all its imperfections, has probably done more to keep the home market well supplied and to promote farming than any other law on the books. It's from this law that the inland grain trade has derived all the freedom and protection it has ever enjoyed. Both the home market's supply and farming's interests are served far more effectively by the domestic grain trade than by either imports or exports.

The ratio of average grain imports to total domestic consumption, as calculated by the author of the tracts on the grain trade, is no more than one to 570. So for supplying the home market, the domestic trade is 570 times more important than the import trade.

The average quantity of grain exported from Britain, according to the same author, is no more than one thirty-first of annual production. So for encouraging farming by providing a market for domestic grain, the domestic trade is about 30 times more important than the export trade.

I don't have great faith in political arithmetic, and I don't vouch for the precision of either calculation. I mention them only to show that, in the judgment of the most experienced and knowledgeable observers, the domestic grain trade is vastly more important than the foreign one. The remarkable cheapness of grain in the years just before the export subsidy was established may reasonably be attributed, at least in part, to this statute of Charles II, which had been enacted about twenty-five years earlier — enough time to produce its full effect.

A very few words will cover what I have to say about the other three branches of the grain trade.

The trade of the merchant who imports foreign grain for domestic consumption obviously contributes directly to supplying the home market, and must therefore be immediately beneficial to the general public. It does tend to lower the average money price of grain somewhat, but it doesn't reduce grain's real value — the quantity of labor it can support. If imports were always free, our farmers and landowners would probably, on average, get less money for their grain than they do now, when imports are for the most part effectively banned. But the money they received would be worth more — it would buy more of all other goods and employ more labor. Their real wealth and real income would be the same as now, even though expressed in a smaller amount of silver. They would be neither unable nor unwilling to grow as much grain as they currently do.

On the contrary, since the rise in silver's real value (which results from lowering the money price of grain) also lowers the money price of all other goods, it gives the country's industry a competitive advantage in every foreign market, thereby encouraging and expanding that industry. But the size of the home market for grain depends on the country's overall level of industry — on the number of people who produce other things and therefore have other things (or the money from selling other things) to exchange for grain. In every country, the home market is the nearest, most convenient, and also the largest and most important market for grain. The rise in silver's real value that results from a lower average money price of grain tends to expand this largest and most important market, thereby encouraging rather than discouraging grain production.

Under a statute of Charles II, the import of wheat was subjected to a duty of sixteen shillings per quarter whenever the domestic price was below fifty-three shillings fourpence, and to eight shillings whenever the price was below four pounds. The lower threshold has, for over a century, been reached only during severe shortages. The higher threshold has, as far as I know, never been reached at all. Yet until wheat rose above this higher price, it faced a very heavy duty, and until it rose above the lower price, the duty effectively amounted to a ban. Similar restrictions were imposed on other grains, at rates and duties almost equally high. Later laws increased these duties even further.

The suffering that strict enforcement of these laws might have caused during years of scarcity would probably have been very great. But in such emergencies, enforcement was generally suspended by temporary statutes that permitted grain imports for a limited time. The very need for these temporary exceptions proves how badly designed the permanent law was.

These import restrictions, though enacted before the export subsidy, were inspired by the same spirit and the same principles. However harmful in themselves, some kind of import restrictions became necessary once the export subsidy existed. If, when wheat was at or near forty-eight shillings per quarter, foreign grain could have been imported duty-free or at only a small duty, it could have been immediately re-exported with the subsidy — a massive loss to the public treasury and a complete perversion of the subsidy's purpose, which was to expand the market for domestically grown grain, not for foreign grain.

III. The Merchant Exporter of Domestic Grain

The trade of the merchant who exports grain for foreign consumption certainly doesn't contribute directly to keeping the home market well supplied. But it does so indirectly. Whatever the usual source of domestic supply — whether homegrown or imported — the home market can never be reliably well stocked unless more grain is usually grown or imported than the country itself consumes. But unless the surplus can normally be exported, growers will be careful never to produce more, and importers never to import more, than bare domestic consumption requires. The market will rarely be oversupplied — but it will generally be undersupplied, because the people whose business it is to provide grain will always be afraid of getting stuck with unsold inventory. Banning exports limits the country's agricultural development to what its own population can consume. Allowing exports enables agriculture to expand to serve foreign demand as well.

Under a statute of Charles II, grain exports were permitted whenever wheat was below forty shillings per quarter. A later statute of the same reign extended this to forty-eight shillings. A third allowed exports at all higher prices. A small duty was payable to the king on exports, but since all grains were valued very low in the official tariff book, this amounted to only a shilling on wheat, fourpence on oats, and sixpence on other grains per quarter. Under the act of William and Mary that established the subsidy, this small duty was effectively waived whenever wheat was under forty-eight shillings. A later act explicitly eliminated it at all higher prices.

The export trade was thus not only encouraged by a subsidy but made much freer than the domestic trade. Under the last of these statutes, grain could be bought up at any price for export. But it could not be bought up for domestic resale unless the price was below forty-eight shillings per quarter. As I've already shown, the inland dealer's interest can never be opposed to the public's interest. The exporter's interest, however, sometimes can be. If his own country is suffering from a shortage while a neighboring country faces famine, it might be in his interest to ship grain to the latter in quantities that would severely worsen the shortage at home. These export-friendly statutes weren't really aimed at keeping the domestic market well supplied. Their real goal — under the pretense of encouraging agriculture — was to push the money price of grain as high as possible, creating what amounted to a permanent shortage at home. Import restrictions limited the home market to domestic production, even in times of great scarcity. Export encouragements — allowing exports even when wheat hit forty-eight shillings — prevented the home market from enjoying its own full harvest, even in times of considerable scarcity. The frequent need for temporary laws banning exports and suspending import duties — emergency measures Britain has been forced to adopt again and again — proves how poorly designed the permanent system was. If the system had been good, there would have been no need to keep abandoning it.

If all nations followed the open system of free exports and free imports, the different countries of a great continent would function much like the different provinces of a great empire. Just as free internal trade within a great empire is — by both reason and experience — not only the best way to ease shortages but the most effective preventive of famine, free international trade would work the same way among the different countries of a continent. The larger the continent and the easier the communication across it by land and water, the less any one part would be vulnerable to either calamity, since the scarcity in one country would more likely be relieved by the abundance of another.

But very few countries have fully adopted this open system. Freedom in the grain trade is almost everywhere more or less restricted, and in many countries is constrained by regulations so absurd that they frequently turn the unavoidable hardship of a shortage into the horrifying catastrophe of a famine. These poorly governed countries' demand for grain can sometimes become so desperate that a small neighboring country experiencing its own mild shortage wouldn't dare supply them without risking the same catastrophe at home. The terrible policies of one country can thus make it dangerous for another country to adopt what would otherwise be the best policy. Completely free exports, however, would be much less risky in large countries, where production is so great that the supply could rarely be significantly affected by any likely volume of exports.

In a small Swiss canton, or one of the little Italian states, it might sometimes be necessary to restrict grain exports. In great countries like France or England, it almost never is. Besides, preventing a farmer from selling his goods at all times in the best market is clearly a sacrifice of the ordinary principles of justice to some notion of national interest — a type of government action that should be reserved for, and can only be pardoned in, cases of the most urgent necessity. The price at which grain exports are banned, if they're ever to be banned, should always be very high.

The laws concerning grain may everywhere be compared to the laws concerning religion. People feel so personally invested in what relates to their livelihood in this world, or to their happiness in the next, that government must yield to their passions and, for the sake of public peace, establish whatever system they approve of. It's perhaps for this reason that we so rarely find a reasonable system established with regard to either of these two vital matters.

IV. The Merchant Carrier

The trade of the merchant carrier — the importer of foreign grain in order to re-export it — contributes to keeping the home market well stocked. Re-exporting grain isn't his direct intention, but he'll generally be willing to sell it domestically, even for considerably less than he might expect in a foreign market, because this saves him the cost of loading and unloading, freight, and insurance. The inhabitants of a country that becomes, through the carrying trade, a warehouse and distribution center for supplying other countries can very rarely find themselves short. Even though the carrying trade might somewhat reduce the average money price of grain domestically, it wouldn't lower its real value — it would only raise the real value of silver somewhat.

The carrying trade in grain was effectively banned in Britain under normal circumstances by the high import duties (most of which had no drawback), and in emergencies, when scarcity led to temporary suspension of those duties, exports were always banned. Under this system of laws, the carrying trade was prohibited in every situation.

This system of laws — the whole framework connected to the export subsidy — therefore deserves none of the praise it has received. The improvement and prosperity of Great Britain, so often credited to these laws, can easily be explained by other causes. The security that British law gives to every person — the assurance that they will enjoy the fruits of their own labor — is by itself enough to make any country flourish, despite these and twenty other absurd trade regulations. This security was perfected by the Glorious Revolution, around the same time the subsidy was established. The natural effort of every individual to better his own condition, when allowed to operate with freedom and security, is so powerful a force that it alone — without any help — is capable not only of carrying a society to wealth and prosperity, but of overcoming a hundred foolish obstacles that misguided laws constantly put in its way. The effect of these obstacles is always, to some degree, either to restrict its freedom or to undermine its security. In Britain, industry is perfectly secure; and though it's far from perfectly free, it's as free or freer than in any other part of Europe.

The period of Britain's greatest prosperity has come after the system of laws connected with the subsidy was established. But we must not therefore credit those laws. This prosperity has also come after the national debt was created. But the national debt has most assuredly not been the cause of it.

Though the regulatory system connected to the grain subsidy operates in exactly the same way as the policies of Spain and Portugal — tending to lower the value of precious metals in the country where it applies — Britain is certainly one of the richest countries in Europe, while Spain and Portugal are among the poorest. This difference is easily explained by two factors. First, Spain's tax and Portugal's ban on exporting gold and silver, together with the vigilant enforcement of these laws, must — in two very poor countries that between them import over six million pounds sterling annually in precious metals — operate far more directly and powerfully to depress the value of those metals domestically than the grain laws can do in Britain. Second, this bad policy isn't counterbalanced in Spain and Portugal by the general freedom and security of their people. Industry there is neither free nor secure. The civil and ecclesiastical governments of both countries would alone be enough to perpetuate their poverty, even if their trade regulations were as wise as most of them are absurd and foolish.

A recent act of Parliament seems to have established a new framework for the grain laws that is in many ways better than the old one, though in a point or two perhaps not quite as good.

Under this statute, the heavy import duties for domestic consumption are removed as soon as the price of middling wheat rises to forty-eight shillings per quarter; of rye, peas, or beans, to thirty-two shillings; of barley, to twenty-four; and of oats, to sixteen shillings. In their place, only a small duty of sixpence per quarter of wheat is imposed (other grains proportional). For all these grains — but especially wheat — the home market is thus opened to foreign supplies at considerably lower prices than before.

Under the same statute, the old five-shilling export subsidy on wheat now stops when the price reaches forty-four shillings per quarter, instead of forty-eight as before. The subsidy on barley (two shillings sixpence) stops at twenty-two shillings instead of twenty-four. The subsidy on oatmeal (two shillings sixpence) stops at fourteen shillings instead of fifteen. The subsidy on rye is reduced from three shillings sixpence to three shillings and stops at twenty-eight shillings instead of thirty-two. If subsidies are as unwise as I've tried to show, the sooner they stop and the smaller they are, the better.

The same statute permits, at the lowest prices, the duty-free import of grain for re-export, provided it's stored in a warehouse under the joint locks of the government and the importer. This liberty applies to only twenty-five of Britain's ports, but these are the principal ones, and proper warehouses may not exist in most of the others.

So far, this law is clearly an improvement over the old system.

But under the same law, a new two-shilling subsidy per quarter is created for oat exports whenever the price is below fourteen shillings. No subsidy had ever been given before for exporting oats, or for peas or beans.

Under the same law, wheat exports are banned as soon as the price reaches forty-four shillings per quarter; rye at twenty-eight shillings; barley at twenty-two; and oats at fourteen. These price thresholds all seem considerably too low. There's also something inherently contradictory about banning exports at the exact same prices where the subsidy meant to encourage exports is withdrawn. Either the subsidy should have been withdrawn at a much lower price, or exports should have continued to be allowed at a much higher one.

In this respect, therefore, the new law seems inferior to the old system. With all its imperfections, however, we may perhaps say of it what was said of the laws of Solon: that though not the best in itself, it is the best that the interests, prejudices, and temper of the times would admit. It may, in time, prepare the way for something better.

Chapter VI: Of Treaties of Commerce

The reasons behind the first European colonies in America and the West Indies were not nearly as straightforward as those that drove the colonies of ancient Greece and Rome.

Every city-state in ancient Greece held only a small territory. When the population of any one of them grew beyond what the land could support, some of the people were sent off to find a new home in some distant part of the world. Their warlike neighbors, pressing in on all sides, made it nearly impossible to expand at home. The Dorian colonies settled mainly in Italy and Sicily, which in the centuries before Rome's founding were inhabited by uncivilized peoples. The Ionians and Aeolians — the two other great branches of the Greeks — settled in Asia Minor and the islands of the Aegean Sea, whose inhabitants seem to have been in roughly the same condition as those of Sicily and Italy.

The mother city viewed the colony as a child — entitled to great kindness and assistance, and owing gratitude and respect in return — but as an emancipated child, over whom she claimed no direct authority or control. The colony set up its own government, passed its own laws, elected its own leaders, and made peace or war with its neighbors as a fully independent state. It had no need to wait for approval from the mother city. Nothing could be clearer or more straightforward than the purpose behind every one of these settlements.

Rome, like most ancient republics, was originally founded on an agrarian law that divided public land in fixed proportions among its citizens. Over time, the natural course of human affairs — marriage, inheritance, and sale — disrupted this original distribution, frequently concentrating lands that had been meant to support many different families into the hands of a single person. To fix this problem (or what was supposed to be a problem), a law was passed limiting any citizen's landholding to five hundred jugera — roughly 350 English acres. This law, however, though we read of it being enforced on one or two occasions, was either ignored or evaded, and inequality of wealth kept growing.

Most citizens ended up with no land at all. And without land, the customs of those times made it hard for a free man to maintain his independence. In our own era, a poor man without land can still, if he has a little capital, farm someone else's land or run a small retail business. If he has no capital, he can find work as a farm laborer or a craftsman. But among the ancient Romans, the rich had all their land worked by slaves, supervised by overseers who were also slaves. A poor free man had almost no chance of being hired as either a farmer or a laborer. All trades and production — even retail — were carried on by the slaves of the wealthy for their masters' benefit. The wealth, power, and influence of these masters made it nearly impossible for a poor free man to compete. Citizens without land, therefore, had hardly any means of survival except the handouts distributed by candidates during annual elections.

The tribunes, whenever they wanted to stir up the common people against the rich and powerful, reminded them of the original division of lands and held up the law limiting private property as the fundamental law of the republic. The people clamored for land, and the rich, we can safely assume, were absolutely determined not to give up any of theirs. To satisfy the people at least somewhat, the powerful frequently proposed sending out a new colony.

But conquering Rome had no need to send her citizens out to wander the world in search of a place to settle. She assigned them land in the conquered provinces of Italy, where, being within her own territory, they could never form an independent state. At best, they were a sort of municipal corporation — able to pass local bylaws but always subject to the authority and laws of the mother city. Sending out this kind of colony served a double purpose: it gave some satisfaction to the people, and it also planted what was essentially a garrison in a newly conquered province whose loyalty might otherwise have been uncertain.

A Roman colony, then — whether we look at the nature of the settlement itself or the reasons for creating it — was entirely different from a Greek one. The words in each language reflect this. The Latin word "colonia" simply means a plantation or settlement. The Greek word "apoikia," by contrast, means a separation of dwelling, a departure from home, a going out of the house. But although Roman and Greek colonies were different in many ways, the motivations behind them were equally clear. Both grew from either pressing necessity or obvious practical benefit.

The European colonies in America and the West Indies arose from no such necessity. And although the benefits that have come from them have been enormous, those benefits were not at all obvious at the time. They were not understood when the colonies were first established, and they were not the reason for either the settlements or the voyages of discovery that led to them. Even today, the nature, extent, and limits of those benefits are not, perhaps, fully understood.

During the fourteenth and fifteenth centuries, the Venetians ran a hugely profitable trade in spices and other East Indian goods, distributing them to the rest of Europe. They bought these goods mainly in Egypt, then under the rule of the Mamelukes — who were enemies of the Turks, who were in turn enemies of the Venetians. This shared hostility, backed by Venetian money, created an alliance that gave Venice something close to a monopoly on the trade.

The enormous profits of the Venetians stirred the greed of the Portuguese. Throughout the fifteenth century, they had been trying to find a sea route to the lands from which the Moors brought ivory and gold dust across the Sahara. They discovered Madeira, the Canaries, the Azores, the Cape Verde islands, the coast of Guinea, and the coasts of Loango, Congo, Angola, and Benguela — and finally, the Cape of Good Hope. They had long wanted a share of the Venetians' lucrative trade, and this last discovery opened up a real prospect of getting it. In 1497, Vasco da Gama sailed from Lisbon with four ships and, after eleven months at sea, reached the coast of India — completing a chain of exploration that had been pursued with remarkable persistence, and with very little interruption, for close to a century.

A few years earlier, while Europe was still uncertain whether the Portuguese voyages would succeed, a Genoese navigator conceived an even bolder plan: sailing to the East Indies by heading west. At the time, Europeans had only the vaguest knowledge of those eastern lands. The few European travelers who had been there had exaggerated the distances — perhaps from simple ignorance, since what was genuinely vast seemed almost infinite to those with no way to measure it, or perhaps to make their own adventures sound even more marvelous. Columbus reasoned, quite logically, that the longer the eastern route was, the shorter the western one must be. He proposed to take this western route as both the shortest and the surest, and he had the good fortune to convince Queen Isabella of Castile that his project was plausible.

He sailed from the port of Palos in August 1492 — nearly five years before Vasco da Gama's expedition left Portugal — and after a voyage of two to three months, discovered first some of the small Bahama (or Lucayan) islands, and then the great island of Hispaniola.

But the lands Columbus discovered, on this voyage and all his later ones, bore no resemblance to what he had been looking for. Instead of the wealth, civilization, and dense population of China and India, he found in Hispaniola and everywhere else he visited nothing but a country entirely covered in forest, uncultivated, and inhabited only by scattered tribes of indigenous peoples living in extreme poverty. He was not very willing, however, to accept that these were not the same lands described by Marco Polo — the first European to visit, or at least to leave a written account of, China and the East Indies. The slightest resemblance — such as the similarity between Cibao, a mountain in Hispaniola, and Cipango, mentioned by Marco Polo — was enough to let him cling to his favorite delusion, despite all evidence to the contrary. In his letters to Ferdinand and Isabella, he called the lands he had discovered "the Indies." He had no doubt that they were the far edge of the territories Marco Polo had described, and that they were not far from the Ganges or from the lands Alexander the Great had conquered. Even when he was finally convinced they were different, he still flattered himself that those rich eastern lands were not far away, and on a later voyage he went searching for them along the coast of South America and toward the Isthmus of Panama.

Because of Columbus's mistake, the name "the Indies" has been stuck to those unfortunate lands ever since. When it was at last clearly established that these new lands were completely different from the old Indies, the new ones were called the West Indies, to distinguish them from what became known as the East Indies.

It was important to Columbus, however, that whatever countries he had discovered should be presented to the Spanish court as enormously valuable. But in what actually constitutes the real wealth of any country — the animal and plant products of the land — there was nothing at the time that could support such a claim.

The cori, something between a rat and a rabbit (believed by the naturalist Buffon to be the same as the Brazilian aperea), was the largest mammal on Hispaniola. This species seems never to have been very numerous, and the dogs and cats brought by the Spaniards are said to have nearly wiped it out long ago, along with several other even smaller species. These animals, together with a fairly large lizard called the iguana, made up the main land-based animal food available.

The plant food of the inhabitants, though not very abundant due to limited cultivation, was not entirely meager. It consisted of corn, yams, potatoes, bananas, and similar crops — all of which were completely unknown in Europe at the time, and which have never since been highly regarded there or believed to provide nourishment equal to the common grains and legumes that had been cultivated in Europe since time immemorial.

The cotton plant, it is true, provided the material for a very important industry and was undoubtedly the most valuable crop the islands produced, from a European perspective. But even though muslin and other cotton fabrics from the East Indies were highly prized throughout Europe by the late fifteenth century, cotton manufacturing did not yet exist anywhere in Europe. So even this product could not have seemed very significant to Europeans at the time.

Finding nothing in the animals or plants of the newly discovered lands to justify a glowing report, Columbus turned his attention to their minerals. In the riches of this third natural kingdom, he convinced himself he had found ample compensation for the poverty of the other two. The small bits of gold that the inhabitants used to decorate their clothing — which, he was told, they often found in the streams and torrents rushing down from the mountains — were enough to convince him that those mountains were full of the richest gold mines. Hispaniola was therefore presented as a land overflowing with gold, and on that basis (according to the prejudices of those times, and of our own), an inexhaustible source of real wealth for the Spanish crown.

When Columbus returned from his first voyage and was introduced with something like a triumphal procession to the sovereigns of Castile and Aragon, the main products of the lands he had discovered were carried before him in a formal parade. The only truly valuable items were some small fillets, bracelets, and other gold ornaments, along with some bales of cotton. The rest were mere curiosities designed to impress the crowd: some extraordinarily large reeds, some birds of beautiful plumage, and some stuffed skins of alligators and manatees — all preceded by six or seven of the wretched natives, whose unfamiliar appearance added greatly to the spectacle.

Based on Columbus's reports, the Council of Castile decided to seize possession of these lands, whose inhabitants were plainly unable to defend themselves. The pious goal of converting them to Christianity was used to justify the injustice of the project. But the hope of finding gold was the real and only motive. To make this motive even more compelling, Columbus proposed that half of all the gold and silver found there should go to the crown. The council approved.

As long as most of the gold the first adventurers shipped back to Europe was obtained by the easy method of plundering defenseless native peoples, paying even this heavy tax was perhaps not too difficult. But once the natives had been completely stripped of everything they had — which in Hispaniola and all the other lands Columbus discovered took only six to eight years — and once it became necessary to dig for gold in mines, there was no longer any way to pay such a tax. The rigorous enforcement of it is said to have led to the total abandonment of Hispaniola's mines, which have never been worked since. The tax was soon reduced to a third, then a fifth, then a tenth, and finally a twentieth of the gross output of the gold mines. The tax on silver remained at a fifth for a long time, and was reduced to a tenth only in the present century. But the first adventurers did not seem much interested in silver. Nothing less precious than gold seemed worthy of their attention.

Every subsequent Spanish enterprise in the New World was driven by the same motive. It was the sacred thirst for gold that carried Ojeda, Nicuessa, and Vasco Nunez de Balboa to the Isthmus of Panama; that carried Cortes to Mexico; and that carried Almagro and Pizarro to Chile and Peru. Whenever these adventurers arrived on an unknown coast, their first question was always whether there was gold to be found. Depending on the answer, they either left or settled in.

Of all the expensive and risky ventures that bankrupt most of the people who pursue them, none is perhaps more perfectly ruinous than the search for new gold and silver mines. It is perhaps the worst lottery in the world — the one in which the winners' gains bear the smallest proportion to the losers' losses. The prizes are few and the blanks are many, yet the typical price of a ticket is the entire fortune of a very rich man. Mining projects, instead of returning the capital invested in them along with the normal profits, usually consume both the capital and the profits. They are, therefore, the very last projects a wise lawmaker would want to encourage, or toward which he would want to direct any more of the nation's capital than what would naturally flow there on its own. But such is the absurd confidence that almost everyone has in their own good luck that wherever there is even the slightest chance of success, too much capital tends to flow there of its own accord.

Sober reason and experience have always judged such ventures extremely unfavorably. But human greed has usually seen things quite differently. The same passion that has led so many people to pursue the absurd dream of the philosopher's stone has led others to the equally absurd fantasy of immensely rich gold and silver mines. They failed to consider that the value of these metals has always, in every age and nation, come mainly from their scarcity — and that this scarcity comes from the tiny quantities nature has deposited in any one place, from the hard, unyielding rock that almost always surrounds those deposits, and consequently from the enormous labor and expense needed to reach them. They imagined that veins of gold and silver might be found as large and abundant as those commonly found of lead, copper, tin, or iron.

The dream of Sir Walter Raleigh about the golden city and country of El Dorado should be enough to show us that even wise people are not immune to such delusions. More than a century after Raleigh's death, the Jesuit missionary Gumilla was still convinced El Dorado was real, and expressed with great enthusiasm — and, I dare say, great sincerity — how happy he would be to bring the light of the gospel to a people who could so handsomely reward the pious efforts of their missionary.

In the lands first discovered by the Spaniards, no gold or silver mines currently known are thought to be worth working. The quantities of precious metals the first adventurers supposedly found there were probably wildly exaggerated, as was the productivity of the mines that were worked right after the initial discovery. But what those adventurers were reported to have found was enough to set every one of their countrymen on fire with greed. Every Spaniard who sailed to America expected to find an El Dorado. And fortune did something on this occasion that she has done on very few others: she actually fulfilled, to some degree, the wildly extravagant hopes of her followers. In the discovery and conquest of Mexico and Peru — the first about thirty years, the second about forty years after Columbus's first voyage — she presented them with something not far from the flood of precious metals they had been dreaming of.

So a commercial venture to the East Indies led to the discovery of the West. A project of conquest led to all the Spanish settlements in these newly found lands. The driving force behind that conquest was the dream of gold and silver mines, and a series of accidents that no human wisdom could have predicted made this dream far more successful than anyone had any reasonable grounds to expect.

The first explorers from all other European nations who tried to settle in America were driven by the same fantastical visions, but they were not as lucky. It was more than a century after the first settlement of Brazil before any gold, silver, or diamond mines were found there. In the English, French, Dutch, and Danish colonies, none have ever been discovered — at least none currently thought worth mining. The first English settlers in North America, however, offered one-fifth of all the gold and silver they might find to the king, as an incentive for granting their charters. In the patents granted to Sir Walter Raleigh, to the London and Plymouth companies, to the Council of Plymouth, and others, this fifth was duly reserved for the crown. Along with the hope of finding gold and silver mines, these first settlers also hoped to discover a Northwest Passage to the East Indies. So far, they have been disappointed on both counts.

Chapter VII: Of Colonies

A colony established by a civilized nation — one that takes over either an empty country or one so thinly populated that the native inhabitants are easily displaced by the new settlers — advances more rapidly toward wealth and greatness than any other human society.

The colonists bring with them knowledge of agriculture and other useful skills far superior to anything that could develop on its own over many centuries among hunter-gatherer or pre-agricultural peoples. They also bring habits of social order, some understanding of the regular government that exists in their home country, the legal system that supports it, and a functioning administration of justice. They naturally set up something similar in the new settlement. But among pre-agricultural peoples, the natural development of law and government is even slower than the natural development of practical skills — and practical skills themselves can only develop so far without the protection of law and government.

Every colonist gets more land than he could possibly farm. He pays no rent and barely any taxes. No landlord takes a share of his crops, and the government's share is usually trivial. He has every incentive to make his land produce as much as possible, since nearly all of it will be his own. But his land is typically so vast that even with all his own effort, and all the labor of anyone he can hire, he can rarely make it produce even a tenth of what it is capable of. He is eager, therefore, to recruit workers from everywhere, offering the most generous wages. But those generous wages, combined with cheap and plentiful land, soon lead the workers to leave and become landowners themselves — offering equally generous wages to other workers, who soon leave them for the same reason. Generous pay for labor encourages marriage. Children are well fed and well cared for during infancy, and when they grow up, the value of their labor far exceeds the cost of their upbringing. When they reach adulthood, high wages and cheap land allow them to set up on their own, just as their fathers did before them.

In established countries, rent and profit eat up wages, and the two wealthier classes oppress the working class. But in new colonies, the interests of the wealthier classes actually force them to treat workers with more generosity and humanity — at least when those workers are not enslaved. Uncultivated land of the greatest natural fertility can be had for almost nothing. The increase in income that the landowner (who is always also the developer) expects from improving the land is his profit, and in these circumstances it is usually very large. But this great profit cannot be earned without employing other people's labor to clear and cultivate the land. The enormous disparity between the vast extent of available land and the tiny number of people, which is typical of new colonies, makes it hard for him to find workers. He therefore does not haggle over wages but is willing to hire labor at whatever price he must pay.

High wages encourage population growth. Cheap and plentiful good land encourages development and enables the landowner to pay those high wages. These wages make up almost the entire cost of the land. Though they are high as wages, they are low as the price of something so enormously valuable. Whatever encourages population growth and development encourages real wealth and greatness.

The ancient Greek colonies seem to have grown wealthy and powerful very rapidly. Within a century or two, several of them appear to have rivaled, and even surpassed, their mother cities. Syracuse and Agrigentum in Sicily, Tarentum and Locri in Italy, Ephesus and Miletus in Asia Minor — all seem by every account to have been at least equal to any of the cities of ancient Greece. Although founded later, the arts of civilization — philosophy, poetry, and rhetoric — seem to have been cultivated just as early and developed just as highly in these colonies as anywhere in the mother country. Remarkably, the schools of the two oldest Greek philosophers, Thales and Pythagoras, were established not in Greece itself but in an Asian and an Italian colony respectively. All these colonies had settled in lands inhabited by peoples who easily gave way to the newcomers. They had plenty of good land, and since they were completely independent of their mother cities, they were free to manage their own affairs however they thought best.

The history of the Roman colonies is far less impressive. Some of them, like Florence, did eventually grow over many centuries — and after the fall of Rome — into important states. But none of them seems to have grown rapidly. They were all established in conquered provinces that were usually already well populated. The land allotted to each colonist was generally not very large, and since the colonies were not independent, they were not always free to manage things as they saw fit.

In the abundance of good land, the European colonies in America and the West Indies resemble — and vastly surpass — those of ancient Greece. In their dependence on the mother country, they resemble those of ancient Rome. But their great distance from Europe has, in all cases, softened the effects of that dependence. Distance has kept them somewhat out of the sight and out of the reach of the mother country. When they pursued their own interests in their own way, their conduct was often overlooked in Europe — either because it was unknown or because it was not understood. On some occasions it was simply tolerated, because distance made it too difficult to stop. Even the harsh and authoritarian government of Spain has repeatedly been forced to recall or soften orders issued for its colonies, out of fear of a general uprising. The wealth, population, and development of all the European colonies have accordingly grown enormously.

The Spanish crown, through its share of the gold and silver, earned revenue from its colonies from the very beginning. And this was revenue of a kind to excite the most extravagant expectations of still greater riches. The Spanish colonies therefore attracted intense attention from their mother country from the start, while the colonies of other European nations were largely neglected for a long time. The former did not necessarily thrive any better for all this attention, nor did the latter suffer from its absence. Relative to the size of the territories they occupy, the Spanish colonies are generally considered less populous and less prosperous than those of almost any other European power.

Even the Spanish colonies, however, have grown remarkably in population and development. The city of Lima, founded after the conquest, was reported by the explorer Ulloa as having about 50,000 inhabitants some thirty years ago. Quito, which had been a miserable indigenous hamlet, was described by the same author as equally populous in his day. Gemelli Careri, a traveler of somewhat doubtful reliability but seemingly excellent sources, described Mexico City as having 100,000 inhabitants — a number that, despite all the exaggerations of Spanish writers, is probably more than five times what it had in the time of Montezuma. These figures far exceed those of Boston, New York, and Philadelphia, the three largest cities in the English colonies.

Before the Spanish arrived, there were no draft animals in either Mexico or Peru. The llama was their only beast of burden, and its strength seems to have been considerably less than that of an ordinary donkey. The plow was unknown. They had no iron. They had no coined money and no established medium of exchange; all their trade was carried on by barter. A kind of wooden spade was their main farming tool. Sharp stones served as knives and hatchets; fish bones and the hard sinews of certain animals served as sewing needles — and these seem to have been their main tools of production. Given all this, it seems impossible that either of these empires could have been as developed or as well cultivated as they are now, when they have been plentifully supplied with European cattle and introduced to iron, the plow, and many of the practical arts of Europe. But the population of any country must be proportional to its level of development and cultivation. Despite the cruel destruction of the native peoples that followed the conquest, these two great empires are probably more populous now than they ever were before — and the people are certainly very different, for we must acknowledge, I think, that the Spanish creoles are in many respects superior to the indigenous peoples of old.

After the Spanish settlements, the Portuguese in Brazil established the oldest European colony in America. But since no gold or silver mines were found there for a long time, and since the colony therefore produced little or no revenue for the crown, it was largely neglected. During that period of neglect, it grew into a great and powerful colony. When Portugal fell under Spanish rule, Brazil was attacked by the Dutch, who seized seven of its fourteen provinces. They expected to conquer the rest soon enough, but then Portugal regained its independence with the rise of the Braganza dynasty. The Dutch, as enemies of Spain, now became friends of Portugal — which was likewise an enemy of Spain. They agreed to leave the unconquered part of Brazil to the king of Portugal, who agreed to leave the conquered part to them, considering it not worth arguing about with such good allies.

But the Dutch government soon began to oppress the Portuguese colonists, who — rather than wasting time with complaints — took up arms against their new rulers. Through their own courage and determination, with the quiet support but no official aid from the mother country, they drove the Dutch out of Brazil. The Dutch, finding it impossible to hold any part of the country, agreed to its complete restoration to Portugal. This colony is said to contain more than 600,000 people of European descent — Portuguese, creoles, mulattoes, and people of mixed Portuguese and Brazilian heritage. No other colony in America is believed to contain so many people of European origin.

Toward the end of the fifteenth century and for most of the sixteenth, Spain and Portugal were the two great naval powers of the open ocean. (The commerce of Venice reached every part of Europe, but its fleets had rarely ventured beyond the Mediterranean.) The Spanish, claiming all of America by right of first discovery, could not prevent a naval power as strong as Portugal from settling in Brazil. But their reputation was so fearsome that most other European nations were afraid to establish themselves anywhere else on the continent. The French, who tried to settle in Florida, were slaughtered by the Spaniards. But the decline of Spanish naval power after the defeat of the so-called Invincible Armada in the late sixteenth century ended Spain's ability to block other European settlements. Over the course of the seventeenth century, the English, French, Dutch, Danes, and Swedes — every major nation with Atlantic ports — attempted to establish colonies in the New World.

The Swedes settled in New Jersey, and the number of Swedish families still found there is proof enough that this colony would likely have prospered if the mother country had supported it. But Sweden neglected it, and it was soon absorbed by the Dutch colony of New York, which itself fell under English rule in 1674.

The small islands of St. Thomas and Santa Cruz are the only territories in the New World that have ever belonged to Denmark. These tiny settlements were governed by an exclusive trading company that had the sole right to buy the colonists' surplus crops and to supply them with goods from other countries. In both buying and selling, this company had not only the power but the strongest temptation to exploit them. The government of an exclusive merchant company is perhaps the worst possible government for any country. It was not, however, able to stop the colonies' growth entirely, though it did make that growth slower and more sluggish. The late king of Denmark dissolved this company, and since then the prosperity of these colonies has been remarkable.

The Dutch settlements in the West Indies, like those in the East Indies, were originally placed under the control of an exclusive company. Their progress, though considerable compared to most long-established countries, has been sluggish and slow compared to most new colonies. The colony of Surinam, though quite substantial, is still smaller than most of the sugar colonies of other European nations. The colony of New Netherland, now divided into New York and New Jersey, would probably have grown significant even under Dutch rule. The abundance of cheap, good land is such a powerful driver of prosperity that even the worst government can barely suppress it entirely. The great distance from the mother country also allowed the colonists to evade, through smuggling, some of the monopoly the company held over them. Currently, the company allows any Dutch ship to trade with Surinam for a license fee of 2.5 percent of the cargo's value, reserving for itself only the direct trade from Africa to America — which consists almost entirely of the slave trade. This relaxation of the company's exclusive privileges is probably the main reason for whatever prosperity the colony now enjoys. Curacao and St. Eustatius, the two main Dutch islands, are free ports open to the ships of all nations. This openness, surrounded by other colonies whose ports are open to only one nation's ships, has been the great cause of these two barren islands' prosperity.

The French colony of Canada was governed for most of the previous century and part of the current one by an exclusive company. Under such unfavorable management, its growth was inevitably very slow compared to other new colonies. Growth became much faster after this company was dissolved following the collapse of what is called the Mississippi Scheme. When the English took possession of Canada, they found nearly double the number of inhabitants that Father Charlevoix had reported twenty to thirty years earlier. That Jesuit had traveled the entire country and had no reason to understate its importance.

The French colony of Saint-Domingue was established by pirates and buccaneers who for a long time neither sought the protection nor recognized the authority of France. When that band of outlaws became civilized enough to accept French authority, it was necessary for some time to govern them with a very light hand. During this period, the colony's population and development grew very rapidly. Even the oppression of the exclusive company to which it was subjected for a time — along with all other French colonies — could not stop its progress entirely, though it certainly slowed it down. Prosperity returned as soon as the company was removed. Saint-Domingue is now the most important sugar colony in the West Indies, and its output is said to exceed that of all the English sugar colonies combined. The other French sugar colonies are generally thriving as well.

But no colonies have grown more rapidly than the English ones in North America.

Plenty of good land and the freedom to manage their own affairs seem to be the two great causes of prosperity in all new colonies.

In terms of good land, the English colonies of North America, though undoubtedly well supplied, are actually inferior to the Spanish and Portuguese colonies, and not superior to some of those the French held before the Seven Years' War. But the political institutions of the English colonies have been more favorable to the improvement and cultivation of their land than those of any of the other three nations.

First, the monopolization of uncultivated land, though by no means completely prevented, has been more effectively restrained in the English colonies than anywhere else. Colonial law requires every landowner to improve and cultivate a certain proportion of his holdings within a set time, and declares any neglected lands available for grant to someone else. This law has not always been strictly enforced, but it has had some effect.

Second, in Pennsylvania there is no right of primogeniture, and land, like personal property, is divided equally among all children. In three of the New England provinces, the eldest child receives only a double share, following the Old Testament pattern. So even when too much land is accumulated by one person, it is likely to be adequately divided again within a generation or two. In the other English colonies, primogeniture does apply, as in English law. But in all of them, land is held under a simple, easily transferable type of tenure, which makes it easy to buy and sell. The holder of any large land grant generally finds it in his interest to sell off most of it as quickly as possible, keeping only a small annual rent. In the Spanish and Portuguese colonies, by contrast, the "right of majorat" applies to all great estates attached to a title of nobility. These estates go entirely to one heir and are effectively entailed and unsaleable. The French colonies follow the Custom of Paris, which is more generous to younger children than English law when it comes to inheriting land. But in the French colonies, if any part of a noble estate is sold, it is subject for a limited time to a right of repurchase by either the feudal superior's heir or the family heir. All the largest estates are held under such noble tenures, which inevitably make sales complicated and slow.

In a new colony, large uncultivated estates are much more likely to be broken up through sale than through inheritance. The abundance and cheapness of good land, as I have already noted, are the main drivers of rapid prosperity in new colonies. Monopolizing land effectively destroys that abundance and cheapness. Beyond that, monopolizing uncultivated land is the greatest obstacle to its improvement. The labor employed in improving and cultivating land produces the greatest and most valuable output for society. In this case, the output of labor pays not only its own wages and the profit on the capital that employs it, but also the rent of the land on which it works. The labor of English colonists, being more focused on actually improving and cultivating land, is therefore likely to produce a greater and more valuable output than that of the other three nations, whose labor is, to varying degrees, diverted from agriculture by the monopolization of land.

Third, the labor of English colonists is not only likely to produce a greater and more valuable output, but because of moderate taxes, a larger share of that output belongs to the colonists themselves. They can save it and use it to employ still more labor. The English colonists have never yet contributed anything toward the defense of the mother country or the support of its civil government. On the contrary, they have been defended almost entirely at the mother country's expense. But the cost of fleets and armies is out of all proportion greater than the cost of civil government. The colonists' own civil government has always been very inexpensive, generally limited to paying modest salaries to the governor, the judges, and a few other officials, and to maintaining a handful of the most useful public works.

Before the start of the current American conflict, the civil government of Massachusetts Bay cost roughly 18,000 pounds a year. New Hampshire and Rhode Island cost about 3,500 pounds each. Connecticut cost 4,000 pounds. New York and Pennsylvania cost 4,500 each. New Jersey cost 1,200 pounds. Virginia and South Carolina cost 8,000 each. Nova Scotia and Georgia are partly supported by an annual grant from Parliament, but Nova Scotia also pays about 7,000 pounds a year toward its own public expenses, and Georgia about 2,500. In total, all the civil governments of North America — excluding Maryland and North Carolina, for which no exact figures are available — cost their inhabitants no more than about 64,700 pounds a year before the current conflict began. This is an unforgettable example of how cheaply three million people can be not only governed, but governed well.

The most important expense of government — defense and protection — has always fallen on the mother country. The ceremonial aspects of colonial government, though perfectly respectable, involve no costly pomp or pageantry. Their religious establishment is run on an equally frugal plan. Tithes are unknown. Their clergy, who are far from numerous, are supported either by modest salaries or by voluntary contributions.

The powers of Spain and Portugal, by contrast, draw some support from taxes levied on their colonies. France has never collected much revenue from its colonies, since the taxes it levies there are generally spent there. But the colonial governments of all three nations operate on a much more expensive footing, accompanied by far more costly ceremony. The sums spent on receiving a new viceroy of Peru, for example, have frequently been enormous. Such ceremonies are not just one-time taxes on the wealthy colonists; they also introduce the habit of extravagance and display, which becomes a permanent and even more burdensome tax in the form of private luxury and waste. The ecclesiastical establishments of all three nations' colonies are also extremely oppressive. Tithes are collected everywhere, and enforced with the utmost severity in the Spanish and Portuguese colonies. On top of all this, the colonies are plagued by swarms of mendicant friars, whose begging — not merely permitted but sanctified by religion — is a crushing burden on the poor, who are carefully taught that giving is a duty and refusing is a grave sin. And beyond even that, the clergy are everywhere the greatest monopolizers of land.

Fourth, in disposing of their surplus production — whatever they produce beyond their own consumption — the English colonies have been more favored and given a more extensive market than those of any other European nation. Every European power has tried, to one degree or another, to monopolize its colonies' trade. All have banned foreign ships from trading with their colonies and prohibited the colonies from importing European goods from any foreign country. But the way this monopoly has been enforced varies greatly.

Some nations have handed the entire commerce of their colonies over to an exclusive company, from which the colonies had to buy all the European goods they wanted and to which they had to sell all their surplus production. It was in the company's interest not only to sell European goods as dearly and buy colonial products as cheaply as possible, but to buy no more colonial goods, even at these low prices, than they could resell at very high prices in Europe. Their interest was not just to suppress the value of the colonies' surplus production, but in many cases to actively hold down the amount produced. Of all the methods ever devised to stunt the natural growth of a new colony, an exclusive company is undoubtedly the most effective. This was the policy of Holland (though their company has in recent years relaxed many of its exclusive privileges). It was the policy of Denmark until the recent king's reign. It was sometimes France's policy. And since 1755, after every other nation had abandoned it as absurd, it has become Portugal's policy for at least two of Brazil's main provinces, Pernambuco and Maranhao.

Other nations, without setting up an exclusive company, confined all their colonial trade to a single port in the mother country. Ships could only sail from there, either in a fleet at a specific season or individually with a special license — which was usually very expensive. This policy technically opened colonial trade to all citizens of the mother country, as long as they traded from the right port, at the right time, in the right ships. But since the merchants who pooled their capital to outfit these licensed vessels naturally found it advantageous to act together, the trade was effectively run on the same principles as an exclusive company. The merchants' profits were nearly as outrageous and exploitative. The colonies were poorly supplied and forced to buy dear and sell cheap. This had always been Spain's policy until just a few years ago, and the price of European goods in the Spanish West Indies was reportedly astronomical. At Quito, according to Ulloa, a pound of iron sold for about four shillings sixpence, and a pound of steel for about six shillings ninepence sterling. But it is mainly to buy European goods that the colonies sell their own products. The more they pay for one, the less they actually receive for the other: the dearness of European goods is really just the cheapness of colonial goods by another name. Portugal's policy has been the same as Spain's old approach for all its colonies except Pernambuco and Maranhao — and for those two, it has recently adopted something even worse.

Other nations leave their colonial trade open to all their citizens, who may carry it on from any port in the mother country with nothing more than the standard customs documents. In this case, the large number of traders, scattered across many locations, makes it impossible for them to conspire together, and their competition prevents anyone from earning outrageous profits. Under such a liberal policy, the colonies can sell their products and buy European goods at reasonable prices. This has always been England's policy since the dissolution of the Plymouth Company, when the colonies were still in their infancy. It has generally been France's policy as well, and consistently so since the dissolution of what the English call the Mississippi Company. The profits that France and England earn from their colonial trade, while certainly higher than they would be under completely free competition, are by no means outrageous. European goods are accordingly not exorbitantly expensive in most colonies of either nation.

When it comes to exporting their surplus products, the colonies of Great Britain are restricted to the mother country's market only for certain goods. These goods, listed in the Navigation Act and several later laws, are called "enumerated commodities." Everything else is "non-enumerated" and may be exported directly to other countries, as long as it goes in British or colonial ships, with British subjects making up the owners and at least three-quarters of the crew.

Among the non-enumerated commodities are some of America's most important products: grain of all kinds, lumber, salted meat, fish, sugar, and rum.

Grain is naturally the first and main focus of agriculture in any new colony. By allowing the colonists a very wide market for their grain, the law encourages them to extend their farming far beyond what a thinly populated country would consume, and thus to build up the food supply needed for a continually growing population.

In a country entirely covered with forest, where timber is consequently worth little or nothing, the cost of clearing the ground is the main obstacle to development. By giving the colonies a very large market for their lumber, the law helps facilitate development — raising the price of something that would otherwise be nearly worthless, and thus allowing the colonists to profit from what would otherwise be a pure expense.

In a country that is neither well populated nor well cultivated, cattle naturally multiply far beyond local consumption and are often worth little or nothing. But it has already been shown that the price of cattle must bear a certain proportion to the price of grain before most of a country's land can be profitably improved. By giving American cattle — alive or dead, in all forms — access to a very broad market, the law raises the value of a commodity whose high price is essential to agricultural development. (The benefits of this freedom, however, are somewhat reduced by the act of 4 George III, c. 15, which placed hides and skins among the enumerated commodities, tending to lower the value of American cattle.)

Expanding the colonial fisheries — and thereby increasing Britain's shipping and naval power — has been an almost constant objective of the legislature. These fisheries have been given all the encouragement that freedom of trade can provide, and they have thrived accordingly. The New England fishery in particular was, before the current American conflict, one of the most important in the world. The whale fishery, which in Great Britain is carried on with such poor results despite an extravagant subsidy — so poor, many believe (though I do not vouch for this), that the total output barely exceeds the value of the annual subsidies paid for it — is conducted in New England without any subsidy at all, yet on a very large scale. Fish is one of the main goods with which North Americans trade with Spain, Portugal, and the Mediterranean.

Sugar was originally an enumerated commodity that could only be exported to Great Britain. But in 1731, after the sugar planters petitioned, its export was permitted to the rest of the world — though the restrictions attached to this freedom, combined with the high price of sugar in Britain, have largely made it ineffective. Britain and her colonies still consume almost all the sugar produced in the British plantations. Consumption is growing so fast that although imports have increased greatly over the past twenty years (thanks to the improvement of Jamaica and the Ceded Islands), exports to foreign countries are said to be barely larger than before.

Rum is a very important item in the trade that Americans carry on with the coast of Africa, from which they bring back enslaved people in return.

If all of America's surplus grain, salted meat, and fish had been placed on the enumerated list and thus forced into the British market, it would have competed too directly with British producers. It was probably not so much concern for American interests as jealousy of this competition that kept these important commodities not only off the enumerated list, but effectively banned from import into Britain (all grain except rice, and all salted meat, are normally prohibited).

Non-enumerated commodities could originally be exported anywhere in the world. Lumber and rice, after being briefly placed on the enumerated list and then removed, were restricted to European markets south of Cape Finisterre. Under the act of 6 George III, c. 52, all non-enumerated commodities became subject to the same restriction. The parts of Europe south of Cape Finisterre are not manufacturing countries, so there was less concern about colonial ships bringing back manufactures that might compete with British industry.

The largest possible imports of the first category could not compete with or undercut any product of the mother country. By confining these goods to the home market, British merchants expected not only to buy them more cheaply in the colonies (and thus sell them at a better profit at home), but also to establish a profitable carrying trade between the colonies and foreign countries — with Great Britain necessarily serving as the hub, since these commodities had to be imported to Britain first.

Imports of the second category, it was thought, could be managed so as to compete not with domestic British products of the same kind, but with similar goods imported from foreign countries. Through carefully set duties, colonial products could be made somewhat more expensive than the domestic version, but still considerably cheaper than foreign imports. By channeling these goods through the home market, the aim was to undercut the products not of Great Britain, but of foreign countries with which Britain supposedly had an unfavorable balance of trade.

The ban on colonies exporting masts, yards, bowsprits, tar, pitch, and turpentine to any country but Great Britain naturally tended to lower timber prices in the colonies, which increased the cost of clearing land — the main obstacle to colonial development. But around the beginning of the eighteenth century, in 1703, Sweden's pitch and tar company tried to jack up the price of their products sold to Britain by restricting exports to Swedish ships, at Swedish-set prices, in whatever quantities they chose. To counter this clever bit of mercantile maneuvering and to make herself as independent as possible — not just of Sweden, but of all the northern European powers — Great Britain offered a subsidy on the import of naval stores from America. The effect of this subsidy was to raise timber prices in America far more than the trade restriction could lower them. Since both policies were enacted at the same time, their combined effect actually encouraged rather than discouraged the clearing of land in America.

Although pig and bar iron were also placed on the enumerated list, they are exempt from the hefty duties charged when imported from other countries. So the duty exemption does more to encourage the building of iron furnaces in America than the trade restriction does to discourage it. No industry consumes as much wood as an iron furnace, or does as much to clear a country overgrown with forest.

The tendency of some of these regulations to raise the value of timber in America, and thereby make it easier to clear land, was probably neither intended nor understood by the legislature. But even though the beneficial effects were accidental, they were no less real for that.

The most complete freedom of trade exists between the British colonies of America and the West Indies, for both enumerated and non-enumerated goods. These colonies have grown so populous and prosperous that each of them finds a large and extensive market in the others for every part of its output. Taken together, they form a great internal market for one another's products.

Britain's generosity toward the trade of her colonies, however, has mainly applied to their raw products, or at most to what might be called the very first stage of manufacturing. The more advanced or refined manufactures, even those made from colonial raw materials, British merchants and manufacturers have chosen to reserve for themselves. They have persuaded the legislature to prevent these industries from developing in the colonies — sometimes through high duties, sometimes through outright bans.

For example, raw muscovado sugar from the British plantations pays an import duty of only 6 shillings 4 pence per hundredweight. White sugar pays 1 pound, 1 shilling, 1 penny. Refined sugar, whether double or single, in loaves, pays 4 pounds, 2 shillings, 5 pence. When these high duties were first imposed, Great Britain was the sole market — and still remains the primary market — for colonial sugar exports. The duties effectively amounted to a prohibition, first against processing or refining sugar for any foreign market, and now against refining it for the market that buys more than nine-tenths of the total output. The sugar-refining industry, which has flourished in all the French sugar colonies, has consequently been barely developed in any English colony except for local consumption. When Grenada was in French hands, nearly every plantation had at least a basic sugar refinery. Since it passed to the English, almost all such operations have been shut down. As of October 1773, I am told there are no more than two or three left on the island. Currently, however, through an accommodation by customs officials, refined sugar reduced from loaves to powder is routinely imported as if it were raw muscovado.

While Great Britain encourages the production of pig and bar iron in America by exempting them from the duties charged on imports from other countries, she absolutely prohibits the building of steel furnaces and slit-mills in any of her American colonies. She will not allow her colonists to work in these more advanced industries even for their own use, but insists they buy all such goods from British merchants and manufacturers.

She prohibits the transport of hats, wool, and woolen goods produced in America from one province to another — whether by water, by horseback, or by cart. This regulation effectively prevents the establishment of any manufacturing industry for anything beyond local trade, and confines colonial industry to the kind of crude, homemade production that any family would make for its own use or for its immediate neighbors.

To prohibit a great people from making the most of every part of their own production, or from using their capital and labor in the way they judge most advantageous to themselves, is a blatant violation of the most sacred rights of humanity. Unjust as these prohibitions are, however, they have not so far been very harmful to the colonies in practice. Land is still so cheap, and labor consequently so expensive, that the colonies can import almost all the more refined manufactures from the mother country more cheaply than they could produce them themselves. Even without these prohibitions, self-interest would probably have prevented them from setting up such industries. In their current stage of development, these restrictions — while not actually cramping their industry or holding it back from anything it would have done on its own — are merely insulting badges of slavery imposed on them, without any good reason, by the groundless jealousy of the merchants and manufacturers of the mother country. In a more advanced stage of development, these same restrictions might become truly oppressive and unbearable.

Great Britain also, as she restricts some of the colonies' most important products to her own market, gives some of them an advantage in that market by way of compensation. Sometimes she does this by imposing higher duties on similar products imported from other countries, and sometimes by offering subsidies on imports from the colonies. In the first way, she gives colonial sugar, tobacco, and iron an advantage in the home market. In the second way, she subsidizes colonial raw silk, hemp and flax, indigo, naval stores, and building timber. This second approach — subsidizing colonial imports — is, as far as I know, unique to Great Britain. The first is not. Portugal, for instance, not only imposes higher duties on tobacco from other countries but bans its import entirely, under the severest penalties.

In terms of importing goods from Europe, England has also dealt more generously with her colonies than any other nation.

Great Britain refunds a portion of the import duties on foreign goods when they are re-exported to another country — usually at least half, generally more, and sometimes the full amount. It was easy to foresee that no independent foreign country would accept these goods if they arrived loaded with the heavy duties Britain imposes on imports. Unless some of those duties were refunded on re-export, the carrying trade — so highly prized by the mercantile system — would simply cease.

The colonies, of course, are not independent foreign countries. Great Britain, having claimed the exclusive right to supply them with all European goods, could have forced them to accept those goods loaded with the same duties they bore in the mother country, as other nations have done with their colonies. But instead, until 1763, the same duty refunds were given on goods re-exported to the colonies as to any independent foreign nation. In 1763, however, this generosity was significantly curtailed. A new law provided that no part of the duty called the "old subsidy" would be refunded on any European or East Indian goods exported to the British colonies in America — with exceptions for wine, white calicoes, and muslins. Before this law, many types of foreign goods could actually be bought more cheaply in the colonies than in the mother country. Some still can.

It should be noted that the merchants who conduct the colonial trade have been the primary advisors behind most of the regulations governing it. We should not be surprised, then, that in most of these regulations, their own interests have been given more weight than either those of the colonies or those of the mother country. In their exclusive privilege of supplying the colonies with all the European goods they wanted, and of buying up all colonial products that did not compete with their own domestic trades, the colonies' interests were sacrificed to those of the merchants. In allowing the same duty refunds on re-exports to the colonies as to independent countries, the mother country's interests were sacrificed to those of the merchants — even by the mercantile system's own logic. It was in the merchants' interest to pay as little as possible for the foreign goods they sent to the colonies, and therefore to recover as much as possible of the duties they had paid on importing those goods. This way, they could sell the same quantity at a bigger profit, or a bigger quantity at the same profit. It was also in the colonies' interest to get these goods as cheaply and abundantly as possible. But this was not always in the mother country's interest. She frequently suffered both in her tax revenue — by refunding a large share of the import duties — and in her manufacturing sector, which was undercut in the colonial market by foreign goods made artificially cheap through these refunds. The growth of Britain's own linen industry, it is commonly said, has been considerably held back by duty refunds on German linen re-exported to the American colonies.

But though Britain's colonial trade policy has been driven by the same mercantile thinking as other nations', it has, on the whole, been less restrictive and oppressive than any of the others.

In everything except their foreign trade, the English colonists' freedom to manage their own affairs is complete. It is in every way equal to that of their fellow citizens at home, and is secured the same way: by an elected assembly of the people's representatives, which claims the sole right to impose taxes for the support of the colonial government. The authority of this assembly keeps the executive power in check. Neither the humblest nor the most controversial colonist, as long as he obeys the law, has anything to fear from the governor or any other civil or military officer. The colonial assemblies, though — like the House of Commons in England — they are not always a perfectly equal representation of the people, come closer to that ideal. Since the executive either lacks the means to corrupt them or, because it is supported by the mother country, has no need to, the assemblies are generally more responsive to the actual wishes of their constituents.

The councils that serve as the upper house in colonial legislatures — corresponding to the House of Lords in Britain — are not made up of hereditary nobles. In some colonies, like the three New England provinces, these councils are elected by the people's representatives, not appointed by the king. In none of the English colonies is there a hereditary aristocracy. In all of them, as in all free countries, the descendant of an old colonial family is more respected than a newcomer of equal merit and fortune — but he is only more respected, not more privileged. He has no special legal powers that could make him a nuisance to his neighbors.

Before the current American conflict began, the colonial assemblies had not only legislative power but also part of the executive power. In Connecticut and Rhode Island, they elected the governor. In the other colonies, they appointed the tax collectors, who were directly accountable to the assemblies that had appointed them. There is more equality among the English colonists than among the people of the mother country. Their manners are more republican, and their governments — those of the three New England provinces in particular — have been more republican as well.

The absolute governments of Spain, Portugal, and France, by contrast, are replicated in their colonies. The discretionary powers that such governments typically delegate to their subordinate officials are, because of the great distance, naturally exercised there with even greater brutality than at home. Under any absolute government, there is more liberty in the capital than in the provinces. The sovereign himself usually has neither the interest nor the inclination to pervert justice or oppress the majority of his people. In the capital, his presence restrains his officials somewhat. In the remote provinces, where complaints from the people are less likely to reach him, those officials can exercise their tyranny with far more impunity. But the European colonies in America are more remote than the most distant provinces of any empire in history. The government of the English colonies is perhaps the only one that has ever provided genuine security to the inhabitants of such a distant territory.

French colonial administration, it should be said, has always been conducted with more gentleness and restraint than that of Spain and Portugal. This fits both the character of the French nation and the nature of its government, which — though arbitrary and violent compared to Great Britain's — is lawful and free compared to Spain's and Portugal's.

It is in the progress of the North American colonies, however, that the superiority of English colonial policy is most evident. The French sugar colonies have grown at least as fast as, and perhaps faster than, most of the English sugar colonies. And the English sugar colonies enjoy a free government much like that of the North American colonies. But the French sugar colonies are not forbidden, as the English ones are, from refining their own sugar. And what is even more important, the nature of the French government naturally leads to better treatment of enslaved workers.

In all European colonies, sugar is grown by enslaved Africans. It was assumed that Europeans, raised in a temperate climate, could not endure the labor of digging in the ground under the burning Caribbean sun. Sugar cultivation, as currently practiced, is all done by hand — though many people believe the drill plow could be introduced with great advantage. Now, just as the profit and success of farming with draft animals depends on how well those animals are managed, the profit and success of farming with enslaved labor depends on how well those workers are managed. And in the management of their enslaved workers, French planters are generally acknowledged to be superior to the English.

The law, insofar as it gives the enslaved person some feeble protection from the violence of his master, is more likely to be enforced in a colony under an authoritarian government than in one with a free government. In any country with the unfortunate institution of slavery, when a magistrate protects an enslaved person, he is interfering to some extent in the management of the master's private property. In a free country, where the master is perhaps a member of the colonial assembly or a voter who elects one, the magistrate barely dares to intervene, and does so only with the greatest caution. The deference he must show the master makes it harder for him to protect the enslaved person.

But in a country where the government is largely authoritarian — where magistrates routinely intervene in the management of private property and might send a lettre de cachet to anyone who displeased them — it is much easier for the magistrate to offer some protection to the enslaved person. And ordinary humanity naturally inclines him to do so. The protection of the magistrate makes the enslaved person somewhat less contemptible in the master's eyes, which leads the master to treat him with more respect and gentleness. Humane treatment makes enslaved people not only more loyal but also more capable, and therefore doubly more useful. They begin to approach the condition of free servants and may develop some degree of integrity and dedication to their master's interests — virtues that free servants often possess, but that can never be found in an enslaved person who is treated the way they typically are in countries where the master faces no constraints.

That the condition of an enslaved person is better under an authoritarian government than under a free one is, I believe, supported by the history of all ages and nations. In Roman history, the first time we read of a magistrate stepping in to protect a slave from his master's violence is during the era of the emperors. When Vedius Pollio, in the presence of Augustus, ordered one of his slaves — who had committed a minor offense — to be cut to pieces and thrown into his fishpond to feed his fish, the emperor commanded him, with indignation, to free not only that slave but all the others who belonged to him. Under the republic, no magistrate would have had the authority to protect the slave, much less to punish the master.

It is worth noting that the capital which built up the French sugar colonies, especially the great colony of Saint-Domingue, was raised almost entirely from the gradual improvement and cultivation of those colonies themselves. It was almost wholly the product of the soil and the industry of the colonists — or, what amounts to the same thing, the accumulated value of that production, well managed and reinvested to produce still more. But a large part of the capital that has developed and cultivated the English sugar colonies was sent out from England. It has by no means been entirely generated by the colonists themselves. The prosperity of the English sugar colonies has largely been owed to the great wealth of England, which has, in a sense, overflowed into those colonies. But the prosperity of the French sugar colonies has been entirely owed to the good management of the colonists, which must therefore have been superior to that of the English. And this superiority has been most visible in the management of their enslaved workers.

Such have been the general outlines of the policies of the different European nations toward their colonies.

European policy, therefore, has very little to boast about — either in the original establishment of the American colonies or, as far as their internal governance is concerned, in their subsequent prosperity.

Folly and injustice seem to have been the guiding principles behind the first colonial projects: the folly of chasing after gold and silver mines, and the injustice of seizing a country whose harmless native inhabitants — far from having ever harmed the people of Europe — had welcomed the first adventurers with every sign of kindness and hospitality.

The adventurers who established some of the later colonies did, admittedly, combine the fantasy of finding gold mines with other motives that were more reasonable and more admirable. But even these do very little credit to European policy.

English Puritans, oppressed at home, fled to America for freedom and founded the four governments of New England. English Catholics, treated with even greater injustice, founded Maryland. The Quakers founded Pennsylvania. Portuguese Jews, persecuted by the Inquisition, stripped of their property, and banished to Brazil, introduced some degree of order and industry among the transported convicts and prostitutes who originally populated that colony, and taught them to cultivate sugarcane. In every one of these cases, it was not the wisdom and good policy of European governments that populated and cultivated America, but their disorder and injustice.

In carrying out some of the most important of these settlements, the various European governments deserved as little credit as they did for planning them. The conquest of Mexico was the project not of the Spanish royal council, but of a governor of Cuba — and it was accomplished by the bold spirit of the adventurer entrusted with it, in spite of everything that governor (who soon regretted giving him the job) could do to obstruct him. The conquerors of Chile and Peru, and of nearly all the other Spanish settlements on the South American continent, set out with no official support beyond a general permission to make settlements and conquests in the king of Spain's name. These ventures were all undertaken at the adventurers' own risk and expense. The Spanish government contributed virtually nothing. The English government contributed just as little to several of its most important North American colonies.

When these settlements had grown large enough to attract the mother country's attention, the first regulations imposed on them always aimed at securing a monopoly on their trade — restricting their markets and expanding the mother country's, at the colonies' expense. The goal was to dampen and discourage, rather than quicken and advance, the course of colonial prosperity. The different methods by which this monopoly has been enforced represent one of the most fundamental differences in how European nations have governed their colonies. The best approach — England's — is only somewhat less restrictive and oppressive than the rest.

In what way, then, has European policy contributed to either the founding or the present greatness of the American colonies? In one way only, but in that one way it has contributed a great deal. "Magna virum Mater!" — Great Mother of Men! Europe bred and shaped the people who were capable of achieving such great things and laying the foundations of so great an empire. No other part of the world has a political culture capable of producing — or has ever actually produced — such people. The colonies owe to European policy the education and grand vision of their bold and enterprising founders. Some of the greatest and most important colonies, as far as their internal governance goes, owe it practically nothing else.

Such are the advantages the American colonies have gained from European policy.

What are the advantages that Europe has gained from the discovery and colonization of America?

These advantages can be divided into two categories: first, the general advantages that Europe as a whole has gained from those great events; and second, the particular advantages that each colonizing country has gained from the colonies under its control.

The general advantages Europe has gained from the discovery and colonization of America are, first, an increase in its enjoyments, and second, an expansion of its industry.

The surplus products of America, imported into Europe, provide the people of this great continent with a variety of goods they could never otherwise have had — some useful, some pleasurable, some decorative — and thereby increase their enjoyments.

The discovery and colonization of America have clearly expanded the industry of, first, all the countries that trade directly with it — Spain, Portugal, France, and England — and second, all those countries that trade with it indirectly, sending their own products through other nations. Austrian Flanders and some German provinces, for example, ship considerable quantities of linen and other goods to America through the countries mentioned above. All such countries have obviously gained access to a larger market for their surplus production, and have naturally been encouraged to increase that production.

But it might seem less obvious that these great events have also boosted the industry of countries like Hungary and Poland, which may never have sent a single item of their own production to America. Yet that is precisely what has happened. Some American products are consumed in Hungary and Poland — there is demand there for sugar, chocolate, and tobacco from the New World. But these goods must be paid for with something: either with Hungarian and Polish products, or with something purchased using Hungarian and Polish products. American goods are new values, new things to exchange, introduced into Hungary and Poland to be traded for the surplus production of those countries. By being brought there, they create a new and larger market for that surplus production. They raise its value and thereby encourage its growth. Even though none of that production may ever be shipped to America, it may be shipped to other countries that buy it with their share of America's surplus. It finds a market through the chain of commerce that was originally set in motion by American production.

These great events may even have increased the enjoyments and expanded the industry of countries that have neither sent goods to America nor received any from it. Such countries may have received a greater abundance of other goods from nations whose surplus production had been expanded by the American trade. This greater abundance must have increased their enjoyments and expanded their industry. More new goods must have been available to exchange for the surplus production of their own industries. A larger market must have opened up for that surplus, raising its value and encouraging its growth. The total mass of goods constantly circulating through the great system of European commerce, distributed by its various movements among all the nations within it, must have been increased by the entire surplus production of America. A greater share of this greater total is likely to have reached each of these nations, increasing their enjoyments and expanding their industry.

The exclusive trade claimed by the mother countries tends to reduce — or at least to hold below what it would otherwise be — both the enjoyments and the industry of all these nations generally, and of the American colonies in particular. It is a dead weight on one of the great engines that drives much of the world's economic activity. By making colonial products more expensive in every other country, it reduces consumption, which in turn restrains the colonies' industry. It also restrains the enjoyments and industry of all other countries, which enjoy less when they pay more for what they enjoy, and produce less when they get less for what they produce. By making other countries' products more expensive in the colonies, it similarly restrains the industry of those other countries, and both the enjoyments and the industry of the colonies themselves.

It is a drag that, for the supposed benefit of a few favored countries, burdens the pleasures and hampers the industry of all others — but of the colonies most of all. It does not merely shut other countries out of one particular market; it confines the colonies to one particular market. And there is a vast difference between being shut out of one market when all others are open, and being confined to one market when all others are closed. The surplus production of the colonies is the original source of all the increased enjoyment and industry that Europe has gained from the discovery and colonization of America. The exclusive trade of the mother countries tends to make this source far less abundant than it would otherwise be.

The particular advantages that each colonizing country gains from its own colonies are of two kinds: first, the ordinary advantages that any empire gains from the provinces under its control; and second, the special advantages that are supposed to come from provinces as unusual as the European colonies in America.

The ordinary advantages any empire gains from subject provinces are, first, the military forces those provinces provide for defense, and second, the revenue they contribute to support the government. Roman colonies routinely provided both. Greek colonies sometimes provided military support but rarely any revenue. They seldom acknowledged themselves as subject to the mother city. They were usually allies in wartime, but very rarely subjects in peacetime.

The European colonies in America have never yet provided any military forces for the defense of the mother country. Their own military forces have never been sufficient for their own defense. In every war the mother countries have fought, the defense of their colonies has required a very significant diversion of military resources. In this respect, all the European colonies, without exception, have been a source of weakness rather than strength to their mother countries.

Only the colonies of Spain and Portugal have contributed any revenue toward the defense or civil government of the mother country. The taxes levied on other European colonies — England's in particular — have rarely covered the peacetime costs of maintaining them, and have never been enough to cover wartime expenses. These colonies have therefore been a source of expense, not revenue, to their mother countries.

The advantages of such colonies to their mother countries consist entirely in the special benefits that are supposed to come from provinces of such an unusual nature as the European colonies in America. And the exclusive trade, everyone acknowledges, is the sole source of all those special benefits.

Because of this exclusive trade, the entire surplus production of the English colonies that falls into the category of enumerated commodities can only be sent to England. Other countries must buy it from her afterward. It is therefore cheaper in England than anywhere else, and contributes more to increasing England's enjoyments than those of any other country. It must also do more to stimulate her industry. For all the parts of her own surplus production that England exchanges for these enumerated goods, she gets a better price than any other country can get for similar products exchanged for the same goods. English manufactures, for example, will purchase a larger quantity of sugar and tobacco from England's own colonies than the equivalent manufactures of other countries can purchase. So far as English manufactures and those of other countries are both being exchanged for colonial sugar and tobacco, this price advantage gives English industry an edge over its competitors. The exclusive colonial trade, therefore, while it depresses (or at least holds down) the enjoyments and industry of the countries that do not have it, gives a clear advantage to the country that does.

This advantage, however, may turn out to be relative rather than absolute — giving a superiority to the country that enjoys it more by depressing the industry and output of other countries than by actually raising its own above what they would naturally be under free trade.

Maryland and Virginia tobacco, for example, certainly comes cheaper to England than to France, thanks to England's monopoly, since England commonly sells a large share of it to France. But if France and all other European countries had always been allowed free trade with Maryland and Virginia, the tobacco from those colonies might by now have become cheaper than it currently is — not only for all those other countries, but for England too. Production of tobacco, with a market so much larger than any it has ever had, would probably have expanded enough by now to bring the profits of a tobacco plantation down to normal levels — roughly equal to those of a grain farm, which they are still thought to exceed somewhat. The price of tobacco would probably have fallen somewhat below its current level. An equal quantity of English goods (or goods from other countries) could have bought a larger quantity of tobacco in Maryland and Virginia, and would consequently have sold for a better price there.

So to the extent that cheap and plentiful tobacco can increase the enjoyments or expand the industry of England or any other country, free trade would probably have produced both effects to a somewhat greater degree than the current system does. England would not have had any advantage over other countries in this scenario. She might have bought colonial tobacco somewhat cheaper and sold her own goods somewhat dearer. But she could not have bought cheaper or sold dearer than any other nation. She might have gained in absolute terms, but she would certainly have lost in relative terms.

To obtain this relative advantage in the colonial trade — to carry out the hostile and spiteful project of shutting other nations out of it as much as possible — there are very strong reasons to believe that England has not only sacrificed part of the absolute advantage that she, like every other nation, could have gained from that trade, but has also subjected herself to both an absolute and a relative disadvantage in nearly every other branch of trade.

When the Navigation Act gave England a monopoly on the colonial trade, the foreign capital that had previously been invested in it was necessarily withdrawn. English capital, which had formerly handled only part of it, now had to handle the whole thing. The capital that had previously supplied the colonies with only some of the European goods they wanted was now all that was available. But it could not supply them with everything, and the goods it did supply were inevitably sold at very high prices. The capital that had previously bought only some of the colonies' surplus production was now all that was available to buy the whole of it. But it could not buy the whole at anything close to the old price, so whatever it bought, it bought very cheaply. In a business where the merchant sells very dear and buys very cheap, the profit must have been enormous — far above the normal level in other trades. This exceptional profitability in the colonial trade inevitably drew capital away from other branches of commerce. But as this shift gradually increased competition in the colonial trade while decreasing it in all others, it gradually lowered profits in the former while raising them in the latter, until profits across all trades settled at a new, somewhat higher overall level.

This double effect — drawing capital away from all other trades while pushing up the general rate of profit — was not only produced by the monopoly when it was first established, but has continued to be produced by it ever since.

First, the monopoly has continually drawn capital away from other trades and toward the colonial trade.

Although Great Britain's wealth has increased enormously since the Navigation Act was passed, it has not increased in the same proportion as the colonies' wealth. But any country's foreign trade naturally grows in proportion to its wealth, and its surplus production in proportion to its total production. Since Great Britain had claimed for herself almost the entire foreign trade of the colonies, and her own capital had not grown as fast as that trade, she could only keep up with it by continually pulling capital from other branches of trade — and by keeping out a great deal more capital that would otherwise have flowed to those other branches. Since the Navigation Act, accordingly, the colonial trade has been continually expanding, while many other branches of foreign trade — particularly trade with the rest of Europe — have been continually shrinking.

British manufactures for export, instead of being designed for the nearby European market (or the somewhat more distant markets around the Mediterranean) as they were before the Navigation Act, have mostly been retooled for the much more distant colonial market — the market where Britain has a monopoly, rather than the ones where she has many competitors. The causes of decline in other branches of foreign trade — which other writers have blamed on excessive taxation, the high cost of labor, the spread of luxury spending, and so on — can all be traced back to the overgrowth of the colonial trade. Britain's commercial capital, though very large and growing, is not infinite. Since it has not grown as fast as the colonial trade, that trade could only be sustained by pulling capital away from other branches — and those other branches have inevitably declined.

England was already a great trading nation, with a large and growing commercial capital, not only before the Navigation Act established the colonial monopoly, but before the colonial trade was of any real significance. During the Dutch War under Cromwell, England's navy was superior to Holland's. In the war at the start of Charles II's reign, it was at least equal to, and perhaps stronger than, the combined fleets of France and Holland. Its relative superiority would hardly appear greater today — at least if the Dutch navy bore the same proportion to Dutch commerce that it did then.

But this great naval power could not, in either of those wars, have been a result of the Navigation Act. During the first war, the Act had only just been drafted. By the outbreak of the second, it had been formally enacted, but no part of it had had time to produce any significant effect — least of all the part establishing the colonial monopoly. Both the colonies and their trade were insignificant at that time compared to what they are now. Jamaica was an unhealthy, barely inhabited and barely cultivated desert. New York and New Jersey belonged to the Dutch. Half of St. Kitts belonged to the French. Antigua, the two Carolinas, Pennsylvania, Georgia, and Nova Scotia had not yet been settled. Virginia, Maryland, and New England had been settled and were growing, but there was probably not a single person in Europe or America who foresaw their astonishing future growth in wealth, population, and development. Barbados was essentially the only British colony whose condition at that time bore any resemblance to what it is today.

The colonial trade — which England, even for some years after the Navigation Act, enjoyed only partially (since the Act was not strictly enforced for years) — could not have been the foundation of England's great commerce or the naval power it supported. That commerce and that naval power were built on trade with Europe and the Mediterranean. But Britain's current share of that European trade could not sustain a navy of comparable strength.

If the growing colonial trade had been left open to all nations, whatever share of it fell to Britain — and a very considerable share probably would have — it would have been a pure addition to the great European trade she already had. Because of the monopoly, however, the expansion of the colonial trade has not so much added to Britain's existing commerce as totally redirected it.

Second, the monopoly has inevitably kept the rate of profit in all branches of British trade higher than it would otherwise have been if all nations had been allowed free access to the British colonies.

The colonial monopoly, by drawing a larger share of British capital into that trade than would have gone there naturally, and by expelling all foreign capital, reduced the total amount of capital in the colonial trade below what free competition would have produced. By reducing competition among capitals in that particular trade, it raised the rate of profit there. By reducing competition among British capitals in all other trades, it raised the rate of British profit in those other trades as well. Whatever the state of Britain's commercial capital at any time since the Navigation Act, the colonial monopoly must have pushed the ordinary rate of British profit higher than it would otherwise have been — both in the colonial trade itself and in every other branch of British trade. If the ordinary rate of British profit has in fact fallen considerably since the Navigation Act (which it certainly has), it would have fallen even further without the monopoly propping it up.

But whatever raises the ordinary rate of profit in any country above its natural level inevitably subjects that country to both an absolute and a relative disadvantage in every branch of trade where it does not have a monopoly.

It subjects her to an absolute disadvantage, because in those trades her merchants cannot earn this inflated profit without selling at higher prices — both the foreign goods they import and the domestic goods they export. The country must buy dearer and sell dearer. It must buy less and sell less. It must enjoy less and produce less than it otherwise would.

It subjects her to a relative disadvantage, because in those same trades it puts other countries — which are not burdened by the same absolute disadvantage — either further above her or less far below her than they would otherwise be. It enables them to enjoy more and produce more relative to what she enjoys and produces. It makes their superiority greater or their inferiority smaller. By pushing the price of British products above their natural level, it allows the merchants of other countries to undercut British goods in foreign markets and to elbow Britain out of nearly every branch of trade where she does not have a monopoly.

British merchants frequently blame high British wages for the fact that their manufactures are undersold in foreign markets, but they say nothing about high British profits. They complain about other people's excessive gains but keep quiet about their own. Yet high profits on British capital may contribute as much to raising the price of British goods in many cases — and in some cases perhaps even more — than high British wages do.

In this way, British capital has partly been drawn and partly been driven from most branches of trade where Britain does not have a monopoly — particularly from European trade and Mediterranean commerce.

It has been drawn from those trades by the lure of higher profits in the colonial trade, which has been continually growing while the capital devoted to it has been continually insufficient from one year to the next.

It has been driven from them by the competitive advantage that artificially high British profit rates give to other countries in every branch of trade where Britain lacks a monopoly.

Just as the colonial monopoly has pulled British capital out of other branches of trade, it has pushed foreign capital into them. In those other trades, it has reduced the competition from British capital (and thus raised British profit rates) while increasing the competition from foreign capital (and thus lowered foreign profit rates). In both ways, it has clearly subjected Great Britain to a relative disadvantage in all those other trades.

It might be argued that the colonial trade is more profitable for Great Britain than any other, and that the monopoly, by forcing a larger share of British capital into it, has directed capital toward a more advantageous use for the country.

The most advantageous use of any capital for the country it belongs to is the one that employs the greatest quantity of productive labor at home and adds the most to the annual output of the nation's land and labor. But the quantity of productive labor that any capital employed in foreign trade can support is directly proportional to how frequently its returns come in, as was shown in the second book. A capital of a thousand pounds employed in foreign trade that turns over once a year can keep employed the same amount of productive labor as a thousand pounds can support for a year. If the turnover happens twice or three times a year, it can support as much productive labor as two or three thousand pounds.

A foreign trade carried on with a nearby country is therefore generally more advantageous than one with a distant country, because the returns come in more often. And for the same reason, a direct foreign trade is generally more advantageous than a roundabout one, as was also shown in the second book.

But the colonial monopoly, as it has affected the use of British capital, has in every case forced some of it out of nearby foreign trade into more distant trade, and in many cases has forced it from direct foreign trade into roundabout trade.

First, the monopoly has in every case forced some British capital from trade with nearby countries into trade with more distant ones.

It has, in every case, shifted some capital away from trade with Europe and the Mediterranean toward trade with the far more distant regions of America and the West Indies, where the returns are inevitably less frequent. This is not only because of the greater distance, but because of the particular circumstances of those countries. New colonies, as I have already observed, are always short of capital. Their own capital is always far less than what they could employ profitably in developing their land. They are constantly in need of more capital than they have, and to make up the shortfall, they try to borrow as much as they can from the mother country. They are therefore perpetually in debt.

The most common way colonists go into this debt is not by formally borrowing from wealthy people in the mother country (though they sometimes do that too), but by running up tabs with the merchants who supply them with European goods — as large as those merchants will allow. Their annual payments frequently amount to no more than a third of what they owe, and sometimes even less. So the total capital that their suppliers advance to them rarely returns to Britain in less than three years, and sometimes not in less than four or five. A British capital of a thousand pounds that comes back only once every five years can continuously employ only one-fifth the amount of British industry it could support if it came back every year. Instead of the labor that a thousand pounds can maintain for a year, it can maintain only what two hundred pounds can.

The planter, no doubt, compensates his supplier for this delay through the high prices he pays for European goods, the interest on the long-dated bills he issues, and the commissions on the short-dated bills he renews. He may more than compensate the individual merchant. But he cannot compensate Great Britain as a whole. In a trade with very slow returns, the merchant's profit may be as great as — or even greater than — in a trade with fast returns. But the benefit to his home country, the quantity of productive labor continuously supported there, and the annual output of its land and labor, must always be far less.

That the returns from American trade — and still more from West Indian trade — are generally not only more distant but also more irregular and more uncertain than those from European or Mediterranean trade, I imagine everyone with experience in these different branches will readily agree.

Second, the monopoly has in many cases forced some British capital from direct foreign trade into roundabout trade.

Among the enumerated commodities that can only be sent to Great Britain, there are several produced in quantities far exceeding British consumption, so a portion must be re-exported to other countries. But this cannot be done without forcing some British capital into a roundabout foreign trade. Maryland and Virginia, for example, ship more than 96,000 hogsheads of tobacco annually to Great Britain, and British consumption is said to be no more than 14,000. More than 82,000 hogsheads must therefore be re-exported to other countries — France, Holland, and the Baltic and Mediterranean nations.

The British capital that brings these 82,000 hogsheads to Britain, re-exports them, and brings back goods or money in return, is engaged in a roundabout foreign trade. It has been forced into this arrangement in order to dispose of this enormous surplus. If we want to calculate how long it takes for all this capital to return to Britain, we must add the delay of the secondary trade to the already slow American returns. If capital in direct American trade often takes three or four years to come back, capital in this roundabout trade is unlikely to come back in less than four or five. If direct trade can keep only a third or a quarter of the domestic industry continuously employed that the same capital could support with annual returns, roundabout trade can keep only a fourth or a fifth.

At some outports, credit is typically extended to the foreign buyers of re-exported tobacco. In London, it is usually sold for cash — "weigh and pay" is the rule. So at London, the final returns from the full roundabout circuit are delayed beyond the American returns only by however long the goods sit unsold in the warehouse (which can sometimes be quite a while).

But if the colonies had not been confined to the British market for their tobacco, very little more of it would probably have come to Britain than what was needed for domestic consumption. The goods Britain currently buys with the great surplus of tobacco she re-exports would probably have been purchased instead with the direct output of British industry or British manufactures. Those manufactures, instead of being designed almost entirely for one great market, would probably have been adapted to many smaller ones. Instead of one great roundabout foreign trade, Britain would probably have carried on many small direct trades. Because of the more frequent returns, perhaps only a small fraction — maybe a third or a quarter — of the capital currently tied up in this great roundabout trade could have sustained an equal quantity of British industry through all those small direct trades. All the purposes of the trade would have been served with much less capital, leaving a large surplus to be applied to other uses: improving the land, expanding manufacturing, and extending Britain's commerce. This spare capital would have entered into competition with other British capital in all these different areas, lowering the rate of profit across the board and giving Britain an even greater edge over other nations than she currently enjoys.

The colonial monopoly has also forced some British capital out of all foreign trade entirely and into the carrying trade — thereby shifting it from supporting British industry to supporting, in part, the industry of the colonies and of other countries.

The goods purchased with the surplus of 82,000 hogsheads of re-exported tobacco, for example, are not all consumed in Britain. Some of them — linen from Germany and Holland, for instance — are sent on to the colonies for their use. The British capital that buys the tobacco, then buys the linen with the tobacco proceeds, is necessarily withdrawn from supporting British industry and devoted instead to supporting partly the colonies' industry and partly the industry of the countries that supply the linen.

In her present condition, Great Britain resembles one of those unhealthy bodies in which some vital organ has become overgrown, and which is therefore prone to dangerous disorders that would hardly afflict a body in which all the parts were properly proportioned. A small blockage in that great blood vessel — artificially swollen beyond its natural size, and through which an unnatural share of the country's industry and commerce has been forced to flow — could easily bring on the most dangerous disorders in the entire body.

The prospect of a rupture with the colonies has accordingly struck the people of Great Britain with more terror than they ever felt from a Spanish armada or a French invasion. It was this fear — whether well founded or not — that made the repeal of the Stamp Act so popular, at least among the merchants. In the total loss of the colonial market, even for just a few years, most merchants foresaw a complete halt to their business. Most large manufacturers foresaw the total ruin of their enterprises. Most workers foresaw the end of their employment. A breakdown in trade with any of our European neighbors, though it too would cause some disruption across all these groups, is contemplated without any such general panic. Blood whose flow is blocked in the smaller vessels easily diverts itself into the larger ones without causing any dangerous disorder. But when it is blocked in one of the great vessels, the immediate and unavoidable consequences are convulsions, stroke, or death.

If even one of those overgrown industries — artificially inflated by subsidies or by monopoly over the domestic and colonial markets — suffers even a small disruption in business, it frequently triggers unrest and disorder alarming to the government and paralyzing to the legislature. How enormous, then, would be the chaos caused by a sudden and total disruption in the employment of so great a share of our leading industries?

Some gradual and moderate relaxation of the laws that give Great Britain exclusive colonial trade, until that trade is made largely free, seems to be the only policy that can, in the long run, deliver her from this danger. It is the only policy that can enable her — or even force her — to withdraw some capital from this overgrown sector and redirect it, though at lower profit, toward other activities. By gradually shrinking one branch of industry while gradually expanding all the rest, it could eventually restore all the different branches to that natural, healthy proportion that only perfect freedom can establish and only perfect freedom can maintain.

To throw open the colonial trade all at once to all nations might cause not merely some temporary inconvenience but a great permanent loss to most people whose labor or capital is currently invested in it. The sudden loss of employment for just the ships that carry the 82,000-plus hogsheads of tobacco exported beyond British consumption might alone be felt severely. Such are the unfortunate effects of all the regulations of the mercantile system: they not only create dangerous disorders in the economic body, but disorders that are often impossible to cure without causing, at least temporarily, even greater ones. In what manner the colonial trade should gradually be opened up — which restrictions should be removed first, which last, and how the natural system of perfect freedom and justice should gradually be restored — we must leave to the wisdom of future statesmen and legislators to determine.

Five different events, unforeseen and unplanned, have fortunately conspired to cushion Great Britain from the impact of the total exclusion that has now been in effect for more than a year (since December 1, 1774) from a very important branch of the colonial trade — that of the twelve associated provinces of North America.

First, in preparing for their non-importation agreement, the colonies drained Britain completely of all the goods suited to their market. Second, the extraordinary demand from the Spanish treasure fleet has this year drained Germany and the North of many goods — linen in particular — that usually competed with British manufactures even in the British market. Third, the peace between Russia and Turkey has created an extraordinary demand from the Turkish market, which had been very poorly supplied while the country was in turmoil and a Russian fleet was cruising in the Aegean. Fourth, Northern Europe's demand for British manufactures has been growing steadily for some years. And fifth, the recent partition and pacification of Poland, by opening up that great country's market, has added an extraordinary new source of demand from the North on top of the existing growth.

All of these events except the fourth are temporary and accidental. If the exclusion from the colonial trade unfortunately continues much longer, it may yet cause some real hardship. But since this hardship will come on gradually, it will be felt much less severely than if it had arrived all at once. In the meantime, the country's industry and capital may find new outlets, preventing the distress from ever reaching a serious level.

The colonial trade monopoly, therefore, insofar as it has diverted a disproportionate share of British capital toward colonial trade, has in every case redirected it from nearby foreign trade to more distant trade; in many cases, from direct foreign trade to roundabout trade; and in some cases, from all foreign trade to carrying trade. In every case, it has shifted capital from uses that would have supported more productive labor at home to uses that support far less. By tying such a large share of British industry and commerce to a single market, it has also made the entire system more precarious and less secure than if British production had been spread across a greater variety of markets.

We must carefully distinguish between the effects of the colonial trade and the effects of the monopoly of that trade. The former are always and necessarily beneficial. The latter are always and necessarily harmful. But the beneficial effects are so great that the colonial trade, even burdened by the monopoly and despite all its harmful effects, is still on the whole enormously beneficial — just considerably less so than it would be without the monopoly.

The effect of colonial trade in its natural, free state would be to open a great (though distant) market for whatever British products exceed the demand of the nearer markets in Europe and the Mediterranean. In its natural, free state, the colonial trade — without pulling any products away from those existing markets — would encourage Britain to continually increase her surplus by continually offering new goods to exchange for it. In its natural, free state, the colonial trade would tend to increase the quantity of productive labor in Great Britain without redirecting any of the labor already employed there. Under free competition from all other nations, the rate of profit would be prevented from rising above the normal level, either in the new market or the new trade. The new market would create, so to speak, new products to supply itself, and that new production would constitute new capital to carry on the new business — drawing nothing from the old.

The monopoly, by contrast, excludes the competition of other nations, raises the rate of profit in both the new market and the new business, and thereby draws products away from old markets and capital away from old businesses. Expanding Britain's share of the colonial trade beyond what it would naturally be is the declared purpose of the monopoly. If Britain's share would have been just as large without the monopoly, there would have been no reason to create it. But whatever forces a disproportionate amount of a country's capital into a branch of trade with slower and more distant returns than most other trades necessarily makes the total quantity of productive labor, and the total annual output of the nation's land and labor, less than they would otherwise be. It holds down the income of the country's inhabitants below what it would naturally rise to, and thereby reduces their ability to accumulate wealth. It not only prevents their capital from supporting as much productive labor as it otherwise would, but prevents it from growing as fast — and consequently from supporting even more productive labor in the future.

The naturally beneficial effects of the colonial trade, however, more than compensate Britain for the harmful effects of the monopoly. Monopoly and all, the trade as currently conducted is not just advantageous but enormously so. The new market and new employment created by the colonial trade are far larger than the portion of the old market and old employment lost to the monopoly. The new production and new capital created by the colonial trade support a greater quantity of productive labor in Great Britain than can have been thrown out of work by the diversion of capital from trades with faster returns. If the colonial trade is advantageous to Britain even in its current form, it is not because of the monopoly but in spite of it.

It is for manufactured goods, rather than raw materials, that the colonial trade mainly opens a new market. Agriculture is the natural business of all new colonies: cheap land makes it more profitable than anything else. The colonies therefore have abundant raw materials and, rather than importing them, generally have a large surplus to export. In new colonies, farming either draws workers away from all other employment or prevents them from entering it. There are few hands to spare for necessary manufactures and none for luxury goods. The colonists find it cheaper to buy most manufactured goods from other countries than to make them. It is mainly by encouraging European manufacturing that the colonial trade indirectly encourages European agriculture. The European manufacturers whose work is supported by the colonial trade constitute a new market for the output of the land. And the most advantageous of all markets — the domestic market for grain, cattle, bread, and meat — is thereby greatly expanded by the trade to America.

But the monopoly of trade with populous and thriving colonies is not by itself enough to create or even maintain a manufacturing sector. The examples of Spain and Portugal prove this conclusively. Both were manufacturing countries before they had significant colonies. Since acquiring the richest and most fertile colonies in the world, they have both ceased to be.

In Spain and Portugal, the harmful effects of the monopoly, compounded by other problems, have perhaps nearly canceled out the natural benefits of the colonial trade. These other problems include: additional monopolies of various kinds; the depreciation of gold and silver below their value in most other countries; exclusion from foreign markets through excessive export taxes; the narrowing of the domestic market through even worse taxes on transporting goods from one part of the country to another; and above all, an irregular and biased administration of justice that often shields rich and powerful debtors from their creditors, making industrious producers afraid to supply goods on credit to arrogant grandees from whom they are never sure of being paid.

In England, by contrast, the natural benefits of the colonial trade, reinforced by other advantages, have largely overcome the harmful effects of the monopoly. These advantages include: a general freedom of trade that, despite some restrictions, is at least equal to — perhaps greater than — that of any other country; the freedom to export virtually all domestically produced goods, duty-free, to almost any foreign country; and what may be even more important, the unlimited freedom to transport goods from any part of the country to any other, without having to report to any government office or submit to any questioning or inspection. But the greatest advantage of all is the equal and impartial administration of justice, which makes the rights of the humblest British citizen respected by the greatest, and which — by securing to every person the fruits of his own labor — provides the most powerful possible encouragement to every kind of industry.

If British manufacturing has advanced — as it certainly has — because of the colonial trade, it has not been because of the monopoly but in spite of it. The monopoly's effect has been not to increase the quantity of British manufacturing but to alter its character and shape — adapting it to a market with slow and distant returns instead of one with frequent and nearby returns. Its effect has been to redirect part of British capital from an employment that would have supported more manufacturing to one that supports far less, thereby reducing, rather than increasing, the total amount of manufacturing maintained in Great Britain.

The colonial trade monopoly, like all the other petty and malicious expedients of the mercantile system, depresses the industry of all other countries — but especially that of the colonies — without in the least increasing, and actually diminishing, the industry of the country it is supposed to benefit.

The monopoly prevents the country's capital, whatever its size at any given time, from supporting as much productive labor as it otherwise would, and from generating as much income for its industrious inhabitants. But since capital can only grow through savings from income, the monopoly, by holding down income, necessarily holds down the growth of capital — and consequently the amount of productive labor it could support in the future. One great original source of income — the wages of labor — the monopoly has necessarily made less abundant at all times than it otherwise would have been.

By raising the rate of commercial profit, the monopoly also discourages the improvement of land. The profit from improving land depends on the gap between what it currently produces and what it could produce with a certain investment of capital. If this gap yields a better return than commercial investment, capital will flow toward land improvement. If it yields a worse return, capital will flow toward commerce instead. Whatever raises the rate of commercial profit therefore either reduces the advantage of land improvement or increases its disadvantage, either discouraging capital from going to improvement or actively pulling it away. By discouraging improvement, the monopoly slows the natural growth of another great original source of income: the rent of land. And by pushing up profits, the monopoly also keeps interest rates higher than they would otherwise be. Since land prices naturally fall when interest rates rise (and vice versa), the monopoly hurts landlords in two ways: it slows the growth of their rents, and it depresses the sale price of their land relative to those rents.

The monopoly does raise the rate of commercial profit, and thereby increases the gains of merchants somewhat. But by obstructing the natural growth of capital, it tends to reduce rather than increase the total income that the country's inhabitants derive from the profits of capital. A modest profit on a large capital generally produces more total income than a large profit on a small one. The monopoly raises the rate of profit but prevents the total sum of profit from rising as high as it otherwise would.

All three original sources of income — wages of labor, rent of land, and profits of capital — the monopoly makes much less abundant than they would otherwise be. To promote the narrow interest of one small class of people in one country, it damages the interests of all other classes in that country, and of all people in all other countries.

It is solely by raising the ordinary rate of profit that the monopoly has proved, or could prove, advantageous to any single class. But beyond all the harmful effects I have already mentioned, there is one more — perhaps the most fatal of all — that high profit rates seem inseparably connected to. High profits everywhere seem to destroy the thrift that would otherwise be natural to the merchant's character. When profits are high, frugality seems unnecessary, and expensive luxury seems more fitting for the merchant's prosperous station. But the owners of the great commercial capitals are inevitably the leaders and directors of every nation's entire industry, and their example has far more influence on the behavior of the working population than that of any other class. If the employer is careful and thrifty, the worker is very likely to be so too. But if the master is wasteful and undisciplined, the worker who follows his master's instructions at work will follow his example in life.

Accumulation is thus prevented in the hands of exactly those people who are naturally most inclined to accumulate. The funds available for supporting productive labor receive no addition from the income of those who ought to be adding to them the most. The country's capital, instead of growing, gradually shrinks, and the amount of productive labor it supports dwindles day by day.

Have the outrageous profits of the merchants of Cadiz and Lisbon increased the capital of Spain and Portugal? Have they reduced the poverty or promoted the industry of those two impoverished countries? Such has been the extravagance of merchant spending in those two trading cities that their enormous profits, far from adding to the country's capital, have barely been enough to maintain the capital already invested. Foreign capital is, as I might put it, intruding more and more into the trade of Cadiz and Lisbon every day. It is precisely to drive out this foreign capital from a trade that their own capital grows ever more insufficient to sustain that the Spanish and Portuguese keep tightening the chains of their absurd monopoly. Compare the spending habits of Cadiz and Lisbon merchants with those of Amsterdam, and you will immediately see how differently the conduct and character of merchants are shaped by high and low profit rates.

The merchants of London have not yet generally become such magnificent lords as those of Cadiz and Lisbon. Nor are they, on the whole, as careful and thrifty as those of Amsterdam. They are thought to be considerably richer than most of the former, though not quite as rich as many of the latter. But their profit rate is typically much lower than the Cadiz and Lisbon merchants' and considerably higher than the Amsterdam merchants'. "Easy come, easy go," as the saying goes — and the general level of spending everywhere seems to be governed not so much by what people can actually afford as by how easy they think it is to get more money.

This, then, is how the single advantage the monopoly provides to a single class of people is, in many different ways, harmful to the country's general interest.

To found a great empire for the sole purpose of creating a nation of customers may at first glance seem like a project fit only for a nation of shopkeepers. It is, however, a project entirely unfit for a nation of shopkeepers — but perfectly suited to a nation whose government is controlled by shopkeepers. Only such statesmen would imagine there is any advantage in spending the blood and treasure of their fellow citizens to found and maintain such an empire.

Say to a shopkeeper, "Buy me a nice estate, and I will always buy my clothes at your shop, even if I have to pay a bit more than I would elsewhere." You will not find him very eager to accept the offer. But if someone else buys you such an estate, the shopkeeper would be deeply grateful to your benefactor for requiring you to buy all your clothes at his shop.

England purchased for some of her citizens — people who were uncomfortable at home — a great estate in a distant country. The price was remarkably low: instead of thirty years' purchase (the normal price of land), it amounted to little more than the cost of the expeditions that made the first discovery, surveyed the coast, and took nominal possession. The land was excellent and vast, and the settlers, having plenty of good ground to work and being free for a while to sell their products wherever they pleased, became in little more than thirty or forty years (between 1620 and 1660) such a numerous and thriving people that the shopkeepers and traders of England decided to secure a monopoly on their custom.

Without pretending that they had paid any part of either the original purchase price or the subsequent cost of development, these merchants petitioned Parliament to restrict the American colonists to their shop — first for buying all the European goods they wanted, and second for selling all their products that the merchants found it convenient to buy. (They did not find it convenient to buy everything. Some colonial products, imported into England, would have competed with the merchants' own domestic business. Those particular items they were happy to let the colonists sell wherever they could — the farther away the better. And so they proposed confining the colonial export market to countries south of Cape Finisterre.) A clause in the famous Navigation Act turned this truly shopkeeper-like proposal into law.

The maintenance of this monopoly has been the main — or more accurately, the only — purpose of the authority Great Britain claims over her colonies. The exclusive trade is supposed to be the great advantage of having these colonies, which have never yet contributed either revenue or military force toward the civil government or defense of the mother country. The monopoly is the principal symbol of their dependence, and the sole benefit so far harvested from it. Every penny Great Britain has spent maintaining this colonial relationship has really been spent maintaining this monopoly.

Before the current American conflict, the peacetime military costs of the colonies included the pay for twenty regiments of infantry, the cost of artillery, supplies, and special provisions that had to be sent out, and the cost of a substantial naval force kept constantly on patrol to guard the enormous North American coastline and the West Indian islands from smugglers of other nations. All these peacetime costs were paid entirely from British revenue, and they were the smallest part of what colonial dominion has cost the mother country.

To calculate the full cost, we must add the interest on all the money Britain has spent defending her colonies on various occasions — treating them, as she does, as provinces subject to her authority. In particular, we must add the entire cost of the Seven Years' War and a large part of the cost of the war before it. The Seven Years' War was entirely a colonial quarrel, and its full cost — wherever in the world it was incurred, whether in Germany or the East Indies — should rightly be charged to the colonial account. It amounted to more than 90 million pounds sterling, including not only the new debt but the additional two-shilling land tax and the sums annually borrowed from the sinking fund. The Spanish war that began in 1739 was also primarily a colonial quarrel; its main object was to prevent the inspection of colonial ships carrying on a smuggling trade with the Spanish American mainland.

This entire expense is, in reality, a subsidy paid to support a monopoly. The stated purpose was to encourage manufacturing and increase commerce. But its actual effect has been to inflate the rate of commercial profit and to enable merchants to pour a larger share of their capital into a branch of trade with slower and more distant returns than most — two outcomes that, if a subsidy could have prevented them, might indeed have been well worth preventing.

Under the present system of management, therefore, Great Britain derives nothing but loss from the authority she claims over her colonies.

To propose that Great Britain should voluntarily give up all authority over her colonies — letting them elect their own leaders, pass their own laws, and make their own decisions about peace and war — would be to propose something that no nation in the world has ever done, or ever will. No nation has ever voluntarily surrendered dominion over any province, however troublesome to govern or however paltry its revenue compared to the cost of keeping it. Such a sacrifice, though it might serve the national interest, is always humiliating to national pride. And what is perhaps more important, it always runs counter to the private interests of the governing class, who would lose control of the many offices, positions of trust, and opportunities for acquiring wealth and distinction that even the most turbulent and unprofitable province provides. Not even the most starry-eyed idealist would seriously propose such a measure with any real hope of its adoption.

If it were adopted, however, Great Britain would not only be immediately freed from the entire peacetime cost of the colonies, but might negotiate a trade agreement that would effectively guarantee her a free trade far more advantageous to the general population — though less so to the merchants — than the current monopoly. By parting as friends, the natural affection of the colonies for the mother country, which our recent conflicts have all but extinguished, would quickly revive. It might lead them not only to honor, for centuries, the trade agreement concluded at separation, but to support us in war as well as in commerce — becoming not turbulent and rebellious subjects but our most faithful, loving, and generous allies. The same kind of parental affection on one side and filial respect on the other might be reborn between Great Britain and her colonies, just as it once existed between the colonies of ancient Greece and the mother cities from which they sprang.

Chapter VIII: Conclusion of the Mercantile System

That neither the ordinary nor the extraordinary revenue Great Britain receives from her colonies meets this standard will be readily admitted. It has been argued that the monopoly, by increasing the private income of the British people and thereby enabling them to pay higher taxes, compensates for the colonies' shortfall in public revenue. But this monopoly, as I have tried to show, though it is a very heavy tax on the colonies, and though it may increase the income of one particular class in Britain, actually reduces the income of the great majority of the people. It therefore reduces, rather than increases, the public's ability to pay taxes. And the class whose income the monopoly does increase is one that is both absolutely impossible to tax above its proportionate share and extremely unwise to even attempt to, as I will try to show in the next book. No special revenue, therefore, can be extracted from this particular class.

The colonies can be taxed in one of two ways: either by their own assemblies or by the British Parliament.

It seems very unlikely that the colonial assemblies could ever be managed well enough to levy taxes sufficient not only to maintain their own civil and military establishments at all times, but also to pay their proper share of the general government of the British Empire. It took a very long time before even the English Parliament — sitting right under the king's nose — could be brought to cooperate well enough to adequately fund even England's own civil and military establishment. That level of cooperation was achieved only by distributing a large share of government offices and appointments among individual members of Parliament.

But the colonial assemblies are far from the king's eye. They are numerous, scattered, and governed by different constitutions. Managing them in the same way would be extremely difficult even if the crown had the same tools — and it does not. It would be absolutely impossible to distribute among all the leading members of all the colonial assemblies enough offices or patronage to persuade them to sacrifice their popularity at home and tax their own constituents for the support of an imperial government whose benefits would mostly flow to strangers. The inevitable ignorance of administrators about the relative importance of the different members of these various assemblies, the offenses that would constantly be given, and the blunders that would constantly be made in trying to manage them this way, seem to make such a system completely unworkable.

Besides, the colonial assemblies cannot be expected to know what is needed for the defense and support of the empire as a whole. That responsibility is not theirs. It is not their job, and they have no reliable way of getting the information they would need. A provincial assembly, like a parish council, may be perfectly competent to judge the affairs of its own district, but it has no proper basis for judging the affairs of the entire empire. It cannot even properly judge its own province's proportion of the imperial burden, or its relative wealth and importance compared to other provinces — because those other provinces are not under its inspection or oversight. What is needed for the defense and support of the whole empire, and in what proportion each part should contribute, can only be judged by the assembly that oversees the affairs of the whole empire.

It has been proposed, accordingly, that the colonies should be taxed by requisition — with Parliament determining the amount each colony should pay, and each colonial assembly assessing and collecting it in whatever way best suited its circumstances. Imperial matters would be decided by the assembly that oversees the whole empire, while each colony's local affairs would still be managed by its own assembly. The colonies would have no representatives in the British Parliament under this arrangement. But if experience is any guide, there is no reason to think parliamentary requisitions would be unreasonable. Parliament has never shown the slightest inclination to overtax the parts of the empire not represented in it. The Channel Islands of Guernsey and Jersey, which have no way of resisting Parliament's authority, are more lightly taxed than any part of Great Britain. In its attempts to exercise its supposed right to tax the colonies — whether that right is legitimate or not — Parliament has never demanded anything approaching a fair proportion of what their fellow subjects at home pay. If, moreover, the colonies' contribution were to rise and fall in step with the land tax, Parliament could not tax the colonies without simultaneously taxing its own constituents. The colonies might in this case be considered virtually represented in Parliament.

There are precedents for empires in which different provinces are not taxed as a single unit, but where the sovereign sets the amount each province owes, directly assessing and collecting it in some provinces while leaving others to assess and collect it themselves. In some provinces of France, the king both sets and collects whatever taxes he sees fit. From other provinces, he demands a set sum but leaves it to the provincial legislature to determine how it is assessed and collected. Under a system of taxation by requisition, the British Parliament would stand in roughly the same relationship to the colonial assemblies as the king of France does to the provincial legislatures in those parts of France that still have them — the provinces generally considered the best governed in France.

Under this scheme, the colonies would have no just reason to fear that their tax burden would ever exceed their fair share relative to their fellow citizens at home. But Great Britain might have good reason to fear that it would never reach that fair share. Parliament has not, for some time, wielded the same established authority in the colonies that the French king has in his provincial legislatures. The colonial assemblies, unless they were very favorably disposed (and unless they were managed far more skillfully than they have been so far, they are unlikely to be), could always find pretexts for evading or rejecting even the most reasonable parliamentary requisitions.

Suppose a war with France breaks out. Ten million pounds must be raised immediately to defend the heart of the empire. This sum must be borrowed against a parliamentary fund pledged to pay the interest. Parliament proposes to raise part of this fund through a tax in Great Britain and the rest through requisitions to the various colonial assemblies of America and the West Indies. Would investors readily lend their money against a fund that partly depended on the goodwill of all those distant assemblies — assemblies far from the war zone, and sometimes thinking themselves not much affected by its outcome? Investors would probably lend no more than what the British tax alone could be expected to cover. The entire burden of war debt would then fall, as it always has, on Great Britain alone — on one part of the empire, not the whole.

Great Britain is perhaps the only state in history that has expanded its empire while only increasing its expenses, never its revenues. Other empires have generally shifted a large share of defense costs onto their subject provinces. Great Britain has allowed her subject provinces to shift nearly all those costs onto her. To put Great Britain on an equal footing with her own colonies — which the law has always treated as subordinate — it seems necessary, under a system of taxation by requisition, that Parliament should have some means of making its requisitions immediately enforceable if the colonial assemblies tried to evade or reject them. What those means might be is not easy to imagine, and no one has yet explained them.

If, on the other hand, Parliament were to firmly establish its right to tax the colonies directly, without the consent of their assemblies, the importance of those assemblies would instantly be destroyed — and with it, the importance of all the leading men in British America. People want a share in managing public affairs mainly because of the importance it gives them. The stability and survival of every free government depends on the ability of the leading people — the natural aristocracy of every country — to maintain and defend their respective importance. The whole drama of domestic politics and ambition consists of these leading figures continually attacking one another's importance and defending their own.

The leading men of America, like those of every other country, want to preserve their importance. They feel — or imagine — that if their assemblies, which they like to call parliaments and consider equal in authority to the Parliament of Great Britain, were so degraded as to become mere instruments and executive officers of that Parliament, the greater part of their own importance would be finished. They have therefore rejected the proposal of taxation by parliamentary requisition. Like other ambitious and proud people, they have chosen to draw the sword in defense of their own importance.

Toward the end of the Roman Republic, the allies of Rome — who had borne the main burden of defending the state and expanding the empire — demanded full Roman citizenship. When they were refused, the Social War broke out. During that war, Rome granted citizenship to most of the allies, one by one, as each detached itself from the general alliance. The British Parliament insists on taxing the colonies; the colonies refuse to be taxed by a parliament in which they are not represented.

If Great Britain were to offer each colony that broke from the general alliance a number of parliamentary representatives proportional to what it contributed to imperial revenue — granting it the same taxes as British citizens at home, and in exchange the same freedom of trade, with representation increasing as its contribution increased — a new path to importance, a new and more dazzling object of ambition, would be opened to the leading men of each colony. Instead of scrambling for the petty prizes of what might be called the small-stakes lottery of colonial politics, they might hope — with the natural confidence people have in their own ability and good fortune — to win some of the great prizes that come from the wheel of the grand lottery of British politics.

Unless this method or some other is found to preserve the importance and satisfy the ambition of the leading men of America (and none seems more obvious than this), it is very unlikely that they will ever voluntarily submit to us. And we should consider that the blood that must be shed to force them is, every drop, the blood of people who are — or whom we would like to have as — our fellow citizens. Those who flatter themselves that, given how things now stand, our colonies will be easily conquered by force alone are very badly mistaken.

The people who currently direct the decisions of what they call their Continental Congress feel, at this moment, a degree of importance that perhaps the greatest figures in Europe hardly experience. From shopkeepers, tradesmen, and lawyers, they have become statesmen and legislators, employed in designing a new form of government for a vast empire which they believe will become — and which indeed seems very likely to become — one of the greatest and most formidable the world has ever seen. Five hundred people, perhaps, who in various capacities act directly under the Continental Congress, and five hundred thousand more who act under those five hundred, all feel a similar rise in their own importance. Almost every individual on the governing side in America currently occupies, in his own mind, a position superior not only to anything he held before, but to anything he ever expected to hold. Unless some new avenue of ambition is presented either to him or to his leaders, if he has the ordinary spirit of a human being, he will die in defense of that position.

The French historian President Henault observed that we now read with pleasure the accounts of many small events of the Catholic League that were not considered particularly important at the time. But everyone then, he says, fancied himself a person of consequence. The innumerable memoirs that have come down to us from that era were, for the most part, written by people who enjoyed recording and exaggerating events in which they flattered themselves they had played a significant role.

How stubbornly the city of Paris defended itself on that occasion — the dreadful famine it endured rather than submit to the best, and afterward the most beloved, of all French kings — is well known. Most of the citizens, or those who directed most of them, fought in defense of their own importance, which they foresaw would end the moment the old government was restored. Our colonies, unless they can be persuaded to agree to a union, are very likely to defend themselves against the best of all mother countries as stubbornly as the city of Paris defended itself against one of the best of all kings.

The idea of political representation was unknown in ancient times. When the citizens of one state were admitted to citizenship in another, they had no way of exercising that right except by physically showing up to vote and deliberate with the citizens of the other state. The admission of most of the inhabitants of Italy to Roman citizenship completely destroyed the Roman Republic. It became impossible to tell who was and who was not a Roman citizen. No tribal assembly could identify its own members. Any mob could barge into the popular assemblies, drive out the genuine citizens, and decide the republic's affairs as if they belonged there.

But even if America were to send fifty or sixty new representatives to Parliament, the doorkeeper of the House of Commons would have no great difficulty telling who was a member and who was not. Although the union of Rome with the Italian allies necessarily ruined the Roman constitution, there is not the slightest reason to think the British constitution would be harmed by a union of Great Britain with her colonies. On the contrary, it would be completed by such a union. It seems imperfect without it. The assembly that deliberates and decides on the affairs of every part of the empire, if it is to be properly informed, certainly ought to have representatives from every part of it.

I do not claim that such a union could be easily accomplished, or that significant difficulties might not arise in the execution. I have not yet heard of any, however, that appear truly insurmountable. The main obstacles probably arise not from the nature of things but from the prejudices and opinions of people on both sides of the Atlantic.

We on this side of the water fear that a flood of American representatives might upset the balance of the constitution — giving too much power to the crown on one hand, or too much to popular government on the other. But if the number of American representatives were proportional to the amount of American taxation, the number of people to manage would increase in exact proportion to the means of managing them. The monarchical and democratic elements of the constitution would, after the union, stand in precisely the same relative balance as before.

The people on the other side fear that their distance from the seat of government might expose them to oppression. But their representatives in Parliament — whose number ought to be substantial from the start — would easily protect them from all oppression. Distance would not significantly weaken the representative's dependence on his constituents; he would still know that he owed his seat and all the influence that came with it to their goodwill. It would be in his interest to cultivate that goodwill by using all his authority as a legislator to protest every abuse committed by any civil or military officer in those remote territories.

Besides, the Americans might flatter themselves — with some justification — that the distance of America from the seat of government would not last very long. Such has been the rapid progress of that country in wealth, population, and development that within little more than a century, perhaps, the output of American taxation might exceed that of British taxation. The seat of empire would then naturally shift to the part of the empire that contributed most to the common defense and support of the whole.

The discovery of America, and the discovery of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of the human race. Their consequences have already been immense. But in the brief period of two to three centuries since these discoveries were made, it is impossible that their full consequences can yet have been seen. What benefits or what misfortunes they may ultimately bring to humanity, no one can foresee.

By connecting, to some degree, the most distant parts of the world — enabling them to relieve one another's shortages, increase one another's enjoyments, and stimulate one another's industries — their general tendency would seem to be beneficial. To the native peoples, however, of both the East and the West Indies, all the commercial benefits that could have resulted from these events have been swallowed up and lost in the dreadful misfortunes they have caused. These misfortunes seem to have arisen more from accident than from anything inherent in the events themselves. At the time these discoveries were made, the Europeans happened to possess such an overwhelming advantage in military force that they were able to commit every kind of injustice in those remote countries with complete impunity.

Perhaps, in the future, the peoples of those countries will grow stronger, or those of Europe will grow weaker, and the inhabitants of all the different parts of the world will arrive at that equality of strength and courage which, by inspiring mutual fear, is the only thing that can compel independent nations to show some respect for one another's rights. But nothing seems more likely to establish this equality than the mutual exchange of knowledge and improvements of all kinds that extensive commerce between all countries naturally — or rather, necessarily — carries with it.

In the meantime, one of the main effects of these discoveries has been to raise the mercantile system to a level of splendor and glory it could never otherwise have achieved. The object of that system is to enrich a nation through trade and manufacturing rather than through the improvement and cultivation of the land — through the industry of the towns rather than that of the countryside. But as a result of these discoveries, the commercial cities of Europe, instead of being manufacturers and shippers for only a small part of the world (the European Atlantic coast and the countries around the Baltic and Mediterranean), have become manufacturers for the numerous and thriving peoples of America, and shippers — and in some ways manufacturers too — for nearly all the nations of Asia, Africa, and the Americas. Two new worlds have been opened to their industry, each much larger than the old one, and one of them still growing bigger every day.

The countries that possess the American colonies and trade directly with the East Indies enjoy all the show and splendor of this great commerce. Other countries, however — despite all the hostile restrictions meant to exclude them — frequently enjoy a larger share of its real benefits. The colonies of Spain and Portugal, for example, give more genuine encouragement to the industry of other countries than to that of Spain and Portugal themselves. In linen alone, the consumption of those colonies reportedly amounts to more than three million pounds sterling a year (though I do not vouch for the exact figure). But nearly all this linen is supplied by France, Flanders, Holland, and Germany. Spain and Portugal contribute only a small share. The capital that supplies these colonies with such vast quantities of linen is annually distributed among, and provides income to, the people of those other countries. Only the profits are spent in Spain and Portugal, where they help sustain the extravagant lifestyles of the merchants of Cadiz and Lisbon.

Even the regulations by which each nation tries to secure the exclusive trade of its own colonies are frequently more harmful to the favored countries than to those they are meant to exclude. The unjust suppression of other countries' industries rebounds, as it were, on the heads of the oppressors, crushing their own industry more than that of the countries they target.

Take the Hamburg linen merchant, for example. Under these regulations, he must ship the linen he intends for the American market to London, and he must bring back through London the tobacco he wants for the German market — because he cannot ship the linen directly to America or bring back the tobacco directly from there. This restriction probably forces him to sell the linen somewhat cheaper and buy the tobacco somewhat dearer than he otherwise would, trimming his profits a bit. But in the London-Hamburg trade, he gets his returns much faster than he ever could in direct American trade (even assuming — which is far from the case — that American payments were as reliable as London's). The capital the Hamburg merchant uses in this restricted trade can therefore keep far more German industry continuously employed than it could in the direct American trade from which he is excluded. Though the restricted trade may be less profitable for him personally, it cannot be less beneficial to his country.

The situation is quite the opposite for the London merchant, whose capital the monopoly naturally draws into the colonial trade. That trade may be more profitable for him than most other trades, but because of the slow returns, it cannot be more beneficial to his country.

So after all the unjust attempts of every European country to monopolize the trade of its own colonies, no country has managed to monopolize anything but the expense of maintaining colonial authority in peacetime and defending it in wartime. Each country has monopolized all the costs of its colonies for itself. The benefits of colonial trade it has been forced to share with many other nations.

At first glance, the monopoly of the great American trade naturally seems like an acquisition of enormous value. To the undiscerning eye of reckless ambition, it appears amid the confused scramble of politics and war as a dazzling prize worth fighting for. But the very dazzle of the prize — the immense scale of the trade — is exactly what makes the monopoly harmful. It is what causes one particular use of capital, inherently less advantageous to the country than most others, to absorb a far larger share of the nation's capital than would naturally flow to it.

A country's commercial capital, as was shown in the second book, naturally gravitates toward the uses most advantageous to that country. If it is employed in the carrying trade, the country becomes a hub for the goods of all the nations whose trade it carries. But the owner of that capital naturally wants to sell as much as possible at home, to save himself the trouble, risk, and expense of exporting. He will gladly sell domestically for a somewhat lower price, and even at a somewhat smaller profit, than he might get abroad. He naturally tries to turn his carrying trade into a direct foreign trade. If his capital is in a direct foreign trade, he will for the same reason try to sell as much of his collected goods at home as he can, trying to convert his foreign trade into domestic trade.

Commercial capital in every country naturally courts the near and avoids the distant. It naturally courts frequent returns and avoids slow ones. It naturally gravitates toward uses that employ the most productive labor at home and avoids those that employ the least. It naturally seeks the most advantageous employment and avoids the least advantageous.

But if, in any of those more distant and normally less advantageous trades, profit happens to rise somewhat above the level needed to offset the natural preference for nearer business, this excess profit will draw capital away from the nearer trades until profits everywhere return to their proper level. This excess profit is proof that, in the actual circumstances of the society, those distant trades are somewhat underserved relative to other trades, and that the society's capital is not optimally distributed among all its different uses. It is proof that something is being bought too cheaply or sold too dearly, and that some particular class of people is being short-changed or overcharged.

Though the same amount of capital will never support as much productive labor in distant trade as in nearby trade, a distant trade may still be as necessary for the society's welfare as a nearby one — the goods it deals in may be essential for conducting many of the nearer trades. But if the profits of those who deal in such goods are above their natural level, those goods will be sold at artificially high prices, and everyone engaged in the nearer trades will suffer from those inflated prices. Their interest, therefore, requires that some capital be shifted from the nearer trades to the distant one, to bring its profits back to normal and the price of its goods back to their natural level.

In this unusual situation, the public interest requires that some capital be pulled from trades that are normally more advantageous and redirected toward one that is normally less advantageous. And in this unusual situation, individual self-interest and the public interest coincide just as perfectly as they do in all ordinary cases: people naturally pull their capital from the nearby trades and redirect it toward the distant one.

It is in this way that private interests and passions naturally lead people to distribute their capital among all the different trades of a society in roughly the proportions most beneficial to society as a whole. Without any intervention of law, private interests naturally achieve a distribution of capital that comes very close to the ideal.

All the various regulations of the mercantile system necessarily distort this natural and optimal distribution of capital to some degree. But the regulations affecting trade with America and the East Indies distort it more than any others, because trade with those two great continents absorbs more capital than any other two branches of trade. The regulations that cause this distortion are not exactly the same in both cases. Monopoly is the central mechanism in both, but it takes different forms. Monopoly of one kind or another seems to be the sole instrument of the mercantile system.

In the trade with America, every nation tries to monopolize the entire market of its own colonies by shutting out all other nations from direct trade with them. For most of the sixteenth century, the Portuguese tried to manage the East Indian trade the same way, claiming the sole right to sail the Indian Ocean on the grounds of having discovered the route. The Dutch still exclude all other European nations from any direct trade with their Spice Islands. Monopolies of this kind are clearly aimed against all other European nations, which are not only shut out of a trade they might profitably join, but are forced to pay higher prices for the goods involved than if they could import them directly from the producing countries.

Both types of monopoly distort the natural distribution of a society's capital, but they do not always distort it in the same way.

Monopolies of the first kind — those aimed at foreign nations — always attract a larger share of the country's capital to the protected trade than would go there naturally.

Monopolies of the second kind — exclusive companies — sometimes attract capital toward the trade they control and sometimes repel it, depending on the circumstances. In poor countries, they tend to draw in more capital than would otherwise flow there. In rich countries, they tend to drive out a great deal of capital that otherwise would.

Consider poor countries like Sweden and Denmark. They would probably never have sent a single ship to the East Indies if the trade had not been controlled by an exclusive company. The existence of such a company naturally encourages risk-takers. Its monopoly guarantees them freedom from domestic competition, and they have the same chance of competing in foreign markets as traders from other nations. Its monopoly guarantees them a substantial profit on a large quantity of goods, and offers the chance of a very large profit on an even larger quantity. Without such extraordinary encouragement, the small-scale traders of these poor countries would probably never have dreamed of risking their modest capital on so distant and uncertain a venture as the East Indian trade.

A rich country like Holland, on the other hand, would probably send far more ships to the East Indies under free trade than it actually does. The limited capital of the Dutch East India Company probably repels many large trading operations that would otherwise enter the business. Holland's commercial capital is so enormous that it is constantly overflowing — sometimes into the government bonds of foreign countries, sometimes into loans to foreign traders and entrepreneurs, sometimes into the most roundabout foreign trades, and sometimes into the carrying trade. Since all the nearby business opportunities are already fully occupied and all the capital that can be profitably placed there has already been placed, Dutch capital inevitably flows toward the most distant ventures. If the East Indian trade were completely free, it would probably absorb the greater part of this surplus capital. The East Indies offer a market for European manufactures, for gold and silver, and for several other American products that is larger and more extensive than Europe and America combined.

Every distortion of the natural distribution of capital is necessarily harmful to the society in which it occurs — whether it repels capital from a trade it would naturally enter or attracts it to a trade it would not. If, without an exclusive company, Holland's East Indian trade would be larger than it actually is, that country must be suffering a considerable loss from having part of its capital excluded from its most natural destination. And if, without an exclusive company, Sweden's and Denmark's East Indian trade would be smaller than it currently is — or, what is perhaps more likely, would not exist at all — those countries must also be suffering from having part of their small capital drawn into a trade that is poorly suited to their current circumstances. It would be better for them to buy East Indian goods from other nations, even at somewhat higher prices, than to divert so large a portion of their limited capital to such a distant trade, where returns are painfully slow, where that capital can support so little productive labor at home, and where productive labor is so desperately needed, with so much left undone and so much still to do.

Even if, without an exclusive company, a particular country could not carry on any direct trade to the East Indies, it does not follow that such a company should be established there. It only follows that the country should not, under those circumstances, trade directly with the East Indies. That exclusive companies are not generally necessary for the East Indian trade is amply demonstrated by the experience of the Portuguese, who conducted virtually the entire trade for more than a century without one.

It has been argued that no private merchant could have enough capital to maintain agents and representatives at the various East Indian ports, to have goods ready for his ships when they arrived. Without this ability, his ships might miss their sailing season, and the cost of such a long delay would not only wipe out all profit but could cause a serious loss. This argument, however, if it proved anything at all, would prove that no major branch of trade could be conducted without an exclusive company — which contradicts the experience of every nation. No great branch of trade requires any single merchant's capital to cover all the subsidiary operations needed to support the main one. But when a nation is ready for any major trade, some merchants naturally invest in the main branch and others in its supporting branches. Though all the different branches are carried on, it rarely happens that they are all carried on by any single merchant.

If a nation is ready for the East Indian trade, the necessary capital will naturally divide itself among all the different branches of that trade. Some merchants will find it worthwhile to live in the East Indies and invest their capital there to prepare goods for ships sent out by other merchants back in Europe. The settlements that various European nations have established in the East Indies, if they were taken away from their exclusive companies and placed under the direct protection of the government, would make this kind of residence both safe and practical — at least for the merchants of the particular nation that owned each settlement.

If at any given time the capital that naturally inclines toward the East Indian trade is not enough to handle all its different branches, that is simply proof that the country is not yet ready for it, and that it would be better off buying East Indian goods from other European nations, even at a higher price, than importing them directly. The loss from paying higher prices would rarely equal the loss from diverting a large chunk of capital from more necessary, useful, or suitable domestic investments.

Although Europeans have established many settlements along the African coast and in the East Indies, they have not built anything in either place remotely comparable to the thriving colonies of the American islands and continent. Africa, as well as the countries grouped under the general name of the East Indies, are inhabited by peoples who were by no means as weak and defenseless as the wretched indigenous Americans. In proportion to the natural fertility of their lands, these peoples were also far more numerous. The most pre-agricultural peoples of Africa and the East Indies were at least herders — even the Khoikhoi were so. But the native peoples of every part of America except Mexico and Peru were only hunters. The difference in population that the same area of equally fertile land can sustain between herding and hunting societies is immense. In Africa and the East Indies, therefore, it was much harder to displace the native populations and extend European settlements over their lands.

The nature of exclusive trading companies, besides, as I have already observed, is hostile to the growth of new colonies, and has probably been the main reason for the limited progress Europeans have made in the East Indies. The Portuguese, who conducted their trade with both Africa and the East Indies without exclusive companies, established settlements at Congo, Angola, and Benguela on the African coast, and at Goa in India. Though severely hampered by superstition and every sort of misgovernment, these settlements bear some faint resemblance to the American colonies and are partly inhabited by Portuguese families that have been there for several generations.

The Dutch settlements at the Cape of Good Hope and at Batavia are currently the most important European colonies in either Africa or the East Indies. Both are exceptionally well situated. The Cape of Good Hope was inhabited by a people nearly as unable to defend themselves as the indigenous Americans. Moreover, it is the natural halfway point between Europe and the East Indies, where almost every European ship stops on both the outward and return voyages. Supplying these ships with fresh provisions, fruit, and sometimes wine is alone enough to create a very large market for the colonists' surplus production. What the Cape is between Europe and the East Indies, Batavia is between the main countries of the East Indies themselves. It sits on the busiest route between India and China and Japan, roughly midway along that route. Nearly every ship sailing between Europe and China stops at Batavia. Beyond all this, it is the center and main marketplace of what is called the "country trade" of the East Indies — not just the part carried on by Europeans, but the trade conducted by the people of the region themselves. Ships navigated by Chinese, Japanese, Vietnamese, Malay, Cochin-Chinese, and Celebes islanders are frequently seen in its port. Such advantageous locations have enabled these two colonies to overcome all the obstacles that an exclusive company's oppressive policies have thrown in their way. They have even enabled Batavia to flourish despite what is perhaps the most unhealthy climate in the world.

The English and Dutch companies, though they have not established any significant colonies except the two just mentioned, have both made considerable conquests in the East Indies. But in the way they govern their conquered peoples, the true character of an exclusive company is displayed most clearly.

In the Spice Islands, the Dutch reportedly burn all the spices that a productive season yields beyond what they expect to sell in Europe at a satisfactory profit. On islands where they have no settlements, they pay bounties to those who destroy the young blossoms and green shoots of the clove and nutmeg trees that grow naturally there — a ruthless policy that has, it is said, nearly exterminated them. Even on the islands where they do have settlements, they have reportedly destroyed a large number of these trees. If the output of their own islands exceeded what suited their market, they feared, the native people might find ways to sell the surplus to other nations. The surest way to protect their monopoly, they decided, was to make sure no more was grown than what they themselves could bring to market. Through various methods of oppression, they have reduced the population of several of the Molucca Islands to barely enough to provide food and necessities for their own tiny garrisons and for whatever ships happened to stop there for a cargo of spices. Under the Portuguese, those islands are said to have been reasonably well populated.

The English company has not yet had time to establish such a thoroughly destructive system in Bengal. But the plan of their government has had precisely the same tendency. It has not been unusual, I am reliably informed, for the chief agent of a trading station to order a peasant to plow up a rich field of poppies and plant rice or some other grain instead. The stated reason was to prevent a food shortage. The real reason was to give the agent an opportunity to sell a large stock of opium he happened to have on hand at a better price. On other occasions the order has been reversed: a rich rice field plowed up to make room for a poppy plantation, because the agent foresaw that extraordinary profits could be made from opium.

The Company's agents have repeatedly attempted to establish private monopolies over some of the most important branches of trade — not just foreign trade, but the internal trade of the country as well. If they had been allowed to continue unchecked, they would inevitably have tried to restrict the production of the goods they monopolized — not just to the quantities they themselves could buy, but to the quantities they expected to sell at whatever profit they considered acceptable. Within a century or two, the English Company's policy would in this way have probably proved as completely destructive as the Dutch.

Nothing, however, could be more directly contrary to the real interests of these companies in their capacity as sovereign rulers of the territories they have conquered. In virtually every country, government revenue comes from the revenue of the people. The greater the people's income — the greater the annual output of their land and labor — the more they can contribute to the government. The sovereign's interest, therefore, is to increase that annual output as much as possible. This is especially true of a sovereign whose revenue, like that of the ruler of Bengal, comes mainly from land taxes. That tax revenue must be proportional to the quantity and value of what the land produces, and both of these depend on the size of the market. The quantity produced will always roughly match what consumers can afford to buy, and the price they pay will always reflect the intensity of competition among buyers.

It is therefore in such a sovereign's interest to open the widest possible market for the country's products, to allow the greatest possible freedom of trade in order to maximize the number and competition of buyers — and for this reason to abolish not just all monopolies, but all restrictions on transporting goods within the country, on exporting them to foreign markets, or on importing any goods for which they might be exchanged. This is how the sovereign is most likely to increase both the quantity and value of the country's output, and consequently his own share of it — his own revenue.

But a company of merchants, it seems, is incapable of seeing itself as a sovereign, even after it has become one. They still regard buying and selling as their main business, and by a bizarre contradiction, they treat the role of sovereign as merely an appendage to that of merchant — something that ought to serve their commercial interests, enabling them to buy cheaper in India and thereby sell at a better profit in Europe. To this end, they try to shut out all competitors from the markets of the countries they rule, and consequently to reduce at least some of the surplus production of those countries to what is barely enough to supply their own demand, or what they expect to sell in Europe at a profit they find acceptable.

Their commercial instincts lead them, almost inevitably and perhaps unconsciously, to prefer the petty, short-term profits of a monopolist over the great and lasting revenue of a sovereign. This mindset would gradually lead them to treat the countries under their government much as the Dutch treat the Moluccas. As sovereigns, their interest is for European goods sold in their Indian territories to be as cheap as possible, and for Indian goods brought out to bring as high a price as possible. But as merchants, their interest is precisely the opposite. As sovereigns, their interest is identical to that of the country they govern. As merchants, their interest is directly opposed to it.

But if the management of such a company is fundamentally and perhaps incurably flawed even in its European headquarters, its administration in India is even worse. That administration necessarily consists of a council of merchants — a perfectly respectable profession, but one that in no country in the world carries the kind of natural authority that commands willing obedience from the people. Such a council can enforce obedience only through military force, and their government is therefore necessarily military and despotic. Their actual job, however, is commerce: to sell European goods consigned to them by their principals, and to buy Indian goods for the European market. Their job is to sell the one as dearly and buy the other as cheaply as possible — and consequently to exclude competitors from their market as thoroughly as they can. The character of the administration, as far as the Company's trade is concerned, is the same as that of the head office in London. It makes government the servant of monopoly, and consequently stunts the natural growth of at least some of the country's surplus production to whatever bare minimum the Company needs.

All the members of the administration, moreover, trade on their own private accounts. It is pointless to forbid them from doing so. Nothing could be more absurdly naive than to expect that clerks in a distant counting-house, ten thousand miles away and almost completely out of sight, would simply obey an order from their bosses to stop doing business on the side — abandoning forever all hope of making a fortune when the means are right in their hands — and contentedly accept modest salaries that are already as high as the Company's actual profits can afford. In such circumstances, forbidding the Company's employees from private trading can have no practical effect other than enabling the senior employees, under the pretext of enforcing their bosses' orders, to oppress any junior employees who have fallen out of favor.

The employees naturally try to establish the same kind of monopoly for their own private trade as exists for the Company's official trade. If left to their own devices, they would establish this monopoly openly and directly, simply banning everyone else from dealing in whatever goods they choose. This, perhaps, is actually the best and least oppressive way of doing it. But if they are forbidden by orders from Europe to operate so openly, they will still try to establish the same kind of monopoly — secretly and indirectly, in ways far more destructive to the country. They will use all the power of government and pervert the administration of justice to harass and ruin anyone who competes with them in any line of business they have chosen to pursue, whether through concealed agents or semi-public proxies.

The private trade of these employees naturally extends to a far wider range of goods than the Company's official trade, which covers only the trade with Europe — only a fraction of the country's foreign commerce. Private employee trade can cover every branch of both the domestic and foreign commerce of the country. The Company's monopoly tends to stunt the growth only of that part of the surplus that would be exported to Europe under free trade. The employees' private monopoly tends to stunt the growth of every product they choose to deal in — including goods meant for domestic consumption as well as export — and consequently to degrade the cultivation of the entire country and reduce its population. It tends to reduce the quantity of every product, even basic necessities, whenever the Company's employees decide to deal in them, to whatever those employees can both afford to buy and expect to sell at a profit that suits them.

Given their situation, the employees are inevitably more inclined to ruthlessly pursue their own interests at the expense of the country they govern than their bosses are. The country belongs to their bosses, who cannot help feeling some concern for what belongs to them. But it does not belong to the employees. The bosses' true interest, if they could understand it, is the same as the country's — they oppress it mainly out of ignorance and the narrow prejudices of commercial thinking. But the employees' true interest is by no means the same as the country's, and the most complete information would not necessarily end their oppression. The regulations sent out from Europe, though often weak, have generally been well-intentioned. The regulations established by the employees in India have sometimes shown more intelligence — and considerably less good intention.

It is a truly remarkable form of government in which every member of the administration wants to get out of the country, and consequently to be done with the government, as soon as possible — and in which, the day after he has left and taken his entire fortune with him, it is a matter of perfect indifference to him if the whole country were to be swallowed up by an earthquake.

I do not mean, by anything I have said here, to cast any slur on the general character of the East India Company's employees, and still less on that of any particular individual. It is the system of government — the situation in which they have been placed — that I mean to criticize, not the character of those who have served in it. They acted as their circumstances naturally directed them to act, and those who have complained most loudly about them would probably have behaved no differently in their place.

In war and diplomacy, the councils of Madras and Calcutta have on several occasions conducted themselves with a resolution and decisive wisdom that would have done honor to the Roman Senate in the best days of the republic. The members of those councils had been trained for professions very different from war and politics. But their situation alone — without special education, experience, or even precedent — seems to have drawn out of them all at once the great qualities it required, and to have inspired them with abilities and virtues they did not know they possessed. If on some occasions their circumstances drove them to acts of genuine greatness, we should not be surprised that on others, those same circumstances prompted them to exploits of a somewhat different character.

Such exclusive companies, therefore, are a blight in every respect — always more or less harmful to the countries in which they are established, and utterly destructive to those that have the misfortune to fall under their rule.

Conclusion of the Mercantile System

Although encouraging exports and discouraging imports are the two great engines of the mercantile system — its supposed recipe for enriching every country — the system actually follows the opposite plan for certain commodities. For some goods, it discourages exports and encourages imports. But the ultimate goal, it claims, is always the same: to enrich the country through a favorable balance of trade. It discourages the export of raw materials and tools of production in order to give domestic workers an advantage — enabling them to undersell foreign competitors in every market. By restricting the export of a few cheap commodities, the system hopes to generate a much larger and more valuable export of finished goods. And it encourages the import of raw materials so that domestic producers can work them up more cheaply, thereby preventing a larger, more costly import of finished manufactured goods.

I don't find, at least in our statute books, any encouragement given to importing the tools of production. When manufacturing has reached a certain level of development, making those tools itself becomes a major industry. Giving special encouragement to importing such tools would step on too many powerful toes. So instead of being encouraged, that kind of import has frequently been banned outright. The import of wool cards, for example — except from Ireland, or when they came in as shipwreck salvage or war prizes — was prohibited by an act of Edward IV, renewed under Elizabeth, and made permanent by later laws.

The import of raw materials, however, has sometimes been encouraged — either by exempting them from the duties that other goods pay, or by granting actual subsidies.

Sheep's wool from various countries, cotton from everywhere, undressed flax, most dyeing materials, most raw hides from Ireland or the British colonies, seal skins from the British Greenland fishery, pig and bar iron from the British colonies, and several other raw materials have all been allowed in duty-free, provided they were properly declared at the customs house. The private interests of our merchants and manufacturers may have extorted these exemptions from the legislature, along with most of our other trade regulations. But these particular exemptions are perfectly fair and reasonable. If they could be extended to all raw materials — consistently with the government's need for revenue — the public would certainly benefit.

The greed of our great manufacturers, however, has in some cases stretched these exemptions well beyond what can honestly be called "raw materials." Under George II, a tiny duty of just one penny per pound was imposed on imported foreign brown linen yarn, replacing much higher duties that had been in effect before — sixpence per pound on sail yarn, a shilling per pound on all French and Dutch yarn, and two pounds thirteen shillings and fourpence per hundredweight on spruce or Russian yarn. But our manufacturers weren't satisfied with this reduction for long. By a later act under the same king — the same law that granted a subsidy on exported British and Irish linen priced at eighteen pence the yard or less — even this tiny duty on imported brown linen yarn was eliminated.

Now consider what's involved in making linen yarn: far more labor goes into it than into the later step of weaving the yarn into linen cloth. Setting aside the work of the flax growers and flax dressers, you need at least three or four spinners to keep one weaver busy. More than four-fifths of all the labor needed to produce linen cloth goes into making the yarn. But our spinners are poor people — women, mostly — scattered across the country, without support or protection. It's not by selling their yarn that the big master manufacturers make their profits. It's by selling the finished linen. Since it's in their interest to sell finished goods for as much as possible, it's equally in their interest to buy raw materials as cheaply as possible. By extracting from the legislature subsidies on linen exports, high duties on imported foreign linen, and an outright ban on some French linens for domestic sale, they've worked to sell their own goods as expensively as possible. By encouraging the import of foreign linen yarn — forcing it into competition with the yarn made by our own spinners — they've worked to buy the labor of those poor spinners as cheaply as possible.

They are just as determined to keep down the wages of their own weavers as the earnings of the spinners. Their efforts to raise the price of finished goods while lowering the cost of raw materials have nothing to do with the workers' benefit. It is the industry of the rich and powerful that our mercantile system principally encourages. The industry of the poor is too often either neglected or actively oppressed.

Both the subsidy on linen exports and the duty exemption on imported foreign yarn — originally granted for just fifteen years but extended twice — were set to expire at the end of the parliamentary session following June 24, 1786.

The encouragement given to importing raw materials through subsidies has mostly been confined to imports from our American plantations.

The first such subsidies were those granted around the beginning of the present century on naval stores imported from America — timber for masts, yards, and bowsprits; hemp; tar, pitch, and turpentine. The subsidy of one pound per ton on masting timber and six pounds per ton on hemp was extended to imports from Scotland as well. Both subsidies continued at the same rate until they were separately allowed to expire — the hemp subsidy on January 1, 1741, and the masting timber subsidy at the end of the parliamentary session following June 24, 1781.

The subsidies on tar, pitch, and turpentine went through several changes during their existence. Originally the subsidy on tar was four pounds per ton, on pitch the same, and on turpentine three pounds per ton. The four-pound tar subsidy was later restricted to tar prepared in a specific way; the rate on other good, clean, merchantable tar was reduced to two pounds four shillings. The pitch subsidy dropped to one pound, and turpentine to one pound ten shillings per ton.

The second subsidy on raw materials, in order of time, was granted under George II on indigo imported from the British plantations. When plantation indigo was worth three-fourths the price of the best French indigo, it qualified for sixpence per pound. This subsidy, like most others granted for a limited time, was extended several times but was reduced to fourpence per pound. It expired at the end of the parliamentary session following March 25, 1781.

The third subsidy of this kind was granted — right around the time we were beginning to alternately court and quarrel with our American colonies — on hemp or undressed flax from the British plantations. It was granted for twenty-one years, from June 24, 1764, to June 24, 1785. For the first seven years it was eight pounds per ton, for the second seven years six pounds, and for the third four pounds. It didn't extend to Scotland, whose climate — although hemp is sometimes grown there in small quantities and inferior quality — really isn't suitable for it. A subsidy on importing Scottish flax into England would have been too great a blow to flax production in the southern part of the kingdom.

The fourth subsidy was on timber imported from America. It was granted for nine years, from January 1, 1766, to January 1, 1775. During the first three years, it was one pound per 120 good deals and twelve shillings per load of other squared timber (a load being fifty cubic feet). For the next three years, fifteen shillings for deals and eight shillings for other timber. For the final three years, ten shillings for deals and five shillings for other timber.

The fifth subsidy was on raw silk from the British plantations. It was granted for twenty-one years, from January 1, 1770, to January 1, 1791. For the first seven years it was twenty-five percent of the value; for the second, twenty percent; for the third, fifteen percent. Raising silkworms and preparing silk requires enormous amounts of hand labor, and labor is so very expensive in America that even this generous subsidy, I've been told, was unlikely to have any significant effect.

The sixth subsidy covered barrel staves and heading from the British plantations. It was granted for nine years, from January 1, 1772, to January 1, 1781. For the first three years, the rate on a certain quantity was six pounds; for the next three, four pounds; and for the final three, two pounds.

The seventh and last subsidy of this kind was on hemp from Ireland. It was granted on the same terms as the American hemp subsidy: twenty-one years from June 24, 1779, to June 24, 1800, divided into three seven-year periods at the same rates as the American subsidy. Unlike the American one, however, it didn't extend to undressed flax — that would have been too great a blow to flax cultivation in Great Britain. When this last subsidy was granted, the British and Irish legislatures weren't in much better temper with each other than the British and American ones had been. But this gift to Ireland, let us hope, was made under more fortunate circumstances than all those to America.

The same goods that received subsidies when imported from America were hit with heavy duties when imported from anywhere else. The interests of our American colonies were treated as identical to those of the mother country. Their wealth was considered our wealth. Whatever money we sent them, it was said, all came back through the balance of trade, and we could never be a farthing poorer for anything we spent on them. They were ours in every respect, and spending on them was just investing in our own property and putting our own people to work. I don't think it's necessary, at this point, to say anything further to expose the folly of this system. Painful experience has exposed it well enough. Had our American colonies truly been a part of Great Britain, those subsidies might have been considered subsidies on domestic production — and while they'd still have been open to all the objections that production subsidies generally face, they wouldn't have faced any others.

The export of raw materials is sometimes prohibited outright and sometimes hit with heavy duties.

Our woolen manufacturers have been more successful than any other group of workers at convincing the legislature that the prosperity of the whole nation depends on the success of their particular industry. They've obtained not only a monopoly against consumers through an absolute ban on importing woolen cloth from any foreign country, but also another monopoly against sheep farmers and wool growers through a similar ban on exporting live sheep and wool.

The severity of many revenue laws has been justly criticized for imposing heavy penalties on actions that, before the laws declared them crimes, had always been considered perfectly innocent. But the cruelest of our revenue laws, I'll venture to say, are mild and gentle compared to some of the laws that the clamoring of our merchants and manufacturers has extracted from the legislature to support their own absurd and oppressive monopolies. Like the laws of Draco, these may be said to be written in blood.

Under Elizabeth, anyone who exported sheep, lambs, or rams was, for a first offense, to forfeit all his goods forever, serve a year in prison, and then have his left hand cut off in a market town on market day and nailed up there. For a second offense: death. The goal of this law was apparently to prevent our sheep breeds from being established in foreign countries. Under Charles II, exporting wool was declared a felony carrying the same penalties.

For the honor of our national humanity, let's hope neither of these statutes was ever actually enforced. The first one, as far as I know, has never been directly repealed, and the legal authority Serjeant Hawkins seems to consider it still technically in force. But it may have been effectively superseded by a later act of Charles II, which — without explicitly removing the old penalties — imposed a new one: twenty shillings for every sheep exported or attempted to be exported, plus forfeiture of the sheep and the owner's share of the ship. The second statute was expressly repealed under William III, which declared that "Whereas the statute of the 13th and 14th of King Charles II... doth enact the same to be deemed felony; by the severity of which penalty the prosecution of offenders hath not been so effectually put in execution: Be it therefore enacted... that so much of the said act, which relates to the making the said offense felony, be repealed and made void."

The penalties that remain under this milder law — or that were imposed by earlier laws and not repealed — are still harsh enough. Besides forfeiting the goods, the exporter faces a penalty of three shillings for every pound weight of wool exported or attempted to be exported — roughly four or five times the value of the wool. Any merchant convicted of this offense is legally barred from collecting any debts owed to him. No matter what his fortune, whether or not he can actually pay these enormous penalties, the law's intention is to ruin him completely. But since the morals of ordinary people have not yet sunk to the level of those who designed this statute, I haven't heard of anyone actually invoking this clause. If the convicted person can't pay the penalties within three months, he's to be transported overseas for seven years. If he comes back early, he faces the penalties of a felon, without right of appeal. The ship owner who knowingly allows the offense forfeits his entire interest in the ship and its equipment. The master and crew who know about it forfeit all their personal property and serve three months in prison. A later law extended the master's imprisonment to six months.

To prevent export, the entire domestic wool trade was burdened with extraordinarily oppressive restrictions. Wool couldn't be packed in any box, barrel, cask, case, chest, or other container — only in leather packs or pack-cloth, with the words "WOOL" or "YARN" stamped on the outside in letters at least three inches tall, on pain of forfeiting both the wool and the container, plus three shillings per pound weight, payable by the owner or packer. It couldn't be loaded on any horse or cart, or carried by land within five miles of the coast, except between sunrise and sunset, on pain of forfeiture. The district nearest the coast, from which or through which the wool was carried, could be fined twenty pounds if the wool was worth less than ten pounds, or triple its value if worth more, plus triple costs, if sued within a year. The judgment could be enforced against any two inhabitants of the district, who would then be reimbursed through a local tax on other inhabitants — just like robbery cases. Anyone who settled with the district for less than the full penalty got five years in prison, and any other person could bring the prosecution. These regulations applied throughout the entire kingdom.

But in Kent and Sussex, the restrictions were even more absurd. Every wool owner within ten miles of the coast had to file a written account with the nearest customs officer within three days of shearing, reporting the number of fleeces and where they were stored. Before moving any of them, he had to file another notice with the number and weight, the name and address of the buyer, and the intended destination. No one within fifteen miles of the coast in those counties could buy wool without first posting a bond guaranteeing that none of it would be resold to anyone else within fifteen miles of the sea. Any wool found heading toward the coast without proper paperwork was forfeited, and the offender also owed three shillings per pound weight. Any wool not properly registered, found within fifteen miles of the coast, could be seized and forfeited. Anyone claiming the seized wool had to post bond with the Exchequer guaranteeing triple costs if they lost at trial, on top of all other penalties.

With restrictions like these on the inland trade, you can imagine the coastal shipping trade wasn't exactly free either. Anyone carrying wool to a port for shipment along the coast had to first register it at the departure port — giving the weight, marks, and number of packages — before bringing it within five miles. The penalty for not doing so was forfeiture, along with the horses, carts, and other vehicles, plus all the penalties from the anti-export laws. The law was, however, "so very indulgent" — and you can almost hear the sarcasm — as to declare that this wouldn't prevent anyone from carrying his own wool home from shearing, even if it was within five miles of the sea, provided that within ten days he certified to the nearest customs officer the exact number of fleeces and where they were stored, and gave three days' notice before moving them. Bond had to be given that wool shipped along the coast would be unloaded at the specific port declared in advance. If any of it was landed without a customs officer present, not only was the wool forfeited, but the usual penalty of three shillings per pound weight was tacked on as well.

Our woolen manufacturers, to justify these extraordinary restrictions, confidently asserted that English wool was uniquely superior — that the wool of other countries couldn't be made into any decent cloth without mixing in English wool, that fine cloth couldn't be made without it. England, therefore, if it could completely prevent wool exports, could monopolize nearly the entire world's woolen trade, charge whatever prices it pleased, and quickly accumulate incredible wealth through a perpetually favorable balance of trade.

This claim, like most claims confidently made by enough people, was and continues to be blindly believed by far more people than those who make it — especially by everyone who either doesn't know the wool trade or hasn't looked into the matter. But it is completely false that English wool is in any way necessary for making fine cloth. In fact, it's entirely unsuitable for it. Fine cloth is made entirely from Spanish wool. English wool can't even be blended with Spanish wool without degrading the fabric.

As I showed earlier in this work, the effect of these regulations has been to push the price of English wool not just below what it would naturally be today, but well below what it actually was in the time of Edward III. The price of Scottish wool reportedly fell by about half after Scotland became subject to the same regulations through the Act of Union. The Reverend Mr. John Smith, the very thorough and knowledgeable author of the Memoirs of Wool, noted that the price of the best English wool in England is generally below what substantially inferior wool commonly sells for in the Amsterdam market. Pushing the price of wool below its natural level was the avowed purpose of these regulations, and there's no doubt they achieved it.

This price reduction, you might think, should have greatly decreased annual wool production by discouraging sheep farming — not necessarily below historical levels, but below what it would have been had wool been allowed to reach its natural price in a free market. But I'm inclined to believe the quantity of annual production hasn't been much affected, though it may have been somewhat. Growing wool isn't the main reason sheep farmers raise sheep. They expect their profit primarily from selling the carcass, not the fleece. The ordinary price of the carcass usually makes up for any shortfall in the ordinary price of the fleece. As I noted earlier: "Whatever regulations tend to push down the price of wool or raw hides must, in a developed country, tend to raise the price of butcher's meat. The price of cattle raised on improved land must be enough to cover the landlord's rent and the farmer's expected profit. If it isn't, they'll stop raising cattle. Whatever portion of that price isn't covered by wool and hides must be covered by the carcass. The less that's paid for one, the more must be paid for the other. How the price is divided among the different parts of the animal doesn't matter to landlords and farmers, as long as the full amount reaches them." Following this reasoning, depressed wool prices probably haven't significantly reduced overall wool production — except insofar as raising the price of mutton might slightly reduce demand for, and therefore production of, that particular kind of meat. Even this effect is probably not very large.

But while the quantity of wool produced may not have been greatly affected, you might wonder about the quality. Surely, if wool prices have fallen — not just below historical levels but below what they'd naturally be given current improvements in farming — the quality of wool must have declined in roughly the same proportion? After all, wool quality depends on breed, pasture, and careful management throughout the growing season, and the attention farmers pay to these things naturally depends on how well the fleece price rewards their effort. It happens, though, that fleece quality depends largely on the health, growth, and size of the animal. The same care that improves the carcass also, in many ways, improves the fleece. Despite depressed prices, English wool has reportedly improved considerably over the present century. The improvement might have been greater with better prices, but low prices have slowed it — not stopped it.

So the harsh effects of these regulations appear not to have damaged either the quantity or the quality of annual wool production as badly as one might expect — though I suspect the quality has been hurt more than the quantity. And the interests of wool growers, while certainly damaged somewhat, seem to have been hurt much less than you'd imagine.

These considerations, however, don't justify an outright ban on wool exports. But they fully justify a substantial tax on wool exports.

To harm one group of citizens for no purpose except to benefit another is clearly contrary to the fair and equal treatment that the government owes to everyone. And the prohibition certainly harms the interests of wool growers for no purpose but to benefit the manufacturers.

Every group of citizens is bound to contribute to the support of the government. A tax of five or even ten shillings on every tod of wool exported would produce a very considerable revenue for the government. It would hurt wool growers somewhat less than an outright ban, since it probably wouldn't depress the price quite as much. It would still give manufacturers a sufficient advantage: though they might not buy their wool quite as cheaply as under the ban, they'd still get it five or ten shillings cheaper than any foreign manufacturer could, on top of saving the shipping and insurance costs that competitors would have to pay. It's hard to imagine a tax that could raise meaningful revenue for the government while causing so little inconvenience to anyone.

The ban, despite all the penalties guarding it, doesn't actually prevent wool from being exported. Everyone knows it's exported in large quantities. The huge gap between domestic and foreign prices creates such a temptation to smuggle that no law enforcement can stop it. This illegal export benefits no one but the smuggler. A legal export subject to a tax, by generating revenue for the government and thereby preventing the need for other, possibly more burdensome taxes, might benefit everyone.

The export of fuller's earth — a clay used in preparing and cleaning woolen fabrics — has been subjected to nearly the same penalties as wool exports. Even tobacco-pipe clay, though acknowledged to be a different substance, was hit with the same prohibitions and penalties because of its resemblance to fuller's clay, and the concern that fuller's clay might be smuggled out disguised as pipe clay.

Under Charles II, the export of not just raw hides but even tanned leather — except in the form of finished boots, shoes, or slippers — was prohibited. This gave bootmakers and shoemakers a monopoly not just against cattle graziers, but against tanners too. Through later laws, tanners managed to exempt themselves from this monopoly by paying a small tax of just one shilling per hundredweight of tanned leather. They also secured a rebate of two-thirds of the excise duties on their product even when it was exported without further manufacture. All leather goods can be exported duty-free, and the exporter even gets a full rebate of excise duties. But graziers remain subject to the old monopoly. Graziers, scattered across the countryside, can't easily combine to either impose monopolies on their fellow citizens or free themselves from monopolies imposed by others. Manufacturers, clustered together in large numbers in every major city, easily can. Even cattle horns are banned from export — so the tiny trades of horn-working and comb-making enjoy a monopoly against the graziers.

Restrictions on exporting partially manufactured goods — whether through prohibitions or taxes — aren't unique to the leather trade. As long as anything remains to be done to make a commodity ready for use, our manufacturers think they should be the ones to do it. Woolen yarn and worsted are banned from export under the same penalties as raw wool. Even undyed white cloth is subject to an export duty — so our dyers have obtained a monopoly against our clothiers. The clothiers would probably fight back, except that most major clothiers are themselves also dyers. Watch-cases, clock-cases, and dial-plates have also been banned from export. Our clockmakers and watchmakers, it seems, don't want the price of these components raised by foreign competition.

Under various old laws of Edward III, Henry VIII, and Edward VI, the export of all metals was banned. Lead and tin were excepted — probably because of their abundance, since exporting them was a major part of the kingdom's trade in those days. To encourage mining, an act of William and Mary exempted iron, copper, and mundic metal made from British ore. Export of all kinds of copper bars, foreign and British alike, was later permitted as well. But unmanufactured brass — including gun-metal, bell-metal, and shroff-metal — is still banned from export. All finished brass products, however, can be exported duty-free.

The export of raw materials, where not outright banned, is often subject to heavy duties.

Under George I, the export of all goods produced or manufactured in Great Britain that had been subject to duties under earlier laws was made duty-free. The following goods, however, were excluded from this general relief: alum, lead, lead ore, tin, tanned leather, copperas, coal, wool cards, undyed white woolen cloth, calamine, skins of all kinds, glue, rabbit hair or wool, hare's wool, hair of all sorts, horses, and litharge of lead. Except for horses, all of these are either raw materials, partially finished goods, or tools of production.

By the same law, many foreign dyeing materials were exempted from all import duties. Each of them, however, was then subjected to a certain duty — not a very heavy one — on export. Our dyers, it seems, while thinking it was in their interest to encourage the import of these materials through duty-free entry, also thought it was in their interest to throw a small obstacle in the way of re-export. The greed behind this clever bit of trade policy most likely defeated its own purpose. It inevitably taught importers to be more careful that their imports didn't exceed what the domestic market needed. The domestic market ended up less well supplied, and the goods were slightly more expensive than they would have been if re-export had been just as free as import.

Under the same law, gum arabic from Senegal — classified as a dyeing material — could be imported duty-free, subject only to a tiny export duty of three pence per hundredweight. At the time, France had an exclusive monopoly on the region that produced the most gum arabic, around the Senegal River, so Britain couldn't easily import directly from the source. A later act therefore allowed gum arabic to be imported from anywhere in Europe — contrary to the general Navigation Acts — but imposed a duty of ten shillings per hundredweight on such imports, with no rebate on re-export.

The successful war that began in 1755 gave Britain the same exclusive access to these African gum-producing territories that France had enjoyed before. Our manufacturers immediately tried to exploit this advantage, establishing a monopoly for themselves against both the African producers and other importers. A new law confined the export of gum arabic from Britain's African territories to Great Britain alone, with all the same regulations, fines, and penalties as the enumerated goods from the American colonies. Import was subject to a tiny sixpence per hundredweight, but re-export was hit with an enormous duty of one pound ten shillings per hundredweight. The manufacturers' intention was that all of the output should come to Britain, and that they should buy it at their own price — with re-export made so expensive as to be effectively impossible.

But their greed, as usual, defeated itself. This enormous duty created such a temptation to smuggle that large quantities were clandestinely exported — probably to manufacturing countries all across Europe, but especially to Holland — not only from Britain but directly from Africa. As a result, the export duty was eventually reduced to five shillings per hundredweight.

In the official rate books that governed the old subsidy, beaver skins were valued at six shillings eightpence each. The various duties that had accumulated on their import before 1722 amounted to one-fifth of the rated value, or sixteenpence per skin — all of which, except half the old subsidy (twopence), was refunded on re-export. This import duty on such an important manufacturing material was thought too high, so in 1722 the rate was cut to two shillings sixpence, bringing the duty down to sixpence, with only half refundable on re-export.

The same successful war brought the prime beaver-producing country under British control, and beaver skins, listed among the enumerated commodities, could be exported from America only to Britain. Our manufacturers quickly saw the advantage. In 1764, the import duty on beaver skins was slashed to one penny each, but the export duty was jacked up to sevenpence per skin, with no rebate of the import duty. At the same time, an export duty of eighteenpence per pound was imposed on beaver wool and beaver pelts, while the import duty — fourpence to fivepence per piece when imported by British subjects in British ships — was left unchanged.

Coal can be considered both a raw material and a tool of production, so heavy duties have been imposed on its export — amounting in 1783 to more than five shillings per ton, or over fifteen shillings per chaldron in Newcastle measure. In most cases, this is more than the original value of the coal at the mine or at the port.

The export of actual tools and equipment, as opposed to raw materials, is usually restricted not by high duties but by outright bans. Under William III, the export of knitting frames for making gloves or stockings was banned, with a penalty of both forfeiture and a fine of forty pounds — half to the king, half to whoever informed on the violator. Similarly, under George III, exporting any equipment used in the cotton, linen, woolen, or silk trades was banned, with forfeiture plus fines of two hundred pounds each on both the exporter and the ship's captain who knowingly allowed the equipment on board.

When such heavy penalties fell on the export of "dead" tools of production, it would be strange to let the "living" tool — the skilled worker himself — go free. And indeed, under George I, anyone convicted of luring a skilled British worker to a foreign country to practice or teach his trade faced a fine of up to a hundred pounds and three months in prison for a first offense, or an unlimited fine and twelve months for a second. Under George II, the penalties escalated: five hundred pounds and twelve months for a first offense, a thousand pounds and two years for a second.

Under the first of these laws, on proof that someone had been recruiting skilled workers — or even that a worker had merely promised to go abroad — the worker could be forced to post bond guaranteeing he wouldn't leave the country, and could be jailed until he did.

If any skilled worker had already gone abroad and was practicing or teaching his trade in a foreign country, he'd be warned — by any British ambassador, consul, or secretary of state — that he had six months to return. If he didn't come back, he became legally incapable of inheriting property, serving as an executor, or owning land in Britain. He forfeited all his possessions to the Crown, was declared an alien in every respect, and was stripped of the king's legal protection.

It's hardly necessary, I imagine, to point out how completely these regulations contradict the celebrated liberty of the subject that we supposedly hold so dear — but which, in this case, is so plainly sacrificed to the trivial interests of our merchants and manufacturers.

The laudable goal of all these regulations is to promote our manufacturing — not by actually improving it, but by crushing everyone else's, by putting an end to the troublesome competition of those odious and disagreeable rivals. Our master manufacturers think it reasonable that they should have a monopoly on the talent of all their countrymen. Through limits on apprenticeships in some trades and mandatory long apprenticeships in all trades, they work to confine knowledge of their crafts to as few people as possible. But they're unwilling to let even this small number go abroad and teach foreigners.

Consumption is the sole end and purpose of all production. The interest of the producer should be considered only insofar as it promotes the interest of the consumer. This principle is so perfectly self-evident that trying to prove it would be absurd. But in the mercantile system, the consumer's interest is almost constantly sacrificed to the producer's. The system treats production, not consumption, as the ultimate purpose of all industry and commerce.

In the restrictions on importing any foreign goods that compete with domestic products, the consumer's interest is clearly sacrificed to the producer's. It is entirely for the benefit of the producer that the consumer is forced to pay the higher prices that monopoly almost always creates.

It is entirely for the benefit of the producer that subsidies are granted on the export of his goods. The domestic consumer pays twice: first, the tax needed to fund the subsidy; and second, the even larger tax that comes from artificially inflated prices in the domestic market.

By the famous trade treaty with Portugal, the consumer is prevented by high duties from buying wine from a nearby country — our own climate doesn't produce it — and is forced to buy from a distant country, even though the distant country's wine is acknowledged to be worse. The consumer must put up with this inconvenience so that producers can export their own goods to that distant country on more favorable terms. And the consumer also pays for whatever price increase this forced export causes at home.

But in the laws governing our American and West Indian colonies, the interest of the domestic consumer has been sacrificed to the producer's with more extravagant excess than in all our other commercial regulations combined. A vast empire has been established for the sole purpose of creating a captive nation of customers, forced to buy from the shops of our producers whatever those producers choose to supply. For the sake of the tiny price advantage this monopoly might give our producers, domestic consumers have been saddled with the entire cost of maintaining and defending that empire. For this purpose — and this purpose only — more than two hundred million pounds have been spent in the last two wars, and new debts of more than a hundred and seventy million have been added on top of everything spent on the same purpose in earlier wars. The interest alone on this debt is not only greater than the total extraordinary profit that could ever be claimed from the colonial trade monopoly — it's greater than the entire value of that trade, greater than the total value of goods that have been annually exported to the colonies on average.

It's not hard to figure out who designed this entire mercantile system. Not the consumers, certainly — their interests have been completely ignored. The producers, whose interests have been so carefully protected. And among the producers, our merchants and manufacturers have been by far the principal architects. In the regulations I've discussed throughout this chapter, the interest of our manufacturers has received the most attentive care. And it is not so much the consumer's interest that has been sacrificed to theirs, as the interest of other groups of producers.

Chapter IX: Of the Agricultural Systems

The Agricultural Systems of Political Economy, Which Treat the Produce of Land as Either the Sole or the Principal Source of Every Country's Wealth

The agricultural systems of political economy won't require as long an explanation as what I've thought necessary to give the mercantile or commercial system.

The system that treats the produce of land as the sole source of every country's wealth and revenue has never, as far as I know, been adopted by any nation. It exists only in the writings of a few remarkably learned and ingenious French thinkers. It would hardly be worth examining at great length the errors of a system that has never done, and probably never will do, any real harm anywhere in the world. I'll try, however, to explain the main outlines of this very clever system as clearly as I can.

Mr. Colbert, the famous minister of Louis XIV, was a man of integrity, great industry, and tremendous knowledge of administrative detail — experienced and shrewd in examining public accounts, and in every way suited to bringing method and order to government finances. Unfortunately, this minister had embraced all the prejudices of the mercantile system, which is by nature a system of restriction and regulation — the kind of thing that naturally appeals to a hardworking, methodical bureaucrat who has spent his career organizing government departments and establishing checks and controls to keep each one in its proper lane. He tried to regulate the industry and commerce of a great country the way you'd organize the departments of a government office. Instead of letting every person pursue his own interest in his own way — following the generous plan of equality, liberty, and justice — he heaped extraordinary privileges on some industries while burying others under extraordinary restrictions.

Like other European ministers, he was inclined to favor urban industry over rural production. But he went further: to support the industry of the towns, he was willing to actively depress and hold down the industry of the countryside. To make food cheap for city dwellers — and thereby encourage manufacturing and foreign trade — he banned grain exports altogether, cutting off the rural population from every foreign market for the most important part of their output. This ban, combined with ancient provincial laws restricting the transport of grain from one French province to another, and combined with the arbitrary and degrading taxes levied on farmers in nearly every province, discouraged and depressed French agriculture far below what it would naturally have reached in such fertile soil and such a favorable climate. This depression was felt more or less throughout the country, and many investigations were launched into its causes. One of those causes turned out to be the preference Colbert's policies had given to urban industry over rural production.

If a rod is bent too far in one direction, says the proverb, you have to bend it just as far the other way to straighten it. The French philosophers who proposed the system treating agriculture as the sole source of a nation's wealth seem to have adopted this proverbial wisdom. Just as Colbert's program had clearly overvalued urban industry relative to agriculture, their system just as clearly undervalued it.

They divided the people who contribute to a country's annual output into three classes. The first is the class of landowners. The second is the class of farmers and agricultural laborers, whom they honored with the special title of "the productive class." The third is the class of craftsmen, manufacturers, and merchants, whom they tried to degrade with the humiliating label of "the barren" or "unproductive" class.

The landowner class contributes to annual output through the money they occasionally spend on improving their land — buildings, drainage, fencing, and other improvements that enable farmers, with the same capital, to produce more and therefore pay higher rent. This increased rent can be considered the return on the capital the landowner invested in improvements. In this system, such expenditures are called "ground expenses" (depenses foncieres).

The farmer class contributes through what this system calls "original expenses" and "annual expenses" (depenses primitives and depenses annuelles). Original expenses include farming equipment, livestock, seed, and the cost of maintaining the farmer's family, servants, and animals during at least the first year — before any returns come in from the land. Annual expenses include seed, wear and tear on equipment, and the ongoing cost of maintaining the farmer's workers, animals, and household (insofar as the household can be considered part of the farm workforce).

The portion of the harvest left over after paying rent should be enough, first, to repay the farmer's entire original investment within a reasonable time — along with the normal return on capital — and second, to cover the full annual expenses each year, again with a normal profit. These two categories of expense represent the two kinds of capital the farmer deploys. Unless he's regularly reimbursed for both, with a reasonable profit, he can't keep farming as a viable occupation. Self-interest would drive him to abandon it and find something better. The share of the harvest necessary to keep the farmer in business should be treated as a fund sacred to agriculture. If the landlord raids this fund, he inevitably reduces his own land's output, and within a few years, he'll not only disable the farmer from paying inflated rent, but from paying even the reasonable rent the land could otherwise have earned.

The rent that rightfully belongs to the landlord is nothing more than the net produce — what remains after completely paying all the expenses that must first be incurred to generate the total harvest. It is because the labor of farmers, over and above covering all those necessary expenses, produces a net surplus of this kind that the Physiocrats gave this class the honorable label "productive." Their original and annual expenses are called "productive expenses" for the same reason: beyond replacing their own value, they generate the annual reproduction of this net surplus.

The landlord's ground expenses also earn the label "productive" in this system. Until these investments, along with the normal return on capital, have been fully repaid through the higher rent they generate, that higher rent should be considered sacred and untouchable — exempt from both church tithes and taxes. Otherwise, by discouraging land improvement, the church would reduce its own future tithes and the king his own future tax revenue. Since, in a well-functioning economy, ground expenses eventually reproduce both their own value and a net surplus, they too qualify as productive expenses in this system.

But the landlord's ground expenses, together with the farmer's original and annual expenses, are the only three types of spending that this system considers productive. All other expenses and all other classes of people — even those that common sense regards as the most productive — are in this framework treated as completely barren and unproductive.

Craftsmen and manufacturers in particular — whose work, in the common understanding, so enormously increases the value of raw materials — are classified as entirely barren and unproductive. Their labor, it is said, merely replaces the capital that employs them, along with its normal profits. That capital consists of the materials, tools, and wages their employer advances to them — the fund that pays for their employment and maintenance. The employer's profits are the fund for his own maintenance. As he advances his workers the materials, tools, and wages they need, he simultaneously advances himself what he needs for his own upkeep, generally proportioned to the profit he expects from their work. Unless the price of their output repays his own maintenance as well as the materials, tools, and wages he advanced — in other words, unless it repays his entire outlay — then it doesn't fully replace his expense.

Manufacturing profits, therefore, are not like rent. Rent is a net surplus that remains after completely repaying all costs. The farmer earns a profit, just like the manufacturer, but the farmer also generates rent for someone else — which the manufacturer does not. Therefore, the Physiocrats argue, the money spent employing craftsmen and manufacturers merely keeps their own value in existence — it doesn't create any new value. It is an entirely barren and unproductive expenditure. The money spent employing farmers, by contrast, not only maintains its own value but also creates new value: the landlord's rent. It is therefore a productive expenditure.

Commercial capital is equally barren and unproductive in this framework — it merely maintains its own value without creating anything new. A merchant's profits are simply the repayment of the maintenance he advances to himself while his capital is deployed. They're just part of the cost of doing business.

According to this system, the labor of craftsmen and manufacturers never adds anything to the total annual value of a country's raw produce. It greatly increases the value of particular portions, certainly. But the consumption it requires in the meantime is precisely equal to the value it adds, so the total remains unchanged.

Consider the person who makes the lace for a pair of fine ruffles. He might raise the value of a penny's worth of flax to thirty pounds sterling — apparently multiplying the value of a bit of raw material about seven thousand two hundred times. But in reality, he adds nothing to the total annual value of the country's raw produce. Making that lace costs him roughly two years of labor. The thirty pounds he receives when it's finished is nothing more than repayment for the two years of food and necessities he consumed while working on it. At no point does he add anything to the total: the portion of raw produce he continually consumes is always equal to the value he continually produces. The extreme poverty of most people employed in this expensive but trivial craft confirms that the price of their work typically doesn't exceed the value of their subsistence.

It's different with farmers. The landlord's rent is a value that their labor continually produces over and above the complete replacement of every expense — all the costs of employing and maintaining both the workers and their employer.

Craftsmen, manufacturers, and merchants can increase their society's wealth and revenue only through thrift — or as this system puts it, through "privation," meaning depriving themselves of part of the funds intended for their own living. They reproduce nothing each year but those funds themselves. Unless they save some portion, unless they deny themselves the enjoyment of some part, the wealth of society can never be increased by their industry even in the smallest degree. Farmers, on the other hand, can enjoy their full wages and still increase society's wealth, because their labor produces a net surplus over and above their own maintenance — the landlord's rent. Any growth in this surplus necessarily grows the wealth of the whole society.

Nations like France or England, consisting largely of landowners and farmers, can therefore be enriched through both industry and enjoyment. Nations like Holland and Hamburg, made up chiefly of merchants, craftsmen, and manufacturers, can grow rich only through thrift and self-denial. Since the economic situations of these two types of nations are so different, so too is the general character of their people. In nations of the first type, generosity, openness, and good fellowship naturally become part of the national character. In the second type, narrowness, meanness, and a selfish temperament hostile to social pleasure.

The "unproductive" class of merchants, craftsmen, and manufacturers is entirely maintained and employed at the expense of the other two classes — landowners and farmers. These two classes supply both the raw materials for their work and the food for their subsistence. The landowners and farmers ultimately pay the wages of every worker in the unproductive class and the profits of all their employers. Those workers and employers are, in effect, servants of the landowners and farmers — just servants who work outdoors rather than indoors. Both types are equally maintained at their masters' expense. Both types of labor are equally unproductive. Neither adds to the total value of a country's raw produce. Instead of increasing it, their labor is a cost that must be paid out of it.

The "unproductive" class, however, is not merely useful but enormously useful to the other two. Through the work of merchants, craftsmen, and manufacturers, landowners and farmers can buy both imported goods and domestic manufactured products with a much smaller amount of their own labor than if they tried, clumsily and unskillfully, to import or make these things themselves. The "unproductive" class frees farmers from countless distractions that would otherwise pull their attention from farming. The greater harvest that this focused attention enables is more than enough to cover the entire cost of maintaining and employing the unproductive class. So the work of merchants, craftsmen, and manufacturers — though inherently unproductive in itself — indirectly increases the output of the land. It boosts the productive powers of productive labor by letting it focus on its proper job: farming. The plow frequently runs easier and better thanks to the work of people whose own business is as far removed from plowing as can be.

It can never be in the interest of landowners and farmers to restrict or discourage the industry of merchants, craftsmen, and manufacturers. The more freedom this "unproductive" class enjoys, the more competition there will be in all their various trades, and the more cheaply the other two classes will be supplied with both imported goods and domestic manufactured products.

Nor can it ever be in the interest of the "unproductive" class to oppress the other two. It's the surplus produce of the land — what remains after deducting the maintenance of first the farmers and then the landowners — that supports and employs the unproductive class. The bigger this surplus, the more employment and support for that class. The establishment of perfect justice, perfect liberty, and perfect equality is the beautifully simple secret that most effectively ensures the highest degree of prosperity for all three classes.

The merchants, craftsmen, and manufacturers of commercial nations like Holland and Hamburg are maintained and employed in exactly the same way — at the expense of landowners and farmers. The only difference is that those landowners and farmers are, for the most part, located far away, in other countries and under other governments.

Such commercial nations, however, are not just useful but enormously useful to the people of those other countries. They fill a very important gap — providing the merchants, craftsmen, and manufacturers that those countries' own people ought to have at home but, because of some flaw in policy, don't.

It can never be in the interest of agricultural nations to discourage or distress the industry of such commercial states by imposing high duties on their trade. Such duties, by making goods more expensive, would only reduce the real value of the surplus produce of their own land — the very thing with which they buy those goods. Such duties would discourage the growth of that surplus and consequently the improvement and development of their own land. The most effective way to raise the value of their surplus, to encourage its growth, and to develop their land, is to allow the most perfect freedom of trade with all commercial nations.

This perfect freedom of trade would also be the most effective way to eventually develop their own domestic manufacturing. It would supply them, in due time, with all the craftsmen, manufacturers, and merchants they need at home, filling that important gap in the best and most advantageous way.

As the surplus produce of their land continually grows, it would eventually create more capital than could be profitably invested in agriculture. The excess would naturally flow into employing craftsmen and manufacturers at home. These domestic workers, finding both their raw materials and their food supply close at hand, could immediately work as cheaply as the workers in commercial nations — who have to bring both from far away — even with less skill and experience. And even if they couldn't match foreign prices at first, since they'd have a home market advantage, they could sell their work there just as cheaply as imports that had to travel a great distance. As their skills improved, they'd soon sell even cheaper. The craftsmen and manufacturers of commercial nations would first be rivaled in these agricultural nations' markets, then gradually undersold, and eventually driven out altogether. As domestic manufacturing improved, its products would eventually spread beyond the home market into foreign markets, gradually displacing imports from commercial nations there too.

This continual growth in both raw and manufactured output would eventually create more capital than could be profitably deployed in either agriculture or manufacturing. The surplus would naturally flow into foreign trade — exporting to other countries whatever domestic raw and manufactured goods exceeded home demand. In this export trade, the merchants of agricultural nations would have the same advantage over those of commercial nations that their manufacturers had: the advantage of finding their cargo, stores, and provisions right at home, rather than having to seek them at great distance. Even with inferior shipping skills, they could sell as cheaply abroad as merchants from commercial nations. With equal skills, they'd sell cheaper. They would soon rival and eventually displace those commercial nations in foreign trade altogether.

According to this generous and enlightened system, then, the best way for an agricultural nation to develop its own craftsmen, manufacturers, and merchants is to grant the most perfect freedom of trade to those of every other nation. This raises the value of its surplus produce, whose continual growth gradually builds up a fund that inevitably develops all the domestic craftsmen, manufacturers, and merchants the country needs.

When an agricultural nation instead oppresses foreign trade through high duties or prohibitions, it hurts its own interests in two ways. First, by raising the price of all foreign goods and manufactured products, it reduces the real value of its own surplus produce — the thing with which it buys those goods. Second, by giving its own merchants and manufacturers a monopoly of the home market, it raises the rate of commercial and manufacturing profit relative to agricultural profit, which either pulls capital away from farming or prevents capital from flowing into it. This policy discourages agriculture doubly: first by reducing the real value of farm output and lowering its profitability; and second by raising profits in other sectors. Agriculture becomes less attractive while trade and manufacturing become more so, and everyone is tempted to shift both their capital and their labor from the former to the latter.

Even if this protectionist policy could speed up the development of domestic manufacturing somewhat — which is far from certain — it would do so prematurely, before the nation was truly ready. By accelerating one type of industry too quickly, it would depress a more valuable one. By rushing the development of an industry that merely replaces the capital that employs it (plus normal profits), it would depress an industry that, beyond replacing capital and profits, also generates a net surplus — a free rent to the landlord. It would depress productive labor by rushing ahead with labor that is entirely barren and unproductive.

The way this system distributes a nation's total annual produce among the three classes — and the way the labor of the "unproductive" class merely replaces the value of its own consumption without increasing the total — is represented by Mr. Quesnay, the brilliant and profound author of this system, in some mathematical tables. The first and most famous of these, which he calls the "Economic Table" (Tableau Economique), shows how this distribution works under conditions of perfect liberty — and therefore maximum prosperity — where the annual output yields the greatest possible net surplus and each class gets its proper share. Other versions of the table show how this distribution works under various conditions of restriction and regulation, where either the landowner class or the "unproductive" class is favored at the expense of the farmers. Every such distortion, every violation of the natural distribution that perfect liberty would produce, must — according to this system — progressively degrade the value and total of the annual output, and inevitably cause a gradual decline in the real wealth and revenue of the society. The pace of decline depends on the degree of distortion, on how severely the natural distribution is disrupted.

Some theoretical physicians have imagined that the health of the human body can be maintained only by one precise regimen of diet and exercise, with even the smallest deviation causing illness proportional to the deviation. But experience seems to show that the human body frequently maintains perfect health — at least to all appearances — under a wide variety of regimens, even some that are generally thought quite unhealthy. The body seems to contain some hidden principle of self-preservation, capable of preventing or correcting, in many cases, the bad effects of even a very poor regimen.

Mr. Quesnay, who was himself a physician — and a very theoretical one — seems to have held a similar notion about the political body. He seems to have imagined that it could thrive only under one precise regimen: perfect liberty and perfect justice. He doesn't seem to have considered that in the political body, the natural effort every person continually makes to improve their own condition is itself a principle of preservation — capable of preventing and correcting, in many ways, the bad effects of a political economy that is both biased and oppressive. Such a political economy, though it certainly slows progress, isn't always capable of stopping a nation's natural advance toward wealth and prosperity — much less of reversing it. If no nation could prosper without enjoying perfect liberty and perfect justice, there isn't a nation in the world that would ever have prospered. In the political body, the wisdom of nature has fortunately provided ample remedies for the folly and injustice of man — just as in the natural body, it has provided remedies for sloth and overeating.

The fundamental error of this system, however, lies in classifying craftsmen, manufacturers, and merchants as entirely barren and unproductive. The following observations should show why this classification is wrong.

First, this class admittedly reproduces the value of its own annual consumption every year — it maintains the existence of the capital that supports and employs it. On that basis alone, calling it "barren" or "unproductive" seems deeply inappropriate. We wouldn't call a marriage barren just because it produced only a son and a daughter — replacing the father and mother without increasing the population, merely maintaining it. Farmers and agricultural laborers do, it's true, produce a net surplus over and above the capital that maintains them — a free rent to the landlord. Just as a marriage that produces three children is certainly more productive than one that produces only two, agricultural labor is certainly more productive than manufacturing labor. But the greater productivity of one doesn't make the other barren.

Second, it seems entirely wrong to treat craftsmen, manufacturers, and merchants the same way as domestic servants. The labor of domestic servants does not maintain the fund that pays for their employment. Their maintenance is entirely at their employer's expense, and their work doesn't repay that expense. Their services perish the instant they're performed and don't produce any sellable commodity. The labor of craftsmen, manufacturers, and merchants, by contrast, does produce sellable commodities that can replace the value of wages and maintenance. That's why, in my discussion of productive and unproductive labor earlier in this work, I classified craftsmen, manufacturers, and merchants as productive, and domestic servants as unproductive.

Third, it seems wrong on any assumption to say that manufacturing and commercial labor doesn't increase a society's real income. Suppose, as this system does, that the value of what this class consumes every day, month, and year is exactly equal to what it produces. It still doesn't follow that their labor adds nothing to real income.

Consider a craftsman who, in the six months after harvest, does ten pounds' worth of work while consuming ten pounds' worth of grain and other necessities. He really does add ten pounds to the annual output of the society. While consuming a half-year's income of ten pounds in food and necessities, he has produced an equal value of work that can purchase an equivalent income for himself or someone else. The total value consumed and produced during those six months is not ten pounds but twenty. It's possible that no more than ten pounds of value exists at any single moment. But if those ten pounds' worth of food had been consumed by a soldier or a domestic servant instead of a craftsman, the value of goods actually existing at the end of six months would have been ten pounds less. Even though the value of what the craftsman produces may never, at any single moment, be greater than what he consumes, the total value of goods actually in the market is, at every moment, greater than it otherwise would have been because of his work.

When the supporters of this system say that the consumption of craftsmen, manufacturers, and merchants equals the value of what they produce, they probably mean only that these people's income equals what they produce. But if they'd put it more precisely that way, any reader would immediately realize that whatever is saved out of this income must necessarily increase the real wealth of society. To construct even the appearance of an argument, they had to phrase it the way they did. And even on its own terms, the argument is unconvincing.

Fourth, farmers can no more increase a nation's real income without thrift than craftsmen and manufacturers can. A nation's annual output can only be increased in two ways: by improving the productive powers of the labor already being used, or by increasing the quantity of that labor.

Improvements in productive power depend, first, on improving the worker's skill, and second, on improving the machinery he works with. But manufacturing labor, precisely because it can be more finely subdivided — with each worker's task reduced to a simpler operation — is capable of both kinds of improvement to a much higher degree than agricultural labor. In this respect, the farming class has no advantage whatsoever over craftsmen and manufacturers.

The increase in the quantity of productive labor actually employed in any society must depend entirely on the increase of the capital that employs it. And the increase of that capital must exactly equal the total savings — either of the people who manage and direct the use of that capital, or of others who lend it to them. If merchants, craftsmen, and manufacturers are — as this system assumes — naturally more inclined to save and invest than landowners and farmers, then they are actually more likely to increase the quantity of productive labor in their society, and therefore to increase its real income: the annual output of its land and labor.

Fifth and finally, even if we accepted the assumption that every country's income consists entirely of the food its people can procure for themselves — as this system seems to suppose — the income of a trading and manufacturing country must still, all else being equal, always be much greater than that of one without trade or manufacturing. Through trade and manufacturing, a country can annually import a greater quantity of food than its own land, in its current state of cultivation, could produce. The residents of a city, though they typically own no farmland, draw to themselves through their industry enough of the surrounding countryside's raw produce to supply not just their work materials but their food. What a town always is to its neighboring countryside, an independent trading nation may be to other independent nations. This is how Holland draws a large part of its food from other countries — live cattle from Holstein and Jutland, grain from nearly every country in Europe. A small quantity of manufactured goods buys a large quantity of raw produce. A trading and manufacturing country naturally purchases, with a small part of its manufactured output, a large share of other countries' raw produce. A country without trade or manufacturing, by contrast, is generally forced to purchase a very small amount of manufactured goods at the cost of a very large amount of its own raw produce. One type of country exports what can feed and house only a few people and imports the food and housing for many. The other exports the food and housing of many and imports that of only a few. The people of the first must always enjoy far more than what their own land alone could provide. The people of the second, far less.

This system, however, with all its imperfections, is perhaps the closest approximation to the truth that has yet been published on political economy, and it is well worth studying for anyone who wants to examine the principles of that very important science with care. Its ideas about productive labor may be too narrow and limited — representing only agricultural labor as truly productive. But in treating the wealth of nations as consisting not in the supposedly permanent riches of gold and silver but in the consumable goods that labor annually reproduces; and in treating perfect liberty as the only effective way to maximize this annual reproduction — in these respects, the doctrine seems as sound as it is generous and enlightened.

The Physiocrats have attracted many followers. Since people are naturally drawn to paradoxes, and to the appearance of understanding what ordinary people cannot grasp, the paradox about manufacturing labor being unproductive has probably done a fair bit to swell the ranks of their admirers. For some years they've formed a considerable intellectual movement in France, known in the French republic of letters as "the Economists." Their work has certainly been useful to their country — not only by bringing important subjects into public discussion for the first time, but by actually influencing government policy in favor of agriculture.

Thanks to their advocacy, French agriculture has been freed from several of the oppressions it previously suffered. The term for which a valid farm lease can be granted — one that holds up against any future buyer or owner of the land — has been extended from nine to twenty-seven years. The old provincial restrictions on transporting grain from one part of France to another have been entirely abolished, and the freedom to export grain to foreign countries has been established as the general law of the kingdom in ordinary circumstances.

This school's followers, in their very numerous works — which treat not only political economy proper but every branch of government — all follow the doctrine of Mr. Quesnay without any real variation. There isn't much variety in most of their writings, as a result. The clearest and most coherent account of the doctrine is found in a short book by Mr. Mercier de la Riviere, a former administrator of Martinique, called The Natural and Essential Order of Political Societies. The whole school's admiration for their master — who was himself a man of the greatest modesty and simplicity — is no less intense than the admiration of ancient philosophical schools for their founders. "Since the beginning of the world," wrote the Marquis de Mirabeau, a very diligent and respected author, "there have been three great inventions that have principally given stability to political societies, independent of the many other inventions that have enriched and adorned them. The first is the invention of writing, which alone gives humanity the power of transmitting its laws, contracts, records, and discoveries without alteration. The second is the invention of money, which binds together all the relationships between civilized societies. The third is the Economic Table, the result of the other two, which completes them both by perfecting their purpose — the great discovery of our age, whose benefits our descendants will reap."

As the political economy of modern European nations has been more favorable to manufacturing and foreign trade — the industry of the towns — than to agriculture, the industry of the countryside, other nations have followed a different path, one more favorable to agriculture than to manufacturing and trade.

China's policy favors agriculture above all other occupations. In China, a laborer's status is said to be as far above that of a craftsman as, in most of Europe, a craftsman's is above a laborer's. In China, every person's great ambition is to get hold of some little piece of land, whether owned or leased. Leases are reportedly granted on very moderate terms and are well secured for the tenants. The Chinese have little respect for foreign trade. "Your beggarly commerce!" was how the officials in Beijing used to address Mr. de Lange, the Russian envoy, when discussing it. Except with Japan, China conducts little or no foreign trade in its own ships, and foreign vessels are admitted to only one or two ports. Foreign trade in China is thus confined within a much narrower scope than it would naturally reach if more freedom were allowed — whether in Chinese ships or foreign ones.

Manufactured goods, since they pack great value into small volume and can be transported between countries more cheaply than most raw produce, are in nearly every country the main engine of foreign trade. In countries less vast and less favorably situated for internal commerce than China, manufacturing generally depends on foreign trade for its support. Without extensive foreign markets, manufacturing can't flourish — either in moderately sized countries with narrow home markets, or in countries where poor transportation between provinces prevents any one area's goods from reaching the whole domestic market.

The perfection of manufacturing, as I've shown before, depends entirely on the division of labor, and the degree to which labor can be divided depends on the size of the market. But the sheer size of China, its enormous population, the variety of its climate and productions across different provinces, and the easy communication by water between most of them make China's home market vast enough on its own to support very large-scale manufacturing with highly refined divisions of labor. China's domestic market may be nearly as large as the combined markets of all the countries of Europe. A more extensive foreign trade — adding the markets of the rest of the world to this already enormous home market — especially if a significant share were carried in Chinese ships, could hardly fail to dramatically expand Chinese manufacturing and improve its productive powers. Through wider navigation, the Chinese would naturally learn to use and build all the different machines employed in other countries, along with the other improvements in technology and industry practiced throughout the world. Under their current system, they have little opportunity to improve by following the example of any other nation — except Japan.

The policy of ancient Egypt, and that of the Hindu governments of India, also seem to have favored agriculture above everything else.

In both ancient Egypt and India, the entire population was divided into different castes or tribes, each confined by birth to a particular line of work. The son of a priest was necessarily a priest, the son of a soldier a soldier, the son of a laborer a laborer, the son of a weaver a weaver, the son of a tailor a tailor. In both countries, the priestly caste held the highest rank and the military caste the second. And in both, the caste of farmers and laborers stood above the castes of merchants and manufacturers.

The governments of both countries paid special attention to agricultural interests. The works built by the ancient rulers of Egypt for managing the waters of the Nile were famous throughout antiquity, and some of their ruins still amaze travelers. Similar works built by the ancient rulers of India for managing the Ganges and many other rivers, though less celebrated, seem to have been equally impressive. Both countries, though occasionally hit by famine, were renowned for their extraordinary fertility. In years of reasonable plenty, both could export large quantities of grain to their neighbors.

The ancient Egyptians had a superstitious fear of the sea. The Hindu religion doesn't permit its followers to light a fire on water, effectively banning them from long sea voyages. Both peoples therefore had to depend almost entirely on other nations' ships for exporting their surplus produce. This dependency, by limiting their markets, must have held back the growth of that surplus. And it must have discouraged manufacturing output even more than raw produce. Manufacturing requires a much larger market than even the most important agricultural products.

A single shoemaker makes more than three hundred pairs of shoes a year, while his own family might not wear out six. Unless he has the business of at least fifty families like his own, he can't sell all his output. The most numerous class of craftsmen will rarely make up more than one in fifty or one in a hundred of a country's total families. But the share of the population engaged in agriculture has been estimated by various authors at somewhere between one-fifth and one-half of total inhabitants. So each agricultural worker needs the business of only one, two, or at most four families like his own to sell his output. Agriculture can survive the limitation of a confined market far better than manufacturing can.

In both ancient Egypt and India, the restriction of foreign markets was partly offset by the convenience of extensive inland waterways, which opened the whole home market to every region's products in the most advantageous way. India's great size also made its home market large enough to support considerable manufacturing variety. But tiny ancient Egypt — never bigger than England — always had too small a home market to support much manufacturing diversity. Bengal, the Indian province that typically exports the most rice, has always been more famous for its tremendous variety of manufactured exports than for its grain. Ancient Egypt, though it exported some manufactures — fine linen in particular — was always most distinguished for its grain exports. It was long the granary of the Roman Empire.

The rulers of China, of ancient Egypt, and of the various kingdoms of India have always derived all or most of their revenue from some form of land tax or land-rent. This tax, like the tithe in Europe, consisted of a fixed proportion — a fifth, reportedly — of the land's produce, either paid in kind or converted to a cash payment based on a valuation that fluctuated with annual output. It was natural, therefore, for these rulers to take a special interest in agriculture, since the prosperity or decline of farming directly determined the annual rise or fall of their own revenue.

The ancient Greek republics and Rome, while honoring agriculture more than manufacturing or trade, seem to have positively discouraged the latter rather than given any direct encouragement to the former. In several ancient Greek states, foreign trade was prohibited entirely. In several others, the work of craftsmen and manufacturers was considered damaging to physical strength and agility — rendering the body incapable of the fitness that their military and athletic training was designed to build — and therefore disqualifying for the rigors and dangers of war. Such occupations were considered fit only for slaves, and free citizens were forbidden to practice them.

Even in states without explicit prohibitions — Rome and Athens, for instance — the great mass of free citizens were effectively excluded from the trades now typically practiced by urban workers. At Athens and Rome, these trades were all performed by the slaves of the wealthy, who worked for their masters' benefit. The wealth, power, and protection of these slave-owning families made it nearly impossible for a poor free worker to find a market for his work in competition with their slaves.

Slaves, however, are almost never inventive. All the most important improvements in machinery, in the organization of work, and in the methods that make labor faster and more efficient have been the discoveries of free people. If a slave proposed such an improvement, his master would likely see it as laziness — a desire to lighten his own workload at his master's expense. Instead of a reward, the slave would probably get a beating. In slave-operated manufacturing, therefore, more labor was generally needed to produce the same output as in workshops run by free workers. The output of slave labor was consequently more expensive.

The Hungarian mines, as Montesquieu observed, though no richer than the neighboring Turkish mines, have always been worked more cheaply and therefore more profitably. The Turkish mines are worked by slaves, and the slaves' own hands are the only tools the Turks have ever thought to use. The Hungarian mines are worked by free workers who employ extensive machinery to speed up their work.

From the little we know about manufacturing prices in ancient Greece and Rome, the finer products seem to have been extraordinarily expensive. Silk sold for its weight in gold — though since it was all imported from the East Indies, the long shipping distance partly explains the price. But the price a lady would sometimes pay for a piece of very fine linen seems equally extreme, and since linen was always either a European or at most an Egyptian product, this high price can be explained only by the enormous labor cost — itself a reflection of the crude and inefficient tools available.

Fine woolens, though not quite as extreme, also seem to have been much more expensive than today. Pliny tells us some specially dyed cloths cost a hundred denarii per pound — about three pounds, six shillings and eightpence. Others dyed a different way cost a thousand denarii per pound — about thirty-three pounds, six shillings and eightpence. (The Roman pound, remember, was only twelve of our avoirdupois ounces.) The high price was partly due to the dye, but if the cloth itself hadn't been far more expensive than anything made today, nobody would have wasted such expensive dye on it — the mismatch between the dye's cost and the fabric's value would have been absurd.

Pliny also mentions the price of certain Triclinaria — woolen cushions used for reclining at dinner — that defies belief. Some reportedly cost more than thirty thousand pounds, others more than three hundred thousand. And this wasn't due to the dye. In the fashionable dress of both sexes, there seems to have been much less variety in ancient times than today, as Dr. Arbuthnot observed — and the uniformity of ancient statues confirms his point. He concluded that ancient clothing must therefore have been cheaper overall, but this doesn't follow. When fashionable dress is very expensive, variety is necessarily limited. But when improvements in manufacturing bring the cost of any one outfit down to something modest, variety naturally explodes. Unable to distinguish themselves by spending lavishly on a single outfit, the rich try to stand out through the sheer number and variety of their clothes.

The most important branch of every nation's commerce, as I've observed before, is the trade between town and country. Town dwellers draw from the countryside the raw produce that serves as both their work materials and their food supply. They pay for it by sending back a portion of that produce manufactured and ready for use. This trade ultimately consists of raw produce exchanged for manufactured produce. The more expensive the manufactured goods, the cheaper the raw produce — and whatever tends to raise the price of manufactured goods in any country tends to lower the price of raw produce, thereby discouraging agriculture. The less manufactured goods a given quantity of raw produce can buy, the lower the exchangeable value of that raw produce, and the less incentive landlords have to improve their land or farmers to cultivate it. Furthermore, whatever reduces the number of craftsmen and manufacturers in a country shrinks the home market — the most important market of all for raw produce — and further discourages agriculture.

Those systems, therefore, which favor agriculture over everything else, and which try to promote it by imposing restrictions on manufacturing and foreign trade, act contrary to the very goal they're pursuing. They indirectly discourage the very type of industry they claim to support. In this sense, they're even more inconsistent than the mercantile system. The mercantile system, by favoring manufacturing and trade over agriculture, diverts a portion of society's capital from a more advantageous to a less advantageous use. But it does actually end up encouraging the kind of industry it intends to promote. The agricultural systems, by contrast, actually end up discouraging their own favorite.

Every system that tries, through special incentives, to channel more of society's capital into one particular industry than would naturally flow there — or through special restrictions, to force capital away from one particular industry that it would otherwise support — is in reality undermining the very goal it claims to promote. It slows rather than accelerates society's progress toward real wealth and greatness. It shrinks rather than expands the real value of the nation's annual output.

Once all systems of preference and all systems of restraint are completely swept away, the obvious and simple system of natural liberty establishes itself on its own. Every person, as long as he doesn't violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and his capital into competition with those of anyone else.

The government is completely freed from a duty that it could never perform without falling prey to countless delusions — a duty for which no human wisdom or knowledge could ever be sufficient: the duty of overseeing private industry and directing it toward the occupations best suited to society's interest.

Under the system of natural liberty, the government has only three duties to attend to — three duties of great importance, certainly, but straightforward and understandable to common sense:

First, the duty of protecting the society from the violence and invasion of other nations.

Second, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member — that is, the duty of establishing a reliable system of justice.

And third, the duty of building and maintaining certain public works and institutions that could never be profitable enough for any individual or small group to undertake, but that may more than repay their cost to society as a whole.

The proper performance of these three duties necessarily involves a certain expense, and this expense requires a certain revenue to support it. In the following book, therefore, I'll try to explain: first, what the necessary expenses of government are, and which should be paid for by the whole society versus specific groups or individuals; second, what are the different methods by which society can raise the money to cover its shared expenses, and what are the advantages and disadvantages of each method; and third, what reasons have led nearly all modern governments to borrow money and take on debt, and what effects those debts have had on the real wealth — the annual output of the land and labor — of the society. The following book will naturally be divided into three chapters.

Book V: Of the Revenue of the Sovereign or Commonwealth

Chapter I: Of the Expenses of the Sovereign or Commonwealth

The Expense of Defense

The first duty of government — protecting the society from the violence and invasion of other nations — can only be performed through a military force. But the expense of both preparing this military force in peacetime and deploying it in war varies enormously across different stages of society and different levels of development.

Among hunter-gatherer peoples — the earliest and most basic stage of society, such as we find among the native tribes of North America — every man is a warrior as well as a hunter. When he goes to war, whether to defend his people or to avenge injuries done to them by other groups, he supports himself through his own labor, just as he does at home. His society — for at this stage there is really neither government nor state — bears no expense whatsoever, either to prepare him for battle or to maintain him while he's fighting.

Among pastoral peoples — a more advanced stage of society, such as we find among the Tartars and Arabs — every man is likewise a warrior. Such peoples typically have no fixed homes, living in tents or covered wagons that are easily moved from place to place. The whole tribe shifts its location according to the seasons and other circumstances. When their herds have consumed the grazing land in one area, they move to another, and then another. In the dry season they come down to the riverbanks; in the wet season they retreat to higher ground.

When such a people goes to war, the warriors won't leave their herds and flocks under the feeble protection of their old men, women, and children — and their old men, women, and children won't be left behind without either defense or food. Besides, the whole population is so accustomed to a wandering life, even in peacetime, that marching to war comes naturally. Whether they're moving as an army or traveling as a band of herders, the daily routine is almost the same — only the purpose is different. So they all go to war together, and everyone does the best he can. Among the Tartars, even the women have frequently fought in battle. If they win, everything belonging to the enemy tribe is their reward. But if they lose, all is lost — not just their herds and flocks but their women and children become the spoils of the conqueror. Even most of the survivors are forced to submit for the sake of immediate survival. The rest scatter into the wilderness.

The ordinary life and everyday activities of a Tartar or Arab are themselves preparation for war. Running, wrestling, fighting with clubs, throwing javelins, shooting arrows — these are the common pastimes of people who live in the open air, and every one of them is an image of war. When a Tartar or Arab actually goes to war, he's fed by the herds he brings with him, just as in peace. His chief — these peoples all have chiefs — bears no expense in preparing him for battle, and once he's fighting, the chance of plunder is the only pay he expects or needs.

An army of hunters can rarely exceed two or three hundred men. The unreliable food supply that hunting provides simply can't sustain a larger group for any length of time. An army of herders, by contrast, can sometimes number two or three hundred thousand. As long as nothing blocks their advance — as long as they can keep moving from one region whose grass they've consumed to another that's still green — there seems to be almost no limit to how many can march together.

A nation of hunters can never be a serious threat to its civilized neighbors. A nation of herders can be terrifying. Nothing could be more insignificant than warfare among the North American tribes. Nothing, on the other hand, has been more devastating than a Tartar invasion of Asia. The judgment of Thucydides — that neither Europe nor Asia could resist the Scythians united — has been confirmed by the experience of every age. The inhabitants of the vast, defenseless plains of Central Asia have repeatedly been united under some conquering warlord, and the resulting devastation of Asia has marked every such unification. The Arabs — the other great pastoral people — were never united until Muhammad and his immediate successors accomplished it. Their union, driven more by religious enthusiasm than by conquest, was marked by the same kind of devastation. If the hunter-gatherer peoples of America ever became herders, their neighborhood would become far more dangerous to the European colonies than it is now.

In a still more advanced stage of society — among agricultural peoples who have little foreign trade and no manufacturing beyond the coarse household goods that almost every family makes for itself — every man is likewise either a warrior or easily becomes one. People who live by farming spend their days outdoors, exposed to every kind of weather. The hardness of their ordinary life prepares them for the hardships of war — some of which closely resemble their regular work. Digging ditches, for example, trains a man for trenching and fortifying a camp about as well as for fencing a field. Their pastimes are the same as those of pastoral peoples — the same images of war. But since farmers have less leisure than herders, they practice these activities less often. They're soldiers, but soldiers not quite as expert in their drills. Still, it rarely costs the government anything to prepare them for battle.

Agriculture, even in its most primitive form, requires a permanent settlement — a fixed home that can't be abandoned without serious loss. When a purely agricultural nation goes to war, therefore, the whole population can't take the field together. The old men, women, and children must stay behind to tend the homestead. But all men of military age can fight, and in small nations of this kind, they frequently have. In every nation, men of military age are typically about a fourth or fifth of the total population.

If the campaign begins after planting and ends before harvest, both the farmer and his main laborers can be spared without too much loss. He trusts that the old men, women, and children can handle the work that needs doing in the meantime. He's therefore willing to serve without pay during a short campaign, and it frequently costs the government as little to maintain him in the field as to prepare him for it.

The citizens of the various ancient Greek states seem to have served in this way until after the Second Persian War, and the Peloponnesians until after the Peloponnesian War. The Peloponnesians, as Thucydides observed, generally left the field in summer and went home to harvest their crops. The Roman citizens served the same way under their kings and during the early republic. It wasn't until the siege of Veii that those who stayed home began contributing something toward maintaining those who went to war. In the European monarchies founded on the ruins of the Roman Empire — both before and for some time after the establishment of the feudal system — the great lords and all their immediate followers served the crown at their own expense. In the field, as at home, they maintained themselves from their own revenues, not from any stipend or pay from the king.

In a more advanced stage of society, two developments make it completely impossible for soldiers to maintain themselves at their own expense: the progress of manufacturing, and improvements in the art of war.

When a farmer goes on a campaign that starts after planting and ends before harvest, the interruption to his business doesn't always cause a major loss of income. Nature does most of the remaining work without him. But the moment a craftsman — a smith, a carpenter, a weaver — leaves his workshop, his only source of income dries up completely. Nature does nothing for him; he does everything for himself. When he goes to fight for the public, since he has no income to support himself, the public must support him. In a country where a large share of the population works in manufacturing, a large share of those who go to war must be drawn from these occupations and must therefore be maintained by the public for the duration.

As the art of war grows into a complex science — when wars are no longer decided by a single skirmish or battle but drag on through multiple campaigns, each lasting most of the year — it becomes universally necessary for the public to pay those who serve. Whatever people's peacetime occupations, such long and expensive service would otherwise be far too heavy a burden. After the Second Persian War, Athens' armies were generally composed of mercenary troops — partly citizens, partly foreigners, all hired and paid by the state. From the siege of Veii onward, Rome paid its soldiers for their time in the field. Under feudal governments, the military service of the lords and their followers was eventually replaced by cash payments, which were used to hire others in their place.

The proportion of the population that can go to war is necessarily much smaller in a civilized society than in a primitive one. In a civilized society, soldiers are maintained entirely by the labor of non-soldiers. Their number can never exceed what the civilian population can support while also maintaining — in a manner appropriate to their stations — both themselves and the other officials of government and law. In the small agricultural states of ancient Greece, a fourth or fifth of the entire population considered themselves soldiers and sometimes took the field. Among the civilized nations of modern Europe, it's generally calculated that no more than one percent of the population can be employed as soldiers without ruining the country that pays for their service.

The expense of preparing the army for battle doesn't seem to have become significant in any nation until long after the expense of maintaining it in the field had already fallen entirely on the government. In every Greek republic, learning military exercises was a mandatory part of education. Each city seems to have had a public training field where young people learned their exercises under various instructors, supervised by public officials. This very simple system was the entire expense that any Greek state ever incurred in preparing its citizens for war. In ancient Rome, the Campus Martius served the same purpose as the Greek gymnasium. Under feudal governments, the various public ordinances requiring citizens of every district to practice archery and other military exercises were aimed at the same goal — but never achieved it as well. Whether from lack of enthusiasm among the officials charged with enforcement, or from other causes, these requirements appear to have been universally neglected. As these governments developed, military exercises gradually fell out of practice among the general population.

In the Greek and Roman republics throughout their existence, and under feudal governments for a considerable time after their establishment, being a soldier was not a separate profession. Every subject, regardless of his regular occupation, considered himself qualified to serve as a soldier under ordinary circumstances and obligated to do so under extraordinary ones.

But the art of war, as it is certainly the noblest of all arts, necessarily becomes one of the most complex as civilization advances. The state of mechanical and other related arts determines how far military science can be developed at any given time. But to push it to that level, soldiering must become the sole or principal occupation of a particular class of people. The division of labor is as necessary for improving warfare as for improving any other field.

In other occupations, the division of labor emerges naturally from the self-interest of individuals, who discover they do better by specializing than by trying to do everything. But only the wisdom of the state can make soldiering a distinct profession. A private citizen who, during peacetime and without any government incentive, spent most of his time doing military exercises might certainly improve his skills and enjoy himself — but he definitely wouldn't be advancing his own economic interests. Only the state can make it worthwhile for him to devote most of his time to this specialized occupation. And states have not always had this wisdom, even when their survival required it.

A herder has plenty of leisure; a farmer in a primitive agricultural society has some; a craftsman or manufacturer has none. The first can spend lots of time on martial exercises without any economic loss; the second, some time; the third, not a single hour without losing income, and his self-interest naturally leads him to neglect military training altogether. The improvements in farming techniques that come with advancing industry and manufacturing leave the farmer with just as little spare time as the craftsman. Military exercises become as neglected in the countryside as in the cities, and the general population becomes completely unwarlike. Meanwhile, the wealth that always follows improvements in agriculture and manufacturing — which is really nothing more than the accumulated output of those improvements — attracts the invasion of every neighbor. An industrious and therefore wealthy nation is the most likely to be attacked. Unless the state takes new measures for defense, the people's ordinary habits leave them completely incapable of defending themselves.

In these circumstances, the state has only two options for providing a tolerable defense.

First, it can enforce the practice of military exercises through strict regulations — compelling either all citizens of military age, or a certain number of them, to combine the trade of soldier with whatever other trade or profession they pursue. This is despite the natural inclinations of the entire population.

Second, it can maintain and employ a certain number of citizens in the constant practice of military exercises, making soldiering a separate and distinct profession.

If the state chooses the first approach, its military force is called a militia. If it chooses the second, it's called a standing army. For soldiers in a standing army, military exercises are their sole or primary occupation, and their government pay is their principal income. For soldiers in a militia, military exercises are only an occasional activity, and they earn their main living from other work. In a militia, the character of the laborer, craftsman, or tradesman predominates over that of the soldier. In a standing army, the character of the soldier predominates over everything else. This distinction is the essential difference between the two types of military force.

Militias have taken various forms. In some countries, the citizens designated for defense have been trained but not organized into permanent units — not "regimented," if you will — meaning they weren't divided into distinct bodies of troops with their own permanent officers. In ancient Greece and Rome, each citizen trained on his own or with companions of his choosing, unattached to any specific unit until actually called to fight. In other countries — England, Switzerland, and most of modern Europe — militias have been both trained and organized, with each militiaman assigned even in peacetime to a particular unit under permanent officers.

Before the invention of firearms, the army with the most individually skilled soldiers had the advantage. Strength and agility of body mattered enormously and commonly decided battles. But this kind of individual weapon skill could only be acquired through one-on-one practice — in a training school, under a master, or with personal sparring partners — not in large-group drills. Since the invention of firearms, physical strength, agility, and even extraordinary weapon skill, while far from irrelevant, matter less than before. Firearms don't put the clumsy on an equal footing with the skilled, but they narrow the gap considerably. All the skill needed to use them, it's believed, can be learned well enough through drills in large groups.

In modern armies, regularity, order, and instant obedience to command are far more important than individual weapon skill in determining the outcome of battles. But maintaining regularity, order, and obedience is extraordinarily difficult amid the noise of gunfire, the smoke, and the invisible death that every soldier feels himself exposed to the moment he comes within cannon range — often long before the battle proper has even begun. In ancient battles, there was no noise but human voices, no smoke, no invisible threat. Every man could see clearly that no lethal weapon was near him until one actually approached. Under those conditions, among troops with some confidence in their own skill, maintaining order throughout a battle — from start to finish, until one army was decisively beaten — must have been considerably easier. But the habits of regularity, order, and instant obedience can only be acquired through drilling in large formations.

A militia, however it may be trained or organized, must always be far inferior to a well-disciplined standing army.

Soldiers who drill only once a week or once a month can never become as skilled with their weapons as those who drill every day or every other day. Even if this matters less in modern warfare than in ancient times, the acknowledged superiority of the Prussian troops — attributed largely to their superior drills — shows that it still matters a great deal.

Soldiers who answer to their officers only once a week or month, and who manage their own lives the rest of the time without any accountability, can never develop the same automatic obedience as those whose entire lives — when they rise, when they go to bed, where they go — are directed by their officers every day. In discipline — the habit of ready and instant obedience — a militia must always be even more inferior to a standing army than it is in weapons training. And in modern warfare, the habit of instant obedience matters far more than superior skill with weapons.

The best militias are those that, like the Tartar or Arab militia, go to war under the same leaders they obey in peace. In respect for their officers and in the habit of obedience, these come closest to standing armies. The Highland militia, when it served under its own clan chiefs, had a similar advantage. But since the Highlanders were settled herders with fixed homes — not wanderers accustomed to following their chief from place to place — they were less willing to follow him far from home or stay in the field for long. Once they'd captured some plunder, they wanted to go home, and their chief's authority was rarely enough to keep them. The Highlanders, spending less time outdoors than the Tartars or Arabs, were also less accustomed to military exercises and less skilled with their weapons.

One important observation about any militia, however: one that has served through several successive campaigns in the field effectively becomes a standing army. The soldiers drill with their weapons every day, live under their officers' constant command, and develop the same habits of instant obedience that characterize standing armies. What they were before taking the field matters little — after a few campaigns, they become a standing army in every respect.

If the American war drags on through another campaign, the American militia may become in every respect a match for the standing army whose valor in the last war appeared at least equal to that of the toughest veterans of France and Spain.

With this distinction clear, the history of every age confirms the irresistible superiority of a well-regulated standing army over any militia.

One of the first standing armies we have any clear record of was that of Philip of Macedon. His frequent wars with the Thracians, Illyrians, Thessalians, and nearby Greek cities gradually transformed his troops — probably a militia originally — into a disciplined standing army. During his rare and brief intervals of peace, he was careful never to disband it. This army conquered the brave and well-trained militias of the major Greek republics after a long, hard struggle — and then, with very little difficulty, crushed the poorly trained militia of the vast Persian Empire.

The fall of the Greek republics and the Persian Empire was the result of a standing army's irresistible superiority over every kind of militia. It is the first great revolution in human affairs of which history has preserved a clear and detailed account.

The fall of Carthage and the consequent rise of Rome is the second. All the ups and downs in the fortunes of those two famous republics can be explained by the same principle.

From the end of the First to the beginning of the Second Punic War, the armies of Carthage were continuously in the field under three great generals who succeeded each other: Hamilcar, his son-in-law Hasdrubal, and his son Hannibal. First they crushed their own rebellious slaves, then subdued the revolted peoples of Africa, and finally conquered the great kingdom of Spain. The army Hannibal led from Spain into Italy had necessarily been forged, through these different wars, into a disciplined standing army. The Romans, meanwhile, though not entirely at peace, hadn't fought any war of real consequence during this period, and their military discipline had reportedly slackened considerably. The Roman armies that Hannibal smashed at Trebia, Trasimene, and Cannae were militias facing a standing army. This, more than anything else, probably determined the outcome of those battles.

The standing army Hannibal left behind in Spain had the same advantage over the Roman militia sent to oppose it, and within a few years, under his brother Hasdrubal, it drove the Romans almost entirely out of the peninsula.

Hannibal was poorly supplied from home. The Roman militia, constantly in the field, gradually became a well-disciplined standing army, and Hannibal's advantage shrank every day. Hasdrubal decided he had to lead most of the standing army from Spain to reinforce his brother in Italy. On this march, he was reportedly misled by his guides. Lost in unfamiliar country, he was surprised and attacked by another standing army — in every respect equal or superior to his own — and was totally destroyed.

After Hasdrubal left Spain, the great Scipio found nothing opposing him but a militia inferior to his own. He conquered it, and in the process, his own militia inevitably became a well-disciplined standing army. That army was then carried to Africa, where it faced only a militia. To defend Carthage, Hannibal's standing army had to be recalled. The demoralized African militia joined it and made up most of his forces at the Battle of Zama. That day's outcome decided the fate of the two rival republics.

From the end of the Second Punic War until the fall of the Roman Republic, Rome's armies were in every respect standing armies. Macedon's standing army put up some resistance — at the height of Roman power, it took two major wars and three great battles to subdue that small kingdom, a conquest that would probably have been even harder without the cowardice of its last king. The militias of all the civilized nations of the ancient world — Greece, Syria, Egypt — put up feeble resistance to Rome's standing armies. The militias of some less developed nations did better. The Scythian and Tartar militia that Mithridates recruited from the lands north of the Black and Caspian Seas were the most formidable enemies the Romans faced after the Second Punic War. The Parthian and German militias were always formidable too, sometimes winning significant victories over the Romans. In general, however, when well commanded, the Roman armies were clearly superior. If the Romans never completed the conquest of Parthia or Germany, it was probably because they judged it wasn't worth adding these wild territories to an empire that was already too large.

Many factors contributed to the decline of Roman military discipline. Its extreme severity may have been one of them. In the days of Roman greatness, when no enemy seemed capable of challenging them, the heavy armor was laid aside as an unnecessary burden and the grueling training exercises were dropped as needlessly exhausting. Under the later emperors, the standing armies — particularly those guarding the frontiers along the Danube — became dangerous to their masters, frequently setting up their own generals as emperor. To make them less threatening, Diocletian (or possibly Constantine) first withdrew them from the frontier, where they had been stationed in large concentrations of two or three legions, and dispersed them in small detachments through provincial towns. These small bodies of soldiers, quartered in trading and manufacturing towns and seldom moved, themselves became tradesmen, craftsmen, and manufacturers. The civilian character came to predominate over the military one, and the standing armies of Rome gradually degenerated into a corrupt, neglected, and undisciplined militia — incapable of resisting the invasions of the Germanic and Central Asian peoples who soon poured into the western empire. Only by hiring the militia of one barbarian nation to fight another could the later emperors defend themselves for a time.

The fall of the Western Roman Empire is the third great revolution in human affairs of which ancient history gives us a clear account. It was brought about by the irresistible superiority that the militia of a less developed nation holds over that of a civilized one — that the militia of a pastoral people holds over that of agricultural workers, craftsmen, and manufacturers. The victories won by militias have generally been not over standing armies but over other, less trained militias. The Greek militia's victories over the Persian Empire were of this kind. So were the later victories of the Swiss militia over the Austrians and Burgundians.

The military force of the Germanic and Central Asian peoples who settled on the ruins of the Western Empire continued for some time to be the same kind as in their original homelands: a militia of herders and farmers who served in war under the same leaders they obeyed in peace. It was therefore reasonably well trained and disciplined. But as industry and the arts advanced, the authority of the chiefs gradually weakened, and ordinary people had less time for military exercises. Both the discipline and the training of the feudal militia deteriorated, and standing armies were gradually introduced to replace them. Once one civilized nation adopted a standing army, all its neighbors had to follow. They quickly found that their safety depended on it and that their own militia was completely incapable of resisting such a force.

The soldiers of a standing army, even if they've never seen an enemy, have frequently shown all the courage of veterans — appearing battle-ready the moment they took the field against the most hardened troops. In 1756, when Russia marched its army into Poland, the Russian soldiers' valor appeared equal to that of the Prussians, then considered the toughest veterans in Europe — even though Russia had enjoyed deep peace for nearly twenty years and could have had very few soldiers who'd ever faced an enemy. When the war with Spain broke out in 1739, England had enjoyed peace for about twenty-eight years. The valor of English soldiers, far from being corrupted by that long peace, was never more distinguished than in the attack on Cartagena — the first unfortunate episode of that unfortunate war. In a long peace, generals may sometimes forget their skill. But where a well-regulated standing army has been maintained, the soldiers never seem to forget their courage.

When a civilized nation depends on a militia for its defense, it is constantly vulnerable to conquest by any warlike neighbor. The frequent conquests of civilized Asian nations by the Tartars demonstrate convincingly the natural superiority that a less developed nation's militia holds over a civilized nation's militia. A well-regulated standing army is superior to any militia. Such an army, being best maintained by a wealthy and civilized nation, can alone defend such a nation against invasion by a poorer, more warlike neighbor. Only through a standing army can the civilization of any country be sustained or even preserved for any length of time.

Just as only a standing army can defend a civilized country, it is also only through a standing army that a less developed country can be rapidly civilized. A standing army establishes, with irresistible force, the law of the government throughout the most remote provinces and maintains some degree of regular administration in territories that couldn't otherwise support any. Anyone who carefully examines the reforms Peter the Great introduced into Russia will find that they virtually all come down to establishing a well-regulated standing army. That army was the instrument that carried out and sustained all his other reforms. The degree of order and internal peace that Russia has enjoyed ever since is entirely due to the influence of that army.

People with republican principles have been suspicious of standing armies as threats to liberty. This concern is certainly valid wherever the commanding general and principal officers don't have a strong personal stake in preserving the constitutional order. Caesar's standing army destroyed the Roman Republic. Cromwell's standing army expelled the Long Parliament. But where the ruler himself serves as commander-in-chief, and where the leading nobles and gentlemen of the country serve as the army's chief officers — where the military force is under the command of those who have the greatest personal interest in supporting the civil authority, because they hold the largest share of it — a standing army can never threaten liberty. On the contrary, it can actually support it.

The security a standing army gives the ruler makes unnecessary that anxious suspicion which, in some modern republics, seems to watch over every citizen's slightest action and to be constantly ready to disturb the peace. Where the government's security, though backed by the country's leading citizens, is threatened by every popular disturbance — where a small riot can trigger a revolution in a few hours — the full force of government must be used to suppress every complaint and every murmur. But a ruler who feels himself supported not only by the natural aristocracy but by a well-regulated standing army can safely ignore the rudest, most groundless, and most outrageous protests. His confidence in his own security naturally inclines him to do so. The degree of liberty that borders on anarchy can be tolerated only in countries where the ruler is secured by a standing army. Only in such countries is it unnecessary to give the government any discretionary power to suppress even the most irresponsible excesses of this unruly liberty.

The first duty of government, then — defending society from the violence and aggression of other nations — grows steadily more expensive as society advances in civilization. The military force that originally cost the government nothing, in peace or war, must eventually be maintained at public expense — first in wartime, and later in peacetime as well.

The great transformation in warfare brought about by the invention of firearms has raised the expense still further — both for training soldiers in peacetime and employing them in war. Weapons and ammunition have become more expensive. A musket costs more than a javelin or a bow and arrows. A cannon or mortar costs more than an ancient catapult. The gunpowder spent in a modern military review is gone forever and represents a significant expense. Ancient javelins and arrows could easily be picked up and reused, and they cost very little to begin with. Cannon and mortars are not only more expensive but far heavier than ancient siege weapons, requiring greater expense both to prepare and to transport. And since modern artillery is so vastly superior to ancient siege weapons, fortifying a town to withstand even a few weeks of modern bombardment has become far more difficult and therefore far more expensive. In modern times, many factors make national defense more expensive. The unavoidable effects of economic progress have been greatly amplified by a revolution in military technology that a single accident — the invention of gunpowder — seems to have set in motion.

In modern warfare, the great expense of firearms gives an obvious advantage to the nation that can best afford it — and therefore to a wealthy, civilized nation over a poor, less developed one. In ancient times, the wealthy and civilized found it hard to defend themselves against the poor and warlike. In modern times, the poor and undeveloped find it hard to defend themselves against the wealthy and civilized. The invention of firearms — which at first glance seems so destructive — is actually favorable to both the permanence and the expansion of civilization.

The Expense of Justice

The second duty of government — protecting, as far as possible, every member of society from the injustice or oppression of every other member, that is, the duty of establishing a reliable system of justice — also requires very different levels of expense at different stages of society.

Among hunter-gatherer peoples, where there is barely any property — or at least none worth more than two or three days' labor — there is rarely any established authority or any regular administration of justice. People who have no property can really only injure each other in their bodies or their reputations. When one person kills, wounds, beats, or slanders another, the victim suffers, but the attacker gains nothing. It's different with injuries to property: the gain to the thief is often equal to the loss of the victim.

Envy, malice, and resentment are the only emotions that can drive a person to attack another's body or reputation. But most people aren't frequently driven by these emotions, and even the worst people feel them only occasionally. Since acting on them — however satisfying it may be to certain temperaments — brings no real or lasting advantage, most people are restrained by common sense. Human beings can live together with some reasonable degree of security even without a civil government to protect them from these kinds of attacks.

But greed and ambition in the rich, and in the poor the hatred of work and the love of immediate comfort and pleasure — these are the emotions that drive people to steal. These are far more constant in their operation and far more universal in their influence. Wherever there is substantial property, there is substantial inequality. For every very rich person, there must be at least five hundred poor ones. The prosperity of the few implies the poverty of the many. The wealth of the rich provokes the resentment of the poor, who are often driven by need and motivated by envy to seize what others have.

It is only under the protection of the law that the owner of valuable property — wealth accumulated over many years, perhaps over many generations — can sleep a single night in peace. He is surrounded at all times by unknown enemies whom he never provoked and can never appease, and from whose attacks he can be protected only by the strong arm of the law, constantly raised to punish. The accumulation of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none worth more than two or three days' labor, civil government is not so necessary.

Civil government implies a certain hierarchy. But just as the need for government gradually grows with the accumulation of valuable property, so the principal forces that naturally create hierarchy gradually grow with the growth of that property.

The causes or circumstances that naturally establish hierarchy — that give some people superiority over others before any formal institutions exist — seem to be four in number.

The first is the superiority of personal qualities: physical strength, attractiveness, and agility; and mental qualities like wisdom, virtue, prudence, justice, courage, and self-control. Physical qualities alone, without mental ones, give little authority at any stage of society. A man would have to be very strong indeed to force two weaker men to obey him through sheer physical power. Mental qualities alone, however, can grant enormous authority. But they are invisible qualities — always debatable and usually debated. No society, whether primitive or civilized, has ever found it practical to rank people by these invisible qualities. Instead, they rank by something more visible and measurable.

The second cause is the superiority of age. An old man — provided he isn't so far advanced as to seem senile — is everywhere more respected than a young man of equal rank, fortune, and ability. Among hunter-gatherer peoples, such as the native tribes of North America, age is the sole basis of rank. "Father" is the term for a superior, "brother" for an equal, "son" for an inferior. In the wealthiest and most civilized nations, age still determines precedence among people who are equal in all other respects. Among brothers and sisters, the eldest always takes precedence. In the inheritance of property that can't be divided — a title of nobility, for instance — everything generally goes to the eldest. Age is a visible, measurable quality that admits of no dispute.

The third cause is the superiority of fortune. The authority that wealth confers is great in every era, but perhaps greatest in the earliest stage of society that allows for significant inequality. A Tartar chief whose growing herds and flocks are enough to support a thousand men has no way to use that surplus except by feeding a thousand men. The primitive state of his society offers him no manufactured luxuries, no trinkets or baubles, for which he could exchange his surplus produce. The thousand men he feeds, depending entirely on him for their survival, must obey his orders in war and submit to his authority in peace. He is necessarily both their general and their judge, and his power is simply the natural result of his superior wealth.

In a wealthy, civilized society, a man may possess a much greater fortune and yet not be able to command a dozen people. Though his estate may produce enough to feed over a thousand people — and may actually do so — since those people pay for everything they get from him and he gives almost nothing without receiving its equivalent in return, hardly anyone considers himself dependent on him. His authority extends only over a few household servants.

The power of wealth, however, remains very great even in a civilized society. That it far exceeds the authority of either age or personal merit has been the constant complaint of every era that allows significant inequality. In the first stage of society — hunting — there is no significant inequality. Universal poverty creates universal equality, and the only — feeble — bases of authority are age and personal qualities. There is therefore little or no authority or subordination at this stage.

The second stage — pastoral society — allows for very great inequalities of fortune, and in no era does wealth confer greater authority. There is no period when hierarchy and subordination are more perfectly established. The authority of an Arabian sheikh is very great; that of a Tartar khan is essentially absolute.

The fourth cause is the superiority of birth. Superior birth implies an old family tradition of superior wealth. All families are equally ancient — the ancestors of a prince, though better known, can't be more numerous than those of a beggar. Ancient family prestige everywhere means the antiquity of either wealth or greatness — a greatness usually either founded on wealth or accompanied by it. Newly acquired greatness is everywhere less respected than old greatness. The hatred of usurpers and the love of an ancient royal family are, to a great extent, rooted in the natural contempt people feel for the newly powerful and the natural reverence they feel for the long-established. Just as a military officer willingly submits to a superior who has always commanded him but is outraged when a junior is promoted over his head, people easily submit to a family they and their ancestors have always submitted to — but burn with indignation when a family they've never acknowledged as superior claims dominion over them.

The distinction of birth, being a product of prior inequality of wealth, has no place among hunter-gatherer peoples, where everyone is roughly equal in fortune and therefore roughly equal in birth. The son of a wise and brave man may be somewhat more respected than someone of equal merit who happens to be the son of a fool or a coward. But the difference won't be very great. I don't believe there has ever been a great family in the world whose prestige was entirely derived from an inherited tradition of wisdom and virtue.

The distinction of birth always exists among pastoral peoples. Such peoples are strangers to luxury, and great wealth can rarely be squandered among them through reckless spending. No peoples, therefore, have more families revered for their descent from long lines of illustrious ancestors — because among no peoples is wealth more likely to stay in the same family for generations.

Birth and fortune are clearly the two factors that most set one person above another. They are the two great sources of personal distinction, and therefore the principal causes that naturally establish authority and hierarchy. Among pastoral peoples, both operate at full strength. The great herdsman — respected for his wealth and the large number of people who depend on him, and revered for the nobility of his birth and the ancient prestige of his family — has a natural authority over all the lesser herdsmen of his clan. He can command the combined strength of more people than any of them. His military power is greater than theirs. In wartime, everyone naturally rallies under his banner rather than anyone else's. His birth and fortune thus naturally give him a kind of executive power.

By commanding the combined strength of more people than anyone else, he is also best able to force anyone who has wronged another to make amends. He is the person to whom the weak naturally look for protection. People naturally bring their complaints to him, and even the person complained against submits to his judgment more easily than to anyone else's. His birth and fortune thus naturally give him a kind of judicial authority as well.

It is in the pastoral stage — the second period of society — that inequality of fortune first takes hold and creates a degree of authority and hierarchy that couldn't possibly exist before. It thereby introduces some degree of the civil government that is absolutely necessary for its own preservation. And it seems to do this naturally, even before anyone consciously recognizes the necessity. The conscious recognition of that necessity does, of course, eventually contribute greatly to maintaining and reinforcing the system. The rich, in particular, are necessarily invested in preserving the order of things that alone secures their advantages. People of lesser wealth cooperate in defending the property of the very wealthy, so that the very wealthy will cooperate in defending theirs. The lesser herdsmen feel that the security of their own herds depends on the security of the great herdsman's herds — that the maintenance of their lesser authority depends on his greater authority, and that their power over their own subordinates depends on their subordination to him. They form a kind of minor nobility, invested in defending the property and supporting the authority of their own local leader, so that he can defend their property and support their authority.

Civil government, insofar as it is established to protect property, is in reality established for the defense of the rich against the poor — or of those who have some property against those who have none at all.

The judicial authority of such a ruler, however, far from being a cost, was for a long time actually a source of revenue. People who sought justice were always willing to pay for it, and a gift always accompanied a petition. Once the ruler's authority was well established, the guilty party — beyond the compensation he owed the victim — was also required to pay a fine to the ruler. He had caused trouble, disturbed the peace, and for these offenses a monetary penalty was considered appropriate.

In the Tartar governments of Asia, in the European governments founded by the Germanic and Central Asian peoples who overthrew the Roman Empire, the administration of justice was a considerable source of revenue — both for the ruler and for the lesser lords who exercised jurisdiction over particular clans or territories. Originally both the ruler and the lesser lords administered justice in person. Eventually they all found it convenient to delegate the job to a deputy — a bailiff or judge. But this deputy was still required to account to his superior for the profits of the jurisdiction.

Anyone who reads the instructions given to the circuit judges in the time of Henry II will see clearly that those judges were essentially traveling revenue agents, sent around the country to collect certain branches of the king's income. In those days, the administration of justice didn't just produce revenue for the ruler — generating that revenue seems to have been one of the main reasons for administering justice at all.

This system of making justice serve the purposes of revenue was inevitably prone to serious abuses. The person who came seeking justice with a large gift was likely to get more than justice, while the person who came with a small one was likely to get less. Justice might be deliberately delayed so that the gift could be repeated. The fine imposed on the guilty party might create a strong incentive to find him guilty even when he wasn't. That such abuses were common is confirmed by the ancient history of every country in Europe.

When the ruler administered justice personally, it was nearly impossible to get any remedy for his abuses — no one was powerful enough to hold him accountable. When justice was delegated to a bailiff, some remedy was sometimes available. If the bailiff acted unjustly for his own benefit, the ruler himself might be willing to punish him or make him pay compensation. But if the bailiff acted unjustly for the ruler's benefit — to curry favor with the person who appointed and promoted him — getting a remedy was usually just as impossible as if the ruler had done it himself. In all primitive governments — particularly in the ancient European governments founded on the ruins of the Roman Empire — the administration of justice was extremely corrupt for a very long time. It was far from fair and impartial even under the best monarchs, and completely debased under the worst.

Among pastoral peoples, the ruler is just the wealthiest herdsman of the clan and is supported the same way as his subjects — by the growth of his own herds and flocks. Among agricultural peoples only recently emerged from the pastoral stage — like the Greek tribes around the time of the Trojan War, or the Germanic ancestors of the European nations when they first settled on the ruins of the Western Empire — the ruler is simply the largest landowner and is supported by the revenue of his own private estate, what in medieval Europe was called the "crown lands" or "demesne." His subjects normally contribute nothing to his support, except when they need his authority to protect them from the oppression of fellow subjects. The gifts they offer on such occasions constitute his entire ordinary revenue — the full sum of benefits, except perhaps in the most extraordinary emergencies, that he derives from his rule.

When Agamemnon, in Homer, offers Achilles the sovereignty of seven Greek cities as a friendship gift, the sole advantage he mentions is that the people will honor him with presents. As long as such presents — the fees of justice, the emoluments of the courts — were the ruler's entire ordinary revenue, it couldn't reasonably be proposed that he give them up entirely. It could be, and frequently was, proposed that he regulate and fix them at specific amounts. But after they'd been regulated, how to prevent an all-powerful ruler from exceeding those limits was still extremely difficult — not to say impossible. Under these conditions, the corruption of justice that naturally resulted from the arbitrary and uncertain nature of these payments was nearly impossible to remedy.

But when, for various reasons — chiefly the continually increasing expense of national defense — the ruler's private estate became totally insufficient to fund the government, and when the people had to start contributing through taxes for their own security, it became standard practice to stipulate that no payment for the administration of justice should be accepted by the ruler, his bailiffs, or his judges under any circumstances. These payments, it was assumed, could be abolished entirely more easily than they could be effectively regulated. Fixed salaries were established for judges, intended to compensate them for the loss of whatever share they'd had in the old fees. Taxes more than compensated the ruler for his loss. Justice was then said to be administered for free.

Justice, however, has never truly been administered for free in any country. Lawyers and attorneys, at least, must always be paid by the parties. If they weren't, they'd do their jobs even worse than they currently do. The fees paid annually to lawyers and attorneys in any court amount to far more than the judges' salaries. The fact that judges' salaries are paid by the government doesn't significantly reduce the cost of a lawsuit. But the point of paying judges fixed salaries wasn't so much to reduce costs as to prevent the corruption of justice.

The office of judge is so inherently honorable that people are willing to accept it even with very modest compensation. The lower office of justice of the peace, though it involves considerable work and usually no pay at all, is an object of ambition for most country gentlemen. The total salaries of all judges, high and low, together with the entire cost of administering and executing justice — even when it's not managed with the best efficiency — makes up only a very small fraction of a government's total spending in any civilized country.

The entire cost of justice could easily be funded by court fees alone. Without exposing justice to any real danger of corruption, the government's general revenue could be relieved of this expense, small as it is. It's hard to regulate court fees effectively when someone as powerful as the ruler shares in them and draws substantial revenue from them. It's very easy when the judge is the main person who benefits. The law can readily compel a judge to follow the rules, even if it can't always compel a ruler to do so.

When court fees are precisely established, when they are paid all at once at a specific point in every case into the hands of a cashier or clerk, to be distributed in fixed proportions among the different judges after the case is decided — and not before — there seems to be no more danger of corruption than when such fees are banned altogether. These fees, without significantly increasing the cost of a lawsuit, could easily be enough to cover the entire cost of justice. By not being paid to judges until the case is resolved, they'd provide some incentive for the court to examine and decide cases promptly. In courts with multiple judges, distributing each judge's share based on the hours and days he actually spent examining the case — either in court or in committee — would provide an incentive for each individual judge to be diligent.

Public services are never performed better than when the reward comes only after the work is done and is proportional to the effort put in.

In the various French parliaments (which served as courts of law), court fees — called Epices and vacations — constituted the vast majority of judges' compensation. After all deductions, the net salary paid by the crown to a judge in the Parliament of Toulouse — France's second-ranking court — amounted to only about 150 livres, roughly six pounds eleven shillings sterling per year. About seven years ago, that was the standard yearly wage for a common footman in the same city. The distribution of these fees was based on the judges' diligence. A hardworking judge earned a comfortable, though moderate, income. A lazy one got little more than his salary. These French courts may not have been ideal in every respect, but they were never accused — never even suspected — of corruption.

Court fees seem originally to have been the principal revenue of the different courts of justice in England. Each court tried to attract as much business as it could and was therefore willing to hear many cases that weren't originally within its jurisdiction. The Court of King's Bench, established for criminal cases only, took on civil suits by having the plaintiff claim the defendant's failure to do him justice amounted to some kind of criminal offense. The Court of Exchequer, established solely to collect the king's revenue and enforce debts owed to the crown, took on all other contract disputes by having the plaintiff claim he couldn't pay the king because the defendant wouldn't pay him.

Through such legal fictions, parties often got to choose which court would hear their case, and each court competed for business by trying to offer faster and fairer justice. The excellent modern organization of the English courts was probably shaped, in large part, by this competition among their original judges — each trying to offer the quickest and most effective remedy the law allowed.

Originally, the courts of law awarded only monetary damages for breach of contract. The Court of Chancery, as a court of equity, first took it upon itself to enforce the specific performance of agreements — actually making people do what they'd promised. When the breach consisted of nonpayment of money, ordering payment was equivalent to specific performance, so the regular courts' remedy was sufficient. But it wasn't sufficient in other cases. When a tenant sued his landlord for unjustly evicting him, the monetary damages the regular courts could award were nothing compared to actual possession of the land. Such cases all went to Chancery, much to the financial loss of the other courts. To win these cases back, the regular courts reportedly invented the artificial legal device of the "writ of ejectment" — the most effective remedy for unjust eviction.

A stamp duty on the proceedings of each court, collected by that court and used to pay its judges and officers, might provide enough revenue to fund the entire administration of justice without burdening the government's general revenue. The judges might, admittedly, be tempted to multiply proceedings unnecessarily to increase the revenue from such a duty. The custom in modern Europe of paying lawyers and court clerks by the page — with each page required to have so many lines and each line so many words — has already led lawyers and clerks to pad their documents with unnecessary verbiage, corrupting the legal language of probably every court in Europe. A similar temptation might produce similar corruption in court procedures.

But whether the justice system pays for itself or whether judges receive fixed salaries from some other source, it doesn't seem necessary that the person or persons holding executive power should manage the fund or pay those salaries. The fund could come from the rent of landed estates, with each court managing its own estate. It could even come from the interest on invested money, with the investment managed by the court it supports. A portion — though a small one — of the salaries of Scotland's Court of Session judges actually does come from the interest on an invested sum. The instability inherent in such a fund, however, seems to make it an unsuitable basis for an institution that should last forever.

The separation of judicial power from executive power seems to have originally arisen from the growing complexity of society as it developed. The administration of justice became so demanding that it required the full attention of the people responsible for it. The person holding executive power, lacking the time to decide private cases himself, appointed a deputy to do it. As Rome grew, the consul — too busy with affairs of state — appointed a praetor to handle justice in his place. As the European monarchies that arose from the ruins of the Roman Empire developed, both rulers and great lords came to see administering justice as too tedious and too undignified to handle personally. They universally delegated it to deputies, bailiffs, and judges.

When judicial and executive power are combined in one authority, it is almost inevitable that justice will frequently be sacrificed to what is commonly called "politics." The people entrusted with great affairs of state may, even without any corrupt intentions, sometimes think it necessary to sacrifice an individual's rights to those interests. But the impartial administration of justice is the foundation of every individual's liberty — the thing that gives every person a sense of security. To make every individual feel truly secure in the possession of every right that belongs to him, it is not enough for the judiciary to be separated from the executive. It must also be made as independent as possible from that power. Judges should not be removable at the executive's whim. The regular payment of their salaries should not depend on the executive's goodwill or even on its budgeting decisions.

The Expense of Public Works and Public Institutions

The third and final duty of government is building and maintaining those public institutions and public works that may be enormously beneficial to society as a whole, but whose profits could never repay the expense for any individual or small group. No individual or small group can therefore be expected to build or maintain them. The cost of performing this duty, like the others, varies greatly at different stages of society.

After the public institutions needed for defense and the administration of justice — both already discussed — the main remaining public works are of two kinds: those that facilitate the nation's commerce, and those that promote the education of the people. The educational institutions are themselves of two kinds: those for educating the young, and those for instructing people of all ages. The question of how to most properly fund these different public works and institutions will divide this third part of the chapter into three sections.

Section I

Public Works and Institutions for Facilitating Commerce

First: Those Necessary for Facilitating Commerce in General

That building and maintaining the public works which facilitate a country's commerce — good roads, bridges, navigable canals, harbors, and the like — must cost very different amounts at different stages of development is obvious without any proof. The cost of making and maintaining a country's public roads must increase with the annual output of its economy — that is, with the quantity and weight of goods that need to be transported on those roads. A bridge's strength must suit the number and weight of the vehicles likely to cross it. The depth and water supply of a navigable canal must match the number and size of the boats likely to use it. A harbor's capacity must match the number of ships likely to take shelter in it.

It doesn't seem necessary for the expense of these public works to come from the government's general tax revenue. Most of them can easily be managed in a way that generates enough of their own revenue to cover their costs, without burdening the general public.

A highway, a bridge, or a navigable canal can usually be both built and maintained by a modest toll on the vehicles that use them. A harbor can be funded by a moderate duty on the tonnage of ships that load or unload there. The mint — another institution for facilitating commerce — not only covers its own costs in many countries but actually generates a small profit for the government. The post office — another such institution — not only covers its own costs in almost every country but generates very substantial revenue.

When the vehicles crossing a highway or bridge, or the boats using a navigable canal, pay tolls in proportion to their weight or tonnage, they're paying for the maintenance of these public works in exact proportion to the wear and tear they cause. It would be hard to invent a fairer way to maintain such works. This toll, though initially paid by the carrier, is ultimately paid by the consumer — it's always included in the price of the goods. But since public works so dramatically reduce the cost of transportation, goods end up cheaper for the consumer despite the toll. The price isn't raised by the toll as much as it's lowered by the cheaper transport. The person who ultimately pays this toll gains more from the service than he loses from the payment. His payment is exactly proportional to his benefit. It's really just a portion of his gain that he gives up in order to keep the rest. It would be hard to imagine a fairer way to raise revenue.

When the toll on luxury vehicles — coaches, post-chaises, and the like — is set somewhat higher, relative to their weight, than the toll on vehicles carrying necessities like carts and wagons, then the leisure and vanity of the rich are made to contribute, in a very painless way, to helping the poor by making the transport of heavy goods cheaper throughout the country.

When roads, bridges, and canals are built and maintained by the commerce that uses them, they can only be built where that commerce needs them — and therefore only where it makes sense to build them. Their cost, scale, and grandeur must suit what that commerce can afford to pay for, and therefore must be appropriate. A magnificent highway can't be built through an empty wilderness with little or no commerce — or built merely because it happens to lead to the country estate of the provincial governor or some influential lord the governor wants to impress. A great bridge can't be thrown across a river where nobody crosses — or built merely to enhance the view from the windows of some nearby palace. Things like this do sometimes happen in countries where such works are funded by revenues other than what they generate themselves.

In several parts of Europe, the toll or lock-duty on a canal is the property of private individuals, whose financial interest obliges them to keep the canal in good repair. If they let it deteriorate, navigation stops entirely, and with it goes all their toll revenue. If those tolls were managed by public commissioners with no personal financial stake, they might be less attentive to maintenance.

The Canal of Languedoc cost the king of France and the province upwards of thirteen million livres — more than nine hundred thousand pounds sterling at the exchange rates of the late seventeenth century. When this great project was finished, the most effective way to keep it in constant repair, it turned out, was to grant the tolls to Riquet, the engineer who designed and directed the work. Those tolls now constitute a very large estate for the various branches of his family, who therefore have a powerful incentive to keep the canal in constant repair. If the tolls had been managed by commissioners with no such incentive, the money might have been wasted on decorative and unnecessary projects while the most essential parts of the canal fell into ruin.

Tolls for maintaining highways, however, can't safely be made the property of private individuals. A highway, even when completely neglected, doesn't become entirely impassable — but a canal does. The owners of highway tolls could therefore neglect the road entirely while continuing to collect nearly the same tolls. Highway tolls, accordingly, should be managed by commissioners or trustees.

In Great Britain, the abuses committed by highway trustees have been justly criticized. At many toll gates, the money collected is reportedly more than double what's needed to do the work properly — and the work is often done sloppily or not at all. But the system of maintaining roads through tolls is relatively new. We shouldn't be surprised that it hasn't yet reached its full potential. If unsuitable people are frequently appointed as trustees, and if proper oversight and accounting haven't yet been established to control their conduct and reduce tolls to what's actually needed — well, the system's newness both explains and excuses these defects, which, through the wisdom of Parliament, can mostly be gradually fixed over time.

The money collected at Britain's various toll roads is supposed to exceed what's needed for road repair by so much that the savings — with proper management — have been considered by some government ministers as a major resource that might someday be tapped for national purposes. The government, it has been argued, could take over the toll roads itself and employ soldiers — who would work for a small addition to their pay — to keep the roads in good order far more cheaply than trustees can, since trustees have no workers to employ except people who depend entirely on their wages. A large revenue — half a million pounds, perhaps — could be raised this way, it was claimed, without placing any new burden on the people. The toll roads would contribute to general government expenses just as the post office already does.

That a considerable revenue could be raised this way, I have no doubt — though probably not nearly as much as this plan's promoters imagined. But the plan itself seems open to several very important objections.

First, if toll-road revenue were ever treated as a general government resource, tolls would certainly be raised whenever government expenses required it. In accordance with Britain's usual fiscal habits, they would probably be raised very frequently and very fast. The ease of extracting large revenues this way would tempt the government to keep going back to the well. Even if it's doubtful whether half a million could be saved from current tolls, there's no doubt that a million could be saved if tolls were doubled, and perhaps two million if they were tripled. This revenue could be collected without hiring a single new official. But tolls that kept going up, instead of facilitating domestic commerce as they do now, would soon become a serious obstacle to it. The cost of transporting all heavy goods across the country would rise so much — and the market for those goods would shrink so much — that their production would be largely discouraged and some of the most important domestic industries destroyed altogether.

Second, a weight-based tax on vehicles, while perfectly fair when used solely for road maintenance, becomes very unfair when used for any other purpose. When applied to road maintenance, each vehicle pays exactly for the wear and tear it causes. When applied to general government expenses, each vehicle pays for more than its wear and tear. Since the toll raises prices in proportion to weight rather than value, it falls mainly on consumers of cheap, bulky goods — not on consumers of precious, lightweight items. Whatever government expense this tax might be intended to fund, the burden would fall primarily on the poor rather than the rich — on those least able to bear it rather than those most able.

Third, if the government ever neglected road repairs, it would be even harder than it currently is to force proper use of the toll revenue. A large amount could be collected from the public without any of it being spent on the only purpose for which such a toll should ever be collected. If the poverty and insignificance of current toll-road trustees sometimes makes it difficult to compel them to do their job, imagine how much harder it would be if the government — with all its wealth and power — were the one neglecting the roads.

In France, the funds for road repair are under the direct control of the executive branch. These funds consist partly of a certain number of days of forced labor — the corvee — that the rural population throughout most of Europe has traditionally been required to contribute to road repair, and partly of whatever portion of general tax revenue the king chooses to allocate from his other expenses.

Under France's old system, the forced labor of the rural population was directed by local or provincial authorities that didn't report directly to the king's council. But under current practice, both the forced labor and whatever additional funding the king assigns are entirely under the control of the intendant — an official appointed and removed by the king's council, who receives orders from it and is in constant communication with it. As despotism advances, the executive power gradually absorbs every other authority in the state and takes over the management of every revenue stream intended for any public purpose.

In France, however, the great post-roads — the highways connecting the major cities — are generally kept in good condition and in some provinces are considerably better than most of England's toll roads. But what the French call the "cross-roads" — meaning the vast majority of roads in the country — are completely neglected and in many places absolutely impassable for any heavy vehicle. In some places it's even dangerous to travel on horseback, and mules are the only safe means of transport.

The proud minister of a showy court may enjoy building a magnificent highway — one that's frequently seen by the leading nobles, whose praise flatters his vanity and supports his position at court. But building a large number of small, unglamorous local works — works where nothing that can be done will look impressive or excite the slightest admiration in any traveler, and whose only recommendation is their extreme usefulness — is a task that seems far too humble and petty to deserve the attention of such an exalted official. Under such an administration, these projects are almost always completely ignored.

In China and several other Asian countries, the executive branch takes responsibility for both road repair and canal maintenance. In the instructions given to each provincial governor, these duties are reportedly always emphasized, and the central government judges his performance largely by the attention he pays to this part of his job. This branch of public administration is reportedly well managed throughout these countries, particularly in China, where the roads and especially the navigable canals are said to far exceed anything of the kind in Europe.

The accounts of these works that have reached Europe, however, have generally been written by naive and credulous travelers — frequently by unintelligent and dishonest missionaries. If they'd been examined by sharper eyes and reported by more reliable witnesses, they might not seem quite so wonderful. The account that the traveler Bernier gives of similar works in India falls far short of what other, more credulous travelers had reported.

It's also possible that in these countries, as in France, the great highways — the ones likely to be talked about at court and in the capital — are well maintained, while everything else is neglected. Moreover, in China, India, and several other Asian governments, the ruler's revenue comes almost entirely from a land tax or land-rent that rises and falls with the annual output of the land. The ruler's own financial interest is therefore directly and obviously tied to the cultivation of the land, to the size of its output, and to the value of that output. To maximize that output and its value, the ruler needs to provide the widest possible market for agricultural produce — which requires the best possible roads and canals, providing the freest, easiest, and cheapest communication between all parts of the country.

But in no part of Europe does government revenue come primarily from a land tax. In all the great European kingdoms, much of the revenue may ultimately depend on the productivity of the land, but the connection is neither so direct nor so obvious. European governments therefore don't feel the same natural incentive to promote agricultural output by maintaining good roads and canals. Even if it were true — and I have serious doubts — that in some parts of Asia the executive branch manages infrastructure reasonably well, there's not the slightest chance that it could be managed acceptably by executive power anywhere in Europe, under current conditions.

Even public works that can't generate their own revenue — but whose benefits are mostly confined to a particular place or district — are always better maintained by a local or provincial government, using local revenue, than by the national government using general tax revenue. If London's streets were lit and paved at the expense of the national treasury, would they really be as well lit and paved as they are now — or even at as low a cost? The expense, instead of being raised through a local tax on the residents of each particular street, parish, or district, would be drawn from the nation's general revenue and therefore paid through taxes on all the people of the kingdom — the vast majority of whom get no benefit whatsoever from London's street lighting and paving.

The abuses that sometimes creep into local and provincial management of local revenues, however enormous they may seem, are in reality almost always trivial compared to the abuses that routinely occur in the spending of a great empire's general revenue. And they're much easier to fix. Under the local administration of justices of the peace in Great Britain, the six days of labor the rural population is required to give for road repairs isn't always applied as wisely as it might be, but it's almost never extracted with any real cruelty or oppression.

In France, under the administration of the intendants, the work isn't always applied more wisely, and the extraction is frequently cruel and oppressive in the extreme. The corvee system, as it's called, is one of the principal instruments of tyranny by which these officials punish any parish or community that has had the misfortune of falling out of their favor.

Public Works and Institutions for Facilitating Particular Branches of Commerce

The public works and institutions discussed above are meant to facilitate commerce in general. But some particular branches of commerce require their own special institutions — which in turn require their own special and extraordinary funding.

Certain branches of trade, carried on with less developed and less stable nations, need extraordinary protection. An ordinary warehouse couldn't secure the goods of merchants trading along the west coast of Africa. To defend them, the trading post needs to be at least partially fortified. The political instability of India was supposed to make similar precautions necessary even among that mild and gentle people. It was under the pretext of protecting their people and property from violence that both the English and French East India Companies were allowed to build their first forts in that country.

Among other nations with strong governments that won't tolerate foreigners holding fortified positions within their borders, it may be necessary to station an ambassador, minister, or consul — someone who can settle disputes among his own countrymen according to their own laws, and who, in their conflicts with locals, can use his official status to intervene with more authority and provide more powerful protection than any private individual could. The interests of commerce have frequently made it necessary to station diplomats in foreign countries where neither war nor alliance would have required one. The Turkey Company's trading interests first led to the establishment of a permanent British ambassador at Constantinople. Britain's first embassies to Russia arose entirely from commercial interests.

The constant friction that these commercial interests inevitably created between the peoples of different European states probably introduced the modern custom of stationing ambassadors or ministers permanently in all neighboring countries, even in peacetime. This custom, unknown in ancient times, appears to date from the late fifteenth or early sixteenth century — that is, from the period when commerce first began expanding to most of the nations of Europe, and when governments first began paying attention to commercial interests.

It seems reasonable that the extraordinary expense of protecting any particular branch of trade should be covered by a modest tax on that branch — perhaps a fee paid by traders when they first enter it, or, more equitably, a specific duty of so many percent on the goods they import or export in that particular trade. The protection of trade in general — from pirates and raiders — is said to have originally given rise to customs duties. If it was reasonable to levy a general tax on all trade to cover the cost of protecting all trade, it should be equally reasonable to levy a specific tax on a particular branch to cover the extra cost of protecting that branch.

Protecting trade in general has always been considered part of national defense, and therefore part of the executive branch's duties. The collection and use of general customs duties have therefore always been left to that branch. But protecting any particular branch of trade is part of the general protection of trade — also the executive's duty. If nations always acted consistently, the special duties collected for special protection should also have been left to the executive branch.

But nations haven't always acted consistently. In most European commercial states, particular groups of merchants have managed to persuade the legislature to entrust them with this piece of the government's duty — along with all the powers that necessarily go with it.

These companies, though they may have been useful for first introducing some branches of trade — by making, at their own risk and expense, an experiment the state might not have thought it wise to try — have in the long run proved to be universally either burdensome or useless. They have either mismanaged the trade or restricted it.

When these companies don't trade as a single entity on a shared pool of capital but are required to admit any qualified person who pays a certain fee and agrees to follow the company's rules — with each member trading on his own capital and at his own risk — they're called "regulated companies." When they trade on a shared pool of capital, with each member sharing in the common profit or loss in proportion to his share — they're called "joint stock companies." Both types sometimes have exclusive privileges and sometimes don't.

Regulated companies resemble, in every respect, the craft guilds found in cities throughout Europe. They're a kind of enlarged monopoly of the same type. Just as no city resident can practice a guild trade without first gaining membership, in most cases no British subject can legally conduct any branch of foreign trade assigned to a regulated company without first becoming a member. The monopoly is tighter or looser depending on how hard it is to get in, and on how much power the directors have to confine most of the trade to themselves and their friends.

In the oldest regulated companies, apprenticeship rules were the same as in guilds — serving your time entitled you to membership, either for free or at a much lower fee than outsiders paid. The usual guild mentality, wherever the law doesn't restrain it, prevails in all regulated companies. When allowed to act on their natural instincts, they've always tried to limit competition to as few people as possible by loading the trade with burdensome regulations. When the law has restrained them from doing this, they've become entirely useless.

The regulated companies currently operating in Great Britain are: the ancient Merchant Adventurers (commonly called the Hamburg Company), the Russia Company, the Eastland Company, the Turkey Company, and the African Company.

The terms for joining the Hamburg Company are now said to be quite easy, and the directors either lack the power to impose burdensome restrictions on the trade or haven't recently exercised that power. This wasn't always so. Around the middle of the last century, the admission fee was fifty pounds — at one point a hundred — and the company was said to be extremely oppressive. In 1643, 1645, and 1661, the clothmakers and independent traders of western England complained to Parliament that the company was monopolizing trade and oppressing domestic manufacturing. Though these complaints produced no legislation, they probably intimidated the company enough to force reforms. Since then, there have been no further complaints.

By one act of William III, the fee for joining the Russia Company was reduced to five pounds. By an act of Charles II, the Eastland Company's fee was cut to forty shillings, while Sweden, Denmark, Norway, and all the countries north of the Baltic were exempted from the company's exclusive charter. The companies' conduct had probably prompted both these laws. Sir Josiah Child had described both them and the Hamburg Company as extremely oppressive, blaming their bad management for the poor state of trade with the countries under their respective charters. But even if these companies aren't very oppressive today, they're certainly completely useless. Being merely useless is perhaps the highest compliment that can honestly be paid to a regulated company, and all three of the companies just mentioned seem, in their current state, to deserve it.

The Turkey Company's admission fee used to be twenty-five pounds for anyone under twenty-six and fifty pounds for everyone else. Only "mere merchants" could join — a rule that excluded all shopkeepers and retailers. A company bylaw required all British goods exported to Turkey to go in the company's own ships, which always sailed from London — confining the trade to that expensive port and to traders who lived in London or nearby. Another bylaw excluded from membership anyone living within twenty miles of London who wasn't a freeman of the city — combined with the previous restriction, this effectively limited membership to freemen of London. Since the timing of loading and sailing the company's ships depended entirely on the directors, they could easily fill them with their own goods and their friends' goods, claiming that others had applied too late.

Under these conditions, this company was in every respect a rigid and oppressive monopoly. These abuses eventually led to a reform act under George II that reduced the admission fee to twenty pounds for everyone regardless of age, dropped the restriction to "mere merchants" and freemen of London, and allowed the export of any non-prohibited British goods from any British port to any port in Turkey, and the import of any non-prohibited Turkish goods — upon paying both the standard customs duties and the special duties that funded the company's necessary expenses, while submitting to the authority of the British ambassador and consuls in Turkey and to the company's properly enacted bylaws.

To prevent oppressive bylaws, the same act provided that any seven members who felt aggrieved by a bylaw enacted after the act's passage could appeal to the Board of Trade within twelve months, and seven members aggrieved by older bylaws could file a similar appeal within twelve months of the act taking effect. But one year's experience may not be enough to reveal the harmful tendencies of a particular rule. And if members discover the problem later, neither the Board of Trade nor its successor committee of the privy council can offer any remedy.

Besides, the real purpose of most bylaws — in regulated companies as in all guilds — is not so much to oppress existing members as to discourage new ones from joining. This can be accomplished not just through high fees but through many other devices. The constant aim of such companies is always to raise their own profits as high as possible — to keep the market as understocked as they can, both for the goods they export and those they import — which can only be done by restricting competition and discouraging new entrants.

A fee of twenty pounds, while it may not discourage someone planning to make the Turkey trade his career, might well discourage a speculative merchant from risking a single venture in it. In all trades, established traders — even when not formally organized — naturally combine to raise profits. The best check on excessive profits is the occasional competition of speculative outsiders willing to take a chance. The Turkey trade, though somewhat liberalized by the reform act, is still considered by many to be far from truly free. The Turkey Company pays for an ambassador and two or three consuls who, like other diplomats, should really be maintained by the state — with the trade opened to all British subjects. The company's various internal taxes could easily generate enough revenue for the state to maintain such diplomats.

Sir Josiah Child observed that regulated companies, though they'd often supported ambassadors, had never maintained forts or garrisons — while joint stock companies frequently had. This makes sense: regulated companies are much less suited for that kind of work.

First, the directors of a regulated company have no personal stake in the overall prosperity of the trade — the trade for whose sake forts and garrisons are maintained. The decline of the general trade may actually help their personal business by eliminating competitors, allowing them to buy cheaper and sell dearer. The directors of a joint stock company, by contrast, share only in the profits of the common fund they manage and have no separate private trade. Their personal interest is aligned with the prosperity of the general trade and with maintaining the forts and garrisons needed to protect it.

Second, joint stock company directors manage a large shared capital, part of which they can appropriately spend on building and maintaining forts. Regulated company directors, managing no shared capital, have only the irregular revenue from admission fees and company dues — often insufficient even with the best intentions. Maintaining an ambassador, which requires little active management and only moderate expense, is much better suited to a regulated company's capabilities.

Long after Sir Josiah Child, however, in 1750, a regulated company was established — the present Company of Merchants Trading to Africa — explicitly charged with maintaining all the British forts and garrisons between Cape Blanc and the Cape of Good Hope (later narrowed to those between Cape Rouge and the Cape of Good Hope). The act establishing this company tried to accomplish two things: first, to restrain the oppressive monopolistic instincts natural to a regulated company's directors; and second, to force them to pay attention — which doesn't come naturally to them — to maintaining forts and garrisons.

For the first objective, the admission fee was capped at forty shillings. The company was barred from trading as a corporate entity or on a joint stock, from borrowing on its corporate seal, and from imposing any restrictions on trade — which was to be freely conducted from any port by any British subject who paid the fee. Governance was vested in a committee of nine, elected annually by the company's members in London, Bristol, and Liverpool — three from each city. No committee member could serve more than three consecutive years. Any could be removed by the Board of Trade after a hearing. The committee was prohibited from exporting enslaved people from Africa or importing any African goods into Britain, though they could export British goods and supplies to Africa for maintaining the forts. Out of the money they received from the company, they were allowed up to eight hundred pounds for salaries, rent, and administrative costs. Whatever remained they could divide among themselves as compensation, however they saw fit.

Under this structure, you'd think the spirit of monopoly would have been effectively restrained. But apparently it wasn't. Although the fort at Senegal had been placed under this company, the very next year the entire coast from southern Morocco to Cape Rouge was exempted from the company's jurisdiction, placed directly under the Crown, and the trade declared free to all British subjects. The company was suspected of restricting trade and establishing some kind of improper monopoly. Under the regulations of the original act, it's hard to see how they could have done this. But in the published parliamentary debates — not always the most reliable records — they were accused of it. Since all nine committee members were merchants, and all the company's governors and agents in the various forts were dependent on them, it's not unlikely that those agents gave special attention to the committee members' shipping and trade commissions — creating a de facto monopoly.

For the second objective — maintaining forts and garrisons — Parliament annually allotted roughly thirteen thousand pounds. The committee was required to file an annual accounting with a specific treasury official. But Parliament, which pays so little attention to how it spends millions, is unlikely to scrutinize thirteen thousand pounds a year. The treasury official, given his training, probably wasn't deeply expert in the proper expense of forts. Royal Navy captains or other commissioned officers appointed by the Admiralty could inspect the forts and report to that board, but the Admiralty had no direct authority over the committee or power to discipline anyone whose conduct it might investigate. And naval officers aren't necessarily experts in fortification.

Removal from an office that can be held for only three years and that pays almost nothing doesn't seem like a punishment frightening enough to compel continual, careful attention to a job that brings no other personal benefit. The committee was accused of shipping bricks and stones all the way from England for repairing Cape Coast Castle in Guinea — a project for which Parliament had several times granted special funding. These materials, shipped on such a long voyage, were reportedly of such poor quality that the walls repaired with them had to be rebuilt from scratch.

The forts north of Cape Rouge are not only maintained at state expense but under the direct management of the executive branch. Why those south of that cape — also maintained at least partly at state expense — should be under a different management is hard to fathom. The protection of Mediterranean trade was supposedly the original purpose of the garrisons at Gibraltar and Minorca, and their management has always — quite properly — been entrusted to the executive branch, not to the Turkey Company. Maintaining the extent of its domain is a matter of pride for the executive, so it's not likely to neglect that domain's defense. Gibraltar and Minorca have never been neglected. Though Minorca has been captured twice and is now probably lost forever, that loss was never blamed on executive neglect.

I wouldn't, however, want to suggest that either of these expensive garrisons was ever, even slightly, necessary for the purpose supposedly justifying them. Their seizure from Spain probably served no real purpose except to alienate England from its natural ally, the King of Spain, and to unite the two main branches of the Bourbon dynasty in a tighter and more lasting alliance than blood ties alone could ever have created.

Joint stock companies, established by royal charter or act of Parliament, differ from regulated companies — and from private partnerships — in several important respects.

First, in a private partnership, no partner can transfer his share to someone else or bring in a new partner without the company's consent. But any partner can, with proper notice, withdraw and demand his share of the common capital. In a joint stock company, the reverse is true: no member can demand his share back from the company, but any member can sell his share to anyone without the company's consent — thereby introducing a new member. The value of a share is whatever it fetches on the market, which may be more or less, in any proportion, than the original amount credited to the owner in the company's books.

Second, in a private partnership, each partner is liable for the company's debts to the full extent of his personal fortune. In a joint stock company, each member's liability is limited to the value of his shares.

A joint stock company's operations are always managed by a board of directors. This board is often subject to oversight by a general meeting of shareholders. But most shareholders have little understanding of the company's business, and when they're not caught up in internal politics, they don't trouble themselves about it. They contentedly accept whatever dividend the directors choose to declare, half-yearly or annually.

This total exemption from trouble and from risk beyond a limited amount encourages many people to invest in joint stock companies who would never risk their fortunes in a private partnership. Such companies therefore attract far more capital than any private firm can. The South Sea Company's trading capital at one point exceeded thirty-three million eight hundred thousand pounds. The Bank of England's capital currently stands at ten million seven hundred and eighty thousand pounds.

The directors of such companies, however, manage other people's money rather than their own. You can't really expect them to watch over it with the same anxious care that partners in a private firm watch over theirs. Like the servants of a wealthy man, they tend to consider attention to small details beneath their dignity and easily excuse themselves from it. Negligence and waste, therefore, must always prevail to some degree in managing such companies' affairs. This is why joint stock companies for foreign trade have rarely been able to compete with private traders. They have accordingly almost never succeeded without an exclusive monopoly — and have frequently failed even with one. Without a monopoly, they've typically mismanaged the trade. With a monopoly, they've both mismanaged and restricted it.

The Royal African Company — predecessor of the current African Company — had an exclusive charter, but since that charter wasn't confirmed by Parliament, the trade was opened to all British subjects soon after the Glorious Revolution of 1688 through the Declaration of Rights. The Hudson's Bay Company is in the same legal position — its exclusive charter has never been confirmed by Parliament. The South Sea Company, while it remained a trading company, held an exclusive privilege confirmed by Parliament, as does the current United Company of Merchants Trading to the East Indies.

The Royal African Company soon found it couldn't compete with private traders — whom, despite the Declaration of Rights, it continued for some time to call "interlopers" and persecute. In 1698, private traders were subjected to a ten percent duty on most branches of their trade, meant to fund the company's forts. But even with this heavy handicap, the company still couldn't compete. Its capital and credit steadily declined. By 1712, its debts had grown so large that a special act of Parliament was needed to protect both the company and its creditors. In 1730, its affairs were in such disorder that it was completely unable to maintain its forts — the sole purpose and justification for its existence. From then until its final dissolution, Parliament had to provide an annual grant of ten thousand pounds for that purpose. In 1732, after losing money for years on the business of shipping enslaved people to the West Indies, the company gave it up entirely and tried trading for gold dust, ivory, and dyes in Africa's interior. But this more modest trade was no more successful. The company's affairs continued to deteriorate until it was finally dissolved by act of Parliament as a total bankrupt, with its forts transferred to the current regulated African Company. Before the Royal African Company, three other joint stock companies had been established successively for the African trade. All failed equally. All had exclusive charters which, though not confirmed by Parliament, were at that time considered to convey genuine monopoly rights.

The Hudson's Bay Company had been more fortunate than the Royal African Company — at least before its recent wartime setbacks. Its required expenses are much smaller. The total staff at its various posts — which it grandly calls "forts" — reportedly doesn't exceed a hundred and twenty people. This is enough, however, to prepare in advance the cargo of furs and other goods for loading onto ships, which because of ice can rarely stay in those waters more than six to eight weeks. The advantage of having cargo ready and waiting couldn't be matched by private traders for several years, and without it there seems to be no way to trade in Hudson Bay. The company's modest capital — reportedly not exceeding a hundred and ten thousand pounds — may also be enough to dominate the entire trade and surplus production of the vast but sparsely populated territory covered by its charter. No private traders have ever tried to compete. So the company has always enjoyed a monopoly in practice, if not necessarily in law.

Beyond all this, the company's modest capital is said to be divided among a very small number of shareholders. A joint stock company with few shareholders and modest capital closely resembles a private partnership and can achieve nearly the same level of vigilance and attention. It's no surprise, then, that the Hudson's Bay Company managed to conduct its trade with considerable success before the recent war. But its profits probably weren't as spectacular as some commentators imagined. A more sober and judicious writer, Mr. Anderson, author of the Historical and Chronological Deduction of Commerce, rightly observes that examining the company's own export and import figures — and making proper allowances for its unusual risks and expenses — suggests its profits were nothing to envy and probably didn't much exceed the ordinary rate of return in competitive trades.

The South Sea Company never had forts or garrisons to maintain, so it was spared that expense — a major burden for other trading companies. But it had an immense capital divided among an immense number of shareholders. You'd naturally expect folly, negligence, and waste to pervade its entire management. The corruption and extravagance of its stock-market schemes are well known, and explaining them would be off-topic here. Its actual trading operations weren't much better.

The first trade the company entered was supplying enslaved people to the Spanish West Indies — a monopoly granted by the Treaty of Utrecht through what was called the Asiento contract. Since this wasn't expected to be very profitable — both the Portuguese and French companies that had operated under the same terms had been ruined by it — the South Sea Company was allowed, as compensation, to send one ship per year to trade directly in the Spanish West Indies. Of the ten voyages this annual ship was permitted to make, the company reportedly made a profit on just one — the Royal Caroline in 1731 — and lost money on almost all the rest. The company's agents blamed the Spanish government's interference, but the real cause was probably the extravagance and embezzlement of those very agents — some of whom reportedly amassed large fortunes in a single year. In 1734, the company petitioned the king for permission to abandon the trade and accept whatever compensation Spain might offer.

In 1724, the company had taken up whale fishing. It had no monopoly on this, but as long as it was in the business, no other British firm seems to have tried it. Of eight whaling voyages, only one turned a profit. After the eighth and final voyage, when they sold their ships and equipment, they found their total loss — capital and interest included — exceeded two hundred and thirty-seven thousand pounds.

In 1722, the company petitioned Parliament to split its enormous capital of over thirty-three million pounds in two: one half to be treated as ordinary government bonds, safe from the company's trading losses; the other half to remain as trading capital, exposed to those losses. The petition was too reasonable to refuse. In 1733, they petitioned again for three-fourths of the trading capital to be converted to bond status, leaving only one-fourth for trading. By then, both their bond and trading stocks had been reduced by several million through government repayments, so this remaining quarter amounted to only about three million six hundred and sixty-three thousand pounds. In 1748, the Treaty of Aix-la-Chapelle settled all the company's claims against Spain under the Asiento contract. Its trade with the Spanish West Indies was terminated, the rest of its trading capital was converted to bonds, and the company ceased to be a trading company in any respect.

It's worth noting that in its annual ship trade — the only trade it was ever expected to profit from — the South Sea Company faced competition both abroad and at home. At Cartagena, Portobelo, and Veracruz, it competed with Spanish merchants bringing European goods from Cadiz. In England, it competed with English merchants importing Spanish colonial goods from Cadiz. The goods of both Spanish and English merchants may have carried somewhat higher duties. But the losses caused by the negligence, waste, and theft of the company's own employees probably amounted to a heavier tax than all those duties combined. That a joint stock company could successfully conduct any branch of foreign trade in open, fair competition with private traders seems contrary to all experience.

The East India Company and the Limits of Joint Stock Enterprise

The old English East India Company was established in 1600 by a charter from Queen Elizabeth. For its first twelve voyages to India, it seems to have operated as a regulated company, with separate investments in each voyage, though using only the company's own ships. In 1612, it merged into a joint stock. Its charter was exclusive, and though not confirmed by act of Parliament, it was at the time considered to convey a genuine monopoly. For many years, therefore, it wasn't much bothered by unauthorized competitors.

Its capital never exceeded seven hundred and forty-four thousand pounds, with fifty pounds being one share. This wasn't so large that it provided either a pretext for gross negligence and waste or a cover for serious embezzlement. Despite some extraordinary losses — caused partly by the hostility of the Dutch East India Company and partly by other mishaps — it conducted a successful trade for many years.

But over time, as the principles of liberty became better understood, it grew increasingly doubtful whether a royal charter not confirmed by Parliament could actually convey a legal monopoly. Court rulings on this question were inconsistent, shifting with the political winds. Unauthorized competitors multiplied. Through the late reign of Charles II, the entire reign of James II, and into the reign of William III, they reduced the old company to great distress.

In 1698, a proposal was made to Parliament: certain subscribers would lend the government two million pounds at eight percent interest, provided they were incorporated as a new East India Company with exclusive privileges. The old company offered seven hundred thousand pounds — roughly its entire capital — at only four percent, on the same terms. But such was the state of public credit at the time that the government found it more convenient to borrow two million at eight percent than seven hundred thousand at four. The new subscribers' proposal was accepted, and a new East India Company was established.

The old company, however, retained the right to continue trading until 1701. It had also, very shrewdly, subscribed three hundred and fifteen thousand pounds — in its treasurer's name — into the stock of the new company. Through a careless bit of drafting in the act of Parliament that vested the East India trade in the subscribers to this two-million-pound loan, it wasn't entirely clear that they were all required to unite into a single joint stock. A handful of private traders, whose subscriptions totaled only seven thousand two hundred pounds, insisted on the right to trade separately, on their own capital, at their own risk.

So the old company had a right to trade separately on its old capital until 1701, plus a right — both before and after that date — to trade separately on the three hundred and fifteen thousand pounds it had subscribed into the new company's stock, just like any other private trader. The competition between the two companies and the private traders reportedly nearly ruined all of them.

On a later occasion, in 1730, when Parliament considered a proposal to put the trade under a regulated company — partially opening it to the public — the East India Company argued fiercely against it, describing in the strongest terms what they claimed had been the disastrous effects of the earlier competition. In India, they said, it had driven up the price of goods so high they weren't worth buying. In England, by flooding the market, it had driven down prices so low that no profit could be made.

That this competition, by providing a more plentiful supply, must have reduced the price of Indian goods in the English market — to the great benefit of the public — can hardly be doubted. But the claim that it dramatically raised prices in the Indian market seems implausible. All the extra demand created by this competition must have been like a drop of water in the vast ocean of Indian trade. And while increased demand may temporarily raise prices, it never fails to lower them in the long run. It encourages production and thereby increases competition among producers, who, trying to undersell each other, develop new divisions of labor and new improvements that might never otherwise have been conceived.

The "disastrous effects" the company complained about were cheaper goods for consumers and more incentives for producers — precisely the two outcomes that it is the whole purpose of political economy to promote.

The competition, however, wasn't allowed to continue for long. In 1702, the two companies were partially merged through an agreement with the queen as third party. In 1708, they were fully consolidated by act of Parliament into the present United Company of Merchants Trading to the East Indies. That act included a clause allowing the remaining private traders to continue until 1711, but empowered the directors to buy out their small capital of seven thousand two hundred pounds on three years' notice, thereby converting the entire enterprise into a joint stock. By the same act, the company's capital — following another loan to the government — was raised from two million to three million two hundred thousand pounds.

In 1743, the company advanced another million to the government, but this was raised by selling bonds and taking on debt rather than calling on shareholders for more capital. So it didn't increase the capital on which shareholders could claim dividends, though it did increase the company's trading capital — since this new million was equally exposed to losses and debts from the company's commercial operations.

From 1708, or at least from 1711, the company — freed from all competitors and firmly established in its monopoly of English trade to the East Indies — conducted a successful trade and declared regular, moderate dividends. During the French war that began in 1741, the ambitions of Mr. Dupleix, the French governor of Pondicherry, dragged the company into the wars of southern India and the politics of Indian rulers.

After a roller coaster of dramatic victories and equally dramatic defeats, the company lost Madras — then its principal Indian settlement. It was restored by the Treaty of Aix-la-Chapelle. Around this time, the spirit of war and conquest seems to have taken permanent hold of the company's people in India and never let go.

During the French war that began in 1755, the company shared in Britain's general good fortune. It defended Madras, captured Pondicherry, recovered Calcutta, and acquired the revenues of a rich and extensive territory reportedly worth over three million pounds a year. It held this revenue peacefully for several years.

But in 1767, the government claimed these territorial acquisitions — and their revenue — as rightfully belonging to the Crown. In compensation, the company agreed to pay the government four hundred thousand pounds per year. It had previously been gradually raising its dividend from about six percent to ten percent — on its capital of three million two hundred thousand pounds, that meant increasing the annual payout from about a hundred and ninety-two thousand to three hundred and twenty thousand pounds. It was trying to push the dividend even higher, to twelve and a half percent, which would have made its annual payments to shareholders equal to what it had agreed to pay the government.

But during the two years of transition, two successive acts of Parliament froze the dividend, intending to speed up the repayment of the company's debts — then estimated at over six or seven million pounds. In 1769, the company renewed its agreement for five more years, with permission to gradually raise its dividend to twelve and a half percent — never by more than one percentage point per year. Even at its maximum, this increase would have added only six hundred and eight thousand pounds to the company's combined annual payments to shareholders and government, compared to the period before its territorial acquisitions.

The gross revenue of those acquisitions has already been mentioned. According to an account brought by the Cruttenden East Indiaman in 1768, the net revenue — after all deductions and military costs — was stated at over two million pounds. The company reportedly also had another revenue stream of about four hundred and thirty-nine thousand pounds, mostly from customs duties at its various settlements. The profits of the trade itself, according to the chairman's testimony before the House of Commons, amounted to at least four hundred thousand pounds a year — or at least five hundred thousand according to the company's accountant. By the lowest estimate, the trade profits alone equaled the highest proposed shareholder dividend.

Such an enormous revenue surely could have funded the six hundred and eight thousand pound increase in annual payments while still leaving a large sinking fund for rapidly paying down debts. Yet by 1773, instead of being reduced, the company's debts had actually grown — through overdue payments to the treasury, unpaid customs duties, money borrowed from the Bank of England, and recklessly accepted bills drawn from India totaling over twelve hundred thousand pounds.

The distress caused by these accumulated obligations forced the company not only to slash its dividend from ten percent to six percent overnight, but to throw itself on the government's mercy — begging first for relief from the four hundred thousand pound annual payment, and second for a loan of fourteen hundred thousand pounds to stave off immediate bankruptcy.

It seems that this enormous increase in the company's fortune had served only to provide its employees with a pretext for even greater extravagance and a cover for even greater embezzlement — in proportion to, or even exceeding, the growth of that fortune.

The conduct of the company's people in India, and the general state of its affairs both there and in Europe, became the subject of a parliamentary investigation. This led to several major changes in how the company was governed, both at home and in India.

In India, the company's principal settlements at Madras, Bombay, and Calcutta — previously independent of each other — were placed under a governor-general assisted by a council of four advisors. Parliament itself made the initial appointments, with the headquarters at Calcutta, which had replaced Madras as the most important English settlement in India. The local court in Calcutta — originally established for commercial disputes in the city and its vicinity but which had gradually extended its jurisdiction as the empire grew — was scaled back to its original purpose. In its place, a new supreme court of judicature was established, with a chief justice and three judges appointed by the Crown.

In Europe, the property qualification for voting at shareholder meetings was doubled from five hundred pounds — the original price of a share — to a thousand pounds. Buyers had to have owned their shares for at least a year (rather than six months, as before) to vote. The board of twenty-four directors, previously elected annually, was now elected for four-year terms, with six rotating out each year, ineligible for immediate re-election.

These changes were expected to make both the shareholder meetings and the board of directors operate with more dignity and stability. But it seems impossible, by any reforms, to make these bodies fit to govern — or even to share in governing — a great empire. The majority of their members will always have too little personal stake in the empire's prosperity to pay any serious attention to what might promote it.

A man of considerable fortune — sometimes even a man of small fortune — is often willing to buy a thousand pounds' worth of East India stock merely for the political influence that a shareholder vote brings. It gives him a share not in the plundering of India, exactly, but in appointing the plunderers. The board of directors, though they make the appointments, are inevitably influenced by the shareholders who elect them and who sometimes override their decisions about personnel in India. As long as such a man can enjoy this influence for a few years and use it to provide for his circle of friends, he frequently cares nothing about the dividend — or even about the value of the shares his vote is based on. About the prosperity of the great empire in whose government his vote gives him a share, he cares not at all.

No other rulers ever were — or, given the nature of things, ever could be — so perfectly indifferent about the happiness or misery of their subjects, the development or devastation of their territories, the glory or disgrace of their administration, as the majority of shareholders in such a commercial company are, and inevitably must be.

This indifference was more likely to be increased than diminished by some of the reforms made after the parliamentary investigation. A resolution of the House of Commons declared that once the company had repaid the government's fourteen-hundred-thousand-pound loan and reduced its bond debts to fifteen hundred thousand, it could pay an eight percent dividend on its capital. Whatever surplus remained from its revenues and net profits at home would be split four ways: three-fourths to the national treasury for public use, and one-fourth reserved as a fund for further debt reduction or other company needs. But if the company had been bad managers and bad rulers when all its net revenue and profits belonged to itself, it was surely not likely to become better when three-fourths would go to others, and even the remaining fourth would be spent under someone else's supervision and approval.

It might be more agreeable to the company for its own employees and dependents to have the pleasure of wasting — or the profit of stealing — whatever surplus remained after the proposed eight percent dividend, rather than see it go to a group of people with whom these arrangements could hardly fail to create conflict. The interests of those employees and dependents could dominate the shareholder meetings to the point of occasionally defending people who had committed depredations in direct violation of the company's own authority. For the majority of shareholders, supporting the company's own authority might sometimes matter less than supporting the people who had defied it.

The 1773 reforms, accordingly, did not end the disorders in the company's government of India. Despite the fact that, during a brief period of good behavior, the company had accumulated more than three million pounds in its Calcutta treasury — and despite having since expanded its control (or its exploitation) over vast additional territories among the richest and most fertile lands in India — everything was wasted and destroyed. The company found itself completely unprepared to stop or resist the invasion of Hyder Ali. As a result of these ongoing disorders, the company is now (in 1784) in greater distress than ever and has once again been forced to beg the government for help. Different plans have been proposed by the different parties in Parliament for better managing its affairs. All of them seem to agree — as has indeed always been abundantly obvious — that the company is completely unfit to govern its territorial possessions. Even the company itself seems convinced of its own incapacity and appears willing, on that basis, to hand its territories over to the government.

With the right to hold forts and garrisons in distant territories necessarily comes the right to make peace and war in those territories. The joint stock companies that have had one right have always exercised the other — and have frequently had it expressly granted. How unjustly, how capriciously, how cruelly they have typically exercised it is only too well known from recent experience.

When a group of merchants undertakes, at its own risk and expense, to open trade with some remote and unfamiliar nation, it may not be unreasonable to incorporate them as a joint stock company and grant them, if they succeed, a monopoly of the trade for a limited number of years. It's the simplest and most natural way for the state to reward them for undertaking a dangerous and expensive experiment whose benefits will ultimately belong to the public. A temporary monopoly of this kind can be justified on the same principle as a patent for a new invention or a copyright for a new book.

But when the term expires, the monopoly should definitely end. Any forts and garrisons that needed to be built should be taken over by the government, with the company compensated for their value, and the trade opened to all citizens. A perpetual monopoly imposes a very foolish tax on the rest of the country's citizens in two ways: first, through the high prices of goods that would be much cheaper under free trade; and second, through their total exclusion from a line of business that many of them might find both convenient and profitable. And the purpose of this absurd tax is the most worthless imaginable: merely to enable the company to support the negligence, waste, and embezzlement of its own employees — whose mismanagement rarely allows the company's dividend to reach even the normal rate of return in competitive trades, and frequently pushes it well below.

Without a monopoly, however, a joint stock company cannot — experience suggests — maintain any branch of foreign trade for long. Buying in one market to sell at a profit in another, when there are many competitors in both; watching not only the fluctuations in demand but the much larger and more frequent fluctuations in the supply that competitors are likely to bring; adjusting with skill and judgment both the quantity and quality of each batch of goods to all these constantly shifting circumstances — this is a kind of commercial warfare whose conditions are always changing. It can hardly ever be conducted successfully without the kind of relentless vigilance and attention that cannot be expected from the directors of a joint stock company.

If the East India Company ever redeems its capital and its exclusive privilege expires, it has the legal right to continue as a joint stock company, trading to the East Indies alongside all other British citizens. But in this situation, the superior vigilance and attention of private competitors would, in all probability, soon make the company sick of the trade.

The distinguished French economist the Abbe Morellet compiled a list of fifty-five joint stock companies for foreign trade established in various parts of Europe since 1600. According to him, every single one failed through mismanagement — despite having exclusive privileges. He was misinformed about two or three, which were not actually joint stock companies and did not actually fail. But to compensate, he missed several joint stock companies that did fail.

The only trades that a joint stock company seems capable of conducting successfully without an exclusive monopoly are those whose operations can all be reduced to what might be called a routine — a uniformity of method that allows for little or no variation. There are four such trades:

First, banking.

Second, insurance — against fire, against loss at sea, and against capture in wartime.

Third, building and maintaining a navigable canal.

Fourth, the similar business of supplying a great city with water.

Though the principles of banking may seem somewhat abstract, the practice can be reduced to strict rules. Departing from those rules to chase some tempting speculation of extraordinary profit is almost always extremely dangerous and frequently fatal to the bank that tries it. But the structure of joint stock companies makes them generally more attached to established rules than any private partnership. Such companies therefore seem well suited to banking. The principal banks in Europe are accordingly joint stock companies, and many of them operate very successfully without any exclusive privilege. The Bank of England has no special privilege except that no other banking company in England may have more than six partners. The two banks of Edinburgh are joint stock companies without any exclusive privilege at all.

The value of insurance risk — from fire, from shipwreck, from piracy — though it can't be calculated with perfect precision, can be estimated roughly enough to make the business reducible to rules and methods. The insurance trade can therefore be conducted successfully by a joint stock company without any monopoly. Neither the London Assurance nor the Royal Exchange Assurance has any such privilege.

Once a navigable canal has been built, managing it becomes quite simple and straightforward — reducible to strict rules. Even the construction can be contracted out at so much per mile and so much per lock. The same is true of aqueducts or large pipes for bringing water to a major city. Such enterprises can therefore be — and frequently are — successfully managed by joint stock companies without any exclusive privilege.

To establish a joint stock company merely because it might be capable of managing a particular enterprise, or to exempt a group of traders from the general laws that apply to everyone else merely because they might prosper with the exemption, would not be reasonable. For a joint stock company to be truly justified, two other conditions must exist beyond the business being reducible to routine.

First, it should be clearly evident that the enterprise is of greater and more general public benefit than ordinary commercial activities.

Second, it should require more capital than can easily be assembled by a private partnership.

If modest capital were sufficient, the great public benefit of the enterprise would not justify a joint stock company — because the market demand for its product would easily be met by private firms.

In all four trades mentioned above, both conditions are met.

The great public value of prudently managed banking has been fully explained in the second book of this work. But a public bank that must support the nation's credit and, in emergencies, advance to the government the full proceeds of a tax — possibly several million pounds, a year or two before the money actually comes in — requires more capital than any private partnership could assemble.

The insurance trade provides great security to the fortunes of private individuals. By spreading across many people a loss that would ruin any one of them, it makes the loss light and bearable for society as a whole. To provide this security, however, the insurer must have a very large capital. Before the two joint stock insurance companies were established in London, a list was reportedly submitted to the attorney-general of a hundred and fifty private insurers who had gone bankrupt in just a few years.

That navigable canals and the works sometimes necessary for supplying a great city with water are of great public benefit — while frequently requiring more capital than private individuals can provide — is obvious enough.

Beyond these four trades, I haven't been able to think of any other business in which all three conditions — routine operations, great public benefit, and capital needs beyond private means — are simultaneously present. The English Copper Company of London, the Lead Smelting Company, and the Glass Grinding Company can't even claim any great or unusual public benefit from what they do, nor does their business seem to require more capital than many private individuals could provide. Whether their trades are routine enough for joint stock management, or whether they have any impressive profits to show, I can't say. The Mine Adventurers Company went bankrupt long ago. A share in the British Linen Company of Edinburgh currently trades well below its original value, though less so than a few years ago.

Joint stock companies established for the public-spirited purpose of promoting some particular line of manufacturing, besides mismanaging their own affairs and thereby reducing the total capital of society, can in other respects hardly ever fail to do more harm than good. Despite the most upright intentions, the directors' unavoidable bias toward particular branches of industry — where promoters mislead and deceive them — is a real discouragement to the rest. It inevitably disrupts the natural balance that would otherwise establish itself between well-judged enterprise and profit — a balance that is, of all encouragements to a nation's general industry, the greatest and most effective.

Educational institutions can, in the same way as other public works, generate enough revenue to cover their own costs. The fees that students pay to their teachers naturally provide this kind of revenue.

Even when a teacher's income doesn't come entirely from student fees, it still doesn't have to come from the general government revenue — the funds that, in most countries, are managed by the executive branch. Across most of Europe, the endowments funding schools and colleges either don't draw on general government revenue at all, or draw only a tiny amount. Their funding almost always comes from some local or provincial source — the rent from a piece of land, or the interest on a sum of money that's been set aside and placed under the management of trustees for this specific purpose, sometimes by the government itself and sometimes by a private donor.

So here's the real question: Have these public endowments actually served their intended purpose? Have they made teachers work harder and become better at their jobs? Have they steered education toward subjects that are more useful — both to the individual and to society — than whatever education would have drifted toward on its own? It shouldn't be too hard to come up with at least a reasonable answer to each of these questions.

In every profession, most people only work as hard as they have to. This pressure is greatest for those whose professional earnings are their only source of income. To build a fortune — or even just to make a living — they need to produce a certain quantity of work at a recognized standard over the course of a year. And where competition is open, the rivalry among competitors, who are all trying to elbow each other out of business, forces everyone to do their work with a certain degree of precision. The prospect of great rewards in some professions may, of course, motivate a few exceptionally ambitious people. But great rewards obviously aren't necessary to produce great effort. Rivalry and the desire to excel can make people work incredibly hard even in humble professions. On the other hand, great rewards alone, without any real need to hustle, have rarely been enough to make anyone work particularly hard. In England, success in law can lead to some very impressive positions — and yet how few people born into comfortable wealth have ever become distinguished lawyers?

Endowments for schools and colleges inevitably reduce the pressure on teachers to perform. Their income, insofar as it comes from salaries, is clearly drawn from a fund that has nothing to do with how good they are at their jobs or how well-regarded they are in their field.

In some universities, the salary is only a part — and often a small part — of a teacher's total compensation. The rest comes from the fees paid by students. In this case, the pressure to perform is reduced but not eliminated. Reputation still matters to the teacher. He still depends to some degree on the goodwill, gratitude, and favorable word-of-mouth of his former students. And the best way to earn those favorable sentiments is to actually deserve them — that is, by doing his job with real skill and dedication.

In other universities, however, the teacher is forbidden from accepting any fees from students, and his salary is his entire income. In this situation, his financial interest is set in direct opposition to his duty as completely as it possibly can be. It's in everyone's interest to live as comfortably as possible. And if a person's pay will be exactly the same whether he performs some demanding task or doesn't perform it at all, then it's certainly in his interest — at least as people commonly understand self-interest — either to neglect the duty entirely, or, if he's subject to some authority that won't let him get away with that, to perform it in the most careless and sloppy manner that authority will tolerate. If he happens to be naturally energetic and loves hard work, it's in his interest to channel that energy into something that actually pays off, rather than into duties that bring him nothing extra.

If the authority over him rests with the corporate body of the college or university itself — where most of the other members are, like him, people who either are or ought to be teachers — they're likely to form a kind of mutual protection pact. They'll all be very lenient with one another. Each person consents to his colleague neglecting his duties, as long as he's allowed to neglect his own. At Oxford, the majority of the public professors have, for many years now, given up even the pretense of teaching.

If instead the authority over a teacher rests with some outside party — say, the bishop of the diocese, the provincial governor, or perhaps some government minister — it's unlikely he'll be allowed to abandon his duties completely. But all that such overseers can really force him to do is show up and deliver a certain number of lectures per week or year. What those lectures actually contain still depends on the teacher's own effort, and that effort will be proportional to whatever motivation he has to exert it. External oversight of this kind is also prone to being exercised both ignorantly and arbitrarily. By its very nature, it's discretionary. The people exercising it don't attend the lectures themselves and often don't even understand the subjects being taught, so they're rarely in a position to judge wisely. On top of that, the arrogance of office often makes them indifferent to how they use their power, and they're quite likely to censure or dismiss a teacher capriciously, without good cause. A teacher subject to this kind of oversight is inevitably degraded by it. Instead of being one of the most respected members of society, he becomes one of the most looked-down-upon. His only real protection against mistreatment is to find a powerful patron, and the best way to find one is not through ability or hard work, but through groveling obedience to his superiors — being ready at all times to sacrifice the rights, interests, and honor of his institution to please them. Anyone who has spent much time observing how French universities are run will have seen these dynamics play out in exactly this way.

Whatever forces students to attend a particular college or university — regardless of the quality or reputation of its teachers — tends to reduce the need for quality and reputation.

The requirement that graduates in arts, law, medicine, and theology can only obtain their degrees by spending a certain number of years at certain universities necessarily channels students to those institutions, regardless of teaching quality. These degree requirements are a kind of apprenticeship law, and they've contributed to the improvement of education about as much as actual apprenticeship laws have contributed to the improvement of trades and manufacturing — which is to say, not much at all.

Charitable foundations offering scholarships, exhibitions, bursaries, and the like inevitably tie certain students to certain colleges, regardless of those colleges' merit. If scholarship students were free to choose whichever college they preferred, that freedom might create some healthy competition among institutions. A rule that went the opposite direction — prohibiting even independent, self-paying students from transferring to another college without first getting permission from the one they were leaving — would do a great deal to destroy that competition.

If the tutor assigned to teach each student in all arts and sciences were not chosen by the student but appointed by the head of the college, and if a student who suffered neglect, incompetence, or mistreatment weren't allowed to switch tutors without permission, that kind of rule would not only kill competition among tutors at the same college but would also greatly reduce every tutor's motivation to be diligent and attentive. Teachers operating under such rules, even if very well paid by their students, would be just as inclined to neglect them as teachers who aren't paid by students at all.

Now, if a teacher happens to be a person of sense, it must be deeply unpleasant for him to stand in front of his students knowing that he's either speaking or reading complete nonsense, or something barely better than nonsense. It must also be unpleasant to notice that most of his students have stopped coming to his lectures, or attend them with obvious signs of boredom, contempt, and mockery. So if he's required to give a certain number of lectures, these feelings alone — even without any financial incentive — might motivate him to put in at least some effort. However, there are various tricks that effectively take the edge off these motivations. Instead of actually explaining the subject to his students, the teacher can simply read aloud from a book. If that book is written in a foreign or dead language, he can translate it for them — or, for even less effort, have them translate it for him, occasionally throwing in a comment here and there, and flatter himself that he's "giving a lecture." Even the slightest bit of knowledge will allow him to pull this off without saying anything truly foolish or ridiculous. And the college's disciplinary system can force all his students into perfectly regular attendance at this sham lecture, maintaining the appearance of respectful attention throughout the whole performance.

University discipline is generally designed not for the benefit of students but for the convenience of the faculty. Its purpose, in every case, is to maintain the teacher's authority and to compel students to behave as if the teacher were doing a brilliant job, whether he is or not. The whole system seems to assume perfect wisdom and virtue on the part of the teachers, and the greatest weakness and foolishness on the part of the students. But where teachers actually do their jobs well, I don't believe there are any examples of students mostly neglecting theirs. No one needs to be forced to attend lectures that are genuinely worth attending — and everyone knows this wherever such lectures are given. Some degree of compulsion may admittedly be needed for children or very young students, to make them pay attention to subjects thought necessary at that early age. But after twelve or thirteen, if the teacher is doing his job, force or compulsion is almost never needed. Young people are, for the most part, remarkably generous in this regard: far from wanting to ignore or disrespect their teacher, provided he shows a genuine interest in helping them, they'll generally forgive a great deal of imperfection in his teaching and sometimes even cover up serious negligence on his behalf.

It's worth noting that the subjects for which no public institutions exist are generally the best taught. When a young man attends a fencing or dancing school, he doesn't always learn to fence or dance very well — but he almost never fails to learn to fence or dance at all. The results of riding schools are less consistently impressive, but riding schools are so expensive that in most places they're run as public institutions. The three most essential elements of a basic education — reading, writing, and arithmetic — are still more commonly learned through private instruction than in public schools, and it's extremely rare for anyone to fail to acquire them to the necessary degree.

In England, the public schools are much less corrupt than the universities. In schools, young people are taught — or at least can be taught — Greek and Latin, which is everything the schoolmasters claim to teach. At the universities, students are neither taught, nor can always find proper means of learning, the subjects that those institutions are supposed to teach. The schoolmaster's pay depends mainly, and in some cases almost entirely, on student fees. Schools have no exclusive privileges. You don't need a certificate proving you studied at a particular school in order to qualify for a degree. If you can pass the examination, no one asks where you learned the material.

Now, it might be argued that the subjects commonly taught at universities are not very well taught. But without those institutions, they wouldn't have been taught at all, and both individuals and society would have suffered considerably from the absence of those important areas of education.

The universities of Europe were originally, for the most part, religious institutions — created to train clergymen. They were founded under papal authority and were so completely under papal protection that their members, whether teachers or students, all enjoyed what was then called "benefit of clergy." That is, they were exempt from the civil courts of the countries where their universities were located and answerable only to ecclesiastical tribunals. What was taught at most of these universities was accordingly suited to their religious purpose: either theology itself, or subjects considered preparatory to theology.

When Christianity was first established by law, a form of corrupted Latin had become the common language throughout western Europe. Church services and the Bible translation read in churches were therefore both in this corrupted Latin — which was simply the everyday language of the people. After the invasions of the various peoples who overthrew the Roman Empire, Latin gradually stopped being spoken anywhere in Europe. But people's reverence for religion naturally preserves established forms and ceremonies long after the circumstances that originally made them sensible have disappeared. So even though Latin was no longer understood by ordinary people anywhere, all church services continued to be conducted in it. Two separate languages thus became established across Europe, just as in ancient Egypt: a language of the priests and a language of the people — one sacred, the other common; one learned, the other unlearned. Since priests needed to understand enough of this sacred, learned language to perform their duties, studying Latin was from the very beginning an essential part of university education.

The same was not true for Greek or Hebrew. The infallible decrees of the Church had declared that the Latin translation of the Bible — the Vulgate — was equally inspired by God and therefore carried the same authority as the Greek and Hebrew originals. Since knowledge of those two languages wasn't absolutely necessary for a clergyman, they didn't become a required part of the standard university curriculum for a long time. I'm told that there are some Spanish universities where Greek has never been part of the curriculum at all. The Protestant reformers found that the Greek New Testament, and even the Hebrew Old Testament, supported their views better than the Vulgate translation, which — as you'd expect — had been gradually adjusted over the centuries to support Catholic doctrine. The reformers set about exposing the many errors in the Vulgate, which the Catholic clergy then had to defend or explain. But this couldn't be done without some knowledge of the original languages, so the study of Greek and Hebrew was gradually introduced into most universities — both those that embraced the Reformation and those that rejected it. Greek was connected to the broader classical learning that, though initially cultivated mainly by Italian Catholics, happened to come into fashion around the same time as the Reformation. In most universities, therefore, Greek was taught before philosophy, as soon as a student had made some progress in Latin. Hebrew, having no connection to classical learning and being — apart from the Holy Scriptures — the language of not a single book that anyone particularly valued, was usually not studied until later, after philosophy and during the study of theology.

Originally, the basics of both Greek and Latin were taught at universities, and some still do this. Others now expect students to arrive already knowing the fundamentals of one or both languages, though the study of these languages continues to be a major part of university education everywhere.

Ancient Greek philosophy was divided into three great branches: physics, or natural philosophy; ethics, or moral philosophy; and logic. This division seems to correspond perfectly to the nature of things.

The great phenomena of nature — the movements of the planets, eclipses, comets, thunder, lightning, and other extraordinary events; the birth, growth, life, and death of plants and animals — are things that naturally inspire wonder and curiosity about their causes. Superstition first tried to satisfy this curiosity by attributing all these remarkable phenomena to the direct actions of the gods. Philosophy then attempted to explain them through more familiar causes — ones that people understood better than divine intervention. Since these great phenomena were the first things to arouse human curiosity, the science that claimed to explain them must naturally have been the first branch of philosophy to develop. And indeed, the earliest philosophers we know of from historical records appear to have been natural philosophers.

In every age and country, people have paid attention to the character, motives, and behavior of those around them, and many sensible rules and principles for living have been developed and widely accepted. Once writing was invented, wise people — or those who thought they were wise — naturally tried to add to these established principles and express their own views on proper and improper conduct. Sometimes they did this through elaborate fables, like those attributed to Aesop. Sometimes they used simple proverbs and wise sayings, like the Proverbs of Solomon, the verses of Theognis and Phocylides, and parts of Hesiod's work. For a long time, they may have simply continued to pile up these observations about good and sensible living without trying to organize them into any systematic order — and certainly without trying to connect them all to a few general principles from which they could all be logically derived, the way effects follow from causes. The appeal of a systematic arrangement of observations connected by common principles was first glimpsed in the early, rough attempts at natural philosophy. Something similar was then tried with morality. The common-sense rules of daily life were organized into a methodical order and connected by a few general principles, just as people had tried to arrange and connect the phenomena of nature. The science that claims to investigate and explain these connecting principles is what we properly call moral philosophy.

Different thinkers developed different systems of both natural and moral philosophy. But the arguments supporting these various systems were, far from being rigorous proofs, often at best flimsy guesses and sometimes pure sophistry — reasoning that rested on nothing more than the imprecision and ambiguity of everyday language. In every era, people have adopted speculative systems for reasons too absurd to have swayed anyone's judgment on the smallest financial matter. Blatant logical nonsense has rarely influenced people's opinions on anything — except philosophy and abstract thought, where it has frequently had enormous influence. The champions of each system of natural and moral philosophy naturally tried to expose the weaknesses in rival systems. In examining those arguments, they inevitably had to consider the difference between a probable argument and a conclusive one, between fallacious reasoning and sound reasoning. And so Logic — the science of the general principles of good and bad reasoning — naturally grew out of this critical scrutiny. Though it came after both physics and ethics in origin, logic was usually taught before either of them in most ancient schools of philosophy. The idea seems to have been that students should understand the difference between good and bad reasoning before being asked to reason about subjects of such great importance.

In most European universities, this ancient three-part division of philosophy was replaced by a five-part system.

In the ancient system, whatever was taught about the nature of the human mind or of God was included within physics. These subjects — whatever their ultimate essence — were considered parts of the great system of the universe, and particularly important parts at that. Whatever human reason could conclude or speculate about them formed, as it were, two chapters (admittedly two very important ones) within the science that claimed to explain the origin and workings of the universe. But in the European universities, where philosophy was taught only as a stepping stone to theology, it was natural to spend much more time on these two chapters than on any other part of the curriculum. They were gradually expanded and subdivided into many sub-topics, until eventually the study of spirits and the immaterial — about which so little can actually be known — took up as much space in the philosophy curriculum as the study of the physical world, about which so much can be known. The study of these two subjects was treated as two separate sciences. What came to be called Metaphysics (or Pneumatics — the study of spirits) was set up in opposition to Physics, and was cultivated not only as the more elevated science, but also — for the purposes of training clergymen — as the more useful one. The proper subject of experiment and observation, a field where careful attention can yield so many useful discoveries, was almost entirely neglected. The subject where, after a few obvious truths, the most careful study can reveal nothing but obscurity and uncertainty — and therefore produce nothing but hairsplitting and sophistry — was the one that flourished.

Once these two sciences had been set in opposition, the comparison between them naturally gave birth to a third: Ontology, the science that dealt with the qualities and attributes common to the subjects of both physics and metaphysics. But if sophistry and hairsplitting made up most of metaphysics as taught in the universities, they made up the entirety of this cobweb science of ontology — which was also sometimes called metaphysics.

In ancient moral philosophy, the goal was to investigate what constituted the happiness and fulfillment of a human being — considered not just as an individual, but as a member of a family, a state, and the whole human community. The duties of life were studied as paths to happiness and fulfillment in this life. But when moral philosophy, like natural philosophy, came to be taught only as a servant of theology, the duties of life were reframed as primarily serving happiness in the life to come. In the ancient system, virtue was portrayed as naturally producing the greatest happiness in this life. In the university version, virtue was frequently depicted as generally — or almost always — incompatible with any happiness in this life. Heaven was to be earned through penance and self-mortification, through the austerities and self-abasement of a monk, not through the generous, spirited, and honorable conduct of a fully engaged human being. Casuistry and an ascetic moral code made up, in most cases, the bulk of moral philosophy as taught in the universities. The most important branch of philosophy had, in this way, become by far the most corrupted.

And so this was the standard course of philosophical education in most European universities. Logic was taught first. Ontology came second. Pneumatology — covering the nature of the human soul and of God — came third. Fourth was a degraded version of moral philosophy, treated as directly following from the doctrines about the soul's immortality and divine rewards and punishments in the afterlife. The course usually concluded with a brief and superficial treatment of physics.

The changes that European universities had made to the ancient curriculum were all designed for training clergymen and making philosophy a better introduction to theology. But the additional layers of hairsplitting and sophistry, the casuistry and the ascetic morality that these changes introduced, certainly didn't make the curriculum any more suitable for educating well-rounded people or future leaders, nor any more likely to sharpen their minds or improve their characters.

This corrupted course of philosophy is still what's taught in most European universities — with more or less effort, depending on how much each university's particular structure rewards or punishes teachers for being diligent. In some of the richest and most generously endowed universities, the tutors content themselves with teaching a few disconnected scraps of this corrupted curriculum, and even those they teach carelessly and superficially.

The great intellectual advances of modern times have, for the most part, not come from universities — though some certainly have. Most universities haven't even been quick to adopt those advances once they were made. Many of these learned institutions have chosen instead to remain, for long periods, the last refuges where discredited theories and obsolete prejudices could find shelter and protection after being driven out of every other corner of the world. In general, the richest and most well-endowed universities have been the slowest to adopt new ideas and the most resistant to any significant change in their established educational program. These improvements were more easily introduced into some of the poorer universities, where teachers who depended on their reputation for most of their income had to pay more attention to what the rest of the world actually thought.

But even though Europe's public schools and universities were originally intended only for training clergymen, and even though they weren't always very diligent about teaching even the subjects supposedly necessary for that profession, they gradually attracted the education of nearly everyone else — particularly nearly all the sons of wealthy and prominent families. No one, it seems, could come up with a better way of spending the long interval between childhood and the age when people seriously begin the real work of their lives. The greater part of what's taught in schools and universities, however, doesn't seem to be the best preparation for that real work.

In England, it's becoming more and more common to send young people abroad to travel in foreign countries right after leaving school, without bothering with university at all. Young people, it's said, generally come home much improved by their travels. A young man who goes abroad at seventeen or eighteen and comes home at twenty-one returns three or four years older than when he left — and at that age, it's very hard not to improve a good deal in three or four years. During his travels, he generally picks up some knowledge of one or two foreign languages, though rarely enough to speak or write them properly. In other respects, he typically comes back more arrogant, more unprincipled, more pleasure-seeking, and less capable of any serious commitment to study or work than he could have become in such a short time had he stayed home. By traveling so young — by wasting the most valuable years of his life in the most frivolous amusements, far from the watchful eyes of parents and family — every good habit his earlier education might have begun to instill in him, instead of being strengthened and confirmed, is almost inevitably weakened or erased. Nothing but the disgrace into which the universities have allowed themselves to fall could ever have made such an absurd practice seem like a good idea. By sending his son abroad, a father at least temporarily frees himself from the unpleasant sight of a son who is unemployed, neglected, and visibly going to waste before his eyes.

Such have been the effects of some of our modern educational institutions.

Different plans and different approaches to education have existed in other times and places.

In the republics of ancient Greece, every free citizen was trained, under the direction of public officials, in both athletic exercises and music. The athletic training was intended to toughen his body, sharpen his courage, and prepare him for the hardships and dangers of war. Since the Greek citizen-army was, by all accounts, one of the finest military forces the world has ever seen, this part of their public education must have perfectly served its intended purpose. The other part — music — was meant, at least according to the philosophers and historians who have written about these institutions, to civilize the mind, soften the temperament, and prepare citizens for the social and moral duties of both public and private life.

In ancient Rome, the exercises of the Campus Martius served the same purpose as the Greek gymnasium, and they seem to have served it equally well. But among the Romans, there was nothing equivalent to the musical education of the Greeks. The morals of the Romans, however, in both private and public life, seem to have been not just equal to, but overall considerably better than those of the Greeks. That they were superior in private life, we have the direct testimony of Polybius and Dionysius of Halicarnassus, two writers well acquainted with both nations. And the entire sweep of Greek and Roman history demonstrates the superiority of Roman public morals. The most essential quality in a free people's public life is the ability of competing factions to maintain good temper and moderation. But Greek political factions were almost always violent and bloody, whereas no blood was shed in any Roman political conflict until the time of the Gracchi — and from the time of the Gracchi onward, the Roman Republic can essentially be considered dead. So despite the very considerable authority of Plato, Aristotle, and Polybius, and despite the very clever arguments with which Montesquieu tried to support that authority, it seems likely that the musical education of the Greeks did little to improve their morals, since the Romans, without any such education, had generally superior ones. The respect these ancient thinkers had for their ancestral traditions probably led them to find deep political wisdom in what was really just an ancient custom, maintained unbroken from the earliest days of their societies through their later periods of cultural sophistication. Music and dancing are the great entertainments of nearly all pre-industrial peoples, and the great accomplishments thought to qualify a person for social life. This is still the case among peoples along the coast of Africa. It was so among the ancient Celts, among the ancient Scandinavians, and, as we can learn from Homer, among the ancient Greeks in the era before the Trojan War. When the Greek tribes organized themselves into small republics, it was natural that the study of these skills should have remained, for a long time, part of their common public education.

The teachers who instructed young people in music or military exercises don't seem to have been paid or even appointed by the state, either in Rome or even in Athens — the Greek republic whose laws and customs we know best. The state required every free citizen to prepare himself to defend it in war and, for that reason, to learn his military exercises. But it left him to find his own instructors, and the state's only contribution seems to have been providing a public field or exercise ground where he could practice and train.

As society grew more refined, and philosophy and rhetoric came into fashion, wealthier families began sending their children to the schools of philosophers and public speakers to learn these fashionable subjects. But the state didn't fund these schools. For a long time, it barely tolerated them. The demand for philosophy and rhetoric was initially so small that the earliest professional teachers of these subjects couldn't find enough work in any single city and had to travel from place to place. This was how Zeno of Elea, Protagoras, Gorgias, Hippias, and many others lived. As demand grew, schools of philosophy and rhetoric became permanent fixtures — first in Athens, then in several other cities. The state, however, seems to have done nothing more for them than occasionally assign them a particular place to teach, something that private donors sometimes did as well. The state apparently assigned the Academy to Plato, the Lyceum to Aristotle, and the Stoa Poikile to Zeno of Citium, the founder of the Stoics. But Epicurus bought his own garden for his school with his own money. Until about the time of Marcus Aurelius, no teacher seems to have received a salary from the public, living entirely on the fees paid by students. The generous grant that the philosophically minded emperor gave to one teacher of philosophy, as we learn from Lucian, probably didn't outlast his own lifetime. There was nothing equivalent to degree requirements, and having attended any of these schools was not a prerequisite for practicing any trade or profession. If a teacher's reputation for usefulness couldn't attract students on its own, the law neither compelled anyone to attend nor rewarded anyone for having done so. The teachers had no authority over their students beyond the natural authority that superior knowledge and character never fail to command from young people who have been placed in their care.

In Rome, studying civil law was part of the education of certain prominent families, but not of most citizens. Young people who wanted to learn law had no public school to attend and no way to study it except by spending time in the company of relatives and friends who were thought to understand it. It's perhaps worth noting that, although the Laws of the Twelve Tables were partly modeled on the laws of some ancient Greek republics, law never developed into a systematic science in any Greek republic. In Rome, it became a science very early and brought considerable prestige to citizens known for understanding it. In the Greek republics, particularly Athens, the ordinary courts consisted of large — and therefore unruly — bodies of citizens who frequently made decisions more or less at random, swayed by whatever faction or wave of emotion carried the moment. The shame of an unjust verdict, when spread across five hundred, a thousand, or even fifteen hundred people (some of their courts were that enormous), didn't weigh very heavily on any single individual. In Rome, by contrast, the main courts consisted of either a single judge or a small number of judges whose reputations — especially since they always deliberated in public — were very much at stake with every decision. In doubtful cases, these courts naturally tried to protect themselves from criticism by following the example or precedent set by judges who had sat before them, either in the same or a similar court. This attention to practice and precedent is what gave Roman law its regular and orderly character — the system that has been handed down to us. The same kind of attention has produced the same kind of results in the legal systems of every other country where it has been practiced. The superior character of the Romans compared to the Greeks, so much remarked upon by Polybius and Dionysius of Halicarnassus, was probably owed more to the better design of Roman courts than to any of the causes those writers suggested. The Romans were said to be particularly distinguished by their respect for oaths. But people who were accustomed to swearing oaths only before careful, well-informed courts would naturally be much more thoughtful about what they swore than people who did the same thing before disorderly mob assemblies.

The intellectual and military abilities of the Greeks and Romans were, it will readily be agreed, at least equal to those of any modern nation. We're probably even inclined to overrate them. But except for military training, the state seems to have made no effort to develop those impressive abilities. I cannot be persuaded that the musical education of the Greeks had much to do with forming them. Yet teachers were clearly available to instruct the better-off citizens of those nations in every art and science that their society made it necessary or useful to learn. The demand for such instruction produced, as it always does, the talent for providing it. And the competitive drive that unrestricted competition never fails to generate appears to have brought that talent to a very high level of excellence. In the attention that the ancient philosophers commanded, in the influence they exercised over their students' opinions and principles, and in their ability to shape the conduct and conversation of those students, they appear to have been far superior to any modern teachers. In modern times, the dedication of university teachers is more or less undermined by the circumstances that make them more or less independent of their actual success and reputation. Their guaranteed salaries also put private teachers — who would compete with them — in the same position as a merchant trying to trade without a subsidy against competitors who enjoy a considerable one. If he sells at nearly the same price, he can't earn the same profit, and poverty and ruin will inevitably follow. If he tries to charge much more, he'll have so few customers that his situation won't improve. Degree requirements, moreover, are in many countries necessary — or at least extremely useful — for most people in learned professions, which is to say the vast majority of people who need an advanced education. But those degrees can only be obtained by attending lectures at the public universities. No matter how carefully someone studies with the best private teacher, it won't entitle him to a degree. These are the various reasons why a private teacher of any subject commonly taught at universities is, in modern times, generally considered to be at the very bottom of the intellectual world. A genuinely talented person could hardly find a more humiliating or unprofitable way to use his abilities. University endowments have, in this way, not only corrupted the performance of public teachers but have made it nearly impossible to find any good private ones.

If there were no public institutions for education, no system or science would be taught for which there was no actual demand — or which circumstances didn't make either necessary, convenient, or at least fashionable to learn. A private teacher could never make a living by teaching either an outdated version of a useful science, or a science universally considered to be nothing but useless, pedantic nonsense. Such systems can survive only in those established educational institutions whose income and prosperity depend largely on their endowments rather than their reputations, and are completely independent of their actual effort. Without public institutions for education, a person who had completed the best available course of study with real ability and dedication could not possibly emerge into the world completely ignorant of everything that educated people commonly talk about.

There are no public institutions for the education of women, and accordingly there is nothing useless, absurd, or ridiculous in the standard course of their education. They are taught what their parents or guardians judge necessary or useful for them to learn, and nothing else. Every part of their education clearly serves some practical purpose: either to cultivate their natural gifts, or to develop in them the qualities of modesty, discretion, and good household management — preparing them to run a household well, and to do so with competence once they have one. At every stage of her life, a woman benefits from every part of her education. A man, by contrast, rarely benefits in any part of his life from some of the most laborious and tedious parts of his.

Should the public, then, pay no attention at all to the education of the people? Or if it should, what aspects of education should it address for different groups, and how should it go about it?

In some cases, the conditions of society naturally develop in most people — without any government involvement — nearly all the abilities and virtues that society needs or can even accommodate. In other cases, however, conditions do not do this, and some government attention is necessary to prevent the near-total mental deterioration of the general population.

As the division of labor advances, the work of the vast majority of people who live by their labor — that is, the bulk of the population — gets confined to a very few simple operations, often just one or two. But most people's minds are inevitably shaped by their daily work. A person whose entire life is spent performing a handful of simple, repetitive tasks never has to use his mind or exercise his ingenuity in solving problems that never arise. He naturally loses the habit of thinking, and generally becomes as dull and ignorant as it's possible for a human being to become. This mental numbness makes him incapable not only of enjoying or participating in any thoughtful conversation, but of feeling any generous, noble, or compassionate emotion, and consequently of forming sound judgments about even the ordinary duties of private life. He becomes completely incapable of understanding the great interests of his country, and unless very deliberate efforts have been made to educate him, equally incapable of defending it in war. The monotony of his unchanging life naturally destroys his courage and makes him recoil from the irregular, uncertain, adventurous life of a soldier. It even degrades his physical fitness, making him incapable of exerting his strength with vigor and endurance in any work other than the narrow task he was trained for. His skill at his own specific job seems to come at the cost of his intellectual, social, and physical capacities. But in every advanced and civilized society, this is the condition into which the working poor — that is, the great majority of the people — must inevitably fall, unless the government takes steps to prevent it.

Things are different in the simpler societies — those of hunters, herders, and even farmers in that early stage of agriculture that comes before the development of manufacturing and international trade. In such societies, the varied tasks of daily life force everyone to use their minds constantly and to come up with solutions to problems that continually arise. Mental creativity stays alive, and the mind is not allowed to sink into that drowsy stupidity which, in civilized society, seems to numb the understanding of nearly all the working classes. In those simpler societies, every person is, as I've noted before, a warrior. Every person is also, in some sense, a political thinker, capable of forming a reasonable judgment about the interests of the community and the conduct of its leaders. How well their chiefs judge in peacetime, or lead in war, is something almost everyone among them can readily observe. In such a society, no one develops the highly refined and advanced understanding that a few individuals sometimes possess in a more civilized state. Though there's plenty of variety in each person's daily tasks, there isn't a great deal of variety in the tasks of the whole society. Everyone does, or is capable of doing, nearly everything that anyone else does. Everyone has a fair amount of knowledge, ingenuity, and inventiveness — but hardly anyone has a great deal of any of these. The level that most people have is generally enough for the simple business of such a society. In a civilized society, by contrast, though there's little variety in what any single individual does, there's an almost infinite variety in what the whole society does. These varied occupations present a dazzling array of subjects for contemplation to the few people who, not being tied to any particular occupation, have the leisure and inclination to study how others work. The contemplation of so vast a range of activities naturally exercises their minds through endless comparisons and combinations, making their understanding extraordinarily sharp and broad. But unless those few happen to find themselves in certain very specific positions of influence, their great abilities, however personally admirable, may contribute very little to the good governance or happiness of their society. Despite the brilliance of these few, all the nobler qualities of human character may be, in large measure, stamped out in the great mass of the people.

The education of ordinary working people requires, in a civilized commercial society, perhaps more public attention than that of the well-to-do. People of some means are generally eighteen or nineteen before they enter the particular business, profession, or trade through which they plan to make their way in the world. Before that, they have ample time to acquire — or at least to prepare themselves for later acquiring — all the knowledge and accomplishments that can earn them public respect. Their parents or guardians are generally eager enough to see them properly educated, and in most cases are willing to spend whatever is necessary. When people of means are not well educated, it's seldom because too little money was spent on their education; it's because that money was spent badly. It's seldom because there are no teachers available; it's because the teachers who are available are negligent and incompetent, and in the current state of affairs, it's difficult — or rather impossible — to find better ones. The careers of the well-to-do, moreover, are not like those of ordinary working people: simple and repetitive. They are almost always complex and intellectually demanding. The minds of people engaged in such work rarely go dull for lack of exercise. Their jobs also don't typically exhaust them from morning to night. They generally have plenty of leisure time in which to deepen their knowledge in any useful or enriching field they may have begun studying or developed a taste for earlier in life.

It's different for ordinary working people. They have little time to spare for education. Their parents can barely afford to support them even in childhood. As soon as they're old enough to work, they must take up some trade to earn their living. That trade is usually so simple and repetitive that it gives little exercise to the mind, while at the same time their labor is so constant and so exhausting that it leaves them little free time and even less desire to think about anything else.

But even though ordinary working people in a civilized society can't be as well educated as the well-to-do, the most essential skills — reading, writing, and basic arithmetic — can be learned at such an early age that even those destined for the lowest-paid jobs have time to acquire them before starting work. For a very modest cost, the government can make it easier for the entire population to acquire these essential skills — can encourage it, and can even make it mandatory.

The government can make it easier by establishing a small school in every parish or district, where children can be taught for a fee so low that even an ordinary laborer can afford it. The teacher should be partly, but not entirely, paid by the public — because if he were wholly or even mainly paid by it, he would quickly learn to slack off. In Scotland, the establishment of parish schools like this has taught nearly all the common people to read, and a very large proportion of them to write and do arithmetic. In England, charity schools have had a similar effect, though not as universally, because they haven't been set up as widely. If in these little schools the books used to teach children to read were a bit more instructive than they usually are — and if, instead of a smattering of Latin (which can hardly ever be of any use to working-class children), they were taught the basics of geometry and mechanics — the basic education of ordinary people would be about as complete as it could reasonably be. There's hardly a common trade that doesn't offer opportunities to apply the principles of geometry and mechanics, and these subjects would therefore gradually exercise and improve the common people's understanding of them — providing the essential foundation for the most advanced as well as the most useful sciences.

The government can encourage the acquisition of these basic skills by offering small prizes and little badges of distinction to the children of working families who excel in them.

The government can make them effectively mandatory by requiring every person to pass an examination in these basics before being admitted to practice any trade, or before being allowed to set up in business in any town or village.

This was how the Greek and Roman republics maintained the martial spirit of their citizens: by making military and athletic training easy to access, by encouraging it, and by effectively requiring the entire population to learn it. They made access easy by providing designated places for practice and training, and by allowing certain instructors the privilege of teaching there. These instructors don't appear to have had either salaries or exclusive privileges of any kind. Their only compensation came from their students. And a citizen who had trained in the public gymnasium had no legal advantage over one who had trained privately, as long as the private training was equally good. Those republics encouraged the practice by awarding small prizes and marks of distinction to those who excelled. To have won a prize at the Olympic, Isthmian, or Nemean games brought honor not only to the winner but to his entire family. And the obligation of every citizen to serve a certain number of years in the army, if called upon, effectively made learning these exercises a practical necessity — since without them, he wouldn't be fit for service.

As societies advance, the practice of military exercises — unless the government actively supports it — gradually declines, and with it the martial spirit of the general population. The example of modern Europe makes this abundantly clear. But the security of every society must always depend, to some degree, on the martial spirit of its people. In our present era, that spirit alone, without the support of a well-trained standing army, probably wouldn't be enough to defend any society. But where every citizen has the spirit of a soldier, a smaller standing army would suffice. Moreover, that spirit would greatly reduce the dangers — whether real or imagined — that people commonly fear from standing armies. Just as it would greatly aid an army's operations against a foreign invader, it would also obstruct those operations if they were ever, unfortunately, turned against the people's own government.

The ancient institutions of Greece and Rome seem to have been far more effective at maintaining the martial spirit of the general population than what we call modern militias. They were much simpler. Once established, they essentially ran themselves, requiring little or no government attention to keep them functioning at full strength. Modern militia systems, by contrast, require the constant and laborious attention of government just to keep them from falling apart — and without that attention, they invariably collapse into total neglect and disuse. The ancient systems were also far more universal. Through them, the entire population was thoroughly trained in the use of arms, whereas modern militia regulations only ever reach a small fraction of the people — with the possible exception of Switzerland. But a coward — a person incapable of either defending or standing up for himself — is clearly missing one of the most essential qualities of a complete human being. He is as mutilated and deformed in his mind as another person might be in his body through the loss of essential limbs. And he is clearly the more miserable of the two, because happiness and misery reside entirely in the mind and must depend more on the health of the mind than of the body. Even if the martial spirit of the population had no practical value for national defense, preventing the kind of mental mutilation, deformity, and wretchedness that cowardice inevitably brings from spreading through the general population would still deserve the most serious attention of any government — in the same way that preventing the spread of a disfiguring disease would deserve its attention, even if that disease were neither fatal nor dangerous, simply because it is a great public evil.

The same can be said of the widespread ignorance and mental dullness that, in civilized societies, so often seem to numb the minds of the working classes. A person without the proper use of his intellectual faculties is, if anything, more pitiable than a coward, and seems to be damaged in an even more fundamental part of what makes us human. Even if the state derived no practical benefit from educating the working classes, it would still be worth ensuring that they weren't left entirely uneducated. But the state does, in fact, derive considerable benefit from their education. The better educated people are, the less susceptible they are to the delusions of fanaticism and superstition — which, among uneducated populations, frequently cause the most terrible upheavals. An educated and intelligent populace, moreover, is always more decent and orderly than an ignorant and dull one. Educated people feel more individually self-respecting, and are more likely to command the respect of their lawful leaders; they are therefore more inclined to give those leaders the respect they deserve. They are more disposed to examine, and more capable of seeing through, the self-interested complaints of demagogues and agitators, and are therefore less likely to be misled into reckless or unnecessary opposition to the government. In free countries, where the security of the government depends heavily on the public's opinion of its conduct, it must surely be of the highest importance that the people not be inclined to judge rashly or recklessly.

The institutions for instructing people of all ages are mainly those devoted to religious instruction. This kind of instruction aims not so much at making people good citizens in this life, but at preparing them for a better one in the next. The teachers of religious doctrine, like other teachers, may either depend entirely on the voluntary contributions of their listeners for their living, or they may draw it from some other source that the law provides — such as land, a tithe or land tax, or a fixed salary. Their effort, their zeal, and their energy are likely to be much greater in the first situation than in the second. In this respect, the teachers of new religions have always had a huge advantage when attacking established religious systems whose clergy, comfortably resting on their guaranteed incomes, have let the fervor of faith and devotion among ordinary people decline. Having given themselves over to laziness, they've become completely incapable of mounting any vigorous defense of even their own institution. The clergy of an established and well-funded church frequently become refined, educated people who have all the polished qualities that earn them the respect of high society. But they tend to gradually lose the qualities — both good and bad — that gave them influence over the common people and that had probably been the original reasons for their religion's success and establishment in the first place. When such a clergy is attacked by a group of popular, bold — though perhaps stupid and ignorant — religious enthusiasts, they find themselves as utterly defenseless as the lazy, soft, well-fed nations of southern Asia when invaded by the tough, hungry warriors of the north. Clergy in this predicament typically have no option left but to call on the civil government to persecute, destroy, or drive out their rivals as disturbers of the public peace. This is how the Roman Catholic clergy called on the government to persecute the Protestants, how the Church of England called for persecution of the Dissenters, and how, in general, every religious group that has enjoyed a century or two of legal establishment has found itself incapable of mounting any effective defense against a new movement that attacks its doctrines or discipline. On these occasions, the advantage in learning and polished writing may sometimes lie with the established church. But the arts of popularity — all the techniques for winning converts — are always on the side of its challengers. In England, these arts have long been neglected by the well-funded clergy of the established church and are now mainly practiced by the Dissenters and the Methodists. The independent funding that has in many places been arranged for Dissenting preachers — through voluntary subscriptions, trust arrangements, and other workarounds of the law — seems to have considerably dampened their zeal and energy. Many of them have become very learned, thoughtful, and respected people, but they've largely stopped being powerful popular preachers. The Methodists, with half the education of the Dissenters, are far more popular.

In the Roman Catholic Church, the dedication and zeal of the lower clergy are kept more alive by the powerful motive of self-interest than in perhaps any established Protestant church. Parish priests derive a significant portion of their income from the voluntary offerings of their congregations — and the practice of confession gives them many opportunities to increase those offerings. The mendicant orders — the Franciscans, Dominicans, and others who live by begging — derive their entire income from such offerings. For them, it's like light cavalry in some armies: no plunder, no pay. Parish priests are like teachers whose pay depends partly on salary and partly on student fees — and the fee portion always depends on their reputation and effort. The mendicant orders are like teachers who live entirely on what they can earn through their own efforts. They're therefore compelled to use every technique that can stir up the devotion of ordinary people. The establishment of the two great mendicant orders of St. Dominic and St. Francis, as Machiavelli observed, revived the fading faith and devotion of the Catholic Church in the thirteenth and fourteenth centuries. In Catholic countries, the spirit of devotion is sustained entirely by the monks and the poorer parish clergy. The senior Church dignitaries, with all the polish of gentlemen and sometimes the accomplishments of scholars, are careful enough to maintain discipline over their subordinates but rarely bother themselves with actually instructing the people.

"Most arts and professions in a state," says by far the most brilliant philosopher and historian of our age, "are of such a nature that, while they serve the interests of society, they also benefit or please particular individuals. In such cases, the government's usual policy — except perhaps when an art is first being introduced — is to leave the profession alone and trust its encouragement to the individuals who benefit from it. The practitioners, finding that their profits rise as they please their customers, increase their skill and effort as much as possible. And as long as the government doesn't interfere clumsily, the product is always sure to be roughly proportioned to demand.

"But there are also some occupations which, though useful and even necessary to a state, bring no benefit or pleasure to any particular individual. In these cases, the government must take a different approach. It must provide public support for the people in these professions, and it must guard against the negligence to which they'll naturally be prone — either by attaching special honors to the profession, by establishing a clear hierarchy of ranks and strict accountability, or by some other means. People employed in finance, the navy, and the judiciary are examples.

"At first glance, you might think that clergy belong to the first category, and that their livelihood, like that of lawyers and doctors, can safely be left to the generosity of individuals who value their doctrines and find comfort in their spiritual ministry. Their dedication and skill will no doubt be sharpened by this incentive, and their expertise in managing people's spiritual lives must improve with practice and experience.

"But if we look more closely, we'll find that this self-interested zeal among clergy is exactly what every wise lawmaker will try to prevent. In every religion except the true one, it's deeply harmful, and it even tends to corrupt true religion by injecting a strong dose of superstition, folly, and delusion. Every spiritual entrepreneur, wanting to make himself more precious and sacred in his followers' eyes, will fill them with violent hatred of all other groups and will constantly try to excite the flagging devotion of his audience with some novelty. No regard will be paid to truth, morality, or decency in the doctrines preached. Every belief will be adopted that best suits the disordered emotions of human nature. Customers will be drawn to each congregation through ever more inventive techniques for playing on the passions and gullibility of the public. In the end, the government will find it has paid dearly for its supposed thriftiness in refusing to fund an established clergy. In reality, the most sensible arrangement the government can make with spiritual guides is to bribe their laziness by giving them fixed salaries, making it unnecessary for them to do anything more than keep their flocks from wandering off in search of new pastures. In this way, established churches, though they usually begin from religious motives, end up serving the political interests of society."

But whatever the good or bad effects of providing clergy with independent incomes may have been, this kind of funding has almost never been given to them out of any consideration of those effects. Times of intense religious conflict have generally also been times of intense political conflict. On these occasions, each political faction has found it — or believed it found it — in its interest to ally itself with one or another of the competing religious groups. But this could only be done by adopting, or at least supporting, the particular doctrines of that group. The religious group lucky enough to ally itself with the winning political side naturally shared in its ally's victory. Backed by the victors' support and protection, it was soon able to silence and suppress all its rivals. Those rivals, having generally allied themselves with the losing political side, became the victors' enemies. The clergy of the triumphant religious group, now in total command of the field and at the peak of their influence over ordinary people, were powerful enough to overawe even the leaders of their own political party and to compel the government to respect their opinions and wishes. Their first demand was usually that the government silence and suppress all rival religious groups. Their second was that it provide them with an independent income. Since they had generally contributed significantly to the political victory, it seemed only fair that they should get a share of the spoils. Besides, they were tired of catering to the people and depending on popular whims for their living. In making this demand, they were thinking of their own comfort without worrying about what effect it might have on their future influence and authority. The government — which could only comply by giving them something it would much rather have kept — was seldom eager to agree. But necessity always forced its hand eventually, though usually only after many delays, evasions, and pretended excuses.

But imagine that politics had never called on religion for help — that the winning party, after its victory, had never adopted the doctrines of any particular religious group over the others. In that case, it would probably have treated all religious groups equally and impartially, allowing everyone to choose their own priest and their own religion as they saw fit. Under these circumstances, there would no doubt have been a huge number of religious groups. Nearly every congregation might have become its own little sect, with its own distinctive beliefs. Each preacher would have felt compelled to make every possible effort, using every art at his disposal, to keep and grow his following. But since every other preacher would have felt the same pressure, no single preacher or group of preachers could have become very successful. The passionate, self-interested zeal of religious teachers is only dangerous and troublesome when there is either just one tolerated religion in a society, or when a large society is divided into two or three major denominations whose teachers act in concert under organized leadership. But that zeal becomes completely harmless when the society is divided into two or three hundred — or even two or three thousand — small groups, none of which is large enough to threaten public peace. The teachers of each little group, finding themselves surrounded on all sides by more rivals than allies, would be forced to develop the kind of tolerance and moderation that is so rarely found among the leaders of the great religions — those whose doctrines are backed by the state and revered by nearly everyone in vast kingdoms and empires, and who therefore see nothing around them but followers, disciples, and adoring admirers. The teachers of each small group, finding themselves essentially alone, would be compelled to respect those of nearly every other group. The mutual concessions they would find it both convenient and agreeable to make would, over time, probably reduce the doctrines of most of them to that pure, rational religion — free from absurdity, fraud, and fanaticism — that wise people have wished to see established in every age. But this is a kind of religion that the law has perhaps never established in any country, and probably never will — because when it comes to religion, the law has always been, and probably always will be, influenced more or less by popular superstition and hysteria. This plan of religious organization — or rather, of no religious organization at all — was what the sect called the Independents, admittedly a group of rather extreme enthusiasts, proposed to establish in England toward the end of the Civil War. If it had been adopted, this system, despite its rather unphilosophical origins, would probably by now have produced the most philosophically admirable tolerance and moderation regarding every kind of religious belief. It has been established in Pennsylvania, where, although the Quakers happen to be the most numerous group, the law truly favors no sect over any other, and it is said to have produced exactly this kind of philosophical good temper and moderation.

But even if this equal treatment of all religions didn't produce tolerance and moderation in every religious group in a particular country — even if only some of them became more reasonable — as long as the groups were numerous enough, and therefore each one small enough to pose no threat to public order, the excessive zeal of each for its own beliefs could not produce any very harmful effects. On the contrary, it might produce several good ones. And if the government was firmly committed both to leaving them all alone and to making them all leave each other alone, there would be little danger that they wouldn't subdivide themselves quickly enough on their own to keep any one group from growing too large.

In every civilized society — every society where class distinctions have become firmly established — there have always been two different moral codes operating at the same time. One might be called the strict or austere system. The other might be called the permissive, or if you prefer, the loose system. The common people generally admire and respect the former. The fashionable elite generally prefer and practice the latter. The main difference between these two systems lies in how severely they condemn the vices of irresponsibility — the vices that tend to arise from great prosperity and an excess of fun and good humor. In the permissive system, luxury, wild and even disorderly partying, the pursuit of pleasure to the point of excess, sexual promiscuity (at least in one gender), and similar behavior — as long as they aren't accompanied by gross indecency and don't lead to dishonesty or injustice — are generally treated with a good deal of indulgence and are easily excused or forgiven. In the austere system, these same excesses are regarded with the utmost horror and disgust. The vices of irresponsibility are always devastating for working people. A single week of recklessness and excess is often enough to ruin a poor worker permanently and drive him, through despair, to commit the most terrible crimes. The wiser and more responsible members of the working class therefore always view such excess with profound horror, because their own experience tells them how immediately destructive it is for people in their situation. For a wealthy person, by contrast, several years of disorder and extravagance won't necessarily spell ruin. People of that class tend to see the ability to indulge in some excess as one of the perks of their wealth, and the freedom to do so without criticism as one of the privileges of their social position. They therefore view such behavior in their own class with little disapproval, or none at all.

Nearly all religious movements have begun among the common people, who have generally provided their earliest and most numerous followers. The strict moral code has accordingly been adopted by these movements almost without exception — because it was the system most likely to appeal to the class of people they were first trying to win over. Many of them — perhaps most — have even tried to bolster their credibility by making the strict code even stricter, pushing it to the point of absurdity and extremism. And this excessive rigidity has often done more to win them the respect and reverence of ordinary people than anything else.

A person of wealth and status is, by virtue of his position, a prominent member of a large social circle that watches everything he does, and that thereby compels him to watch himself. His reputation and influence depend heavily on the respect that his social circle has for him. He doesn't dare do anything that would disgrace him within it, and he's obligated to strictly follow whichever moral code — permissive or austere — his social class generally prescribes. A person of modest means, on the other hand, is far from being a prominent member of any important social circle. As long as he stays in his country village, people notice his behavior, and he has to pay attention to it himself. In that situation — and only in that situation — he has what we might call "a reputation to protect." But the moment he moves to a big city, he vanishes into anonymity and obscurity. No one notices his behavior, so he's very likely to stop noticing it himself, and to give himself over to every kind of low-grade vice and bad behavior. The most effective way he can emerge from this obscurity — the surest way to make his conduct matter to some respectable community — is by joining a small religious group. From that moment, he gains a degree of social standing he never had before. All his fellow members, for the credit of their group, are motivated to observe his conduct. If he causes any scandal, if he strays too far from the strict morals that these groups almost always demand of their members, they punish him with what is always a very severe penalty — even when it carries no legal consequences — namely, expulsion or excommunication from the group. In small religious groups, accordingly, the morals of the common people have almost always been remarkably orderly and well-regulated — generally much more so than in the established church. The morals of these little groups have, admittedly, often been rather unpleasantly rigid and antisocial.

There are two very easy and effective remedies, however, that together would allow the state, without any coercion, to correct whatever is antisocial or unpleasantly rigid in the morals of the various small religious groups into which the country might be divided.

The first remedy is the study of science and philosophy, which the state could make nearly universal among all people of middle-class or higher status — not by paying teachers salaries that would make them lazy and negligent, but by requiring some kind of examination, even in the more advanced and difficult sciences, before anyone could practice a professional career or be considered for any honorable position of trust or responsibility. If the state imposed on the professional class the requirement to learn, it wouldn't need to worry about providing them with good teachers. They would quickly find better teachers on their own than any the state could provide. Science is the great antidote to the poison of fanaticism and superstition. And once the upper and professional classes were protected from it, the working classes wouldn't be very exposed to it either.

The second remedy is the availability and liveliness of public entertainment. The state, by encouraging public entertainment — that is, by granting complete freedom to anyone who wants, without scandal or indecency, to amuse and entertain the public through painting, poetry, music, dancing, theater, and all sorts of dramatic performances — would easily dispel in most people the dark and gloomy mood that is almost always the breeding ground for popular superstition and fanaticism. Public entertainment has always been dreaded and hated by all the fanatical promoters of religious hysteria. The cheerfulness and good humor that entertainment inspires were entirely incompatible with the mental state they needed their followers to be in — the state of mind they could work on most effectively. Theater, in particular, by frequently exposing their tricks to public ridicule, and sometimes even to public outrage, was more than any other form of entertainment the object of their special loathing.

In a country where the law favored no religion over any other, it wouldn't be necessary for any of the clergy to have any particular dependence on the head of state, and the government would have no need to involve itself in appointing or dismissing them. In such a situation, the government would have no reason to concern itself with them at all, beyond keeping the peace among them — the same way it keeps the peace among the rest of its citizens — by preventing them from persecuting, abusing, or oppressing one another. But things are entirely different in countries that have an established or official religion. In those countries, the government can never feel secure unless it has substantial influence over most of the teachers of that religion.

The clergy of every established church form a powerful corporation. They can act in concert and pursue their collective interest with a single plan and spirit, as effectively as if they were all under one leader — and in fact, they often are. Their corporate interest is never the same as the government's, and sometimes it's directly opposed to it. Their overriding concern is to maintain their authority over the people, and that authority depends on the supposed certainty and importance of everything they teach, and on the supposed necessity of believing every bit of it with complete, unquestioning faith in order to avoid eternal damnation. If the government should be imprudent enough to appear to mock or doubt even the most trivial point of their doctrine, or if out of basic humanity it tries to protect those who do, the touchy pride of clergy who owe the government nothing is immediately roused to denounce it as godless and to deploy all the terrors of religion to convince the people to transfer their loyalty to some more obedient ruler. If the government opposes any of the clergy's claims or power grabs, the danger is equally great. Rulers who have dared to stand up to the Church in this way have generally been charged not only with rebellion but with heresy as well — no matter how fervently they professed their faith and submitted to every belief the Church prescribed. But religious authority is more powerful than any other kind. Religious terror overwhelms all other fears. When the official clergy spread doctrines among the people that undermine the government's authority, the government can maintain its position only through force or a standing army. Even a standing army can't provide lasting security, because unless the soldiers are foreign mercenaries (which is rarely the case), they're drawn from the general population and are likely to be swayed by the very same doctrines. The revolutions constantly stirred up by the turbulent Greek clergy at Constantinople, as long as the Eastern Roman Empire survived, and the upheavals caused by the turbulent Roman clergy across Europe for centuries, amply demonstrate how precarious and insecure the situation of any government must be when it has no effective way of managing the clergy of the established religion.

Questions of religious doctrine and all other spiritual matters are obviously not within the proper jurisdiction of a secular government, which may be well qualified to protect the people but is rarely thought qualified to instruct them. The government's authority on these matters can rarely match the united authority of the established clergy. Yet public peace and the government's own security may frequently depend on what doctrines the clergy choose to promote. Since the government can rarely challenge clerical decisions directly with any real authority, it needs to be able to influence those decisions. And it can only influence them through the fears and hopes of the individual clergymen — the fear of demotion or punishment, and the hope of promotion.

In every established church, clerical positions are a kind of permanent appointment that the holders enjoy not at the government's pleasure, but for life or during good behavior. If clergy held their positions more precariously — if they could be dismissed over any minor disagreement with the government — they probably couldn't maintain their authority with the people, who would then see them as mere hired agents of the state, whose teachings couldn't be trusted. But if the government were to try irregularly and forcefully to strip clergy of their positions — say, because they had been preaching some especially provocative political sermon — such persecution would only make both the clergy and their message ten times more popular, and therefore ten times more troublesome, than before. Fear is almost always a terrible tool of government, and it should never be used against any group of people who have even the smallest claim to independence. Trying to intimidate them only inflames their hostility and hardens their resistance — resistance that gentler treatment might easily have softened or eliminated. The heavy-handed methods that the French government typically used to force its courts of law to register unpopular decrees rarely succeeded, even though the usual tactic — imprisoning all the defiant judges — would seem forceful enough. The Stuart kings sometimes used similar methods to try to influence members of the English Parliament, and generally found them equally stubborn. The English Parliament is now managed differently. And a small experiment that the Duke of Choiseul conducted about twelve years ago with the Parliament of Paris demonstrated clearly enough that all the French courts could have been handled the same way. But that experiment wasn't continued. For although management and persuasion are always the easiest and safest tools of government, just as force and violence are the worst and most dangerous, such is the natural arrogance of those in power that they almost always refuse to use the good tool as long as they can get away with using the bad one. The French government could use force, and therefore scorned to use persuasion. But there is no group of people, as I believe the experience of every age shows, upon whom it is so dangerous — or rather so utterly self-defeating — to use force and violence, as the respected clergy of an established church. The rights, privileges, and personal liberty of every individual clergyman who is on good terms with his own order are, even under the most authoritarian governments, more carefully respected than those of almost any other person of comparable rank and wealth. This holds true across every degree of authoritarianism, from the relatively gentle government of Paris to the brutal government of Constantinople. Though clergy can almost never be coerced, they can be managed as easily as anyone else. And the government's security, as well as the public peace, depends very much on managing them well. The means of doing so consist entirely in the promotions the government has at its disposal.

In the original structure of the Christian Church, the bishop of each diocese was elected by the combined votes of the clergy and people of the episcopal city. The people didn't keep their voting rights for long, and while they did, they almost always acted under the influence of the clergy, who seemed to be their natural guides in spiritual matters. The clergy, however, soon grew tired of the bother of managing popular elections and found it easier to simply elect bishops themselves. Abbots, similarly, were elected by the monks of each monastery, at least in most abbeys. All the smaller church positions within a diocese were assigned by the bishop, who gave them to whichever clergy he chose. All church promotions were thus in the hands of the Church itself. The government, though it might have some indirect influence on elections, and though its consent was sometimes formally requested before and after an election, had no direct or reliable way of managing the clergy. Every ambitious clergyman naturally tried to impress not the government but his own clerical superiors, since only they could promote him.

Throughout most of Europe, the Pope gradually took over the appointment of nearly all bishops and abbots — what were called "consistorial benefices" — and then, through various schemes and pretexts, the appointment of most of the smaller positions within each diocese as well. The bishop was left with barely enough patronage to maintain decent authority over his own clergy. This arrangement made the government's position even worse than before. The clergy of every country in Europe were now organized into a sort of spiritual army, spread across different regions but with all its movements and operations directed by a single commander following a unified strategy. The clergy of each country were like a division of this army, whose operations could easily be supported and reinforced by all the other divisions stationed in neighboring countries. Each division was not only independent of the government of the country where it was stationed and supported, but actually answered to a foreign ruler — the Pope — who could at any time turn its forces against the local government, backed by the combined forces of all the other divisions.

These forces were the most formidable you could imagine. In the old Europe, before the rise of manufacturing and trade, the wealth of the clergy gave them the same kind of influence over common people that the great feudal lords had over their tenants and retainers. The vast landed estates that the misguided piety of both rulers and private individuals had given to the Church had developed their own courts and local government, just like the estates of the great feudal lords, and for the same reasons. On these great estates, the clergy or their agents could keep order without any help from the king, while the king couldn't keep order there without the clergy's help. The clergy's legal jurisdiction over their estates was therefore just as independent and just as exclusive of the royal courts as that of the great secular lords. The clergy's tenants, like those of the feudal lords, held their land entirely at their lord's discretion and could be called up at any time to fight in whatever cause the clergy chose. On top of the rents from these estates, the clergy also received tithes — a very large share of the rents from all the other estates in every European kingdom. Since most of these revenues came in the form of goods — grain, wine, cattle, poultry, and so on — the total vastly exceeded what the clergy could consume themselves. And since there was no manufacturing industry whose products they could buy with the surplus, the only way they could use this enormous excess was the same way the feudal lords used theirs: through extravagant hospitality and massive charity. And indeed, both the hospitality and the charity of the medieval clergy were reportedly on a vast scale. They not only supported nearly all the poor in every kingdom, but many knights and gentlemen had no other way of making a living than by traveling from monastery to monastery, ostensibly on religious pilgrimages but actually to enjoy the clergy's hospitality. The retainers of some individual bishops and abbots were as numerous as those of the greatest secular lords, and the retainers of all the clergy combined were probably more numerous than those of all the secular lords put together. There was always much more unity among the clergy than among the lay lords. The clergy operated under an organized hierarchy answering to the Pope. The lay lords operated under no regular organization, were perpetually jealous of each other and of the king. So even if the clergy's tenants and retainers had been fewer in number than those of the great lords — and their tenants probably were fewer — their unity would have made them more formidable. The clergy's hospitality and charity didn't just give them command of a large temporal force; it also hugely amplified the power of their spiritual authority. These virtues earned them the deepest respect and reverence among the common people, most of whom were regularly, and all of whom were occasionally, fed by them. Everything connected to such a beloved institution — its possessions, its privileges, its teachings — naturally came to seem sacred in the eyes of the common people, and any violation of them, real or alleged, was considered the worst kind of sacrilege. In this state of affairs, if the king frequently found it hard to resist a conspiracy of a few powerful feudal lords, it's no wonder he found it even harder to resist the united force of his own country's clergy, supported by the clergy of every neighboring country. The wonder is not that he sometimes had to give in, but that he ever managed to resist at all.

The privileges of the medieval clergy — which to us living today seem completely absurd — their total exemption from secular courts, for instance, or what was called in England "benefit of clergy" — were the natural, indeed the inevitable, consequences of this state of affairs. How dangerous it must have been for the king to try to punish a clergyman for any crime whatsoever, if the clergyman's own order was prepared to protect him — to argue either that the evidence was insufficient to convict so holy a man, or that the punishment was too severe for someone whose person had been made sacred by religion. Under these circumstances, the best the king could do was leave him to be tried by the Church's own courts, which, for the honor of their order, were at least motivated to restrain their members from committing truly outrageous crimes, or at least from causing the kind of scandal that might alienate the public.

The gradual advance of industry, manufacturing, and trade — the same forces that destroyed the power of the great feudal lords — destroyed, in the same way throughout most of Europe, the entire temporal power of the clergy. In manufactured and traded goods, the clergy, like the feudal lords, found things they actually wanted to buy with their surplus income, and they thereby discovered the means of spending their entire revenues on themselves without sharing much of anything with others. Their charity became less generous, their hospitality less lavish. Their retainers became fewer and fewer, and eventually disappeared entirely. The clergy, like the feudal lords, also wanted to squeeze more rent from their lands in order to fund their personal indulgences. But higher rents could only be gotten by granting proper leases to tenants, who thereby became largely independent of them. The ties of economic interest that had bound the lower classes to the clergy were, in this way, gradually broken. They were broken even sooner than the equivalent ties to the feudal lords, because church properties — being mostly smaller than the great lords' estates — allowed their holders to start spending their entire income on themselves sooner. Through most of the fourteenth and fifteenth centuries, the power of the great feudal lords remained in full force across most of Europe. But the temporal power of the clergy — their absolute command over the common people — had already declined significantly. The Church's power had been largely reduced to whatever came from its spiritual authority alone, and even that spiritual authority was weakened once it was no longer supported by the clergy's charity and hospitality. The lower classes no longer saw the clergy as the people who comforted them in distress and relieved their poverty. On the contrary, they were provoked and disgusted by the vanity, luxury, and extravagance of the wealthier clergy, who seemed to be spending on their own pleasures what had always been considered the inheritance of the poor.

In this situation, governments across Europe tried to regain the influence they had once had over the appointment of senior church officials. They did so by restoring to the canons of each cathedral their ancient right to elect the bishop, and to the monks of each abbey the right to elect the abbot. In England, reestablishing this old system was the purpose of several laws enacted during the fourteenth century, particularly what is called the Statute of Provisors. In France, the Pragmatic Sanction, established in the fifteenth century, served the same purpose. To make an election valid, the government had to both consent in advance and approve the person elected afterward. And though the election was still supposed to be free, the government had all the indirect means of influence that its position naturally afforded. Similar regulations were established in other parts of Europe. But nowhere was the Pope's power to appoint senior clergy restricted as effectively and universally as in France and England. The Concordat of the sixteenth century later gave the French kings the absolute right to appoint all the senior clergy — the so-called consistorial benefices — of the French Church.

Since the establishment of the Pragmatic Sanction and the Concordat, the French clergy have generally shown less deference to the papal court than those of any other Catholic country. In every dispute between the French king and the Pope, they have almost always taken the king's side. This independence of the French clergy from Rome seems to be primarily based on the Pragmatic Sanction and the Concordat. In earlier periods, the French clergy appear to have been as devoted to the Pope as those of any other country. When Robert, the second king of the Capetian dynasty, was most unjustly excommunicated by the papal court, his own servants reportedly threw the food from his table to the dogs, refusing to taste anything that had been contaminated by contact with someone in his situation. They were taught to do this, we can safely presume, by the clergy of his own kingdom.

The papal claim to appoint senior church officials — a claim in defense of which the Vatican had frequently shaken, and sometimes toppled, the thrones of some of Europe's most powerful rulers — was in this way either limited, modified, or abandoned altogether in many parts of Europe, even before the Reformation. Since the clergy now had less influence over the people, the state had more influence over the clergy. The clergy therefore had both less power and less inclination to make trouble for the state.

The Church of Rome's authority was already in this state of decline when the disputes that sparked the Reformation began in Germany and quickly spread across all of Europe. The new doctrines were received everywhere with enormous popular enthusiasm. They were promoted with all the passionate zeal that the spirit of a political movement typically brings to an attack on established authority. The teachers of the new doctrines, though perhaps no more learned in other respects than many of the theologians defending the established Church, seem generally to have had a better command of Church history and of the origins and development of the doctrinal system on which the Church's authority rested. This gave them an edge in nearly every debate. The austerity of their personal conduct gave them credibility with ordinary people, who contrasted it with the disorderly lives of most of the established clergy. They also possessed, to a much greater degree than their opponents, all the arts of popular communication and winning converts — arts that the lofty and dignified leaders of the established Church had long neglected as beneath them. The logic of the new doctrines appealed to some people, their novelty to many, and contempt for the established clergy to even more. But it was the zealous, passionate, and fiery eloquence with which they were preached everywhere — though often rough and unsophisticated — that won over the greatest number by far.

The success of the new doctrines was almost everywhere so overwhelming that rulers who happened to be on bad terms with the Vatican found they could easily use them to overthrow the Church within their own territories. The Church, having lost the respect and loyalty of the common people, could barely put up a fight. The papal court had alienated some of the smaller German princes in the north, probably considering them too insignificant to bother managing carefully. They all, accordingly, established the Reformation in their domains. The tyranny of Christian II and Archbishop Trolle of Uppsala enabled Gustavus Vasa to expel them both from Sweden. The Pope had backed the tyrant and the archbishop, and Gustavus Vasa had no difficulty establishing the Reformation in Sweden. Christian II was later deposed from the throne of Denmark, where he had made himself as hated as he had in Sweden. The Pope, however, was still inclined to support him. Frederick of Holstein, who had taken the throne in his place, retaliated by following Gustavus Vasa's example. The authorities in Bern and Zurich, who had no particular quarrel with the Pope, established the Reformation in their respective cantons with great ease — just after some of the clergy there had, through a fraud somewhat cruder than usual, made the entire clerical order both despised and ridiculous.

In this critical situation, the papal court worked hard to cultivate the friendship of the powerful rulers of France and Spain (the latter being at the time also the Holy Roman Emperor). With their help, it managed — though not without great difficulty and enormous bloodshed — either to suppress the Reformation entirely or to seriously obstruct its progress in their territories. The Pope was also willing to accommodate the King of England. But given the circumstances, he couldn't do so without offending an even more powerful ruler: Charles V, King of Spain and Holy Roman Emperor. Henry VIII, therefore, although he didn't personally embrace most of the Reformation's doctrines, was able to exploit their widespread popularity to dissolve all the monasteries and abolish papal authority in his kingdom. That he went this far, though no further, gave some satisfaction to the supporters of the Reformation. When they gained control of the government during the reign of his son and successor, they completed without difficulty the work that Henry VIII had begun.

In some countries, like Scotland, where the government was weak, unpopular, and not firmly established, the Reformation was strong enough to overthrow not just the Church, but the government itself for trying to defend the Church.

Among the followers of the Reformation scattered across Europe, there was no universal tribunal — like the papal court or an ecumenical council — that could settle all disputes among them and authoritatively define the boundaries of correct belief. When Reformation followers in one country disagreed with their counterparts in another, and there was no common judge to appeal to, the dispute could never be resolved. Many such disputes arose. The most important ones — for public peace and order — concerned church governance and the right to appoint clergy. These disputes gave birth to the two main branches of Protestantism: the Lutheran and Calvinist traditions, the only Protestant systems whose doctrine and organization have ever been established by law in any part of Europe.

The followers of Luther, along with the Church of England, preserved more or less of the episcopal system of church governance: they maintained a hierarchy among the clergy, gave the government control over appointments to all bishoprics and other senior positions, and thereby made the ruler the effective head of the church. Without taking away the bishop's right to appoint to smaller positions within his diocese, they also recognized the right of the government and other secular patrons to nominate candidates for even those positions. This system of church governance was from the start favorable to peace, good order, and obedience to the civil government. It has never caused any political upheaval in any country where it has been established. The Church of England in particular has always prided itself, with good reason, on its unwavering loyalty. Under this system, clergy naturally try to win favor with the government, the court, and the upper classes, since these are the people who control their career prospects. They court these patrons sometimes, no doubt, through the most shameless flattery, but often by cultivating the skills that genuinely earn the respect of educated, wealthy people: broad learning, refined manners, engaging conversation, and an open contempt for the absurd and hypocritical austerities that fanatics preach and pretend to practice in order to win the adoration of the common people while earning the contempt of the upper classes. Clergy of this kind, however, while they successfully court the powerful, tend to entirely neglect the means of maintaining influence over the common people. They are listened to, respected, and admired by their social superiors. But in front of ordinary people, they are frequently incapable of effectively defending their own sensible, moderate doctrines against even the most ignorant fanatic who chooses to challenge them.

The followers of Zwingli, or more properly of Calvin, took the opposite approach. They gave the people of each parish the right to elect their own pastor whenever a vacancy arose, and established complete equality among the clergy. The first of these arrangements, as long as it remained in force, seems to have produced nothing but chaos and confusion, tending to corrupt the morals of both the clergy and the people. The second seems to have had nothing but good effects.

As long as parishioners kept the right to elect their own pastors, they almost always acted under the influence of the clergy — and generally the most extreme and fanatical among them. The clergy, wanting to maintain their influence in these popular elections, became (or pretended to become) fanatics themselves, encouraged fanaticism among the people, and almost always gave preference to the most extreme candidate. Something as minor as appointing a parish priest almost always caused a fierce fight — not only within the parish itself but across all the neighboring parishes, which invariably took sides. When a parish happened to be in a major city, it divided the entire population into factions. And when that city happened to be an independent republic or the capital of a small republic — as is the case with many cities in Switzerland and the Netherlands — every petty dispute of this kind, on top of inflaming all the existing political rivalries, threatened to create both a new religious split and a new political faction. In these small republics, therefore, the government soon found it necessary, in the interest of public order, to take over the right to fill all vacant positions itself. In Scotland, the most extensive country where this Presbyterian form of church governance has ever been established, patronage rights were effectively abolished by the act establishing Presbyterianism at the beginning of William III's reign. That act at least gave certain groups of people in each parish the power to buy, for a very small price, the right to elect their own pastor. This arrangement was allowed to continue for about twenty-two years but was repealed by the Act of Queen Anne on account of the confusion and disorder this more democratic process had caused almost everywhere. In a country as large as Scotland, however, a disturbance in a remote parish was less likely to threaten the government than in a smaller state. The Act of Queen Anne restored patronage rights. But although Scottish law now gives the position to whoever the patron nominates, the Church sometimes requires — it hasn't been entirely consistent on this point — some degree of community consent before it will confer what is called "the cure of souls," or formal spiritual jurisdiction in the parish. It sometimes, out of a stated concern for the parish's peace, delays the appointment until this consent can be obtained. The behind-the-scenes maneuvering of some of the neighboring clergy — sometimes to secure, but more often to block, this consent — and the populist techniques they cultivate to make their influence felt on these occasions, are perhaps the main things keeping whatever remains of the old fanatical spirit alive, both among the clergy and among the people of Scotland.

The equality that the Presbyterian system establishes among the clergy has two aspects: equality of authority or jurisdiction, and equality of income. In all Presbyterian churches, the equality of authority is complete; the equality of income is not. But the difference between one position and another is rarely large enough to tempt even the holder of a modest one to grovel before his patron through flattery and scheming in hopes of getting a better one. In all Presbyterian churches where patronage rights are firmly established, the clergy generally try to earn the favor of their superiors through nobler and better means: through their learning, through the irreproachable regularity of their lives, and through the faithful and diligent performance of their duties. Their patrons even frequently complain about their independent spirit, which the patrons tend to interpret as ingratitude for past favors. But at worst, this independence is usually nothing more than the natural indifference of someone who knows that no further favors of that kind are ever coming. There is perhaps no more learned, respectable, independent, and dignified group of people anywhere in Europe than the majority of the Presbyterian clergy of the Netherlands, Geneva, Switzerland, and Scotland.

Where church positions are all roughly equal in pay, none of them can be very lucrative, and this modesty of income — though it can certainly be taken too far — has some very positive effects. When you don't have much money, nothing but exemplary character can give you dignity. The vices of frivolity and vanity inevitably make a person of modest income look ridiculous, and are nearly as financially ruinous for him as they are for ordinary working people. In his own conduct, therefore, he's obliged to follow the moral code that working people respect most. He earns their esteem and affection by living the kind of life that his own circumstances and interests would lead him to live anyway. The common people look at him with the same warmth we naturally feel toward someone whose situation is close to our own but whom we feel ought to be somewhat above us. Their kindness naturally draws out his in return. He becomes attentive to their instruction and eager to help and support them. He doesn't even look down on the prejudices of people who are so well-disposed toward him, and never treats them with the contemptuous arrogance we so often see from the proud dignitaries of wealthy, well-funded churches. The Presbyterian clergy accordingly have more influence over the minds of ordinary people than the clergy of perhaps any other established church. It is only in Presbyterian countries that we find the common people converted — without persecution — completely, and almost to a person, to the established church.

In countries where most church positions pay modestly, a university chair is generally a better position than a church appointment. Universities in those countries get to pick the best from among all the country's clergy, who in every country make up by far the largest class of educated people. Where church positions are highly lucrative, on the other hand, the church drains the universities of most of their brilliant scholars, who generally find some patron happy to enhance his own reputation by arranging a church appointment for them. In the first situation, we'll find the universities filled with the country's most distinguished intellectuals. In the second, we'll find few such people on the faculty, and those few will be the youngest members — who are likely to be poached before they've gained enough experience to contribute much. As Voltaire observed, Father Porree, a Jesuit of no great distinction in the world of letters, was the only professor they'd ever had in France whose works were worth reading. In a country that has produced so many brilliant writers, it's rather remarkable that barely a single one of them was ever a university professor. The famous Gassendi was, at the start of his career, a professor at the University of Aix. As soon as his genius became apparent, he was advised that by entering the Church, he could easily find a much more comfortable living and a better situation for pursuing his studies. He immediately took the advice. Voltaire's observation applies, I believe, not just to France but to all Catholic countries. We very rarely find a leading intellectual who is a university professor in any of them, except perhaps in law and medicine — fields that the Church is less likely to poach from. After the Roman Catholic Church, the Church of England is by far the richest and best-funded church in Christendom. In England, accordingly, the Church is continually draining the universities of their best and brightest members. An elderly college tutor known throughout Europe as a distinguished scholar is as rare in England as in any Catholic country. In Geneva, by contrast, and in the Protestant cantons of Switzerland, the Protestant parts of Germany, the Netherlands, Scotland, Sweden, and Denmark, the most distinguished intellectuals these countries have produced have been — not all of them, but the great majority — university professors. In those countries, the universities are continually draining the Church of all its most brilliant minds.

It's perhaps worth noting that, if we set aside the poets, a few orators, and a few historians, the great majority of the eminent intellectuals of both Greece and Rome appear to have been either public or private teachers — generally of either philosophy or rhetoric. This holds true from the days of Lysias and Isocrates, of Plato and Aristotle, through to those of Plutarch and Epictetus, of Suetonius and Quintilian. Requiring someone to teach a particular branch of knowledge year after year seems, in fact, to be the most effective way to make him a complete master of it. By going over the same ground every year, if he's any good at all, he inevitably becomes thoroughly acquainted with every part of it within a few years. And if he forms too hasty an opinion on some point one year, he's very likely to correct it when he revisits the subject the following year. Just as teaching is the natural occupation for a person whose life is devoted to learning, it is also perhaps the kind of work most likely to make him a person of truly solid knowledge and understanding. The modesty of church incomes naturally channels most of a country's scholars toward the occupation where they can be most useful to the public and where they're most likely to receive the best education they're capable of getting. It tends to make their learning both as thorough as possible and as useful as possible.

The revenue of every established church — except for whatever comes from its own land holdings — is, it should be noted, a branch of the general revenue of the state that has been diverted to a purpose quite different from national defense. The tithe, for example, is really a tax on land, which reduces landowners' ability to contribute to national defense. Land rent is, according to some thinkers, the sole source, and according to others, the principal source from which the expenses of any major government must ultimately be funded. The more of this revenue that goes to the Church, the less is available for the state. We can state it as a definite rule: all else being equal, the richer the Church, the poorer either the government or the people must be, and the less able the state is to defend itself. In several Protestant countries — particularly all the Protestant cantons of Switzerland — the revenue that formerly belonged to the Catholic Church (the tithes and church lands) has proven sufficient not only to provide decent salaries for the established clergy, but to cover, with little or no additional taxation, all the other expenses of government. The government of the powerful canton of Bern, in particular, has accumulated from the savings of this fund a very large reserve, said to amount to several million pounds, part of which is held in a public treasury and part invested in the government bonds of various indebted European nations, mainly France and Great Britain. I don't claim to know the total expense of the church in Bern or any other Protestant canton. But by a very precise accounting, it appears that in 1755, the entire revenue of the Scottish clergy — including their church lands and the estimated value of their residences — came to only 68,514 pounds, 1 shilling, and 5 pence. This very modest revenue provides a decent living for 944 ministers. The total cost of the church, including what is occasionally spent on building and repairing churches and ministers' residences, can hardly exceed 80,000 to 85,000 pounds a year. The wealthiest church in Christendom does not maintain the uniformity of faith, the fervor of devotion, or the spirit of discipline, regularity, and strict morals among the general population any better than this very modestly funded Church of Scotland. All the good effects, both civil and religious, that an established church is supposed to produce are produced by it as completely as by any other. Most of the Swiss Protestant churches, which are generally no better funded than the Church of Scotland, produce these effects to an even higher degree. In most of the Protestant cantons, there is not a single person who doesn't belong to the established church. If anyone claims to belong to a different one, the law requires them to leave the canton. But such a harsh — indeed oppressive — law could never have been enforced in such free countries if the diligence of the clergy hadn't already converted virtually the entire population to the established church, with perhaps only a handful of exceptions. In some parts of Switzerland, however, where the accidental union of Protestant and Catholic territories left the conversion incomplete, both religions are not only tolerated but established by law.

The proper performance of any job requires that the pay be matched, as closely as possible, to the nature of the work. If any profession is seriously underpaid, it will inevitably suffer from the mediocrity and incompetence of most of those drawn to it. If it's seriously overpaid, it may suffer even more from their laziness and neglect. A person with a large income, regardless of profession, naturally thinks he should live like others with similar incomes — spending much of his time on parties, showing off, and entertainment. But in a clergyman, this kind of lifestyle not only consumes the time that should be spent on pastoral duties; in the eyes of ordinary people, it also destroys the very sense of moral authority that alone enables him to perform those duties with real weight and credibility.

Part IV

Beyond the expenses needed to carry out the government's various duties, a certain amount must also be spent on maintaining the dignity of the head of state. This expense varies with both the level of a society's development and its form of government.

In a wealthy and advanced society, where all classes of people are spending more and more on their homes, furniture, dining, clothing, and carriages, it can hardly be expected that the head of state alone should resist the trend. Naturally — or rather, inevitably — the leader becomes more extravagant in all these areas too. The dignity of the office practically demands it.

Since a monarch is elevated far above his subjects to a greater degree than the leader of a republic is above his fellow citizens, greater expense is needed to support that greater dignity. We naturally expect more splendor in the court of a king than in the residence of a governor or mayor.

Conclusion of Chapter I

The expense of national defense, and the expense of supporting the dignity of the head of state, are both incurred for the benefit of the entire society. It's therefore reasonable that they should be funded by the general contributions of the whole society, with everyone contributing as close to proportionally to their means as possible.

The expense of administering justice can also, without doubt, be considered as benefiting the whole society. There is nothing wrong, therefore, with funding it through general taxation. The people who actually create this expense, however, are those whose wrongful behavior makes it necessary to seek justice through the courts. And the people who most directly benefit from it are those whom the courts either restore to their rights or protect in them. The cost of administering justice may therefore be quite properly covered by fees paid by one or both of these groups, as the circumstances of each case require — that is, by court fees. It shouldn't be necessary to tap the general revenue for this purpose, except for prosecuting criminals who don't have the means to pay those fees themselves.

Local or provincial expenses that benefit only a particular area — the cost of policing a particular town or district, for example — should be funded by local or provincial revenue, and should not be a burden on the general revenue of the nation. It's unfair for the entire country to pay for an expense whose benefits are confined to one part of it.

The expense of maintaining good roads and transportation links is, no doubt, beneficial to the whole society and may therefore be fairly funded from general taxation. However, this expense most directly and immediately benefits those who travel or ship goods from one place to another, and those who buy such goods. England's turnpike tolls, and the similar duties called "peages" in other countries, place the entire cost on these two groups, thereby relieving the general revenue of a considerable burden.

The expense of educational and religious institutions is likewise beneficial to the whole society and may therefore be fairly funded from general taxation. This expense, however, could perhaps just as reasonably — and possibly even more effectively — be covered entirely by those who directly benefit from the education and instruction, or by the voluntary contributions of those who feel they need one or the other.

When public institutions or works that benefit the whole society either cannot be, or are not, fully funded by the contributions of those who benefit most directly, the shortfall must in most cases be made up from general taxation. The general revenue of the state, beyond covering the costs of national defense and the dignity of the head of state, must fill the gaps in many other specific revenue streams. I'll try to explain the sources of this general or public revenue in the next chapter.

Chapter II: Of the Sources of the General or Public Revenue of the Society

The revenue that must cover not only the cost of national defense and maintaining the dignity of the head of state, but also all the other necessary expenses of government for which no specific funding has been arranged, can be drawn from one of two sources. First, it can come from some fund that belongs specifically to the government and is independent of the people's income. Second, it can come from the people's income itself.

Article I: Revenue Sources That Belong Specifically to the Government

The funds that belong specifically to the government must consist of either capital or land.

The government, like any other owner of capital, can earn revenue from it in two ways: by investing it directly or by lending it out. The return in the first case is profit; in the second, interest.

The revenue of a nomadic chief — a Tartar or Arabian leader — takes the form of profit. It comes mainly from the milk and offspring of his own herds and flocks, which he personally oversees and manages. He is essentially the chief shepherd of his own tribe. It is, however, only in this earliest and most primitive stage of government that profit has ever been the main source of a monarch's public revenue.

Small republics have sometimes earned considerable revenue from the profits of commercial ventures. The republic of Hamburg is said to do so from the profits of a publicly owned wine cellar and pharmacy. A state can't be very large if its leader has time to run a wine shop and a pharmacy on the side. The profits of a public bank have been a revenue source for more significant states — not only Hamburg but also Venice and Amsterdam. Some people have even suggested that revenue from this kind of enterprise shouldn't be beneath the attention of an empire as great as Britain's. The Bank of England's ordinary dividend being reckoned at 5.5 percent on a capital of 10,780,000 pounds, the net annual profit after management expenses would come to about 592,900 pounds. The government, it's argued, could borrow this capital at 3 percent interest and, by taking over the bank's management, could make a clear profit of 269,500 pounds a year. The orderly, vigilant, and frugal management of aristocratic governments like those of Venice and Amsterdam seems, from experience, to be perfectly suited to running a commercial enterprise of this kind. But whether a government like England's — which, whatever its virtues, has never been famous for good financial management; which in peacetime has generally operated with the lazy, wasteful extravagance that is perhaps natural to monarchies, and in wartime has consistently exhibited all the reckless overspending that democracies tend to fall into — could be safely trusted with such a project must be, to say the least, considerably more doubtful.

The post office is essentially a commercial enterprise. The government invests in setting up the various offices and buying or hiring the necessary horses and vehicles, and earns a large profit from the fees charged for deliveries. It is perhaps the only commercial venture that has been successfully run by, I believe, every type of government. The capital required isn't very large. There's no mystery to the business. And the returns are not only reliable but immediate.

Governments, however, have frequently gotten involved in many other business ventures, willing — like private individuals — to try to improve their finances by becoming entrepreneurs in ordinary lines of trade. They have almost never succeeded. The extravagance with which government affairs are always managed makes success nearly impossible. A ruler's agents treat his wealth as bottomless. They're careless about what price they pay when buying, careless about what price they charge when selling, and careless about the cost of transporting goods from one place to another. These agents frequently live with the extravagance of royalty, and sometimes, despite that extravagance — thanks to creative accounting — manage to amass princely fortunes of their own. This is how, as Machiavelli tells us, the agents of Lorenzo de Medici — by no means a ruler of modest abilities — conducted his trading operations. The Republic of Florence was several times forced to pay off the debts their extravagance had piled up in his name. He eventually found it wise to get out of the merchant business — the business to which his family had originally owed their fortune — and to spend what remained of it, along with the state revenues he controlled, on projects and expenditures more befitting his station.

No two roles seem more incompatible than those of businessman and ruler. If the commercial mentality of the English East India Company made them terrible rulers, the mentality of rulers has made them equally terrible businessmen. When they were just traders, they ran their business profitably and managed to pay their shareholders a reasonable dividend. Since they became rulers — with a revenue reportedly exceeding three million pounds sterling — they've had to beg the government for emergency bailouts just to avoid immediate bankruptcy. When they were a trading company, their employees in India saw themselves as clerks of a business. Now that they're a sovereign power, those same employees see themselves as ministers of state.

A state can also earn part of its public revenue from interest on investments, not just from business profits. If it has accumulated savings, it can lend them out — either to foreign governments or to its own citizens.

The canton of Bern earns considerable revenue by lending part of its savings to foreign governments — that is, by investing in the government bonds of various indebted European nations, mainly France and England. The reliability of this revenue depends, first, on the soundness of the bonds it's invested in, or on the good faith of the government managing those bonds; and second, on the probability of continued peace with the debtor nation. In a war, the debtor nation's very first act of hostility might be to seize its creditor's investments. This policy of lending money to foreign governments is, as far as I know, unique to the canton of Bern.

The city of Hamburg has established a kind of public pawnshop that lends money to citizens against collateral at 6 percent interest. This pawnshop, or "Lombard" as it's called, reportedly yields the state a revenue of 150,000 crowns — about 33,750 pounds sterling at the current exchange rate.

The government of Pennsylvania, without accumulating any savings, invented a method of lending not actual money but something equivalent to money. By issuing paper bills of credit to private individuals — secured by land worth double the value, bearing interest, redeemable after fifteen years, transferable like bank notes, and declared by the legislature to be legal tender for all transactions within the colony — it raised a moderate revenue that went a long way toward covering annual expenses of about 4,500 pounds, the entire ordinary budget of that frugal and well-managed government. The success of this method depended on three things. First, there needed to be a demand for some medium of exchange besides gold and silver coins, or a demand for goods that could only be obtained by sending most of the colony's gold and silver abroad to buy them. Second, the government using this method needed to have good credit. Third, it needed to be used with restraint — the total value of paper bills never exceeding the value of the gold and silver coins they were replacing. Several other American colonies adopted the same method at various times, but because they lacked this restraint, it caused far more problems than benefits in most of them.

The unstable and perishable nature of capital and credit, however, makes them unsuitable as the principal source of the reliable, steady, permanent revenue that alone can give a government security and dignity. No major nation, beyond the nomadic stage, has ever derived the bulk of its public revenue from such sources.

Land is a more stable and permanent asset, and the rent from publicly owned land has, accordingly, been the main source of revenue for many a major nation well beyond the nomadic stage. The ancient republics of Greece and Italy derived most of their revenue — the revenue that covered the necessary expenses of government — from the produce or rent of public lands. The rent from crown lands was similarly the main revenue source for the ancient monarchs of Europe.

War and preparation for war are the two things that, in modern times, account for most of the necessary spending of any major government. But in the ancient republics of Greece and Italy, every citizen was a soldier who served and equipped himself at his own expense. Neither of these costs, therefore, imposed any significant burden on the state. A modest land estate's rent could easily cover all the other necessary expenses of government.

In the ancient European monarchies, the customs and social norms of the time adequately prepared the general population for war. When they marched off to fight, the terms of their feudal land grants required them to be supported either at their own expense or at their lord's, without imposing any new cost on the ruler. The other expenses of government were, for the most part, very small. The administration of justice, as I've shown, was not a cost but a source of revenue. The labor of country people for three days before and three days after harvest was considered sufficient for building and maintaining all the bridges, highways, and public works that the country's trade was thought to require. In those days, the ruler's main expense seems to have been maintaining his own household. His household officers were accordingly the great officers of state. The Lord Treasurer collected his rents. The Lord Steward and Lord Chamberlain managed his household expenses. The care of his stables was entrusted to the Lord Constable and the Lord Marshal. His residences were all built as castles and seem to have been his principal fortresses. The keepers of these castles functioned essentially as military governors — and appear to have been the only military officers it was necessary to maintain in peacetime. Under these circumstances, the rent from a large landed estate could, in ordinary times, easily cover all the necessary expenses of government.

In the present state of most civilized European monarchies, the rent from all the land in the country — even if it were managed as well as it probably would be under a single owner — would barely equal the revenue that governments collect from the people even in peacetime. The ordinary revenue of Great Britain, for example, including not just the current year's expenses but also the interest on the national debt and repayment of some of the principal, amounts to upwards of ten million pounds a year. But the land tax at four shillings in the pound falls short of two million a year. This "land tax," however, is actually assessed as one-fifth not only of the rent of all land but also of the rent of all houses and the interest on all capital in Great Britain — excepting only capital lent to the government or used as farming capital. A very considerable portion of this tax actually comes from house rents and interest on capital. The London land tax at four shillings in the pound amounts to 123,399 pounds. Westminster's amounts to 63,092 pounds. The palaces of Whitehall and St. James's are assessed at 30,754 pounds. A proportional share of the land tax is similarly assessed on all other cities and towns across the kingdom, and in those places it arises almost entirely from house rents or from what is estimated to be the return on commercial and investment capital. According to the assessment used for Britain's land tax, then, the total revenue from all land rents, all house rents, and all returns on capital — excluding only what is lent to the government or used in farming — doesn't exceed ten million sterling a year: the ordinary revenue the government collects even in peacetime. This assessment is no doubt, taking the kingdom as a whole, well below the actual value — though in several particular counties and districts it's said to be fairly close. The rent of land alone, not counting houses or investment returns, has been estimated by many people at twenty million — an estimate made largely by guesswork and just as likely to be too high as too low. But if all the land in Great Britain, in its current state of cultivation, doesn't yield more than twenty million a year in rent, it could certainly not yield half, and probably not even a quarter, of that if it all belonged to a single owner and were subjected to the negligent, wasteful, and oppressive management of his agents and servants. The crown lands of Great Britain don't currently yield even a quarter of the rent that could probably be drawn from them if they were privately owned. If the crown lands were more extensive, they would probably be managed even worse.

The revenue that the general population derives from land is proportional not to the rent of the land but to its total output. The entire annual produce of all the land in a country — minus what's set aside for seed — is either consumed directly by the people or exchanged for something else they consume. Whatever reduces the land's output below what it would otherwise be reduces the income of the general population even more than it reduces the income of landowners. Land rent — the portion of output that goes to the landowner — is rarely thought to exceed a third of the total produce anywhere in Great Britain. If land that currently yields ten million in rent would, under different management, yield twenty million — assuming rent is a third of total output in both cases — the landowners would lose ten million a year of income. But the general population would lose thirty million a year of income (minus the seed). The country's population would be smaller by however many people that thirty million pounds' worth of output could support, according to the standard of living and spending patterns of the various social classes among whom it was distributed.

Although no civilized state in Europe currently derives the bulk of its public revenue from rents on government-owned land, every major European monarchy still possesses many large tracts of land. These are generally forests — and sometimes forests where you can walk for miles without seeing a single tree; complete wastelands, useless in terms of both production and population. In every major European monarchy, selling the crown lands would raise a very large sum of money. If that money were used to pay down the national debt, it would free up a much larger stream of revenue than those lands have ever produced. In countries where well-cultivated farmland typically sells for about thirty years' worth of its annual rent, uncultivated, poorly maintained, low-rent crown lands could be expected to sell for forty, fifty, or even sixty years' rent. The government could immediately enjoy the revenue that this large sale price would free up from debt repayment. Within a few years, it would probably enjoy yet another increase in revenue: once the crown lands became private property, they would be quickly improved and well-cultivated. The increase in production would increase the country's population by boosting people's income and consumption. And the revenue the government earns from customs duties and excise taxes would naturally rise along with the people's income and consumption.

The revenue that the crown derives from crown lands, although it appears to cost the public nothing, actually costs society more than perhaps any other equal amount of government revenue. It would always be in society's interest to replace this revenue with some other equal source and distribute the land among the people. The best way to do this would probably be to sell it at public auction.

Lands kept for pleasure and display — parks, gardens, public walks, and the like — which are everywhere considered causes of expense rather than sources of revenue, seem to be the only lands that should properly belong to the government of a great and civilized nation.

Since the government's own capital and land — the two revenue sources that belong specifically to the state — are both unsuitable and insufficient for funding the necessary expenses of any great and civilized nation, the bulk of government spending must be covered by taxes of one kind or another. The people must contribute part of their own private income to make up a public revenue for the state.

Article II: Taxes

As I showed in the first book of this work, the private income of individuals ultimately comes from three different sources: Rent, Profit, and Wages. Every tax must ultimately be paid from one of these three types of income, or from all of them together. I'll try to give the best account I can of, first, taxes intended to fall on rent; second, those intended to fall on profit; third, those intended to fall on wages; and fourth, those intended to fall on all three sources of income equally. The detailed examination of these four categories of taxes will divide the rest of this chapter into four articles, three of which will require further subdivisions. As the following review will show, many taxes end up not being paid from the income source they were designed to target.

Before I begin examining specific taxes, I need to lay out four fundamental principles regarding taxation in general.

First: The citizens of every state should contribute to the support of the government as nearly as possible in proportion to their respective abilities — that is, in proportion to the income they enjoy under the protection of the state. The cost of government to the individuals of a great nation is like the cost of managing a jointly owned estate: all the co-owners must contribute in proportion to their respective shares. The fairness or unfairness of any tax system depends on how well this principle is observed. I should note, once and for all, that any tax which falls entirely on just one of the three types of income mentioned above is inherently unequal, insofar as it doesn't affect the other two. In the following examination of different taxes, I'll rarely dwell on this kind of inequality, confining my discussion mainly to the inequality that arises when a particular tax falls unevenly even on the specific type of income it's meant to target.

Second: The tax that each person is required to pay should be certain, not arbitrary. The time of payment, the method of payment, and the amount to be paid should all be perfectly clear to the taxpayer and to everyone else. Where this isn't the case, every taxpayer is placed more or less at the mercy of the tax collector, who can either inflate the tax on anyone he dislikes, or extort some bribe by threatening to do so. The uncertainty of taxation breeds arrogance and corruption among a class of officials who are naturally unpopular even when they're neither arrogant nor corrupt. The certainty of what each person owes is so important in taxation that, as I believe the experience of every nation shows, a very considerable degree of inequality is not nearly as great an evil as even a small degree of uncertainty.

Third: Every tax should be collected at the time and in the manner most convenient for the taxpayer. A tax on the rent of land or houses, collected at the same time rent is normally due, is collected when the taxpayer is most likely to have the money to pay. Taxes on luxury goods are ultimately paid by the consumer, and generally in a very convenient way: he pays them little by little, as he buys the goods. Since he's free to buy or not as he chooses, it's really his own fault if such taxes ever cause him serious hardship.

Fourth: Every tax should be designed to take out of people's pockets, and keep out of people's pockets, as little as possible beyond what it actually brings into the public treasury. A tax can take or keep far more from the people than it delivers to the treasury in four different ways. First, collecting it may require a large number of officials whose salaries eat up most of the revenue, and whose own fees and perks impose an additional tax on the people. Second, it may obstruct people's productive activity, discouraging them from certain kinds of business that would otherwise provide jobs and income for many. In this way, while forcing people to pay, it may actually shrink the very resources they need to pay with. Third, through the fines and penalties imposed on those who unsuccessfully try to evade the tax, it may ruin individuals and thereby destroy the benefit that the community would have received from their productive use of capital. A badly designed tax creates a strong temptation to smuggle. But the penalties for smuggling must be proportional to the temptation. The law, contrary to every ordinary principle of justice, first creates the temptation and then punishes those who yield to it — and it typically makes the punishment harsher in exact proportion to the very thing that should make it lighter: the strength of the temptation to commit the offense. Fourth, by subjecting people to frequent visits and the invasive scrutiny of tax collectors, a tax may expose them to a great deal of unnecessary trouble, harassment, and oppression. Though harassment is not technically a financial cost, it is certainly the equivalent of whatever expense people would willingly pay to avoid it. It's through one or more of these four channels that taxes frequently end up costing the public far more than they bring in for the government.

The obvious fairness and good sense of these four principles have earned them at least some attention from every nation. All nations have tried, to the best of their judgment, to make their taxes as equal, as certain, as convenient in timing and method, and as low in collection costs relative to revenue as they could manage. The following brief survey of some of the major taxes that have existed in different times and countries will show that not all nations have been equally successful in this effort.

Taxes on Rent: Taxes on the Rent of Land

A tax on the rent of land can be designed in one of two ways. It can be based on a fixed assessment, where every district is valued at a certain rent that isn't changed afterward. Or it can be designed to vary with the actual rent, rising or falling with improvements or declines in the land's cultivation.

A fixed land tax — like that of Great Britain, where each district is assessed according to a set, unchanging valuation — may be fair when first established, but inevitably becomes unfair over time as different parts of the country improve or decline at different rates. In England, the valuation used to assess the land tax under the 1692 Act of William and Mary was already very unequal when it was first set up. In this respect, then, the tax violates the first of the four principles stated above. But it follows the other three perfectly. It's completely predictable. The payment is due at the same time as the rent, making the timing as convenient as possible. And though the landlord is always the one who really bears the tax, it's usually advanced by the tenant, who then deducts it from the rent. The tax is collected by far fewer officials than almost any other tax of comparable revenue. Since the tax on each district doesn't increase when rents rise, the government doesn't share in the profits of landlords' improvements. Those improvements sometimes do help reduce the tax burden on other landlords in the same district. But the increased burden this might occasionally cause on a particular estate is always so small that it could never discourage improvements or keep the land's output below what it would otherwise be. Since the tax doesn't tend to reduce the quantity of produce, it can't raise its price. It doesn't obstruct productive activity. The only inconvenience the landlord suffers is the unavoidable one of paying the tax.

However, the advantage that landlords have enjoyed from the fixed nature of this assessment has been largely due to circumstances having nothing to do with the nature of the tax itself.

It has been partly due to the general prosperity of nearly every part of the country. Rents on almost all British estates have been continuously rising since this valuation was first established, and hardly any have fallen. Landlords have therefore almost all gained the difference between what they would have paid based on their current rents and what they actually pay based on the old valuation. If conditions had been different — if rents had been falling due to declining agriculture — landlords would have almost all lost this same difference. As things have actually turned out since the Glorious Revolution, the fixed valuation has benefited landlords and hurt the government. Under different circumstances, it could just as easily have benefited the government and hurt landlords.

Since the tax is paid in money, the land valuation is also expressed in money. Since this valuation was established, the value of silver has been fairly stable, and there have been no changes to the coinage in either weight or purity. If silver had risen significantly in value — as it appears to have done in the two centuries before the discovery of the American mines — the fixed valuation could have been very oppressive to landlords. If silver had fallen significantly in value — as it certainly did for at least a century after those mines were discovered — the same fixed valuation would have greatly reduced this branch of government revenue. If any significant change had been made to the coinage standard — say, if an ounce of silver, instead of being coined into five shillings and twopence, had been coined into pieces worth two shillings and sevenpence, or into pieces worth ten shillings and fourpence — it would in one case have hurt the landowner and in the other the government.

Under circumstances somewhat different from those that actually occurred, then, a fixed valuation could have been a serious problem for either taxpayers or the government. In the course of history, such circumstances must eventually arise. But although empires, like all other human creations, have all proved mortal so far, every empire aspires to immortality. Any constitutional arrangement meant to be as permanent as the state itself should therefore be workable not just under certain conditions, but under all conditions — suited not to temporary, occasional, or accidental circumstances, but to those that are permanent and unchanging.

A variable land tax — one that rises and falls with the actual rent as cultivation improves or declines — is recommended by that school of French thinkers who call themselves the Economists (the Physiocrats) as the most equitable of all taxes. All taxes, they argue, ultimately fall on land rent, and therefore should be imposed directly on the fund that must finally pay them. That all taxes should fall as equally as possible on the fund that ultimately bears them is certainly true. But without entering into the tiresome metaphysical arguments these thinkers use to support their very clever theory, the following review will make it clear enough which taxes actually fall on land rent and which fall on other sources.

In the Venetian territories, all farmland that is leased out is taxed at 10 percent of the rent. The leases are recorded in a public register maintained by revenue officers in each province. When a landowner farms his own land, it's valued by a fair appraisal, and he receives a one-fifth reduction in the tax — so he pays only 8 percent of the estimated rent instead of 10 percent.

A land tax of this kind is certainly more equitable than England's land tax. It might not be quite as predictable, and the assessment process could cause the landlord considerably more trouble. The collection costs might also be somewhat higher.

It might be possible, however, to design an administrative system that would largely prevent this uncertainty and moderate these costs.

For example, the landlord and tenant could be required to register their lease in a public record. Appropriate penalties could be imposed for concealing or misrepresenting any of the lease terms. And if part of those penalties were paid to whichever party reported the other's fraud, this would effectively prevent landlord and tenant from conspiring together to cheat the public treasury. All the terms of the lease could be readily verified from such a record.

Some landlords, instead of raising the rent, charge an upfront fee for renewing the lease. In most cases, this is the tactic of a spendthrift who sells a future income stream worth far more for a lump sum of cash today. It's usually harmful to the landlord. It's often harmful to the tenant, and it's always harmful to the community. It frequently takes so much of the tenant's working capital that, with less to invest in cultivation, he actually finds it harder to pay a small rent than he would have found it to pay a larger one. Whatever reduces the tenant's ability to cultivate the land inevitably keeps down the most important part of the community's income. By making the tax on such fees considerably higher than on ordinary rent, this harmful practice could be discouraged — to the considerable benefit of everyone involved: the landlord, the tenant, the government, and the whole community.

Some leases dictate to the tenant a particular method of farming and a specific rotation of crops for the entire term. This condition — generally the product of the landlord's conceit about his own superior farming knowledge (a conceit that is almost always completely unfounded) — should always be treated as an additional form of rent: rent paid in restrictions rather than in money. To discourage this generally foolish practice, this type of rent-in-kind could be valued somewhat high, and consequently taxed somewhat higher than ordinary cash rents.

Some landlords demand rent in kind rather than money — in grain, cattle, poultry, wine, oil, and so on. Others demand rent in the form of labor. Rents like these are always more costly to the tenant than they are valuable to the landlord: they take more from the tenant's pocket than they put in the landlord's. In every country where they're common, the tenants are poor and wretched, roughly in proportion to how widespread the practice is. By valuing such rents somewhat high, and therefore taxing them somewhat higher than ordinary cash rents, a practice that harms the entire community could perhaps be sufficiently discouraged.

When a landlord chooses to farm part of his own land, the rent could be estimated through a fair appraisal by neighboring farmers and landlords, and a modest tax reduction could be granted — just as in the Venetian territories — provided the land he's farming doesn't exceed a certain size. It's important to encourage landlords to cultivate some of their own land. A landlord's capital is generally larger than a tenant's, and with less skill he can often raise more produce. The landlord can afford to experiment and is generally inclined to do so. His failed experiments cost only himself a moderate loss. His successful ones contribute to the improvement and better cultivation of the whole country. It would be important, however, that the tax break should encourage him to farm only up to a certain point. If most landlords were tempted to farm all their own land, the country — instead of being worked by sober, hardworking tenants whose own self-interest drives them to cultivate as well as they can — would be filled with idle, irresponsible estate managers whose sloppy work would soon degrade the land and reduce its output. This would diminish not only their employers' income but the most important part of the whole nation's income.

An administrative system along these lines might perhaps free a variable land tax from any uncertainty that could cause either oppression or hardship for taxpayers, and might also serve to introduce into common farming practice the kind of policies that would considerably improve the country's agriculture.

The cost of administering a variable land tax would no doubt be somewhat higher than that of a fixed one. Some additional expense would be needed for the various registry offices that should be set up around the country, and for the occasional valuations of land that owners choose to farm themselves. But all of this could be quite inexpensive — well below the collection costs of many other taxes that raise far less revenue.

The most important objection to a variable land tax is the discouragement it might give to improving the land. A landlord would certainly be less motivated to invest in improvements if the government — which contributed nothing to the cost — were going to claim a share of the profits. But even this objection could perhaps be addressed by allowing the landlord, before starting any improvement, to establish the current value of his land in partnership with revenue officers, through a fair appraisal by an equal number of neighboring landlords and farmers chosen by both sides. He could then be taxed at this established value for a period long enough to ensure he fully recovered his investment. Drawing the government's attention to land improvement, through the prospect of increased revenue, is in fact one of the main arguments for this kind of land tax. But the protection period for the landlord shouldn't be much longer than what's needed for his full recovery, or the remoteness of the future revenue increase would discourage the government from paying attention. Better, however, to err on the side of making it somewhat too long than too short. No incentive for the government's attention can ever compensate for even the smallest discouragement to the landlord's. The government can at best take only a general and vague interest in what might improve the overall cultivation of most of its territory. The landlord takes a detailed, minute interest in the most productive use of every square foot of his estate. The government's primary goal should be to encourage, by every means available, the initiative of both landlords and farmers — by letting both pursue their own interests in their own way, according to their own judgment; by giving both the most complete assurance that they will enjoy the full rewards of their own efforts; and by providing them the widest possible market for everything they produce, through establishing the easiest and safest transportation routes throughout the country and the most unrestricted freedom to export to every other nation.

If a variable land tax could be administered in a way that not only avoided discouraging improvement but actually encouraged it, it seems unlikely to cause the landlord any inconvenience other than the unavoidable one of paying the tax itself.

Through all the changes in society's condition — through agricultural improvement and decline, through fluctuations in the value of silver, through every alteration in the coinage — a tax of this kind would automatically adjust itself to actual conditions, remaining equally fair under all these different circumstances. It would therefore be far more suitable as a permanent, unchangeable law of the nation than any tax levied according to a fixed valuation.

In the domains of the King of Prussia, the land tax is based on an actual survey and valuation that is periodically reviewed and updated. Under that valuation, secular landowners pay between 20 and 25 percent of their income. Church landowners pay between 40 and 45 percent. The survey and valuation of Silesia was conducted by order of the current king and is said to be very accurate. Under it, the lands of the Bishop of Breslau are taxed at 25 percent of their rent. Other church revenues of both Catholic and Protestant clergy are taxed at 50 percent. The estates of the Teutonic Knights and the Knights of Malta are taxed at 40 percent. Lands held under noble tenure are taxed at 38 and a third percent. Lands held under common tenure are taxed at 35 and a third percent.

The survey and valuation of Bohemia is said to have been the work of more than a hundred years. It wasn't completed until after the peace of 1748, under orders from the current Empress Queen. The survey of the Duchy of Milan, begun during the reign of Charles VI, wasn't finished until after 1760. It's considered one of the most accurate ever made. The survey of Savoy and Piedmont was carried out under orders from the late King of Sardinia.

In the Prussian king's domains, church revenue is taxed much more heavily than that of secular landowners. Church revenue is, for the most part, a burden on land rent. It's rarely used to improve the land or in any way to increase the income of the general population. The Prussian king probably considered it reasonable, on that account, that church revenue should contribute considerably more toward the expenses of the state. In some countries, church lands are exempt from all taxes. In others, they're taxed more lightly than other lands. In the Duchy of Milan, lands that the Church owned before 1575 are assessed at only one-third of their value.

In Silesia, lands held under noble tenure are taxed 3 percent more than those held under common tenure. The Prussian king probably figured that the honors and privileges attached to noble tenure would more than compensate the landowner for a small increase in his tax bill, while the humiliating inferior status of common tenure would be somewhat offset by a lighter tax. In other countries, the tax system, instead of compensating for this inequality, actually makes it worse. In the domains of the King of Sardinia, and in those French provinces subject to what is called the "real" or "predial taille," the tax falls entirely on lands held under common tenure. Noble lands are exempt.

A land tax based on a general survey and valuation, however fair it may be at first, must inevitably become unfair over a fairly short period of time. Preventing this would require the government to continuously and painstakingly monitor every change in the condition and output of every farm in the country. The governments of Prussia, Bohemia, Sardinia, and the Duchy of Milan actually do exert this kind of attention — an attention so foreign to the proper nature of government that it's unlikely to continue for long, and which, if it does continue, will probably end up causing much more trouble and hassle than any relief it provides to taxpayers.

In 1666, the district of Montauban was assessed for the "real" or "predial taille" based on what is said to have been a very accurate survey and valuation. By 1727, this assessment had become completely out of date. To fix the problem, the government's only solution was to impose an additional tax of 120,000 livres on the entire district. This supplementary tax is assessed on all the sub-districts according to the old valuation. But it is collected only from those sub-districts that, under current conditions, are being undertaxed by the old assessment, and the revenue is used to reduce the burden on those being overtaxed. For example, imagine two sub-districts, one of which should currently be taxed at 900 livres and the other at 1,100, but which are both assessed at 1,000 under the old valuation. Both are now rated at 1,100 under the supplementary tax. But the additional tax is collected only from the undertaxed district, and the money is given entirely to the overtaxed one, which consequently pays only 900. The government neither gains nor loses from this supplementary tax, which is used entirely to correct the inequities of the old assessment. How the money is distributed is largely up to the discretion of the local administrator, and is therefore to a great extent arbitrary.

Taxes Proportional to the Produce Rather Than the Rent of Land

Taxes on the produce of land are in reality taxes on the rent. Although they may be initially paid by the farmer, they are ultimately borne by the landlord. When a certain portion of the produce must be paid as tax, the farmer estimates as best he can what that portion is likely to be worth on average over the years and reduces the rent he offers to the landlord accordingly. Every farmer calculates in advance what the church tithe — which is a tax of this kind — is likely to cost him on average.

The tithe, and every other land tax of this kind, appears to be perfectly equal but is actually very unequal. A fixed portion of the produce represents a very different share of the rent depending on the quality of the land. On some very rich land, the produce is so great that half of it is more than enough to cover the farmer's costs and normal profits. He could afford to pay the other half as rent, if there were no tithe. But if a tenth of the produce is taken as tithe, he has to demand a reduction of one-fifth of his rent — otherwise he can't recover his costs with normal profit. In this case, the landlord's rent, instead of being half the total produce (five-tenths), drops to only four-tenths. On poorer land, by contrast, the produce is sometimes so small and the cultivation so expensive that four-fifths of the total output is needed just to cover the farmer's costs and profits. Without any tithe, the landlord's rent would be only one-fifth (two-tenths) of the whole produce. But if the farmer pays one-tenth as tithe, he needs an equal reduction in the rent — dropping it to just one-tenth of the total output. On rich land, then, the tithe may amount to a tax of only one-fifth of the rent (four shillings in the pound). On poor land, it may amount to a tax of one-half (ten shillings in the pound).

The tithe, besides being frequently very unequal as a tax on rent, is always a powerful discouragement to both the landlord's investment in improvements and the farmer's investment in cultivation. Neither can afford to make the most valuable improvements — which are generally also the most expensive — when the Church, which contributes nothing to the cost, takes such a large share of the profit. The cultivation of madder (a dyeing plant) was for a long time confined to the Netherlands, which, being Presbyterian and therefore exempt from this destructive tax, enjoyed a kind of monopoly on this useful product at the expense of the rest of Europe. Recent attempts to grow madder in England were only made possible by a law that set the tithe on madder at a flat five shillings per acre.

Just as the Church is mainly funded by this kind of land tax in most of Europe, so in many Asian countries the state is mainly funded the same way — by a tax proportional to the produce rather than the rent. In China, the main source of government revenue is a tenth of all the land's produce. This tenth, however, is assessed so leniently that in many provinces it is said to amount to no more than a thirtieth of the actual output. The land tax that was paid to the Muslim government of Bengal, before that country fell under the control of the English East India Company, is said to have amounted to about a fifth of the produce. The land tax of ancient Egypt is likewise said to have been about a fifth.

In Asia, this kind of tax is said to motivate the government to care about the improvement and cultivation of the land. The rulers of China, of Bengal under Muslim rule, and of ancient Egypt are all said to have been extremely attentive to building and maintaining good roads and navigable canals, in order to maximize both the quantity and value of every part of the land's output by giving every region access to the widest possible market within their domains. The tithe, by contrast, is divided among so many small recipients that none of them has any incentive of this kind. The local clergyman could never justify the expense of building a road or canal to a distant part of the country just to expand the market for his own parish's produce. Taxes like these, when used to fund the state, have some advantages that partially offset their drawbacks. When used to fund the Church, they have nothing but drawbacks.

Taxes on the produce of land can be collected either in kind or, based on a valuation, in money.

A local clergyman or a small landowner may sometimes find it advantageous to receive their tithe or rent in kind. The quantities involved and the area to be covered are small enough that they can personally oversee the collection and disposal of everything owed to them. A wealthy landowner living in the capital, however, would risk significant losses from the negligence and fraud of his agents if his rents from a distant estate were collected in kind. The government's losses from abuse and theft by tax collectors would inevitably be even greater. A private person's servants are probably watched more closely by their employer than a ruler's servants are by him. A public revenue collected in kind would suffer so badly from mismanagement by the collectors that only a small fraction of what was taken from the people would ever reach the treasury. Some of China's public revenue, however, is said to be collected in kind. The tax collectors there will no doubt find it in their interest to continue a practice that offers so much more opportunity for abuse than collection in money.

A land-produce tax collected in money can be based on a valuation that changes with market prices, or on a fixed valuation where, say, a bushel of wheat is always priced the same regardless of the market. Revenue from the first approach will vary only with the actual output of the land — with improvements or declines in cultivation. Revenue from the second will vary not only with output but also with changes in the value of precious metals and with changes in how much metal is contained in coins of the same denomination. The first approach always takes the same proportion of the land's real output. The second may take very different proportions at different times.

When, instead of a portion of the actual produce or its market value, a fixed sum of money is paid as full settlement of all tax or tithe, the tax becomes essentially the same as England's land tax. It neither rises nor falls with the rent. It neither encourages nor discourages improvement. In most parishes that pay what is called a "modus" (a fixed payment in lieu of tithe), this is exactly how the tithe works. Under Muslim rule in Bengal, instead of the one-fifth payment in kind, a modus — and reportedly a very moderate one — was established in most districts. Some of the East India Company's employees, claiming to be restoring the public revenue to its proper level, have in some provinces replaced this fixed payment with a payment in kind. Under their management, this change is likely both to discourage farming and to create new opportunities for abuse in tax collection. Public revenue has already fallen well below what it was said to be when the Company first took over. The Company's employees may have profited from this change, but probably at the expense of both their employers and the country.

Taxes on the Rent of Houses

The rent of a house can be divided into two parts. One can be called the building rent. The other is usually called the ground rent.

The building rent is the interest or profit on the capital spent on building the house. To keep the building trade competitive with other lines of business, this rent needs to be high enough, first, to pay the builder the same return he'd have gotten by lending his money at market rates, and second, to cover the cost of keeping the house in constant repair — or equivalently, to fully replace the building capital within a certain number of years. The building rent, or normal profit from construction, is therefore always determined by the prevailing interest rate. Where the market interest rate is 4 percent, a house whose total rent (after paying the ground rent) yields 6 to 6.5 percent on the construction cost may provide a decent profit to the builder. Where the interest rate is 5 percent, 7 to 7.5 percent may be needed. If the building trade at any time offers much more profit than this, it will quickly attract capital from other businesses until the profit falls to its normal level. If it offers much less, other businesses will draw capital away until the profit rises again.

Whatever portion of a house's total rent exceeds the amount needed for this reasonable profit on construction naturally goes to the ground rent. When the building owner and the land owner are different people, this surplus is almost entirely paid to the land owner. This surplus rent is the price that the occupant pays for the real or perceived advantages of the location. In country houses far from any major town, where there's plenty of land to choose from, the ground rent is practically nothing — no more than the land would earn if used for farming. In country estates near a major town, it's sometimes quite high, as the special convenience or beauty of the location can command a premium price. Ground rents are generally highest in the capital city, and in those particular neighborhoods where the demand for housing is greatest, whatever the reason — whether for business, for social life, or simply for prestige.

A tax on house rents, paid by the tenant and proportional to the total rent, could not, for any significant length of time, affect the building rent. If the builder couldn't earn a reasonable profit, he'd have to leave the business. The resulting increase in demand for construction would soon bring his profit back to its normal level. But such a tax wouldn't fall entirely on the ground rent either. It would split itself between the occupant and the land owner.

Here's an example. Suppose a particular person decides he can afford 60 pounds a year for housing. Suppose a tax of four shillings in the pound (one-fifth) is imposed on house rents, payable by the tenant. A house renting for 60 pounds would now cost him 72 pounds a year — 12 pounds more than he thinks he can afford. He'll therefore settle for a lesser house at 50 pounds rent, which, with the 10-pound tax, brings his total to 60 — the amount he can afford. To pay the tax, he gives up some of the extra comfort he could have had from a house renting for 10 pounds more. I say "some" because he won't usually have to give up all of it. Because the tax removes him as a competitor for 60-pound houses, it also reduces competition for 50-pound houses, and for every other price level except the very lowest, where competition would temporarily increase. Rents at every level where competition decreases would inevitably fall somewhat. Since none of this reduction can, over the long run, come from the building rent, it must ultimately fall on the ground rent. The final burden of this tax would therefore be split: partly on the occupant, who gives up some comfort to pay his share; and partly on the land owner, who gives up some revenue to pay his. The exact split would be hard to determine. It would probably differ significantly in different circumstances, and a tax of this kind might, depending on those circumstances, fall very unevenly on both the occupant and the land owner.

The inequality with which such a tax might fall on different ground-rent owners would arise entirely from these accidental variations in how the burden is split. But the inequality with which it might fall on occupants of different houses would arise from an additional cause as well. The proportion of a person's income that goes to housing varies with their level of wealth. It is probably highest among the very rich, and it generally decreases as you go down the income scale, being lowest among the poorest. The biggest expense of the poor is the necessities of life. They struggle to get food, and the bulk of their small income goes toward it. The biggest expense of the rich is on luxuries and status symbols, and a magnificent house is the luxury that shows off all the others to best advantage. A tax on house rents would therefore generally fall most heavily on the rich. And there would perhaps be nothing very unreasonable about this kind of inequality. It's not unreasonable for the rich to contribute to public expenses not just in proportion to their income, but something more than in proportion.

The rent of houses, though it resembles the rent of land in some ways, differs from it in one essential respect. Land rent is paid for the use of something productive: the land itself produces what pays the rent. House rent is paid for the use of something unproductive: neither the house nor the ground it sits on produces anything. The person who pays the rent must therefore draw it from some other source of income, entirely separate from and independent of the house. A tax on house rents, insofar as it falls on the occupant, must be drawn from the same source as the rent itself: from the occupant's income, whether that comes from wages, profits, or land rent. Insofar as it falls on the occupant, then, a house-rent tax is one of those taxes that falls not on any single source of income, but on all three equally. It is in every respect similar to a tax on any other type of consumer spending. There is perhaps no single expenditure that reveals more about a person's overall standard of living than what they pay for housing. A proportional tax on this particular kind of spending could perhaps raise more revenue than has ever been collected from it in any part of Europe. But if the tax were set very high, most people would try to evade it by settling for smaller houses and redirecting their spending elsewhere.

The rent of houses could easily be determined with sufficient accuracy through the same kind of system needed to assess ordinary land rent. Houses that aren't occupied should pay no tax. A tax on them would fall entirely on the owner, who would be taxed on a property that provides him neither convenience nor income. Houses occupied by their owners should be assessed not according to what they cost to build, but according to what a fair appraisal judges they could rent for if leased to a tenant. If assessed by construction cost, a tax of three or four shillings in the pound — combined with other taxes — would ruin nearly all the rich and great families of this country, and I believe of every other civilized country. Anyone who examines the town and country homes of some of the richest and most prominent families in this country will find that, at a rate of only 6.5 to 7 percent on the original construction cost, the house rent is nearly equal to their entire net income from their estates. These houses represent the accumulated expenditure of several generations, spent on things of great beauty and magnificence — but which, relative to what they cost, have very little resale value.

Ground rents are an even more appropriate subject for taxation than the rent of houses. A tax on ground rents would not raise house rents. It would fall entirely on the owner of the ground, who always acts as a monopolist, charging the highest rent he can get. How much he can get depends on the wealth of potential tenants — on how much they can afford to pay to gratify their desire for a particular location. Since a tax on ground rents wouldn't make these potential tenants any wealthier, they probably wouldn't be willing to pay any more for the ground. Whether the tax was initially paid by the tenant or the ground owner would make little practical difference. The more the tenant had to pay in tax, the less he'd be willing to pay in ground rent, so the final burden would fall entirely on the ground owner. Ground rents on land with no buildings on it should pay no tax.

Both ground rents and ordinary land rents are a type of income that the owner, in many cases, enjoys without any effort or attention on his part. Even if part of this income were taken in taxes to fund the expenses of government, it wouldn't discourage any kind of productive activity. The total annual output of the nation's land and labor — the real wealth and income of the general public — could be the same after such a tax as before. Ground rents and ordinary land rents are therefore perhaps the type of income that can best bear the burden of a special tax.

Ground rents are, in this respect, an even better candidate for special taxation than ordinary land rents. Ordinary land rent is, in many cases, partly the result of the landlord's own attention and good management. A very heavy tax might discourage this effort too much. Ground rents, insofar as they exceed the ordinary rent of land, are entirely the product of good government. It is the government that, by protecting the industry of the whole people or the inhabitants of a particular place, enables them to pay so much more than its agricultural value for the ground they build on. Nothing could be more reasonable than for a fund that owes its very existence to good government to be taxed specially — to contribute something more than other types of income toward supporting that government.

Although various European countries have taxed house rents, I know of none that has treated ground rents as a separate subject of taxation. Tax designers have probably found it difficult to determine how much of a property's total rent should be attributed to the ground and how much to the building. This shouldn't, however, be very hard to figure out.

In Great Britain, house rents are supposedly taxed at the same rate as land rents under what is called the annual land tax. But the valuation used to assess each parish and district to this tax is always the same as it was originally set — and was extremely unequal from the start. Throughout most of the kingdom, the tax actually falls more lightly on house rents than on land rents. Only in a few districts that were originally overvalued, and where house rents have since fallen considerably, is the land tax of three or four shillings in the pound said to represent a fair proportion of the actual rent. Unoccupied houses, though technically subject to the tax, are in most areas exempted by the generosity of the local assessors. This exemption sometimes causes some variation in the rates on individual houses, even though the district's overall rate stays the same. Improvements to a property — through new construction, repairs, and so on — reduce the burden on the rest of the district, causing further variation in individual rates.

In the province of Holland, every house is taxed at 2.5 percent of its value, regardless of whether it's rented, what rent it actually pays, or whether it's occupied at all. There seems to be a hardship in requiring the owner of an empty house to pay a tax on a property from which he's earning nothing — especially such a heavy tax. In Holland, where the market interest rate doesn't exceed 3 percent, 2.5 percent of a house's total value must in most cases amount to more than a third of the building rent and perhaps more than a third of the entire rent. The valuations used, though very unequal, are said to always be below the real value. When a house is rebuilt, improved, or enlarged, a new valuation is made and the tax adjusted accordingly.

The designers of the various taxes that England has imposed on houses at different times seem to have believed there was great difficulty in accurately determining each house's actual rent. They have therefore based their taxes on some more visible indicator that they assumed would roughly correspond to the rent.

The first tax of this kind was the hearth tax: two shillings on every fireplace. To count the fireplaces, the tax collector had to enter every room in the house. This intrusive inspection made the tax deeply unpopular. Shortly after the Glorious Revolution of 1688, it was abolished as "a badge of slavery."

The next such tax was two shillings on every occupied dwelling house, with an additional four shillings for houses with ten or more windows, and eight shillings for houses with twenty or more windows. This was later revised so that houses with twenty to twenty-nine windows paid ten shillings, and those with thirty or more paid twenty shillings. The number of windows can usually be counted from outside, without entering any room. The tax collector's visit was therefore less offensive than under the hearth tax.

This tax was eventually repealed and replaced by the window tax, which has since undergone several changes and increases. The window tax as it currently stands (January 1775), in addition to a base duty of three shillings on every house in England and one shilling on every house in Scotland, imposes a duty on each window that gradually increases from twopence (the lowest rate, for houses with no more than seven windows) to two shillings (the highest rate, for houses with twenty-five or more windows).

The main objection to all such taxes is their inequality — and inequality of the worst kind, since they frequently fall much harder on the poor than on the rich. A house renting for 10 pounds a year in a small town may sometimes have more windows than a house renting for 500 pounds a year in London. And though the occupant of the first is likely to be much poorer than that of the second, the window tax makes him contribute more to the support of the state. Such taxes therefore directly violate the first of the four principles stated above. They don't seem to offend much against the other three.

The natural tendency of the window tax, and of all other house taxes, is to push rents down. The more a person pays in tax, the less he can obviously afford to pay in rent. Since the window tax was introduced, however, house rents have actually risen across nearly every town and village in Great Britain that I'm familiar with. The increase in demand for housing has pushed rents up by more than the window tax could push them down — one of many proofs of the country's great prosperity and the growing incomes of its people. Without the tax, rents would probably have risen even higher.

The income or profit that comes from capital naturally splits into two parts: the portion that pays the interest (which belongs to the owner of the capital), and the surplus beyond what's needed to pay that interest.

This surplus portion of profit clearly can't be taxed directly. It's the compensation — and in most cases only a very modest compensation — for the risk and hassle of putting capital to work. The employer has to receive this compensation; otherwise, it wouldn't be in his interest to keep the business going. So if he were taxed directly on his entire profit, he'd be forced to do one of two things: raise his rate of profit, or charge the tax against the interest on money — that is, pay less interest.

If he raised his profit rate to cover the tax, the whole tax — even though he initially paid it — would ultimately be borne by one of two different groups, depending on how he used the capital he managed. If he used it as farming capital to cultivate land, he could raise his profit rate only by keeping a larger share of the land's produce (or, what amounts to the same thing, the value of a larger share). Since this could only happen by reducing the rent, the landlord would end up paying the tax. If he used it as commercial or manufacturing capital, he could raise his profit rate only by raising the price of his goods — in which case consumers would ultimately pay the tax. And if he didn't raise his profit rate at all, he'd be forced to load the entire tax onto the interest portion. He could afford to pay less interest on whatever capital he borrowed, and the full weight of the tax would fall on the interest earned on money. To the extent he couldn't get relief one way, he'd have to get it the other way.

At first glance, interest on money seems just as suitable for direct taxation as rent on land. Like land rent, it's a net income that remains after fully compensating for all the risk and trouble of putting capital to work. Just as a tax on land rent can't raise rents — because the net income left after covering the farmer's costs and reasonable profit can't be any greater after the tax than before it — for the same reason, a tax on interest shouldn't raise interest rates. The total amount of capital in the country, like the total amount of land, is assumed to stay the same after the tax as before. As I showed in Book I, the ordinary rate of profit is everywhere determined by the amount of capital available relative to the amount of business to be done with it. But a tax on interest wouldn't increase or decrease the amount of business to be done. So if the amount of capital to be employed were neither increased nor decreased by the tax, the ordinary rate of profit would have to stay the same. The portion of that profit needed to compensate the employer for his risk and trouble would also stay the same, since the risk and trouble haven't changed at all. Therefore, the remaining portion — the part belonging to the owner of the capital, which pays the interest on money — would necessarily stay the same too. So at first glance, interest on money seems just as fit for direct taxation as rent on land.

There are, however, two circumstances that make interest on money a much less suitable target for direct taxation than rent on land.

First, the amount and value of land that anyone owns can never be kept secret and can always be determined with great precision. But the total amount of someone's capital is almost always a secret, and it can rarely be pinned down with any accuracy. What's more, it's subject to nearly constant fluctuation. A year rarely passes — often not even a month, sometimes barely a single day — without it rising or falling by some amount. Investigating every person's private financial situation, and making that investigation continuous enough to track all the ups and downs of their fortune in order to adjust their tax — that would create a level of constant, endless harassment that no people could tolerate.

Second, land can't be moved, but capital easily can. A landowner is necessarily a citizen of whatever country his property is in. But an owner of capital is essentially a citizen of the world, with no necessary attachment to any particular country. He'd be inclined to leave any country where he faced intrusive investigations and burdensome taxes, and move his capital to some other country where he could either do business or enjoy his wealth more comfortably. By moving his capital, he would shut down all the industry it had supported in the country he left. Capital cultivates land; capital employs labor. A tax that tends to drive capital out of any country tends to dry up every source of revenue — both for the government and for society. Not only the profits from capital, but also land rents and wages would inevitably shrink as capital departed.

Countries that have tried to tax the income from capital, instead of resorting to any severe investigation of this kind, have had to settle for some very loose and therefore more or less arbitrary estimate. The extreme inequality and uncertainty of a tax assessed this way can only be offset by keeping the rate extremely low. As a result, everyone finds themselves taxed at so much less than their actual income that they don't get too upset even if their neighbor is rated a bit lower.

In England, the so-called land tax was intended to tax capital at the same rate as land. When the tax on land was four shillings per pound — that is, one-fifth of the estimated rent — capital was supposed to be taxed at one-fifth of its estimated interest income. When the current annual land tax was first imposed, the legal interest rate was six percent. So every hundred pounds of capital was supposed to be taxed at twenty-four shillings — one-fifth of six pounds. Since the legal interest rate was reduced to five percent, every hundred pounds of capital is supposed to be taxed at just twenty shillings. The total amount to be raised by the so-called land tax was divided between the countryside and the major towns. The greater part fell on the countryside, and of what was assessed on the towns, most was levied on houses. What remained to be assessed on the capital or trade of the towns (capital invested in land wasn't meant to be taxed) was far below the real value of that capital or trade. Whatever inequalities existed in the original assessment, they caused little trouble. Every parish and district is still rated for its land, houses, and capital according to that original assessment. And the nearly universal prosperity of the country, which has greatly increased the value of all three in most places, has made those old inequalities even less important now. Since the rate on each district always stays the same, the uncertainty of this tax — insofar as it falls on any individual's capital — has been much reduced and matters much less. If most of England's land isn't rated for the land tax at even half its actual value, most of England's capital is probably rated at barely one-fiftieth of its actual value. In some towns, the entire land tax is assessed on houses — as in Westminster, where capital and trade are exempt. In London, it's a different story.

Every country has carefully avoided any severe investigation into the private circumstances of its citizens.

In Hamburg, every resident is required to pay the state one-quarter of one percent of everything he owns. Since the wealth of Hamburg's people consists mainly of capital, this is effectively a tax on capital. Everyone assesses himself and, in the presence of a magistrate, deposits annually into the public treasury a certain sum of money that he swears under oath equals one-quarter of one percent of his total wealth — without declaring what that total is, and without being subject to any examination on the matter. This tax is generally believed to be paid with great honesty. In a small republic where the people fully trust their magistrates, are convinced the tax is necessary to support the state, and believe it will be spent faithfully for that purpose, such conscientious and voluntary payment can sometimes be expected. This isn't unique to the people of Hamburg.

The canton of Unterwalden in Switzerland is frequently hit by storms and floods, exposing it to extraordinary expenses. On such occasions, the people gather, and everyone reportedly declares with the greatest frankness what he's worth, in order to be taxed accordingly. In Zurich, the law provides that in emergencies, everyone should be taxed in proportion to his income — the amount of which he must declare under oath. The people reportedly have no suspicion that any of their fellow citizens would deceive them. In Basel, the principal government revenue comes from a small customs duty on exported goods. All citizens swear that they will pay every three months all the taxes the law requires. All merchants, and even all innkeepers, are trusted to keep their own records of the goods they sell, whether within or outside the territory. At the end of every three months, they send this account to the treasurer, with the amount of tax calculated at the bottom. Nobody suspects that government revenue suffers from this trust.

To require every citizen to declare publicly, under oath, the total amount of his fortune doesn't seem to be considered a hardship in these Swiss cantons. In Hamburg, it would be considered the greatest hardship imaginable. Merchants involved in risky commercial ventures all tremble at the thought of being forced to reveal the true state of their finances at any time. They foresee that the ruin of their credit and the collapse of their projects would too often be the result. A sober and frugal people who are strangers to such risky ventures don't feel they have any reason for such secrecy.

In Holland, soon after William of Orange was elevated to the office of stadtholder, a tax of two percent — called the "fiftieth penny" — was imposed on the entire wealth of every citizen. Everyone assessed himself and paid in the same way as in Hamburg, and the tax was generally believed to have been paid honestly. The people at that time had the greatest affection for their new government, which they had just established through a general uprising. The tax was meant to be paid only once, to relieve the state in a particular emergency. Indeed, it was too heavy to be permanent. In a country where the market interest rate rarely exceeds three percent, a two percent tax amounts to thirteen shillings and fourpence per pound on the highest net income typically earned from capital. It's a tax that very few people could pay without eating into their capital itself. In a particular emergency, people may, out of great public spirit, make a huge effort and even give up part of their capital to help the state. But they can't keep doing this for long, and if they did, the tax would soon ruin them so completely that they'd be totally unable to support the state any longer.

The tax on capital imposed by England's land tax bill, though proportioned to capital, isn't meant to diminish or take away any part of that capital. It's meant only as a tax on the interest income from capital, proportioned to the tax on land rent — so that when the land tax is four shillings per pound, the capital tax is four shillings per pound too. The tax in Hamburg, and the even more moderate taxes in Unterwalden and Zurich, are likewise meant to be taxes not on capital itself, but on the interest or net income from capital. The Dutch tax was meant to be a tax on capital itself.

Taxes on the Profits of Particular Occupations

In some countries, special taxes are imposed on the profits from capital — sometimes when it's employed in particular types of trade, and sometimes when it's employed in agriculture.

Examples of the first kind in England include the tax on hawkers and peddlers, the tax on hired coaches and sedan chairs, and the fee that pub owners pay for a license to sell beer and spirits. During a recent war, another tax of this kind was proposed on shops. Since the war had been fought to protect the nation's trade, it was argued, the merchants who stood to profit from it ought to help pay for it.

However, a tax on profits earned in any particular line of business can never ultimately fall on the business owners themselves (who must, in normal circumstances, earn their reasonable profit and, where competition is free, can rarely earn more than that). The tax always falls on consumers, who end up paying for the tax the business owner advances — and usually with some markup on top.

When such a tax is proportioned to the volume of the business owner's trade, the consumer ultimately pays it and the business owner isn't burdened unfairly. But when the tax is the same for all business owners regardless of size, then even though consumers still pay it in the end, it gives an advantage to large operators and creates a burden for small ones. The tax of five shillings a week on every hired coach and ten shillings a year on every sedan chair, to the extent these are advanced by their respective operators, is proportioned precisely to the scale of their business. It neither favors the large nor burdens the small operator. But the tax of twenty shillings a year for a license to sell beer, forty shillings for a license to sell spirits, and another forty shillings for a license to sell wine — being the same for all retailers — necessarily gives some advantage to large retailers and creates some burden for small ones. The former can more easily recover the tax in the price of their goods than the latter. The moderation of the tax, however, makes this inequality less important, and many people might think it's reasonable to discourage the proliferation of small pubs. The proposed tax on shops was meant to be the same for all shops. It could hardly have been otherwise — it would have been impossible to match the tax on a shop to the volume of its business without an investigation that would have been completely intolerable in a free country. If the tax had been substantial, it would have crushed small retailers and forced nearly all retail trade into the hands of large operators. With the small competitors eliminated, the large operators would have enjoyed a monopoly, and like all monopolists, they would soon have combined to raise their profits far beyond what was needed to cover the tax. The final burden, instead of falling on the shopkeeper, would have fallen on consumers — with a hefty markup for the shopkeeper's profit. For these reasons, the shop tax proposal was abandoned, and the Subsidy of 1759 was substituted in its place.

In France, the so-called personal taille is perhaps the most important tax on farming profits levied anywhere in Europe.

During the chaotic feudal period in Europe, governments had to settle for taxing those who were too weak to refuse. The great lords, while willing to help the crown in particular emergencies, refused to submit to any permanent tax — and the crown wasn't strong enough to force them. The people who actually worked the land across Europe were, for the most part, originally serfs. Over time, most of them were gradually freed. Some acquired ownership of estates that they held by some lower or less prestigious form of tenure, sometimes under the king and sometimes under another great lord, similar to the old copyholders in England. Others, without gaining ownership, obtained long-term leases on the lands they worked and thus became less dependent on their lords. The great lords seem to have viewed the prosperity and independence that this lower class of men had achieved with spiteful and contemptuous resentment, and they willingly agreed that the government should tax them.

In some countries, this tax applied only to lands held by the less prestigious forms of tenure, in which case it was called a "real taille." The land tax established by the late king of Sardinia, and the taille in the French provinces of Languedoc, Provence, Dauphine, and Brittany — as well as in the district of Montauban, the jurisdictions of Agen and Condom, and certain other French districts — are all taxes on lands held by less prestigious tenure. In other countries, the tax was levied on the estimated profits of everyone who rented or leased land from others, regardless of how the owner held the property, and this was called a "personal taille." In most of the French provinces known as the "Pays d'Elections," the taille is of this personal kind. The real taille, since it applies only to some of the country's land, is inevitably unequal, but it isn't always arbitrary, though it can be in some cases. The personal taille, since it tries to match the estimated profits of a certain class of people — profits that can only be guessed at — is inevitably both arbitrary and unequal.

In France, the personal taille currently (1775) imposes annually about 40 million livres on the twenty administrative districts known as the Pays d'Elections. The proportion assessed on each province varies from year to year, based on reports to the king's council about the quality of the harvest and other factors that might increase or decrease each province's ability to pay. Each administrative district is divided into a number of sub-districts, and the share of the total assessed on each sub-district also varies yearly based on similar reports. It seems impossible for the council, even with the best intentions, to match either of these assessments to the actual capacity of the province or sub-district involved. Ignorance and bad information will always mislead even the most upright council. The share that each parish should bear of what's assessed on the whole sub-district, and the share each individual should bear of what's assessed on his parish, are both adjusted from year to year as circumstances seem to require. In one case, these circumstances are judged by the officers of the sub-district; in the other, by the parish officers. Both are more or less under the direction and influence of the regional administrator. Not only ignorance and bad information, but favoritism, factional hostility, and personal grudges are said to frequently mislead these assessors. Nobody subject to this tax can ever be certain, before being assessed, of what he'll owe. He can't even be certain after being assessed. If someone who should have been exempt gets taxed, or if someone gets taxed more than their fair share — both must pay in the meantime. But if they complain and prove their case, the whole parish is reassessed the next year to reimburse them. If any taxpayer goes bankrupt or becomes insolvent, the tax collector must advance that person's tax, and the whole parish is reassessed the following year to reimburse the collector. If the collector himself goes bankrupt, the parish that elected him is responsible for his obligations to the regional revenue officer. Since it would be inconvenient for the revenue officer to sue the entire parish, he simply picks five or six of the wealthiest taxpayers and forces them to cover the shortfall. The parish is then reassessed to reimburse those five or six. These reassessments are always on top of the regular taille for whatever year they're imposed.

When a tax is imposed on profits in a particular line of business, the business owners are all careful to bring no more goods to market than they can sell at a price high enough to cover the tax. Some of them pull part of their capital out of that business, and the market gets supplied less generously than before. The price of goods rises, and the consumer ends up paying the tax. But when a tax is imposed on farming profits, farmers have no reason to pull any capital out of farming. Each farmer works a certain amount of land for which he pays rent. Properly cultivating that land requires a certain amount of capital, and by pulling out any of that necessary capital, the farmer won't become any more able to pay either his rent or his tax. It can never be in his interest to reduce his output in order to pay the tax — and so he never gets to supply the market less generously than before. The tax therefore never lets him raise the price of his produce and shift the burden onto consumers. But the farmer still needs his reasonable profit, just like every other business person. Otherwise, he'll quit farming. After a tax like this is imposed, he can only get that reasonable profit by paying less rent to the landlord. The more he has to pay in taxes, the less he can afford in rent. Such a tax, imposed during an existing lease, may well bankrupt the farmer. But when the lease comes up for renewal, the tax always falls on the landlord.

In countries where the personal taille is in effect, the farmer is typically assessed based on the amount of capital he appears to invest in cultivation. This is why he's often afraid to keep good horses or strong oxen, and instead tries to farm with the poorest, most wretched equipment he can manage. His distrust of his tax assessors is so deep that he deliberately pretends to be poor, wanting to look barely capable of paying anything for fear of being forced to pay too much. This miserable strategy may not actually serve his own best interest. He probably loses more from the decline in his production than he saves in lower taxes. Although the market is somewhat less well supplied because of this terrible farming, the small price increase this might cause isn't likely to compensate the farmer for his reduced output — and it's even less likely to enable him to pay more rent to the landlord. The public, the farmer, and the landlord all suffer from this degraded farming. As I've already discussed in Book III, the personal taille discourages good farming in many ways and therefore tends to dry up the principal source of wealth in every great country.

What are called poll taxes in the southern colonies of North America and in the West Indian islands — annual taxes of so much per head on every enslaved person — are really taxes on the profits from a particular kind of capital employed in agriculture. Since the planters are, for the most part, both farmers and landlords, the final burden of the tax falls on them in their capacity as landlords, with no way to shift it to anyone else.

Head taxes on enslaved workers used in farming seem to have been common throughout Europe in earlier times. A tax of this kind still exists today in the Russian Empire. This is probably why poll taxes of all kinds have often been called badges of slavery. But really, every tax is a badge not of slavery but of freedom for the person who pays it. It shows that he's subject to government, certainly, but also that because he has some property, he can't himself be the property of a master. A poll tax on enslaved people is entirely different from a poll tax on free people. The latter is paid by the people it's imposed on; the former is paid by an entirely different group. A poll tax on free people is either entirely arbitrary or entirely unequal — and usually both. A poll tax on enslaved workers, though unequal in some ways (since different workers have different values), isn't arbitrary at all. Every owner who knows how many workers he has knows exactly what he owes. But because both taxes share the same name, they've been treated as if they're the same thing.

The taxes imposed in Holland on male and female servants are not taxes on capital but on spending, and in that way resemble taxes on consumer goods. The recently imposed tax of a guinea per head on every male servant in Britain is the same kind. It falls hardest on the middle class. A man with an income of two hundred pounds a year might keep one male servant. A man with ten thousand a year won't keep fifty. It doesn't affect the poor.

Taxes on profits earned in particular occupations can never affect the interest rate on money. Nobody will lend at a lower interest rate to people in taxed occupations than to those in untaxed ones. But taxes on income from capital in all occupations — where the government tries to levy them with any degree of precision — will in many cases fall on the interest rate. The vingtieme, or "twentieth penny," in France is a tax similar to England's land tax. It's assessed in the same way on income from land, houses, and capital. Insofar as it applies to capital, it's assessed with greater precision than the corresponding part of England's land tax, though not with great strictness. In many cases, it falls entirely on the interest earned on money. In France, money is frequently invested in what are called "contracts for the constitution of a rent" — essentially perpetual annuities that the debtor can redeem at any time by repaying the original amount advanced, but which the creditor can't demand repayment of except in special circumstances. The vingtieme doesn't appear to have raised the rate on these annuities, even though it is precisely levied on all of them.

As long as property stays in the same person's hands, whatever permanent taxes are imposed on it, they've never been meant to take away any part of its capital value — only some portion of the income it produces. But when property changes hands — whether passed from the dead to the living, or from one living person to another — taxes have frequently been imposed that do take away part of its capital value.

Transfers of all kinds of property from the dead to the living, and transfers of immovable property (land and houses) between living people, are transactions that are either inherently public and well-known, or at least can't be kept secret for long. Such transactions can therefore be taxed directly. But the transfer of capital or movable property between living people — through lending money, for instance — is often a secret transaction and can always be made one. So it can't easily be taxed directly. It has been taxed indirectly in two ways: first, by requiring that the document containing the obligation to repay be written on paper or parchment that has paid a certain stamp duty, on penalty of being declared invalid; and second, by requiring (also on penalty of invalidity) that it be recorded in either a public or secret register, with certain duties imposed on that registration. Stamp duties and registration fees have also frequently been imposed on deeds transferring property of all kinds from the dead to the living, and on deeds transferring immovable property between living people — even though those transactions could easily have been taxed directly.

The Vicestima Hereditatum — the "twentieth penny" on inheritances — imposed by the Roman emperor Augustus was a tax on the transfer of property from the dead to the living. Dion Cassius, the ancient historian who writes about it most clearly, says it was imposed on all inheritances, legacies, and gifts made in anticipation of death, except those left to close relatives and to the poor.

The Dutch tax on inheritances is of the same kind. Inheritances by extended family members are taxed, according to how closely related they are, at rates ranging from five to thirty percent of the total value. Bequests and legacies to extended family members are subject to the same rates. Transfers between husband and wife are taxed at one-fifteenth. The "luctuosa hereditas" — the "mournful inheritance" that parents leave to their children — is taxed at only one-twentieth. Direct inheritances, where children inherit from parents who lived with them, pay no tax at all. A father's death, for children who lived in his household, rarely brings any increase in income and frequently brings a considerable decrease — through the loss of his labor, his official position, or some income that he'd been receiving during his lifetime. A tax that made their loss worse by taking part of his estate would be cruel and oppressive. It may, however, be different for those children who, in Roman legal terms, are "emancipated" — or in Scottish legal terms, "forisfamiliated" — meaning those who have already received their share, started their own families, and are supported by resources separate from and independent of their father's. Whatever part of his estate came to such children would be a genuine addition to their fortune and might therefore — with no more inconvenience than accompanies all duties of this kind — reasonably be subject to some tax.

The "casualties" of feudal law were taxes on the transfer of land, both from the dead to the living and between living people. In ancient times, they made up one of the principal sources of royal revenue throughout Europe.

The heir of every direct vassal of the crown paid a certain duty — generally a year's rent — upon receiving legal possession of the estate. If the heir was a minor, all the estate's rental income during the minority went to the feudal lord, with no obligation beyond maintaining the minor and paying the widow's dowry when there was a surviving wife. When the minor came of age, another tax called "Relief" was still owed to the lord, which likewise generally amounted to a year's rent. A long minority, which in modern times so often frees a great estate from all its debts and restores a family to its former glory, had no such effect in those days. The waste of the estate, not its financial recovery, was the usual result of a long minority.

Under feudal law, a vassal couldn't sell his property without his lord's consent, and the lord generally extorted a fine or fee for granting it. This fee, which was originally set arbitrarily, came to be regulated in many countries as a fixed percentage of the sale price. In some countries where most other feudal customs have fallen into disuse, this tax on the sale of land still provides a very substantial portion of government revenue. In the canton of Bern, it's as high as one-sixth of the price for all prestigious estates, and one-tenth for less prestigious ones. In the canton of Lucerne, the tax on land sales isn't universal and applies only in certain districts. But if anyone sells his land in order to leave the territory, he pays ten percent on the full sale price. Taxes of the same kind on land sales — whether on all land or only land held by certain kinds of tenure — exist in many other countries and make up a more or less significant portion of government revenue.

Such transactions can also be taxed indirectly, through either stamp duties or registration fees, and those duties may or may not be proportioned to the value of the property being transferred.

In Great Britain, stamp duties are set not so much by the value of the property transferred (an eighteen-penny or half-crown stamp is sufficient for a bond of any size) as by the type of document. The highest don't exceed six pounds per sheet of paper or piece of parchment, and these high duties fall mainly on grants from the crown and on certain legal proceedings, without any regard to the value of what's at stake. In Great Britain, there are no duties on the registration of deeds or documents, except the fees paid to the officers who maintain the register — and these are seldom more than a reasonable compensation for their work. The crown gets no revenue from them.

In Holland, there are both stamp duties and registration fees, which in some cases are proportioned to the value of the property transferred and in some cases are not. All wills must be written on stamped paper whose price is proportioned to the value of the estate being disposed of, so that stamps range in cost from three pence per sheet to three hundred florins (equal to about twenty-seven pounds ten shillings in English money). If the stamp is cheaper than what the will-maker should have used, his entire estate is confiscated. This is on top of all their other inheritance taxes. Except for bills of exchange and certain other commercial documents, all other deeds, bonds, and contracts are subject to a stamp duty. This duty, however, doesn't rise in proportion to the value of the transaction. All sales of land and houses, and all mortgages on either, must be registered, and upon registration pay a duty to the state of two and a half percent of the sale price or mortgage amount. This duty also applies to the sale of all ships and vessels of more than two tons, whether decked or not. Ships, it seems, are considered a kind of house on the water. The sale of movable property, when ordered by a court, is also subject to the same two and a half percent duty.

In France, there are both stamp duties and registration fees. The stamp duties are considered a branch of the excise taxes and are collected by excise officers in the provinces where they apply. The registration fees are considered part of the royal domain and are collected by a different set of officials.

These methods of taxation — stamp duties and registration fees — are quite modern inventions. In just over a century, however, stamp duties have become nearly universal in Europe, and registration fees extremely common. There is no trick that one government learns from another faster than how to drain money from the people's pockets.

Taxes on property transfers from the dead to the living fall ultimately, as well as immediately, on the person receiving the property. Taxes on land sales fall entirely on the seller. The seller is almost always under pressure to sell and must therefore take whatever price he can get. The buyer is rarely under any pressure to buy and will therefore only offer a price he likes. He considers what the land will cost him in tax and price combined. The more he has to pay in tax, the less he'll be willing to pay in price. Such taxes therefore almost always fall on someone in a desperate situation, and must frequently be cruel and oppressive. Taxes on the sale of newly built houses (where the building is sold without the land) generally fall on the buyer, because the builder has to make his profit — otherwise he'd have to quit the business. If the builder advances the tax, the buyer generally has to reimburse him. Taxes on the sale of existing houses, for the same reason as taxes on land sales, generally fall on the seller, who is typically forced to sell by either convenience or necessity. The number of new houses brought to market each year is more or less determined by demand. Unless demand is high enough for the builder to make a profit after paying all expenses, he won't build any more houses. But the number of existing houses that happen to come on the market at any time depends on circumstances that mostly have nothing to do with demand. Two or three major bankruptcies in a commercial town will put many houses up for sale, and they'll have to be sold for whatever they can get. Taxes on the sale of ground rents fall entirely on the seller, for the same reason as land taxes. Stamp duties and registration fees on bonds and loan contracts fall entirely on the borrower and are always paid by him. Duties of the same kind on legal proceedings fall on the parties to the lawsuit. Both types reduce the capital value of whatever is in dispute. The more it costs to acquire any property, the less its net value once acquired.

All taxes on property transfers of every kind, to the extent they reduce the capital value of that property, tend to shrink the funds available for maintaining productive labor. They are all wasteful taxes that increase government revenue — which rarely supports anyone but unproductive workers — at the expense of the people's capital, which supports only productive workers.

Such taxes, even when proportioned to the value of the property transferred, are still unequal. Property of equal value doesn't change hands equally often. When they're not proportioned to the property's value — as is the case with most stamp duties and registration fees — the inequality is even worse. They are in no way arbitrary; they are, or can be, perfectly clear and certain in all cases. Though they sometimes fall on people who can't easily afford to pay, the timing of the payment is generally convenient enough. When payment comes due, the person usually has the money available. These taxes are cheap to collect and subject taxpayers to no inconvenience beyond the unavoidable one of paying the tax itself.

In France, the stamp duties aren't much complained about. The registration fees — called the "Controle" — are. They reportedly give rise to extensive extortion by the officers of the tax farmers who collect them, and the tax itself is largely arbitrary and uncertain. In most of the pamphlets written criticizing France's current tax system, the abuses of the Controle feature prominently. However, uncertainty doesn't seem to be inherent in the nature of such taxes. If the public complaints are justified, the abuse must arise not so much from the nature of the tax itself as from the vagueness and imprecision of the laws that impose it.

The registration of mortgages, and of property rights generally, provides great security to both creditors and buyers and is extremely beneficial to the public. But the registration of most other kinds of documents is often inconvenient and even dangerous to individuals, without providing any public benefit. All registers that everyone agrees should be kept secret clearly shouldn't exist in the first place. People's credit should certainly never depend on something as flimsy as the honesty and integrity of low-ranking revenue officers. But wherever registration fees have been turned into a source of government revenue, registry offices have multiplied endlessly — both for the documents that genuinely should be registered and for those that shouldn't. In France, there are several kinds of secret registers. This abuse, though perhaps not inevitable, is a very natural consequence of such taxes.

Stamp duties like those in England on cards and dice, on newspapers and periodicals, and so on, are really taxes on consumption. The final payment falls on the people who use or consume those items. Stamp duties like those on licenses to sell beer, wine, and spirits, though perhaps intended to fall on the retailers' profits, are likewise ultimately paid by consumers of those drinks. Such taxes, though they share the same name and are collected by the same officers in the same manner as the stamp duties on property transfers mentioned above, are actually quite different in nature and fall on entirely different sources of income.

As I tried to show in Book I, the wages of ordinary workers are everywhere determined by two factors: the demand for labor, and the average price of food and necessities. The demand for labor — depending on whether it's increasing, stable, or declining, and therefore whether it requires a growing, stable, or shrinking population — determines the worker's standard of living: whether it will be generous, moderate, or meager. The average price of necessities determines how much money the worker must be paid so that, on average, he can afford this generous, moderate, or meager standard of living.

So as long as the demand for labor and the price of necessities stay the same, a direct tax on wages can have only one effect: pushing wages somewhat higher than the tax. Here's an example. Suppose that in a particular place, the demand for labor and the price of necessities are such that the ordinary wage is ten shillings a week, and a tax of one-fifth (four shillings per pound) is imposed on wages. If the demand for labor and the price of necessities remain unchanged, the worker still needs to earn enough to buy what ten shillings a week would purchase — meaning he needs ten shillings a week in take-home pay after the tax. But to leave him ten shillings after paying the tax, the price of labor in that place would need to rise not just to twelve shillings a week, but to twelve shillings and sixpence. In other words, to enable him to pay a tax of one-fifth, his wages would necessarily have to rise not by one-fifth, but by one-fourth. Whatever the rate of the tax, wages would always have to rise not just by that rate, but by a higher rate. If the tax were one-tenth, for example, wages would necessarily have to rise not by one-tenth, but by one-eighth.

So a direct tax on wages — even though the worker might pay it out of his own pocket — couldn't really be said to be advanced even by him, at least as long as the demand for labor and the average price of necessities stayed the same after the tax as before. In all such cases, not only the tax but something more than the tax would actually be advanced by the employer. The final burden would fall on different people depending on the circumstances. The wage increase caused by such a tax in manufacturing would be advanced by the manufacturer, who would be both entitled and obliged to pass it on — with a markup — in the price of his goods. So the final payment of this wage increase, along with the manufacturer's additional profit, would fall on consumers. The wage increase caused by such a tax in agriculture would be advanced by the farmer, who would need to invest more capital in order to maintain the same number of workers as before. To recover this larger investment plus his ordinary profit, he would need to keep a bigger share of the land's output — or equivalently, the value of a bigger share — which means he would pay less rent to the landlord. In this case, the final payment of the wage increase would fall on the landlord, along with the additional profit of the farmer who had advanced it. In every case, a direct tax on wages must eventually cause both a greater reduction in land rent and a greater increase in the price of manufactured goods than would have resulted from simply dividing an equal sum between a tax on rent and a tax on consumer goods.

When direct taxes on wages haven't always produced a corresponding rise in wages, it's because they have generally caused a considerable drop in the demand for labor. The decline of industry, the decrease of employment for the poor, and the shrinking of the country's annual output have generally been the effects of such taxes. Even so, the price of labor always ends up higher than it would have been given the actual state of demand, and this higher price — along with the profit of those who advance it — must always be ultimately paid by landlords and consumers.

A tax on agricultural wages doesn't raise the price of raw produce in proportion to the tax, for the same reason that a tax on the farmer's profit doesn't raise that price proportionally.

However absurd and destructive such taxes are, they exist in many countries. In France, the portion of the taille that falls on the labor of workers and day-laborers in rural villages is essentially a tax of this kind. Their wages are estimated based on the going rate in the district where they live, and to minimize the risk of overcharging, their annual earnings are calculated assuming no more than two hundred working days per year. Each individual's tax varies from year to year according to various circumstances, as judged by the local tax collector or the commissioner appointed by the regional administrator to assist him. In Bohemia, following the reform of its tax system that began in 1748, a very heavy tax is imposed on the labor of skilled workers. They're divided into four classes. The highest class pays a hundred florins a year — about nine pounds, seven shillings, and sixpence in English money. The second class is taxed at seventy florins, the third at fifty, and the fourth — which includes village craftsmen and the lowest class of town craftsmen — at twenty-five florins.

As I tried to show in Book I, the pay of talented artists and members of the learned professions necessarily maintains a certain ratio to the compensation of less prestigious trades. A tax on their pay, therefore, could have no effect other than to push it somewhat higher than the tax. If it didn't rise in this way, the creative arts and learned professions — no longer on an equal footing with other trades — would be so widely abandoned that they'd soon return to that footing.

The compensation of government officeholders is not, like that of people in trades and professions, set by free market competition, and therefore doesn't always bear a fair proportion to what the job actually requires. In most countries, it's probably higher than necessary, since the people who run the government are generally inclined to reward both themselves and their close associates rather more generously than needed. Government salaries, therefore, can usually bear to be taxed quite well. Besides, people who hold public offices — especially the more lucrative ones — are in every country the objects of widespread envy. A tax on their compensation, even if it's somewhat higher than on any other kind of income, is always a very popular tax. In England, for example, when the land tax was supposed to assess every other kind of income at four shillings per pound, it was very popular to impose an actual tax of five shillings and sixpence per pound on the salaries of offices paying more than a hundred pounds a year — with exceptions for the pensions of younger members of the royal family, the pay of army and navy officers, and a few other categories that people didn't resent as much. There are no other direct taxes on wages in England.

Taxes intended to fall equally on every kind of income are poll taxes and taxes on consumer goods. These must be paid out of whatever income the taxpayer happens to have — whether from the rent on his land, the profits from his capital, or the wages of his labor.

Poll Taxes

If poll taxes are meant to be proportioned to each person's fortune or income, they become entirely arbitrary. A person's financial situation changes from day to day, and without an investigation more intolerable than any tax — and repeated at least once a year — it can only be guessed at. Each person's assessment must therefore depend mostly on the good or bad mood of his assessors, making the whole thing arbitrary and uncertain.

If poll taxes are proportioned not to estimated fortune but to social rank, they become entirely unequal, since people of the same rank frequently have very different levels of wealth.

So if you try to make such taxes equal, they become arbitrary and uncertain. If you try to make them certain and not arbitrary, they become unequal. Whether the tax is light or heavy, uncertainty is always a serious grievance. In a light tax, a considerable degree of inequality can be tolerated. In a heavy one, inequality is completely intolerable.

During the various poll taxes imposed under William III in England, most taxpayers were assessed according to their social rank — dukes, marquesses, earls, viscounts, barons, esquires, gentlemen, eldest and youngest sons of peers, and so on. All shopkeepers and tradespeople worth more than three hundred pounds — that is, the better-off ones — were assessed at the same rate, regardless of how vast the differences in their actual wealth might be. Their rank mattered more than their fortune. Several people who had been assessed under the first poll tax according to their estimated fortune were later assessed according to their rank instead. Lawyers of various types who had initially been taxed at three shillings per pound of their estimated income were later simply assessed as "gentlemen." In a tax that wasn't very heavy, a considerable degree of inequality turned out to be more bearable than any degree of uncertainty.

In France, a poll tax has been levied without interruption since the beginning of the eighteenth century. The highest social orders are taxed according to their rank at a fixed rate that never changes. The lower orders are taxed according to their estimated fortune at a rate that varies from year to year. Officers of the king's court, judges and other officials in the higher courts, military officers, and so on are assessed the first way. The lower ranks of people in the provinces are assessed the second way. In France, the wealthy easily accept a considerable degree of inequality in a tax that, as far as it affects them, isn't very heavy — but they couldn't tolerate the arbitrary assessment of a regional administrator. The lower ranks of people in that country must simply endure whatever treatment their superiors see fit to impose.

In England, the various poll taxes never produced the revenue that had been expected — or that they might have produced if they'd been strictly enforced. In France, the poll tax always produces the expected amount. England's mild government, when it assessed people by rank for the poll tax, was content with whatever that assessment happened to produce. It demanded no compensation for the losses the state might suffer from those who couldn't pay or those who wouldn't pay (and there were many of both), and who, through lenient enforcement, were never forced to pay. France's more severe government assigns each administrative district a certain sum that the regional administrator must collect however he can. If any province complains of being overtaxed, it may get a proportional reduction the following year. But it must pay in the meantime. The administrator, to make sure he collected his district's full assessment, was empowered to set the total higher than needed, so that the failure or inability of some taxpayers would be covered by overcharging the rest. Until 1765, setting this surplus assessment was left entirely to his discretion. That year, the royal council took this power for itself. In the provincial poll tax, as observed by the thoroughly well-informed author of the Memoirs on French Taxation, the share that falls on the nobility and on those whose privileges exempt them from the taille is the smallest. The largest share falls on those subject to the taille, who are assessed for the poll tax at a rate proportional to what they pay in taille.

Poll taxes, insofar as they fall on the lower classes, are really direct taxes on wages and carry all the same drawbacks as such taxes.

Poll taxes are cheap to collect, and when strictly enforced, they provide a very reliable government revenue. This is why poll taxes are very common in countries where the comfort and security of ordinary people receive little attention. In general, however, only a small part of public revenue in any great country has ever come from such taxes, and whatever they've raised could always have been found through some other means far less burdensome to the people.

Taxes on Consumer Goods

The impossibility of taxing people in proportion to their income through any poll tax seems to have inspired the invention of taxes on consumer goods. Unable to tax its subjects' income directly and proportionally, the state tries to tax it indirectly by taxing their spending — which, it's assumed, will in most cases be roughly proportional to their income. Spending is taxed by taxing the consumer goods on which it's spent.

Consumer goods are either necessities or luxuries.

By "necessities" I mean not only the goods absolutely essential for survival, but also whatever the customs of the country make it shameful for any respectable person, even of the lowest class, to go without. A linen shirt, for example, isn't strictly necessary for life. The Greeks and Romans lived perfectly comfortably without linen. But in modern Europe, a respectable day-laborer would be ashamed to appear in public without a linen shirt. Going without one would suggest a disgraceful level of poverty that nobody is supposed to fall into without extreme irresponsibility. In the same way, custom has made leather shoes a necessity of life in England. The poorest respectable person of either sex would be ashamed to be seen without them. In Scotland, custom has made them a necessity for the lowest class of men, but not for women of the same class, who may walk around barefoot without any disgrace. In France, they're a necessity for neither sex — the poorest people of both sexes appear in public without any embarrassment, sometimes in wooden clogs and sometimes barefoot. So by "necessities" I include not only what nature requires, but what the established rules of decency have made necessary for the poorest people. Everything else I call luxuries — without meaning to cast the slightest disapproval on their moderate use. Beer and ale in Britain, and wine even in wine-producing countries, I classify as luxuries. A person of any rank can abstain from these drinks entirely without any reproach. Nature doesn't require them for survival, and nowhere does custom make it indecent to live without them.

Since wages are determined partly by the demand for labor and partly by the average price of necessities, anything that raises this average price must necessarily raise wages too, so that workers can still afford the quantity of necessities that the state of labor demand — whether increasing, stable, or declining — requires them to have. A tax on necessities pushes their price somewhat higher than the tax itself, because the seller who advances the tax generally needs to recover it with a profit on top. Such a tax must therefore cause wages to rise in proportion to this price increase.

This is how a tax on necessities works exactly like a direct tax on wages. The worker may pay it out of his own pocket, but he can't really be said to advance it — at least not for long. In the long run, his employer must advance it to him through higher wages. If his employer is a manufacturer, the manufacturer will pass on this wage increase, plus a markup, in the price of his goods. The final burden, along with the markup, falls on consumers. If his employer is a farmer, the final burden, with a similar markup, falls on the landlord through reduced rent.

The situation is entirely different with taxes on what I call luxuries — even the luxuries of the poor. A price increase on taxed luxury goods won't necessarily cause any rise in wages. A tax on tobacco, for example — a luxury of the poor as well as the rich — won't raise wages. Even though tobacco is taxed in England at three times its original price and in France at fifteen times, these heavy duties seem to have no effect on wages whatsoever. The same can be said of the taxes on tea and sugar, which in England and Holland have become luxuries even for the poorest people, and of taxes on chocolate, which in Spain is said to have become one. The various taxes on spirits imposed in Britain over the course of the century don't appear to have affected wages at all. The price increase in porter caused by an additional tax of three shillings per barrel on strong beer hasn't raised the wages of ordinary labor in London. They were about eighteen to twenty pence a day before the tax, and they're no higher now.

The high price of such luxuries doesn't necessarily diminish poor people's ability to raise families. For the sober and hardworking poor, taxes on such goods act as a kind of spending regulation, leading them either to cut back or to stop buying luxuries they can no longer easily afford. Their ability to raise families, thanks to this forced thriftiness, may actually be increased rather than decreased by the tax. It's the sober and hardworking poor who generally raise the largest families and who principally supply the demand for useful labor. Not all poor people are sober and hardworking, of course. The reckless and disorderly might continue to indulge in these goods after the price increase just as they did before, regardless of the hardship this might bring on their families. But such disorderly people seldom raise large families — their children generally die from neglect, mismanagement, and inadequate or unwholesome food. Those who survive the hardships of their parents' bad behavior by sheer physical toughness usually have their morals corrupted by the example. Instead of being useful to society through their industry, they become public nuisances through their vices and disorder. So while higher prices on the luxuries of the poor might increase the hardships of such disorderly families and thereby somewhat reduce their ability to raise children, this probably wouldn't much reduce the country's useful working population.

But any increase in the average price of necessities — unless offset by a proportional rise in wages — must necessarily diminish the ability of the poor to raise large families, and consequently to supply the demand for useful labor, regardless of the state of that demand.

Taxes on luxuries don't tend to raise the price of anything except the taxed goods themselves. Taxes on necessities, by raising wages, necessarily tend to raise the price of all manufactured goods and consequently to shrink both sales and consumption. Taxes on luxuries are paid entirely by the consumers of the taxed goods, with no way to shift the burden. They fall equally on every kind of income — wages, profits, and rent alike. Taxes on necessities, insofar as they affect the working poor, are ultimately paid partly by landlords through reduced rent and partly by wealthy consumers — whether landlords or others — through higher prices on manufactured goods, always with a considerable markup. Higher prices on manufactured necessities actually consumed by the poor — coarse woolens, for example — must be compensated to the poor through still higher wages. The middle and upper classes, if they understood their own interest, should always oppose all taxes on necessities, as well as all direct taxes on wages. They themselves end up paying the final burden of both, always with a considerable markup. The burden falls heaviest on landlords, who always pay in a double capacity: as landlords, through reduced rent, and as wealthy consumers, through higher spending. Sir Matthew Decker's observation that certain taxes are sometimes compounded four or five times in the price of certain goods is perfectly accurate when it comes to taxes on necessities. In the price of leather, for example, you pay not only the tax on the leather of your own shoes, but part of the tax on the leather used by the shoemaker and the tanner. You also pay for the tax on the salt, soap, and candles those workers consume while doing your work — and for the tax on the leather consumed by the salt-maker, the soap-maker, and the candle-maker while they're doing theirs.

In Britain, the principal taxes on necessities are those on four commodities: salt, leather, soap, and candles.

Salt is a very ancient and universal subject of taxation. It was taxed by the Romans, and it's taxed today in, I believe, every part of Europe. The amount consumed annually by any individual is so small, and can be purchased so gradually, that nobody seems to have thought that anyone would feel even a fairly heavy tax on it very acutely. In England, it's taxed at three shillings and fourpence per bushel — about three times the commodity's original price. In some other countries, the tax is even higher. Leather is a genuine necessity of life. The use of linen makes soap one. In countries with long winter nights, candles are a necessary tool of trade. Leather and soap are taxed in Britain at three halfpence per pound; candles at a penny — taxes that may amount to about eight to ten percent on the original price of leather, about twenty to twenty-five percent on soap, and about fourteen to fifteen percent on candles. These taxes, though lighter than the one on salt, are still very heavy. Since all four commodities are genuine necessities, such heavy taxes must somewhat increase the expenses of the sober, hardworking poor and must consequently raise wages to some degree.

In a country with winters as cold as Britain's, fuel is, during that season, a necessity of life in the strictest sense — not only for cooking but for the basic comfort of the many kinds of workers who work indoors. Coal is the cheapest fuel available. The price of fuel has such an important influence on the price of labor that manufacturing across Britain has concentrated mainly in the coal-producing regions. Other parts of the country, because of the high cost of this essential commodity, simply can't produce goods as cheaply. In some industries, coal is also a necessary tool of production — as in glass, iron, and all other metalworking. If a subsidy could ever be justified, it might be for transporting coal from regions where it's abundant to regions where it's scarce. But instead of a subsidy, the legislature has imposed a tax of three shillings and threepence per ton on coal transported by sea — which for most types of coal is more than sixty percent of the original price at the mine. Coal transported by land or by inland waterway pays no duty. Where coal is naturally cheap, it's consumed tax-free. Where it's naturally expensive, it's loaded with a heavy tax.

Such taxes do raise the cost of living and consequently wages, yet they produce considerable government revenue that might be hard to replace. So there may be good reasons for keeping them. The subsidy on grain exports, insofar as it tends to raise the price of that essential commodity in the current state of farming, produces all the same bad effects — and instead of generating any revenue, it frequently causes the government very great expense. The high duties on imported foreign grain, which in years of moderate plenty effectively amount to a prohibition, and the absolute ban on importing either live cattle or salted meat (which is the normal state of the law and which, because of the current scarcity, has been temporarily suspended for Ireland and the British colonies) — all of these have the same bad effects as taxes on necessities, while producing no revenue at all. The only thing needed to repeal such regulations is to convince the public of the foolishness of the mercantilist system that created them.

Taxes on necessities are much higher in many other countries than in Britain. Duties on flour and meal at the mill, and on bread at the oven, exist in many countries. In Holland, the cash price of bread consumed in towns is reportedly doubled by such taxes. In place of part of these taxes, people in the countryside pay an annual per-head charge based on the type of bread they're assumed to eat. Those who eat wheat bread pay three guilders and fifteen stivers — about six shillings and ninepence halfpenny in English money. These and similar taxes have reportedly ruined most of Holland's manufacturing by raising the cost of labor. Similar taxes, though not quite as heavy, exist in Milan, Genoa, the duchies of Modena, Parma, Piacenza, and Guastalla, and in the Papal States. A notable French author has proposed reforming his country's finances by replacing most other taxes with this most ruinous of all taxes. As Cicero said, there is nothing so absurd that some philosopher hasn't asserted it.

Taxes on meat are even more common than taxes on bread. It's debatable whether meat is actually a necessity of life anywhere. Grain and other vegetables, supplemented with milk, cheese, and butter (or oil where butter isn't available), are known from experience to provide the most plentiful, wholesome, nourishing, and energizing diet without any meat at all. Social convention nowhere requires that anyone eat meat the way it requires that people wear a linen shirt or leather shoes in most places.

Consumer goods, whether necessities or luxuries, can be taxed in two different ways. The consumer can either pay an annual fee for using or consuming goods of a certain kind, or the goods can be taxed while they're still in the hands of the dealer, before being delivered to the consumer. Durable goods that last a considerable time before being fully consumed are best taxed the first way. Goods that are consumed immediately or quickly are best taxed the second way. The coach tax and the plate tax are examples of the first method. Most excise duties and customs duties use the second method.

A coach, with good care, might last ten or twelve years. It could be taxed once, before it leaves the coach-maker's shop. But it's certainly more convenient for the buyer to pay four pounds a year for the privilege of keeping a coach than to pay an extra forty or forty-eight pounds to the coach-maker all at once — the equivalent of what the tax will likely cost over the coach's lifetime. Similarly, a set of silver plate can last more than a century. It's certainly easier for the consumer to pay five shillings a year for every hundred ounces of plate — roughly one percent of the value — than to pay twenty-five or thirty years' worth of that annual payment upfront, which would raise the price by at least twenty-five or thirty percent. The various taxes on houses are likewise more conveniently paid through moderate annual payments than through a heavy one-time tax on the building or sale.

It was Sir Matthew Decker's well-known proposal that all goods, even those consumed immediately or very quickly, should be taxed in this annual-license manner: the dealer would advance nothing, and the consumer would pay a yearly sum for a license to consume certain goods. His goal was to promote all branches of foreign trade — especially the carrying trade — by eliminating all import and export duties, thereby freeing the merchant to use his entire capital and credit for buying goods and shipping them, without any portion being tied up in advancing taxes. But the proposal to tax goods of immediate or quick consumption this way has four very important objections.

First, the tax would be more unequal — less well matched to each person's actual consumption — than taxes imposed the usual way. When taxes on beer, wine, and spirits are advanced by the dealer, they're ultimately paid by each consumer in exact proportion to what they actually consume. But if the tax were paid through an annual license to drink, the moderate drinker would be taxed much more heavily per drink than the heavy drinker. A family that entertained lavishly would be taxed far more lightly than one that entertained few guests.

Second, this method would largely eliminate one of the great advantages of taxes on goods consumed quickly: piecemeal payment. In the current price of three and a half pence for a pint of porter, the various taxes on malt, hops, and beer — plus the brewer's markup for advancing them — probably amount to about three halfpence. If a worker can conveniently spare that three halfpence, he buys a pint of porter. If he can't, he settles for half a pint, and since a penny saved is a penny earned, he gains a farthing through his temperance. He pays the tax in small installments as he can afford it, and every payment is perfectly voluntary — something he can avoid if he chooses.

Third, such taxes would be less effective as controls on excessive spending. Once the license was purchased, the licensee would pay the same amount whether he drank a lot or a little.

Fourth, if a worker had to pay all at once — yearly, half-yearly, or quarterly — a sum equal to what he currently pays with little inconvenience on all the individual pints and glasses of porter he drinks, the lump sum might cause him serious financial distress. This method of taxation, then, clearly could never produce revenue equal to what the current system produces without hardship — unless it imposed the most severe oppression. In several countries, however, goods of immediate or quick consumption are indeed taxed this way. In Holland, people pay a per-head fee for a license to drink tea. I've already mentioned a tax on bread that, in farmhouses and rural villages, is collected in the same manner.

Excise duties are imposed mainly on domestically produced goods intended for domestic consumption. They cover only a few types of goods in the most general use. There's never any doubt about which goods are subject to these duties or what the specific duty on each type of goods is. They fall almost entirely on what I call luxuries — always excepting the four duties mentioned above on salt, soap, leather, and candles, and perhaps the one on green glass.

Customs duties are much older than excise duties. They seem to have been called "customs" because they were customary payments that had existed since time immemorial. They appear to have been originally conceived as taxes on merchants' profits. During the lawless era of feudal anarchy, merchants — like all other town dwellers — were regarded as barely more than freed serfs: their persons were despised and their profits envied. The great nobles, who had agreed that the king could tax their own tenants' profits, were quite willing to let him tax the profits of a class of men they cared even less about protecting. In those ignorant times, nobody understood that merchants' profits can't be taxed directly, or that the final burden of all such taxes must fall, with a considerable markup, on consumers.

The profits of foreign merchants were viewed even less favorably than those of English merchants. It was natural, then, that foreign merchants should be taxed more heavily. This distinction between duties on foreign and English merchants, which began from ignorance, was continued in the spirit of monopoly — to give English merchants an advantage in both domestic and foreign markets.

With this distinction, the old customs duties were imposed equally on all types of goods — necessities as well as luxuries, exports as well as imports. Why should dealers in one type of goods be favored over dealers in another? Why should the merchant exporter be treated better than the merchant importer?

The old customs duties were divided into three branches. The first, and probably the oldest, was the duty on wool and leather — primarily an export duty. When the English woolen manufacturing industry developed, a similar duty was imposed on woolen cloth to prevent the king from losing customs revenue as wool was increasingly exported in manufactured form. The other two branches were: first, a duty on wine, which was called "tonnage" because it was charged at so much per ton; and second, a duty on all other goods, which was called "poundage" because it was charged at so much per pound of their estimated value. In the forty-seventh year of Edward III's reign, a duty of sixpence per pound was imposed on all goods exported and imported, except wool, sheepskins, leather, and wine, which had their own special duties. Under Richard II, this was raised to one shilling per pound, but three years later reduced back to sixpence. It was raised to eightpence under Henry IV, then to one shilling in the fourth year of his reign. From then until the ninth year of William III, the duty stayed at one shilling per pound. The tonnage and poundage duties were generally granted to the king by a single act of Parliament, and together they were called the "Subsidy of Tonnage and Poundage." Since the poundage subsidy had remained at one shilling per pound — five percent — for so long, the word "subsidy" came to mean, in customs language, a general duty of five percent. This original subsidy, now called the "Old Subsidy," is still collected according to the schedule of rates established under Charles II. The method of using a published schedule to determine the value of goods subject to this duty is said to be even older than James I's reign. The "New Subsidy" imposed under William III added another five percent on most goods. The one-third and two-thirds subsidies together made up yet another five percent, being proportional parts of it. The Subsidy of 1747 added a fourth five percent on most goods, and that of 1759 a fifth five percent on some particular goods. Besides these five subsidies, a great variety of other duties have been imposed from time to time on specific goods — sometimes to meet the state's financial needs, and sometimes to regulate trade according to mercantilist principles.

The mercantilist system has gradually become more and more fashionable. The Old Subsidy was imposed equally on exports and imports. The four later subsidies, as well as the various other duties imposed from time to time on particular goods, have — with a few exceptions — been placed entirely on imports. Most of the old duties that had been levied on exports of domestically produced goods have been either reduced or eliminated entirely. In most cases, they've been abolished outright. Subsidies have even been granted on the export of some goods. Rebates — sometimes of the full amount, usually of part — of the duties paid on imported foreign goods have been granted when those goods are re-exported. Only half the import duties from the Old Subsidy are rebated on re-export, but the full duties from the later subsidies and other levies are rebated on most goods. This growing favoritism toward exports and discouragement of imports has had only a few exceptions, mainly concerning the raw materials used in certain types of manufacturing. Our merchants and manufacturers want these to be as cheap as possible for themselves and as expensive as possible for their foreign rivals and competitors. For this reason, foreign materials are sometimes allowed to be imported duty-free — Spanish wool, flax, and raw linen yarn, for example. Meanwhile, the export of domestically produced materials and materials from our colonies has sometimes been banned outright and sometimes subjected to higher duties. The export of English wool has been prohibited. Exports of beaver skins, beaver wool, and gum senegal have been subjected to higher duties — Britain having acquired a near-monopoly on these commodities through the conquest of Canada and Senegal.

As I tried to show in Book IV, the mercantilist system hasn't been very favorable to the income of the general population — that is, to the annual output of the country's land and labor. It seems to have been no more favorable to government revenue either, at least insofar as that revenue depends on customs duties.

As a result of this system, the importation of several kinds of goods has been banned outright. In some cases, this prohibition has completely stopped imports; in others, it has greatly reduced them by forcing importers to resort to smuggling. It has completely prevented the importation of foreign woolens and has greatly reduced that of foreign silks and velvets. In both cases, it has completely destroyed the customs revenue that might have been collected on such imports.

The high duties imposed on many different foreign goods, intended to discourage their consumption in Britain, have in many cases served only to encourage smuggling. And in all cases, they've reduced customs revenue below what more moderate duties would have produced. As Dr. Swift said, in the arithmetic of customs, two and two sometimes make not four but one. This is perfectly true of such heavy duties, which could never have been imposed if the mercantilist system hadn't taught us to use taxation not as a tool for raising revenue, but as a tool for maintaining monopoly.

The subsidies sometimes granted on exports of domestic goods, and the rebates paid when most foreign goods are re-exported, have given rise to many frauds and to a type of smuggling more destructive to public revenue than any other. To claim the subsidy or rebate, goods are sometimes loaded onto ships and sent to sea — then secretly brought back ashore at some other point along the coast. The loss to customs revenue from these subsidies and rebates, a large portion of which are obtained fraudulently, is enormous. In the year ending January 5, 1755, total customs revenue amounted to 5,068,000 pounds. The subsidies paid out of this revenue (though there was no grain subsidy that year) totaled 167,800 pounds. The rebates paid on certificates of re-export totaled 2,156,800 pounds. Subsidies and rebates together came to 2,324,600 pounds. After these deductions, customs revenue was only 2,743,400 pounds. Deducting another 287,900 pounds for administrative costs — salaries and other expenses — the net customs revenue for that year was just 2,455,500 pounds. Administrative costs thus amounted to between five and six percent of gross customs revenue, and to more than ten percent of what remained after paying out subsidies and rebates.

With heavy duties imposed on almost all imports, our importing merchants smuggle as much as possible and declare as little as they can. Our exporting merchants, on the other hand, declare more than they actually export — sometimes out of vanity, to look like big dealers in goods that carry no duty, and sometimes to claim a subsidy or rebate. As a result of these various frauds, our exports appear in the customs records to far exceed our imports — to the indescribable comfort of those politicians who measure national prosperity by the so-called "balance of trade."

All imported goods, unless specifically exempted (and such exemptions are not numerous), are subject to some customs duty. If any imported goods aren't listed in the official schedule of rates, they're taxed at roughly five subsidies' worth — about five percent — based on the importer's sworn valuation. The schedule of rates is extremely comprehensive and lists a huge variety of items, many of them rarely traded and therefore not well known. It's consequently often uncertain under which category a particular type of goods should be classified and what duty it should pay. Mistakes sometimes ruin the customs officer and frequently cause considerable trouble, expense, and frustration for the importer. In terms of clarity, precision, and certainty, customs duties are far inferior to excise duties.

For the majority of society's members to contribute to public revenue in proportion to their spending, it isn't necessary to tax every single item they buy. Excise duties are believed to fall on taxpayers just as evenly as customs duties, and excise duties cover only a few articles of the most general use and consumption. Many people have argued that, with proper management, customs duties could likewise — without any loss to public revenue, and with great benefit to foreign trade — be limited to just a few articles.

The foreign goods most widely used and consumed in Britain currently seem to consist mainly of: foreign wines and brandies; various products of the Americas and West Indies (sugar, rum, tobacco, coconuts, and so on); and various products of the East Indies (tea, coffee, chinaware, all kinds of spices, several sorts of textiles, and so on). These categories probably account for most of the revenue currently drawn from customs duties. The taxes currently imposed on other foreign manufactured goods have mostly been created not for the purpose of revenue, but for the purpose of monopoly — to give English merchants an advantage in the domestic market. By removing all import prohibitions and subjecting all foreign manufactures to moderate tax rates that experience has shown produce the greatest revenue per article, our own workers could still have a considerable advantage in the home market. And many goods that currently produce no revenue at all, or very little, might produce a great deal.

High taxes frequently produce less government revenue than more moderate taxes would — sometimes by reducing consumption of the taxed goods, and sometimes by encouraging smuggling.

When the revenue decline comes from reduced consumption, there's only one remedy: lower the tax.

When the revenue decline comes from smuggling, there are two possible remedies: reduce the temptation to smuggle, or increase the difficulty of smuggling. The temptation can only be reduced by lowering the tax. The difficulty can only be increased by establishing whatever administrative system is most effective at preventing it.

Experience shows that excise laws obstruct and frustrate smuggling operations far more effectively than customs laws. By introducing customs administration modeled as closely as possible on excise administration — to the extent the different types of duties allow — the difficulty of smuggling could be greatly increased. Many people have argued that this change could be made quite easily.

Here's how it could work. The importer of goods subject to customs duties could choose either to take them to his own private warehouse or to store them in a public warehouse (provided at his own or the public's expense) kept locked by a customs officer and never opened except in the officer's presence. If the merchant took them to his private warehouse, the duties would be paid immediately and never refunded afterward, and the warehouse would be subject to customs inspection at any time to verify that the quantity on hand matched what had been paid for. If he stored them in the public warehouse, no duty would be due until they were removed for domestic sale. If removed for export, they'd be duty-free, with proper guarantees that they actually would be exported. Dealers in those particular goods, whether wholesale or retail, would be subject to customs inspection at all times and required to show certificates proving the duty had been paid on everything in their shops or warehouses. This is essentially how the excise duties on imported rum currently work, and the same system might be extended to all import duties — provided those duties were, like excise duties, limited to a few types of widely used and consumed goods. If they were extended to nearly all goods, as they currently are, it would be hard to build enough public warehouses, and delicate goods requiring careful handling couldn't safely be trusted to any warehouse but the merchant's own.

If such an administrative system could prevent smuggling to any significant degree, even under fairly high duties — and if each duty were periodically raised or lowered depending on which approach was likely to produce the most revenue, with taxation always used as a tool for raising revenue and never for maintaining monopoly — then it seems quite possible that a revenue at least equal to the current net customs revenue could be raised from duties on just a few widely consumed types of goods. The customs system could thus be brought to the same degree of simplicity, certainty, and precision as the excise system. The revenue currently lost through rebates on re-exported foreign goods that are secretly brought back and consumed at home would be completely saved. If this saving — which would be very considerable on its own — were combined with the abolition of all export subsidies (except where those subsidies are really just refunds of excise duties already paid), there can be little doubt that net customs revenue could, after such a reform, be fully equal to whatever it had been before.

If such a reform caused no loss in public revenue, trade and manufacturing would certainly gain a very considerable advantage. Trade in the untaxed goods — by far the largest number — would be perfectly free and could be conducted with every part of the world to the greatest possible advantage. These untaxed goods would include all the necessities of life and all raw materials for manufacturing. Insofar as the free importation of necessities reduced their average cash price in the domestic market, it would reduce the cash price of labor — but without reducing its real purchasing power at all. The value of money depends on the quantity of necessities it can buy. The value of necessities is completely independent of the amount of money they can be exchanged for. A reduction in the cash price of labor would bring a proportional reduction in the price of all domestic manufactures, giving them an advantage in every foreign market. The price of some manufactures would fall even more dramatically through the free importation of raw materials. If raw silk could be imported from China and India duty-free, English silk manufacturers could greatly undersell those of both France and Italy. There would be no need to ban the importation of foreign silks and velvets. The cheapness of our goods would secure for our own workers not only dominance in the home market but a powerful position in foreign markets. Even trade in the taxed goods would be conducted far more advantageously than at present. If those goods were released from the public warehouse for export, being exempt from all taxes in that case, the trade would be perfectly free. The carrying trade in all sorts of goods would enjoy every possible advantage under this system. And if those goods were released for domestic consumption, the importer — not being required to advance the tax until he had a chance to sell the goods to either a dealer or a consumer — could always afford to sell them more cheaply than if he'd had to pay the tax at the moment of importation. Even in the taxed goods, foreign trade for domestic consumption could be carried on far more advantageously than it can now.

It was the goal of Sir Robert Walpole's famous excise scheme to establish a system very similar to the one I've just described, for wine and tobacco. But though the bill introduced in Parliament covered only those two goods, it was widely assumed to be the first step toward a much more extensive scheme of the same kind. A coalition of political factions and smuggling merchants raised such a violent — though unjust — outcry against the bill that the minister thought it best to withdraw it. And ever since, out of fear of provoking a similar outcry, none of his successors has dared revive the proposal.

The import duties on foreign luxuries consumed domestically, though they sometimes fall on the poor, fall mainly on people of middling or higher fortune. Examples include the duties on foreign wines, coffee, chocolate, tea, and sugar.

The duties on cheaper, domestically produced luxuries intended for home consumption fall fairly equally on people of all ranks in proportion to their spending. The poor pay the duties on malt, hops, beer, and ale on their own consumption. The wealthy pay them on both their own consumption and that of their servants.

One important thing to keep in mind: the total consumption of the lower classes — those below the middle class — is in every country much greater, not only in quantity but in value, than that of the middle and upper classes combined. The total spending of the lower classes far exceeds that of the upper ones. This is true for four reasons. First, almost all the capital in every country is distributed annually among the lower classes as wages of productive labor. Second, a large part of the income from both land rent and profits is distributed among the same class as the wages and maintenance of servants and other unproductive workers. Third, some profits from capital belong to this same class, as income from the use of their small amounts of capital. The total profits earned annually by small shopkeepers, tradespeople, and retailers of all kinds is everywhere very considerable and makes up a significant share of annual output. Fourth and finally, some land rent even belongs to this same class — a considerable amount to those somewhat below the middle class, and a small portion even to the very poorest, since common laborers sometimes own an acre or two of land. So although each lower-class person's individual spending is very small, the combined total is always far and away the largest share of society's overall spending. What remains of the country's annual output for the consumption of the upper classes is always much less, in both quantity and value. Taxes on spending that fall mainly on the upper classes — on the smaller share of annual output — will therefore be much less productive than taxes falling equally on everyone's spending, or even those falling mainly on the lower classes' spending. The excise on the materials and manufacture of homemade beer and spirits is accordingly, of all the various taxes on spending, by far the most productive. And this branch of the excise falls very heavily — perhaps mainly — on ordinary people's spending. In the year ending July 5, 1775, the gross revenue from this branch of the excise amounted to 3,341,837 pounds, nine shillings, and ninepence.

But it must always be remembered that it's the luxury spending, not the necessary spending, of the lower classes that should ever be taxed. The final burden of any tax on their necessities would fall entirely on the upper classes — on the smaller share of annual output, not the larger. Such a tax would either raise wages or reduce the demand for labor. If it raised wages, the final burden would shift to the upper classes. If it reduced the demand for labor, it would shrink the country's annual output — the very fund from which all taxes must ultimately be paid. Whatever effect such a tax had on labor demand, it would always push wages higher than they would otherwise have been, and the final burden of this increase would always fall on the upper classes.

Beer brewed and spirits distilled for private use rather than for sale are not subject to any excise duty in Britain. This exemption, which exists to spare private families from the intrusive visits and inspections of the tax collector, causes the burden of these duties to fall much less heavily on the wealthy than on the poor. It's not very common to distill spirits for private use, though it's done occasionally. But in the countryside, many middle-class families and almost all wealthy ones brew their own beer. Their strong beer therefore costs them eight shillings a barrel less than the commercial brewer pays — since the commercial brewer must earn a profit on the tax as well as on all his other costs. These families can therefore drink their beer at least nine or ten shillings a barrel cheaper than the same quality can be had by ordinary people, who find it more convenient everywhere to buy their beer by the glass from the brewery or the pub. Similarly, malt made for a private family's use isn't subject to the tax collector's inspection, but in this case the family must pay a flat rate of seven shillings and sixpence per person. Seven shillings and sixpence equals the excise on ten bushels of malt — roughly what all the members of any sober family (men, women, and children) would consume on average. But in wealthy and generous households where country hospitality is widely practiced, the malt beverages consumed by the family members themselves make up only a small part of the household's total consumption. Whether because of this flat-rate system or for other reasons, malting for private use is much less common than home brewing. It's hard to see any fair reason why those who brew or distill for private use shouldn't pay a similar flat rate.

It has often been argued that more revenue than currently comes from all the heavy taxes on malt, beer, and ale could be raised by a much lighter tax on malt alone. The opportunities for cheating the tax collector are much greater in a brewery than in a malt-house. And people who brew for private use are exempt from all duties or flat-rate payments, which isn't the case for those who malt for private use.

In London's porter breweries, a quarter of malt is commonly brewed into more than two and a half barrels, sometimes three barrels, of porter. The various malt taxes amount to six shillings per quarter; the taxes on strong beer and ale to eight shillings per barrel. So in porter brewing, the combined taxes on malt, beer, and ale amount to between twenty-six and thirty shillings on the output of one quarter of malt. In country breweries selling to the local market, a quarter of malt is seldom brewed into less than two barrels of strong beer and one barrel of small beer, and frequently into two and a half barrels of strong beer. The various taxes on small beer amount to one shilling and fourpence per barrel. So in country brewing, the combined taxes on malt, beer, and ale seldom total less than twenty-three shillings and fourpence, and frequently reach twenty-six shillings, on the output of one quarter of malt. Averaging across the whole country, the total duties on malt, beer, and ale can't be estimated at less than twenty-four or twenty-five shillings per quarter of malt. But by eliminating all the separate duties on beer and ale and tripling the malt tax — raising it from six to eighteen shillings per quarter — a greater revenue, it's claimed, could be raised from this single tax than from all the heavier taxes currently in place.

The malt tax revenue data from 1772-1775 tells a clear story. Averaging across those four years, the old and additional malt taxes together produced about 958,895 pounds per year. The country excise and London brewery duties on beer and ale produced about 1,636,958 pounds. Adding these together, the combined revenue from all the different taxes on malt, beer, and ale came to roughly 2,595,853 pounds. But by tripling the malt tax — raising it from six to eighteen shillings per quarter — that single tax alone would produce about 2,876,685 pounds: an amount exceeding the current total by about 280,832 pounds.

Under the old malt tax, admittedly, there's also a tax of four shillings per hogshead of cider and ten shillings per barrel of mum (a type of spiced wheat beer). In 1774, the cider tax produced only about 3,083 pounds — probably somewhat below its usual amount, since all the various cider taxes yielded less than normal that year. The mum tax, though much heavier, produces even less, since people drink less of it. But to balance these, the "country excise" category includes: the old excise of six shillings and eightpence per hogshead of cider; a similar tax on verjuice; another of eight shillings and ninepence per hogshead of vinegar; and a tax of elevenpence per gallon of mead. The revenue from these duties would probably more than offset the cider and mum duties under the annual malt tax.

Malt is used not only in brewing beer and ale, but also in making spirits. If the malt tax were raised to eighteen shillings per quarter, it might be necessary to reduce the various excise duties on those types of spirits that use malt as an ingredient. In what are called "malt spirits," malt typically makes up only about a third of the ingredients, with the other two-thirds being either raw barley, or one-third barley and one-third wheat. In distilling malt spirits, both the opportunity and the temptation to smuggle are much greater than in either a brewery or a malt-house. The opportunity is greater because of the smaller bulk and greater value of the product. The temptation is greater because of the extremely high duties, which amount to about three shillings and tenpence per gallon of spirits. By increasing the duty on malt and reducing those on distilling, both the opportunities and the temptation to smuggle would decrease, which might produce a further increase in revenue.

It has long been British policy to discourage the consumption of spirits because of their supposed tendency to ruin the health and morals of ordinary people. Under this policy, the reduction in distillery taxes shouldn't be so great as to actually lower the price of spirits. Spirits could remain just as expensive as ever, while the wholesome and energizing beverages of beer and ale could become considerably cheaper. The public could thus be partly relieved of one of the burdens they currently complain about most, while government revenue could be considerably increased.

Dr. Davenant's objections to this change in the excise system seem groundless. His objections are: that the tax, instead of dividing itself fairly equally among the maltster's profit, the brewer's profit, and the retailer's profit, would — insofar as it affected profits — fall entirely on the maltster; that the maltster couldn't as easily recover the tax through higher malt prices as the brewer and retailer can through higher drink prices; and that such a heavy malt tax might reduce the rent and profit of barley-growing land.

No tax can ever reduce, for any considerable time, the rate of profit in any particular trade, which must always stay in line with profits in neighboring trades. The current duties on malt, beer, and ale don't affect the profits of dealers in those products, who all recover the tax, plus an additional profit, in their higher prices. A tax can indeed make goods so expensive that people consume less of them. But malt is consumed in the form of malt beverages, and a tax of eighteen shillings per quarter of malt couldn't possibly make those beverages more expensive than the current combined taxes of twenty-four or twenty-five shillings already do. On the contrary, those beverages would probably become cheaper, and consumption would be more likely to increase than decrease.

It's not easy to understand why it would be harder for the maltster to recover eighteen shillings in his malt prices than it currently is for the brewer to recover twenty-four or twenty-five, sometimes thirty shillings, in his beverage prices. The maltster would certainly have to advance eighteen shillings per quarter of malt instead of just six. But the brewer currently has to advance twenty-four or twenty-five, sometimes thirty shillings per quarter of malt he brews. It couldn't be more inconvenient for the maltster to advance a lighter tax than it currently is for the brewer to advance a heavier one. The maltster doesn't always keep malt in his granaries any longer than the brewer keeps beer and ale in his cellars. So the maltster may get his money back just as quickly. And whatever inconvenience might arise from requiring the maltster to advance a heavier tax could easily be solved by giving him a few months' more credit than the brewer currently receives.

Nothing could reduce the rent and profit of barley land that didn't reduce the demand for barley. But a reform that cut the duties on a quarter of malt brewed into beer and ale from twenty-four or twenty-five shillings to eighteen shillings would be more likely to increase demand for barley than to reduce it. Besides, the rent and profit of barley land must always be roughly equal to those of other equally fertile and well-cultivated land. If they were less, some barley land would soon be converted to other crops. If they were more, more land would soon be planted with barley.

When a particular agricultural product commands what might be called a monopoly price, a tax on it necessarily reduces the rent and profit of the land that produces it. A tax on the output of those precious vineyards whose wine falls so far short of demand that its price is always above the natural proportion relative to other equally fertile land would necessarily reduce the rent and profit of those vineyards. The wine price is already the highest that the market will bear for the quantity typically sold; it couldn't be raised without reducing that quantity, and the quantity couldn't be reduced without even greater loss, since the land couldn't be turned to any equally valuable crop. The entire weight of the tax would therefore fall on the rent and profit — really on the rent — of the vineyard. When new taxes on sugar have been proposed, sugar planters have frequently complained that the whole burden fell not on consumers but on producers, since they could never raise the price of their sugar after the tax above what it had been before. The price, it seems, had already been a monopoly price. The very argument used to show that sugar was an unsuitable subject for taxation actually demonstrated that it was an ideal one: the profits of monopolists, whenever they can be reached, are certainly the most appropriate of all subjects for taxation. But the ordinary price of barley has never been a monopoly price, and the rent and profit of barley land have never been above their natural proportion to other equally fertile land. The various taxes on malt, beer, and ale have never lowered the price of barley or reduced the rent and profit of barley land. The price of malt to the brewer has consistently risen in proportion to the taxes imposed on it, and those taxes — along with the duties on beer and ale — have consistently either raised the price or, what amounts to the same thing, reduced the quality of those beverages for consumers. The final burden has always fallen on the consumer, not the producer.

The only people likely to suffer from the reform I've proposed are those who brew for their own private use. But the exemption that these wealthy people currently enjoy from very heavy taxes paid by poor laborers and craftsmen is surely deeply unjust and unequal, and ought to be abolished even if this reform never took place. It has probably been the influence of this privileged class, however, that has so far prevented a reform that would almost certainly both increase revenue and relieve the people.

Besides customs and excise duties of the kinds I've been discussing, there are several other taxes that affect the price of goods even more unevenly and indirectly. Among these are the duties known in French as "peages," and in old Saxon times as "passage duties." They seem to have been originally established for the same purpose as our turnpike tolls or the tolls on our canals and navigable rivers: maintaining the road or waterway. These duties, when used for such purposes, are most appropriately set according to the bulk or weight of the goods. Since they were originally local duties intended for local purposes, their administration was usually entrusted to the particular town, parish, or feudal estate where they were collected, with those communities held accountable for how the money was spent. In many countries, the government — which is accountable to nobody — has taken over the administration of these duties. Though it has usually raised the duty considerably, it has in many cases completely neglected the upkeep of the road or waterway. If Britain's turnpike tolls ever became a source of government revenue, we can learn from many other nations what the consequences would likely be. Such tolls are undoubtedly paid by the consumer in the end, but the consumer isn't taxed in proportion to his spending when he pays based not on the value of what he consumes but on its bulk or weight. When such duties are imposed according to the supposed value of the goods rather than their bulk or weight, they become essentially a kind of internal customs or excise, which seriously obstruct the most important branch of commerce: domestic trade.

In some small states, duties similar to passage duties are imposed on goods transported across the territory, by land or water, from one foreign country to another. These are called "transit duties" in some countries. Several small Italian states along the Po River and its tributaries derive some revenue from duties of this kind, which are paid entirely by foreigners. These are perhaps the only duties that one state can impose on the citizens of another without in any way obstructing its own industry or commerce. The most important transit duty in the world is the one levied by the king of Denmark on all merchant ships passing through the Sound.

Taxes on luxuries — which is what most customs and excise duties amount to — do fall on every different kind of income and are ultimately paid, without any shifting of the burden, by whoever consumes the taxed goods. But they don't always fall equally or proportionally on each individual's income. Since everyone's personal tastes determine how much they consume, everyone contributes more according to their personal tastes than in proportion to their income. The extravagant contribute more, and the frugal less, than their proper share. During the minority of a wealthy heir, he contributes very little through his consumption to the support of the state from whose protection he derives a large income. Those who live in another country contribute nothing through their consumption to the support of the government where their income originates. If that country has no land tax and no significant duties on property transfers — as is the case in Ireland — such absentees may draw a large income from a government's protection without contributing a single shilling to its support. This inequality is likely to be greatest in a country whose government is in some ways subordinate to and dependent on another. The people who own the most extensive property in the dependent country will generally choose to live in the governing country. Ireland is precisely in this situation, and we can't be surprised that a proposed tax on absentees is so very popular there. It might admittedly be a bit difficult to define exactly what kind or degree of absence should subject a person to an absentee tax, or exactly when it should begin or end. But apart from this very particular situation, whatever inequality in individual contributions may arise from such taxes is more than compensated by the very thing that causes it: the fact that every person's contribution is entirely voluntary. It's completely within his power to consume or not consume the taxed goods. When such taxes are properly assessed and imposed on appropriate goods, they're paid with less grumbling than any other kind. When they're advanced by the merchant or manufacturer, the consumer who ultimately pays them soon confuses them with the price of the goods and practically forgets he's paying any tax at all.

Such taxes are, or can be, perfectly certain — assessed so as to leave no doubt about either what should be paid or when it should be paid. Whatever uncertainty may sometimes exist in customs duties, whether in Britain or elsewhere, it can't come from the nature of those duties but only from the careless or unskillful wording of the laws that impose them.

Taxes on luxuries generally are, and always can be, paid in small amounts as the taxpayer has occasion to buy the taxed goods. In timing and method of payment, they are, or can be, the most convenient of all taxes. Overall, then, such taxes are perhaps as consistent with the first three of the four general maxims of taxation as any other kind. But they violate the fourth maxim in every way.

Such taxes always take or keep out of people's pockets more than they put into the government treasury — proportionally more than almost any other tax. They seem to do this in all four possible ways.

First, collecting such taxes, even when imposed in the most sensible manner, requires a large number of customs and excise officers whose salaries and perks are a real tax on the people that puts nothing into the government treasury. This expense, it must be acknowledged, is more moderate in Britain than in most other countries. In the year ending July 5, 1775, the gross revenue from the various duties managed by the excise commissioners in England amounted to 5,507,308 pounds, collected at a cost of just over five and a half percent. From this gross revenue, however, we must subtract what was paid out in subsidies and rebates on exported excisable goods, which brings the net revenue below five million. Collecting the salt duty — technically an excise duty but under separate management — is much more expensive. The net customs revenue doesn't reach two and a half million pounds, and it's collected at a cost of more than ten percent in officer salaries and other expenses. But customs officers' perks are everywhere much greater than their salaries — at some ports, double or triple. If salaries and other expenses amount to more than ten percent of net customs revenue, the total cost of collection may amount, including perks, to more than twenty or thirty percent. Excise officers receive few or no perks, and the excise administration, being of more recent origin, is generally less corrupt than the customs service, where long establishment has introduced and institutionalized many abuses. By consolidating all the revenue currently raised by the separate duties on malt and malt beverages into a single malt tax, a savings of more than fifty thousand pounds per year could supposedly be made in excise administration costs. By limiting customs duties to a few types of goods and collecting them using excise methods, a much greater savings could probably be made in customs administration costs.

Second, such taxes necessarily cause some obstruction or discouragement to certain industries. By always raising the price of taxed goods, they discourage consumption and consequently production. If the taxed good is domestically produced, less labor is employed in making it. If it's a foreign good whose price the tax raises, domestically made goods of the same type may gain some advantage in the home market, channeling more domestic industry toward producing them. But while this price increase on a foreign good may encourage domestic industry in one particular area, it necessarily discourages it in almost every other. The more expensive the Birmingham manufacturer's foreign wine is, the less his hardware is effectively worth — since that's what he trades for it, directly or indirectly. That hardware becomes less valuable to him, and he has less incentive to produce it. The more consumers in one country pay for another country's surplus output, the less their own surplus output is effectively worth — and the less incentive they have to increase it. All taxes on consumer goods therefore tend to reduce the amount of productive labor below what it would otherwise be — either in making the taxed goods, if they're domestic, or in making the goods exchanged for them, if they're foreign. Such taxes also always distort the natural direction of national industry, diverting it into a channel that is always different from, and generally less advantageous than, the one it would have followed on its own.

Third, the hope of evading such taxes through smuggling frequently leads to seizures and other penalties that completely ruin the smuggler — a person who, though certainly blameworthy for breaking his country's laws, is often incapable of violating the laws of natural justice and would have been an excellent citizen in every respect if the law hadn't made a crime out of something that nature never intended as one. In corrupt governments where there's widespread suspicion of unnecessary spending and gross misuse of public revenue, the laws protecting that revenue command little respect. Few people have any qualms about smuggling when they can find a safe and easy opportunity to do so without committing perjury. To pretend to have scruples about buying smuggled goods, though it clearly encourages lawbreaking and the perjury that almost always accompanies it, would in most countries be considered a piece of prissy hypocrisy that earns no one's respect and only makes you look like a bigger scoundrel than your neighbors. Encouraged by this public tolerance, the smuggler continues a trade he's been taught to regard as more or less innocent. When the full severity of the law finally catches up with him, he's frequently willing to defend with violence what he's grown accustomed to considering his rightful property. Having started out perhaps as merely reckless rather than criminal, he too often ends up as one of the most hardened and determined lawbreakers in society. When the smuggler is ruined, his capital — which had previously been used to employ productive workers — gets absorbed either into government revenue or into the revenue officer's pocket, where it's used to support unproductive workers. This shrinks society's overall capital and the useful industry it might otherwise have supported.

Fourth, such taxes subject at least the dealers in taxed goods to frequent visits and intrusive inspections by tax collectors, sometimes exposing them to a degree of actual oppression and always to considerable trouble and harassment. And though harassment isn't strictly the same as a monetary cost, it's certainly equivalent to the expense everyone would be willing to pay to avoid it. Excise laws, though more effective for their intended purpose, are more harassing in this respect than customs laws. When a merchant has imported goods subject to customs duties, paid those duties, and stored the goods in his warehouse, he's usually not liable to any further trouble from the customs officer. It's different with goods subject to excise duties. Dealers have no respite from the constant visits and inspections of excise officers. Excise duties are therefore more unpopular than customs duties, and so are the officers who collect them. Those officers, it's claimed, though they generally do their job just as well as customs officers, inevitably develop a certain hardness of character because their duty requires them to be frequently troublesome to their neighbors — a hardness that customs officers often don't develop. This observation, however, is quite possibly just the suggestion of dishonest dealers whose smuggling has been either prevented or detected by the excise officers' diligence.

The drawbacks of taxes on consumer goods, though perhaps unavoidable to some degree, fall as lightly on the British people as on those of any other country with a government nearly as expensive. Our system isn't perfect and could be improved, but it's as good as or better than most of our neighbors'.

Because people once believed that duties on consumer goods were taxes on merchants' profits, some countries have imposed these duties repeatedly at every successive sale of the goods. If the importing or manufacturing merchant's profits were taxed, fairness seemed to require that the profits of every middleman between them and the final consumer should be taxed too. The famous Alcavala of Spain seems to have been established on this principle. It was originally a tax of ten percent, later fourteen percent, and is currently six percent on the sale of every kind of property, movable or immovable — and it's charged every time the property is sold. Collecting this tax requires an army of revenue officers sufficient to monitor the movement of goods not only from one province to another but from one shop to another. It subjects not only dealers in some goods, but dealers in all goods — every farmer, every manufacturer, every merchant and shopkeeper — to constant visits and inspections by tax collectors. In most of a country with such a tax, nothing can be produced for sale to distant markets. Each region's output must be limited to what the local area can consume. Ustaritz attributes the destruction of Spain's manufacturing to the Alcavala — and he might equally have attributed the decline of agriculture to it, since it applies not only to manufactured goods but to the raw produce of the land.

In the Kingdom of Naples, there's a similar tax of three percent on the value of all contracts, including all sales contracts. It's both lighter than the Spanish tax and more practically administered — most towns and parishes are allowed to pay a lump sum in place of it. They collect this lump sum however they please, generally in a way that doesn't interrupt internal commerce. The Neapolitan tax is therefore nowhere near as destructive as the Spanish one.

The uniform tax system that applies throughout the United Kingdom of Great Britain, with only a few inconsequential exceptions, leaves the country's internal commerce — both inland and coastal trade — almost entirely free. Inland trade is nearly perfectly free. Most goods can be carried from one end of the kingdom to the other without requiring any permit or pass, without being stopped, inspected, or questioned by revenue officers. There are a few exceptions, but none that could interrupt any important branch of domestic commerce. Goods shipped along the coast do require certificates. But apart from coal, nearly everything else is duty-free. This freedom of internal commerce, the result of having a uniform tax system, is perhaps one of the principal causes of Britain's prosperity — every great country being necessarily the best and most extensive market for most of its own products. If the same freedom, resulting from the same uniformity, could be extended to Ireland and the colonies, both the grandeur of the state and the prosperity of every part of the empire would probably be even greater than at present.

In France, the different tax systems operating in different provinces require an army of revenue officers to patrol not only the kingdom's external borders but the borders of almost every individual province — either to prevent certain goods from crossing or to subject them to certain duties. The disruption to domestic commerce is enormous. Some provinces are allowed to pay a lump sum in place of the gabelle, or salt tax. Others are exempt from it entirely. Some provinces are exempt from the government's tobacco monopoly, which the tax farmers control across most of the kingdom. The aides — France's equivalent of excise duties — are different in different provinces. Some provinces are exempt from them and pay a lump sum instead. Where they do apply and are farmed out, there are many local duties that extend no further than a particular town or district. The traites — corresponding to English customs — divide the kingdom into three zones. First, the provinces subject to the tariff of 1664, called the "provinces of the five great farms," which include Picardy, Normandy, and most of the interior provinces. Second, the provinces subject to the tariff of 1667, called the "provinces deemed foreign," which include most of the frontier provinces. Third, the provinces "treated as foreign" — which, because they're allowed free trade with other countries, are treated in their commerce with the rest of France the same as actual foreign countries. These include Alsace, the three bishoprics of Metz, Toul, and Verdun, and the three cities of Dunkirk, Bayonne, and Marseilles. Both in the provinces of the five great farms (so called because the customs duties were originally divided into five major branches, each farmed separately, though now combined into one) and in those deemed foreign, there are many additional local duties limited to particular towns or districts. There are even some in the provinces treated as foreign, especially in Marseilles. It's hardly necessary to point out how much both the restrictions on domestic commerce and the number of revenue officers must multiply in order to patrol the borders of all these provinces and districts with their different tax systems.

On top of these general restrictions created by the complicated tax system, trade in wine — after grain, perhaps France's most important product — is in most provinces subject to additional restrictions arising from the special treatment given to vineyards in certain provinces and districts over others. The provinces most famous for their wines are, I believe, those where the wine trade faces the fewest such restrictions. The extensive market that those provinces enjoy encourages good management both in cultivating their vineyards and in preparing their wines.

France isn't unique in having such varied and complicated tax systems. The small duchy of Milan is divided into six provinces, each with a different system of taxation for various consumer goods. The even smaller territories of the Duke of Parma are divided into three or four zones, each with its own system. Under such absurd management, nothing but the great fertility of the soil and the favorable climate could keep these countries from sinking into the lowest state of poverty and backwardness.

Taxes on consumer goods can be collected in one of two ways. They can be administered directly by government-appointed officers who are accountable to the government, in which case revenue will vary from year to year depending on the tax's yield. Alternatively, they can be farmed out for a fixed rent, with the tax farmer appointing his own officers who, though required to collect the tax according to the law, work under his supervision and report to him. The best and most economical way to collect a tax is never through farming it out. Beyond what's needed to pay the contracted rent, the officers' salaries, and all administrative costs, the tax farmer must always draw a profit from the tax proportional to his investment, his risk, his effort, and the knowledge and skill required to manage such a complex operation. The government, by establishing its own administration of the same kind as the farmer's, could at least save this profit, which is almost always exorbitant. Farming out any major branch of public revenue requires either enormous capital or enormous credit — conditions that alone would limit competition for such contracts to a very small number of people. Among those few who have the capital or credit, an even smaller number have the necessary knowledge or experience — further limiting competition. The very few who are in a position to compete find it more profitable to combine forces, becoming partners rather than competitors. When the farming contract is auctioned, they offer a rent far below its true value. In countries where public revenues are farmed out, the tax farmers are generally the wealthiest people. Their wealth alone would excite public resentment, and the vanity that almost always accompanies such newly acquired fortunes — the foolish ostentation with which they display their wealth — provokes that resentment even further.

Tax farmers never think the laws too severe that punish anyone who tries to evade a tax. They have no sympathy for the taxpayers, who aren't their subjects and whose universal bankruptcy, if it happened the day after their farming contract expired, wouldn't much affect their interests. In the state's greatest financial emergencies — when the government's anxiety about collecting its revenue is at its peak — tax farmers rarely fail to complain that without even harsher laws than those already in place, they can't possibly pay even the regular rent. In those moments of public crisis, their demands can't be refused. The tax laws therefore become gradually more and more severe. The most brutal tax laws are always found in countries where most public revenue is farmed out. The mildest are in countries where it's collected directly by the government. Even a bad ruler feels more compassion for his people than can ever be expected from the farmers of his revenue. He knows that the permanent greatness of his family depends on the prosperity of his people, and he will never knowingly ruin that prosperity for the sake of any short-term personal gain. Tax farmers are different: their wealth may frequently be built on the ruin, not the prosperity, of the people.

Sometimes a tax is not only farmed out for a fixed rent, but the farmer also gets the monopoly on the taxed commodity. In France, the duties on tobacco and salt are collected this way. In such cases, the farmer extracts two exorbitant profits from the people: the profit of the tax farmer and the even more exorbitant profit of the monopolist. Since tobacco is a luxury, everyone is free to buy it or not. But since salt is a necessity, everyone is required to buy a certain quantity from the farmer — because if they didn't, it would be assumed they were buying from a smuggler. The taxes on both commodities are exorbitant. The temptation to smuggle is therefore irresistible for many people, while at the same time the harshness of the law and the vigilance of the farmer's officers make yielding to that temptation almost certainly ruinous. The smuggling of salt and tobacco sends several hundred people to forced labor in the galleys every year, besides a very considerable number who are sent to the gallows. These taxes, collected in this way, do yield very substantial revenue. In 1767, the tobacco farm was let for about 22.5 million livres per year, and the salt farm for about 36.5 million livres, both for six-year terms starting in 1768. Those who consider the blood of the people as nothing compared to the government's revenue may perhaps approve of this method of taxation. Similar tax-and-monopoly systems for salt and tobacco have been established in many other countries, particularly in the Austrian and Prussian dominions and in most of the Italian states.

In France, the greater part of actual government revenue comes from eight different sources: the taille, the poll tax, the two vingtiemes, the gabelles (salt tax), the aides (excise), the traites (customs), the royal domain, and the tobacco farm. The last five are mostly farmed out. The first three are everywhere collected directly by government administration, and it's universally acknowledged that, in proportion to what they take out of people's pockets, they deliver more to the treasury than the other five, whose administration is much more wasteful and expensive.

France's finances, in their current state, seem to admit of three very obvious reforms. First, by abolishing the taille and the poll tax and increasing the number of vingtiemes to produce an equivalent amount of additional revenue, government revenue could be maintained while collection costs could be much reduced, the harassment of ordinary people caused by the taille and poll tax could be entirely prevented, and the upper classes wouldn't be more heavily burdened than most of them already are. The vingtieme, as I've already noted, is a tax very similar to England's land tax. The burden of the taille ultimately falls on landowners, and since much of the poll tax is assessed on those subject to the taille at a rate proportional to their taille, the final burden of most of it likewise falls on the same class. Even if the number of vingtiemes were increased enough to replace both taxes, the upper classes wouldn't be more burdened than at present — though many individuals would certainly gain or lose due to the great inequalities in how the taille is currently assessed. The opposition of those who currently benefit from these inequalities is the obstacle most likely to prevent this or any similar reform.

Second, by making the salt tax, the aides, the customs, the tobacco taxes, and all other excise and customs duties uniform throughout the kingdom, those taxes could be collected at much less expense, and France's domestic commerce could become as free as England's.

Third and finally, by putting all these taxes under direct government administration, the exorbitant profits of the tax farmers could be added to government revenue.

The opposition arising from the private interests of those who benefit from the current system is likely to be just as effective at blocking the second and third reforms as the first.

France's tax system seems, in every respect, inferior to Britain's. In Britain, ten million pounds sterling are raised annually from fewer than eight million people, without any particular class being oppressively burdened. From the research of Abbe Expilly and the observations of the author of the Essay on the Legislation and Commerce of Grain, it appears that France — including the provinces of Lorraine and Bar — contains about twenty-three or twenty-four million people, perhaps three times the number in Britain. France has better soil and climate than Britain. It has been cultivated and developed for much longer and is consequently better supplied with things that take a long time to build up, such as great cities and well-constructed houses in both town and country. With these advantages, you'd expect that thirty million pounds could be raised in France for the support of the state with as little hardship as ten million in Britain. In 1765 and 1766, total French government revenue, according to the best — though admittedly very imperfect — accounts I could obtain, usually ran between 308 and 325 million livres: that is, less than fifteen million pounds sterling. Not even half of what might have been expected if the French people had contributed in the same proportion to their numbers as the British. The French people, however, are generally acknowledged to be much more heavily burdened by taxes than the British. And yet France is certainly the great empire in Europe that, after Britain, enjoys the mildest and most lenient government.

In Holland, the heavy taxes on necessities have reportedly ruined most of its manufacturing and are likely to gradually discourage even its fisheries and shipbuilding trade. Taxes on necessities are insignificant in Britain, and no industry has yet been ruined by them. The British taxes that bear hardest on manufacturing are certain import duties on raw materials, particularly raw silk. Yet total revenue for the Dutch government and various cities is said to amount to more than five and a quarter million pounds sterling. Since the population of the United Provinces can't be more than a third of Britain's, the Dutch must be much more heavily taxed in proportion to their numbers.

Once all the proper subjects of taxation have been exhausted, if the state still needs more revenue, it must impose taxes on improper ones. So the taxes on necessities in Holland may not reflect poorly on the wisdom of that republic, which — in order to win and maintain its independence — has, despite its great frugality, been forced into such expensive wars that it has had to take on enormous debts. Holland and Zealand, moreover, require considerable expense just to preserve their existence and prevent the sea from swallowing them up, which has undoubtedly added to the tax burden in those two provinces. The republican form of government seems to be the main support of Holland's current greatness. The owners of large fortunes — the great merchant families — generally have either a direct share or indirect influence in the government. For the sake of the respect and authority this position gives them, they're willing to live in a country where their capital, if they invest it themselves, brings them less profit, and if they lend it, less interest — and where the very modest income they can draw from it buys fewer necessities and comforts than anywhere else in Europe. The presence of such wealthy people necessarily keeps alive, despite all disadvantages, a certain level of industry in the country. Any public catastrophe that destroyed the republican government, threw all administration into the hands of aristocrats and soldiers, and wiped out the influence of these wealthy merchants would soon make it unpleasant for them to live in a country where they were no longer likely to be much respected. They would move both their residences and their capital to some other country, and Holland's industry and commerce would soon follow the capital that supported them.

Chapter III: Of Public Debts

In that early stage of society before commerce and manufacturing develop — when the expensive luxuries that only commerce and manufacturing can provide are entirely unknown — a person with a large income, as I tried to show in Book III, can spend or enjoy that income in no other way than by supporting roughly as many people as it can feed. A large income can always be described as commanding a large quantity of the necessities of life. In that early state, income is typically paid in large quantities of those necessities — the raw materials of plain food and rough clothing: grain and cattle, wool and raw hides. When there's no commerce or manufacturing to provide anything worth trading those surplus materials for, the wealthy person can do nothing with the excess but feed and clothe roughly as many people as it will support. Hospitality without luxury, and generosity without showing off, are in this situation the principal expenses of the rich and powerful. But as I also tried to show in the same book, these aren't the kinds of expenses that tend to ruin people. There's probably no selfish pleasure so trivial that pursuing it hasn't sometimes ruined even sensible people. A passion for cockfighting has ruined many. But the number of people ruined by plain hospitality and genuine generosity is, I believe, not very large — though the hospitality of luxury and the generosity of ostentation have ruined plenty. Among our feudal ancestors, the fact that estates remained in the same family for such long periods clearly demonstrates that people generally lived within their means. The rustic hospitality that great landowners constantly practiced may not seem, to us today, consistent with the careful management we associate with good financial sense. But we must certainly admit that they were at least frugal enough not to generally spend their entire income. They usually had an opportunity to sell some of their wool and raw hides for money. Some of this money they may have spent on the few vanity items and luxuries available in those times, but they seem to have commonly hoarded the rest. Indeed, they could hardly do anything else with whatever money they saved. Trade was considered disgraceful for a gentleman, and lending money at interest — which was then considered usury and prohibited by law — would have been even more so. Besides, in those violent and lawless times, it was convenient to have a stash of money on hand, so that if they were driven from their homes, they'd have something of known value to take with them. The same violence that made hoarding convenient also made concealing the hoard equally convenient. The frequency of "treasure trove" — treasure found whose owner was unknown — clearly demonstrates how common both hoarding and hiding were in those times. Treasure trove was then considered an important source of government revenue. Today, all the treasure trove in the entire kingdom would hardly amount to an important source of income for a private gentleman with a good estate.

The same tendency to save and hoard prevailed in governments as well as in their subjects. Among nations where commerce and manufacturing are little known, the ruler, as I already observed in Book IV, is in a position that naturally encourages the thriftiness needed for accumulation. In that situation, even a ruler's spending can't be directed by the kind of vanity that delights in the gaudy finery of a court. The limited knowledge of the times provides few of the trinkets that make up such finery. Standing armies aren't yet necessary, so the ruler's expenses, like those of any other great lord, can go toward little besides generosity to his tenants and hospitality to his followers. But generosity and hospitality very rarely lead to extravagance, while vanity almost always does. All the ancient rulers of Europe, as I've already noted, had treasures. Every Tartar chief today is said to have one.

In a commercial country overflowing with every kind of expensive luxury, the ruler — like almost all the great property owners in his realm — naturally spends a large part of his income on those luxuries. His own country and its neighbors supply him abundantly with all the costly trinkets that make up the splendid but meaningless pageantry of a court. For the sake of an inferior version of the same pageantry, his nobles dismiss their retainers, make their tenants independent, and gradually become as insignificant as most of the wealthy townspeople in his realm. The same frivolous passions that drive their behavior drive his. How can we expect him to be the only rich man in his realm who is immune to these pleasures? Even if he doesn't spend so much of his income on them that he seriously weakens the country's defenses — which he's very likely to do — we can hardly expect him not to spend everything beyond what's needed to maintain those defenses. His ordinary expenses become equal to his ordinary income, and it's a good outcome if they don't frequently exceed it. Building up a treasury is no longer expected, and when emergencies require extraordinary spending, he must inevitably call on his subjects for extraordinary contributions. The current and late kings of Prussia are the only major European rulers who, since the death of Henry IV of France in 1610, are supposed to have accumulated any significant treasure. The thriftiness that leads to saving has become almost as rare in republics as in monarchies. The Italian republics, the Dutch Republic — all are in debt. The canton of Bern is the only republic in Europe that has built up any considerable savings. The other Swiss republics have not. The taste for some kind of pageantry — for splendid buildings at the very least, and other public show — prevails as much in the apparently sober senate house of a small republic as in the extravagant court of the greatest king.

The failure to save in peacetime creates the necessity of borrowing in wartime. When war comes, there's no money in the treasury beyond what's needed for ordinary peacetime expenses. In war, spending three or four times the peacetime level becomes necessary for national defense, requiring three or four times the peacetime revenue. Even if the government could immediately increase its revenue to match its higher expenses — which it almost never can — the new taxes wouldn't start producing money for perhaps ten or twelve months. But the moment war breaks out — or rather, the moment it seems likely to break out — the army must be expanded, the navy fitted out, garrison towns put on a defensive footing. The army, navy, and garrisons must be supplied with weapons, ammunition, and provisions. An immediate and enormous expense must be incurred at the very moment of danger, and it won't wait for the slow, gradual flow of new tax revenue. In this emergency, the government has no choice but to borrow.

The very same commercial society that, through these dynamics, drives governments into the necessity of borrowing also produces in its citizens both the ability and the willingness to lend. The same conditions that create the need to borrow also create the ease of doing so.

A country full of merchants and manufacturers necessarily has plenty of people through whose hands pass not only their own capital but the capital of everyone who lends them money or entrusts them with goods — and this flow passes through their hands as frequently, or more frequently, than a private person's income passes through his. A private person's income typically passes through his hands only once a year. But a merchant dealing in a business with quick turnover may see his entire capital and credit pass through his hands two, three, or four times a year. A country full of merchants and manufacturers therefore has plenty of people who could, if they chose, advance a very large sum of money to the government at any time. This is the ability of a commercial society to lend.

Commerce and manufacturing can rarely flourish for long in any country that doesn't provide a reliable system of justice — where people don't feel secure in their property, where contracts aren't enforced by law, and where the government isn't expected to systematically enforce debt payments from all who can pay. In short, commerce and manufacturing can rarely flourish where people don't have a certain degree of confidence in the justice of their government. The same confidence that leads major merchants and manufacturers to entrust their property to a particular government under normal circumstances also leads them, in emergencies, to entrust that government with the use of their property. By lending money to the government, they don't even temporarily reduce their ability to carry on business. On the contrary, they typically increase it. The state's financial needs usually make the government willing to borrow on terms extremely favorable to the lender. The security the government gives to the original creditor is made transferable to any other creditor, and because of universal confidence in the government's reliability, it generally sells on the market for more than was originally paid. The merchant or financier makes money by lending to the government, and instead of shrinking his trading capital, he increases it. He generally considers it a favor when the government lets him participate in the initial subscription for a new loan. This is the willingness of a commercial society to lend.

A government in this situation naturally relies on its subjects' ability and willingness to lend. It foresees the ease of borrowing and therefore excuses itself from the duty of saving.

In a pre-commercial society, there are no large merchant or manufacturing fortunes. The individuals who hoard whatever money they can save and conceal their hoards do so because they distrust the government's justice — they fear that if their wealth were known and its location discovered, they'd quickly be robbed. In such a society, few people would be able and nobody would be willing to lend money to the government in emergencies. The ruler realizes he must save for such emergencies himself, because he foresees the absolute impossibility of borrowing. This foresight further strengthens his natural tendency to save.

The enormous debts that currently oppress — and will in the long run probably ruin — all the great nations of Europe have followed a fairly uniform pattern of growth. Nations, like individuals, have generally begun by borrowing on what might be called personal credit, without pledging any particular revenue stream to repay the debt. When that approach fails, they move on to borrowing against specific pledged revenues.

What is called the "unfunded debt" of Great Britain is contracted in the first way. It consists partly of debt that bears no interest (or isn't supposed to), similar to what a private person runs up on an open account, and partly of interest-bearing debt, similar to what a private person takes on through a bill or promissory note. The first kind includes debts owed for special services or for services not budgeted for or not paid when performed — part of the military's extraordinary expenses, unpaid subsidies to foreign rulers, back pay for sailors, and so on. Navy bills and Exchequer bills, which are sometimes issued to pay part of these debts and sometimes for other purposes, make up debt of the second kind. Exchequer bills bear interest from the day they're issued; navy bills from six months after issuance. The Bank of England, either by voluntarily discounting these bills at their current value or by agreeing with the government — for certain consideration — to keep Exchequer bills in circulation (that is, to accept them at face value and pay whatever interest has accrued), maintains their value and makes them easy to trade. This frequently allows the government to run up a very large unfunded debt. In France, where there is no national bank, government bills have sometimes sold at sixty to seventy percent below face value. During the great recoinage under William III, when the Bank of England suspended its normal operations, Exchequer bills and tallies reportedly sold at twenty-five to sixty percent below face value — due partly to doubts about the stability of the new government established by the Revolution, but partly also to the lack of the Bank's support.

When this resource is exhausted and it becomes necessary to pledge a particular branch of public revenue for debt repayment, governments have done this in two different ways. Sometimes they've pledged the revenue for a short period — a year or a few years. Sometimes they've pledged it permanently. In the first case, the pledged revenue was expected to cover both principal and interest within the limited time. In the second, it was expected to cover only the interest — or a permanent annual payment equivalent to the interest — with the government free to pay off the principal and cancel the annual payment at any time. When money was raised the first way, it was called borrowing "by anticipation." When raised the second way, it was called "perpetual funding," or simply "funding."

In Britain, the annual land and malt taxes are regularly anticipated every year through a borrowing clause inserted into the acts that impose them. The Bank of England typically advances the expected revenue at an interest rate that has varied since the Revolution from eight to three percent, and receives repayment as the tax proceeds gradually come in. If there's a shortfall — and there always is — it's covered in the following year's budget. The only significant branch of public revenue that isn't already mortgaged is thus regularly spent before it even arrives. Like a reckless spendthrift whose pressing needs won't let him wait for his regular income, the state is constantly borrowing from its own agents and paying interest for the use of its own money.

Under William III and for much of Queen Anne's reign — before perpetual funding had become as familiar as it is now — most new taxes were imposed for only a short period (four, five, six, or seven years), and much of each year's borrowing consisted of loans against the anticipated revenue from those taxes. Since the revenue often wasn't enough to repay principal and interest within the limited term, shortfalls accumulated, and the tax terms had to be extended.

In 1697, the shortfalls from several taxes were charged against what was called the "first general mortgage or fund" — created by extending the term of several different taxes (which would otherwise have expired sooner) to August 1, 1706, and combining their revenue into a single fund. The shortfalls charged to this extended term amounted to about 5.16 million pounds.

In 1701, those duties, along with some others, were extended further to August 1710, creating the "second general mortgage or fund." Its shortfalls amounted to about 2.06 million pounds.

In 1707, the duties were extended again to August 1712 as the "third general mortgage or fund." About 983,000 pounds was borrowed against it.

In 1708, those duties were continued to August 1714 as the "fourth general mortgage or fund," with about 925,000 pounds borrowed against it. In 1709, they became the "fifth general mortgage or fund," extended to August 1716, with about 922,000 pounds borrowed. In 1710, the "sixth general mortgage or fund" extended them to August 1720, with about 1.3 million pounds borrowed.

In 1711, these same duties — which by now were subject to four different layers of anticipation — along with several other taxes, were made permanent and converted into a fund for paying the interest on the South Sea Company's capital. The Company had that year advanced to the government about 9.18 million pounds to pay debts and cover shortfalls — the largest loan ever made at that time.

Before this period, the only taxes that had been made permanent in order to pay interest on debt were those supporting the interest owed to the Bank of England and the East India Company, plus what was expected (but never actually advanced) from a proposed land bank. The Bank fund stood at about 3.375 million pounds, paying annual interest of about 206,500 pounds. The East India fund stood at 3.2 million pounds, paying annual interest of 160,000 pounds — the Bank fund at six percent, the East India fund at five.

In 1715, the various taxes that had been mortgaged for the Bank's annual payment, along with several others made permanent by the same act, were combined into the "Aggregate Fund," which was charged not only with the Bank's payment but with several other obligations. This fund was later expanded in subsequent acts. In 1717, still other taxes were made permanent and combined into the "General Fund" for paying certain annuities totaling about 725,000 pounds a year.

As a result of these various acts, most of the taxes that had previously been anticipated for only short terms were made permanent — serving as a fund for paying not the principal but only the interest on the money that had been borrowed through successive rounds of anticipation.

If money had only ever been raised by anticipation, a few years would have freed the public revenue of debt, provided the government simply avoided overloading each fund with more debt than it could repay within the allotted time, and avoided borrowing again before the first loan was repaid. But most European governments have been incapable of such restraint. They frequently overloaded the fund even on the first anticipation, and when that didn't happen, they generally made sure to overload it by borrowing a second and third time before the first loan expired. When a fund became completely inadequate for paying both principal and interest, it became necessary to charge it with interest payments only — a permanent annuity equal to the interest. Such reckless anticipation inevitably gave birth to the even more ruinous practice of perpetual funding.

Perpetual funding pushes off the liberation of public revenue from a fixed date to one so indefinite that it's unlikely ever to arrive. But because more money can always be raised this way than through short-term anticipation, perpetual funding, once people get used to it, has been universally preferred in major emergencies. Relieving the present emergency is always the main concern of those currently running the government. They leave the future liberation of public revenue to the care of future generations.

Under Queen Anne, the market interest rate fell from six to five percent, and in the twelfth year of her reign, five percent was declared the maximum legal rate on private loans. Soon after most of Britain's temporary taxes had been made permanent and distributed among the Aggregate, South Sea, and General Funds, the government's creditors — like creditors of private individuals — were persuaded to accept five percent instead of six on their investments. This saved one percent on the principal of most debts that had been funded in perpetuity, or one-sixth of most of the annual payments from the three great funds. This saving produced a considerable surplus in those funds' revenue above what was needed for the annual payments charged against them, and created the foundation of what has since been called the Sinking Fund. In 1717, it amounted to about 323,000 pounds. In 1727, interest rates on most public debts were further reduced to four percent, and in 1753 and 1757, to three and a half and three percent — each reduction further growing the sinking fund.

A sinking fund, though created to pay off old debts, makes it much easier to take on new ones. It's a backup fund always available to support any other uncertain fund against which the government proposes to borrow in an emergency. Whether Britain's sinking fund has more often been used for paying off debt or for supporting new borrowing will become clear shortly.

Besides anticipation and perpetual funding, there are two other methods of borrowing that fall somewhere between them: borrowing through annuities for terms of years, and borrowing through annuities for lives.

Under William III and Queen Anne, large sums were frequently borrowed through annuities for various terms of years, sometimes longer and sometimes shorter. In 1693, an act was passed to borrow one million pounds at an annuity of fourteen percent — 140,000 pounds a year — for sixteen years. In 1691, an act was passed to borrow a million through life annuities on terms that would seem very generous today. But the subscription wasn't filled. The following year, the shortfall was made up by borrowing through life annuities at fourteen percent — or at just over seven years' purchase. In 1695, those annuitants were allowed to exchange their life annuities for ninety-six-year annuities by paying sixty-three pounds per hundred into the Exchequer — that is, the difference between fourteen percent for life and fourteen percent for ninety-six years was sold for sixty-three pounds, or four and a half years' purchase. Such was the supposed instability of the government that even these terms attracted few buyers. Under Queen Anne, money was borrowed on various occasions through both life annuities and annuities for terms of thirty-two, eighty-nine, ninety-eight, and ninety-nine years. In 1719, the holders of thirty-two-year annuities were persuaded to exchange them for South Sea Company stock worth eleven and a half years' purchase, plus additional stock equal to their unpaid arrears. In 1720, most other term annuities were exchanged for South Sea stock as well. The long annuities at that time amounted to about 667,000 pounds a year. By January 5, 1775, what remained — the portion not exchanged — was only about 136,000 pounds.

During the two wars beginning in 1739 and 1755, little money was borrowed through either term or life annuities. A ninety-eight or ninety-nine-year annuity is worth nearly as much as a permanent one, so you'd think it would be almost as effective for raising money. But people who buy government bonds to provide for their families and for the distant future don't want to invest in something whose value steadily shrinks — and such people make up a very large proportion of both buyers and holders of government debt. A long-term annuity, though its real value may be virtually identical to a permanent one, won't attract nearly as many buyers. Subscribers to a new loan, who generally plan to sell their holdings as soon as possible, greatly prefer a permanent annuity (redeemable by Parliament) to an irredeemable term annuity of equal amount. The value of the former can be assumed to stay essentially constant, making it a much more convenient tradeable investment.

During the two wars just mentioned, term and life annuities were rarely offered except as bonuses to subscribers to new loans, on top of the redeemable permanent annuity that was the main basis of the loan. They were sweeteners to encourage lending, not the foundation on which the borrowing rested.

Life annuities have occasionally been offered in two forms: on individual lives, or on groups of lives — the latter called "tontines," after their inventor. When annuities are granted on individual lives, each annuitant's death reduces the government's obligation by that person's annuity. When annuities are granted as tontines, the government's burden doesn't begin to lift until all the annuitants in one group have died. A group might consist of twenty or thirty people, with the survivors inheriting the annuities of those who die before them, and the last survivor receiving the entire group's annuities. A government can always raise more money through tontines than through individual life annuities. An annuity with survivorship rights is genuinely worth more than an equal annuity on a single life. And thanks to the confidence every person naturally has in his own good luck — the same principle that makes all lotteries successful — such an annuity generally sells for even more than it's really worth. In countries where governments typically raise money through annuities, tontines are generally preferred to individual life annuities for exactly this reason. The method that raises the most money is almost always preferred to the one most likely to free the public revenue quickly.

In France, a much larger share of the national debt consists of life annuities than in England. According to a report presented by the parliament of Bordeaux to the king in 1764, France's total public debt was estimated at 2.4 billion livres. Life annuity capital was estimated at 300 million livres — one-eighth of the total. The annual annuity payments were estimated at 30 million livres, one-quarter of the 120 million livres in total annual interest payments on the whole debt. I'm well aware these estimates aren't precise, but since they were presented by such a distinguished body as approximations to the truth, I think they can be treated as such. It's not any difference in how anxious the French and British governments are to free their public revenue that explains the different borrowing methods. It comes entirely from the different perspectives and interests of the lenders.

In England, the seat of government being in the world's greatest commercial city, merchants are generally the people who lend money to the government. By lending, they don't intend to shrink their commercial capital — on the contrary, they mean to grow it. They'd never subscribe to a new loan unless they expected to sell their share at a profit. But if their investment bought them life annuities rather than permanent ones — whether on their own lives or others' — they wouldn't always be as likely to sell at a profit. Life annuities on their own lives would always sell at a loss, because nobody will pay the same price for an annuity on someone else's life (at similar age and health) as for one on his own. An annuity on a third party's life is admittedly of equal value to buyer and seller, but its real value starts declining from the moment it's granted and continues falling as long as it lasts. It can therefore never be as convenient a tradeable investment as a permanent annuity, whose real value can be assumed to stay essentially constant.

In France, the seat of government not being in a major commercial city, merchants make up a smaller proportion of the people who lend to the government. The people involved in finance — the tax farmers, the receivers of taxes not farmed out, the court bankers, and so on — make up the majority of those who advance money in public emergencies. Such people are typically of humble birth but great wealth, and frequently great pride. They're too proud to marry their social equals, and women of quality refuse to marry them. Many therefore decide to remain bachelors. Having neither families of their own nor much affection for their relatives — whom they're not always eager to acknowledge — they want only to live in splendor during their own lifetimes and are perfectly content for their fortune to die with them. The number of wealthy people who are either opposed to marriage or whose circumstances make it impractical is much larger in France than in England. For such people, who care little or nothing about posterity, nothing could be more convenient than exchanging their capital for an income stream that lasts exactly as long as they want it to.

The ordinary spending of most modern governments in peacetime is equal to, or nearly equal to, their ordinary revenue. When war comes, they're both unwilling and unable to increase their revenue in proportion to their increased spending. They're unwilling because they fear offending the people, who would quickly turn against the war if hit with a sudden, massive tax increase. They're unable because they don't really know which taxes would raise enough money. The ease of borrowing rescues them from this dilemma. Through borrowing, they can raise enough money each year to fight the war with only a very modest tax increase. And through perpetual funding, they can raise the largest possible annual sum with the smallest possible tax increase. In great empires, many of the people living in the capital and in provinces far from the fighting feel barely any inconvenience from the war. They sit comfortably at home, enjoying the entertainment of reading about their fleets and armies' exploits in the newspapers. For them, this entertainment more than compensates for the small difference between their wartime and peacetime taxes. They're commonly unhappy when peace returns, ending their entertainment and a thousand daydreams of conquest and national glory that a longer war would have sustained.

The return of peace, however, rarely brings relief from the wartime taxes. Those taxes are mortgaged to pay interest on the debt incurred to fight the war. If the old revenue plus new taxes produce some surplus after paying debt interest and covering ordinary government expenses, that surplus may perhaps be converted into a sinking fund to pay down the debt. But first, this sinking fund — even if used for nothing else — is generally far too small to pay off the entire wartime debt within any period during which peace can reasonably be expected to last. And second, the fund is almost always diverted to other purposes.

The wartime taxes were imposed solely to pay interest on the money borrowed against them. If they produce more, that extra revenue was neither planned nor expected and is therefore rarely significant. Sinking funds have generally been created not so much from surplus tax revenue above what's needed for interest payments, but from subsequent reductions in the interest rate. This is how the Dutch sinking fund was created in 1655 and the Papal States' in 1685. Hence the typical inadequacy of such funds.

Even during the deepest peace, various events arise that require extraordinary spending, and the government always finds it more convenient to pay for this by raiding the sinking fund than by imposing a new tax. Every new tax is immediately felt by the people. It always provokes some grumbling and meets some resistance. The more taxes have already been multiplied and raised, the more loudly people protest each new one, and the harder it becomes to either find new things to tax or to raise existing taxes further. A temporary pause in debt repayment, by contrast, isn't immediately felt by anyone and triggers neither protest nor complaint. Raiding the sinking fund is always an obvious and easy way out of the current difficulty. The more public debt has piled up, the more urgent it becomes to reduce it, and the more dangerous and destructive it is to raid the sinking fund — yet the less likely the debt is to be significantly reduced, and the more certain the sinking fund is to be raided for whatever extraordinary peacetime expenses arise. When a nation is already crushed by taxes, only the necessities of a new war — only the fire of national vengeance or the anxiety of national security — can persuade the people to accept a new tax with any patience. Hence the typical misuse of the sinking fund.

In Britain, ever since we first adopted the ruinous practice of perpetual funding, the reduction of public debt in peacetime has never come close to matching its accumulation in wartime. It was in the war that began in 1688 and ended with the Treaty of Ryswick in 1697 that the foundation of Britain's present enormous debt was first laid.

On December 31, 1697, Britain's public debts, funded and unfunded, totaled about 21.5 million pounds. A large part had been contracted through short-term anticipations, and some through life annuities, so that by December 31, 1701 — in less than four years — about 5.1 million pounds had been either paid off or reverted to the public. This was a greater debt reduction than has ever since been achieved in so short a time. The remaining debt was about 16.4 million pounds.

In the war that began in 1702 and ended with the Treaty of Utrecht, the debts grew even more. By December 31, 1714, they stood at about 53.7 million pounds. The conversion of short and long annuities into South Sea Company stock increased the debt total, so that by December 31, 1722, it was about 55.3 million pounds. Debt reduction began in 1723, but proceeded so slowly that by December 31, 1739 — after seventeen years of deep peace — only about 8.3 million pounds had been paid off. The public debt then stood at about 47 million pounds.

The Spanish war beginning in 1739, and the French war that soon followed, caused further increases. By December 31, 1748, after the Treaty of Aix-la-Chapelle ended the war, the debt stood at about 78.3 million pounds. Seventeen years of the most profound peace had paid off only about 8.3 million. A war of less than nine years had added about 31.3 million.

Under the administration of Mr. Pelham, the interest rate on public debt was reduced from four to three percent. The sinking fund grew, and some debt was paid off. In 1755, before the outbreak of the Seven Years' War, the funded debt stood at about 72.3 million pounds. By January 5, 1763, at the conclusion of peace, it had risen to about 122.6 million. The unfunded debt was estimated at nearly 14 million more. But the war's expenses didn't end with the peace treaty, so by January 5, 1764, the funded debt — increased by new loans and the funding of previously unfunded debt — stood at about 129.6 million. There still remained, according to a well-informed contemporary author, an additional unfunded debt of about 10 million. In 1764, therefore, Britain's total public debt, funded and unfunded, amounted to roughly 139.6 million pounds. The life annuities granted as bonuses to loan subscribers in 1757, valued at fourteen years' purchase, were worth about 472,500 pounds. The long-term annuities granted as similar bonuses in 1761 and 1762, valued at twenty-seven and a half years' purchase, were worth about 6.8 million. During about seven years of peace, the prudent and genuinely patriotic administration of Mr. Pelham couldn't manage to pay off more than six million pounds of old debt. During a war of nearly the same length, more than seventy-five million in new debt was created.

By January 5, 1775, the funded debt stood at about 125 million pounds, and the unfunded debt (excluding a large civil list debt) at about 4.15 million, for a combined total of about 129.15 million. According to this accounting, the total debt paid off during eleven years of deep peace was only about 10.4 million pounds. Even this small reduction didn't come entirely from savings on ordinary government revenue. Several external windfalls contributed to it — an additional shilling per pound in land tax for three years, two million received from the East India Company as compensation for its territorial acquisitions, and 110,000 pounds received from the Bank for renewing its charter. To these must be added several sums arising from the war itself: about 690,000 pounds from the sale of captured French ships, 670,000 from ransoms for French prisoners, and about 95,500 from the sale of ceded islands — totaling roughly 1.46 million. Adding the remaining military account balances and the payments from the Bank, the East India Company, and the extra land tax, the total comes to well over five million. The debt actually paid down from savings on ordinary government revenue has therefore averaged not even half a million a year.

The sinking fund has undoubtedly grown considerably since the peace, thanks to the debt that's been paid off, the reduction of four percent bonds to three percent, and the expiration of life annuities. If peace continued, perhaps a million a year could now be set aside for debt reduction. Another million was indeed paid last year — but at the same time, a large civil list debt was left unpaid, and we're now involved in a new war that may prove as expensive as any of our previous ones. The new debt likely to be incurred before the end of the next campaign may nearly equal all the old debt that has been paid off from savings on ordinary revenue. It would therefore be utterly unrealistic to expect the public debt ever to be fully repaid from savings on ordinary revenue as it currently stands.

Some authors have argued that the government bonds of the various indebted European nations, particularly England, represent accumulated capital added to the country's other capital — extending trade, multiplying manufacturing, and improving agriculture far beyond what the country's own capital alone could achieve. But this argument ignores the fact that the capital originally advanced to the government by its creditors was, from the moment it was advanced, a portion of annual output diverted from functioning as capital to functioning as revenue — redirected from supporting productive workers to supporting unproductive ones, to be spent and wasted, generally within the year, with no hope of future reproduction. In exchange for the capital they advanced, the creditors did receive a government annuity usually worth at least as much. This annuity undoubtedly replaced their capital and allowed them to continue their business at the same or even a greater scale — either by borrowing new capital on the strength of the annuity, or by selling it to obtain new capital equal to or greater than what they'd lent to the government. But this new capital, whether bought or borrowed from others, must have already existed in the country, and must have been employed, as all capital is, in supporting productive labor. When it passed to those who had lent their money to the government, it may have been new capital to them, but it wasn't new to the country. It was merely capital shifted from one use to another. Though it replaced what the lenders had advanced to the government, it didn't replace it for the country. If they hadn't advanced that capital to the government, the country would have had two portions of its annual output, instead of one, employed in supporting productive labor.

When government spending is financed within the year from taxes that aren't already mortgaged, a portion of private income is simply redirected from supporting one kind of unproductive labor to supporting another. Some of what people pay in taxes might have been saved and invested as capital supporting productive labor, but most would probably have been spent anyway on unproductive uses. Financing government spending this way undoubtedly slows the further accumulation of new capital, but it doesn't necessarily destroy any capital that already exists.

When government spending is financed through funding, it's financed by the annual destruction of previously existing capital — by diverting a portion of annual output that had been supporting productive workers to supporting unproductive ones. Under this system, however, taxes are lighter than they'd need to be if the same spending were financed entirely within the year. Private incomes are less burdened, and people's ability to save and accumulate capital is less impaired. If funding destroys more old capital, it hinders less the accumulation of new capital than pay-as-you-go taxation. Under the funding system, the thrift and industry of private individuals can more easily repair the damage that government waste and extravagance may inflict on society's total capital.

But funding has this advantage only during wartime. If war spending were always financed from current-year revenue, the taxes needed for that extraordinary revenue would last no longer than the war itself. The ability to save and accumulate would be less during the war but greater during the peace than under the funding system. War wouldn't necessarily destroy any existing capital, and peace would allow the accumulation of much more new capital. Wars would generally be shorter and less recklessly started. The people, feeling the full burden of war during its entire course, would quickly grow tired of it, and the government, to keep them happy, wouldn't need to drag it on longer than necessary. The prospect of war's heavy and unavoidable burdens would discourage people from frivolously demanding war when there was no real interest worth fighting for. The periods during which the ability to accumulate capital was somewhat reduced would occur less often and last less long. The periods when that ability was at its peak would last much longer than they can under the funding system.

Moreover, when funding has progressed far enough, the proliferation of taxes it brings can impair private accumulation even in peacetime just as much as pay-as-you-go taxation would in wartime. Britain's peacetime revenue currently exceeds ten million pounds a year. If it were free and unmortgaged, it would be enough — with proper management and without borrowing a shilling — to fight the most vigorous war. The private income of British citizens is currently as heavily burdened in peacetime, their ability to accumulate as thoroughly impaired, as it would have been during the most expensive war if the ruinous system of funding had never been adopted.

Some have said that in paying interest on the public debt, it's just the right hand paying the left. The money doesn't leave the country. It's simply a transfer of revenue from one set of citizens to another, and the nation isn't a penny poorer. This argument is entirely based on the faulty reasoning of the mercantilist system, and after the lengthy examination I've already devoted to that system, it may be unnecessary to say more about it. The argument also assumes that the entire public debt is owed to the country's own citizens — which isn't true. The Dutch, and several other foreign nations, own a very considerable share of our government bonds. But even if the entire debt were owed domestically, it would be no less harmful.

Land and capital are the two original sources of all revenue, both private and public. Capital pays the wages of productive labor, whether in agriculture, manufacturing, or commerce. The management of these two sources of revenue belongs to two different groups: the owners of land, and the owners or managers of capital.

The landowner has a personal interest in keeping his estate in the best possible condition — building and repairing his tenants' houses, maintaining necessary drainage and fences, and making all those other expensive improvements that are properly the landlord's responsibility. But when various land taxes diminish the landlord's income enough, and various taxes on necessities and comforts reduce the purchasing power of that diminished income enough, he may find himself completely unable to make or maintain those costly improvements. When the landlord stops doing his part, it's impossible for the tenant to continue doing his. As the landlord's financial distress increases, the country's agriculture must necessarily decline.

When the owners and managers of capital find, through various taxes on necessities and comforts, that whatever income they earn from their capital won't buy as many necessities and comforts in their own country as an equal income would in almost any other — they'll be inclined to move elsewhere. And when, in order to collect those taxes, all or most merchants and manufacturers (that is, all or most of those who manage large amounts of capital) are subjected to the constant, humiliating, harassing visits of tax collectors, this inclination to move will quickly become an actual move. The country's industry will inevitably decline as the capital supporting it departs, and the ruin of trade and manufacturing will follow the decline of agriculture.

Transferring the greater part of income from land and capital — away from the people who are personally invested in keeping every particular piece of land in good shape and every particular amount of capital well managed, and toward a different set of people (the public creditors, who have no such personal stake) — must, in the long run, lead to both the neglect of land and the waste or flight of capital. A government bondholder certainly has a general interest in the prosperity of the country's agriculture, manufacturing, and commerce, and consequently in the good condition of its land and the wise management of its capital. If any of these declined generally, the revenue from various taxes might no longer be enough to pay his interest. But a government bondholder, considered purely as such, has no interest in the condition of any particular piece of land or the management of any particular amount of capital. He has no knowledge of such specifics, no oversight, and no ability to care for them. Their deterioration may be unknown to him and can't directly affect him.

The practice of funding has gradually weakened every state that has adopted it. The Italian republics seem to have started it. Genoa and Venice, the only two that can still claim any independent existence, have both been weakened by it. Spain seems to have learned the practice from the Italian republics, and — its taxes being probably less well designed than theirs — has been weakened even more in proportion to its natural strength. Spain's debts are very old. It was deeply in debt before the end of the sixteenth century, about a hundred years before England owed a shilling. France, despite all its natural resources, languishes under an oppressive burden of the same kind. The Dutch Republic is as weakened by its debts as Genoa or Venice. Is it likely that in Great Britain alone, a practice that has brought weakness or ruin to every other country should prove entirely harmless?

It may be said that the tax systems of those other countries are inferior to England's. I believe they are. But we should remember that when even the wisest government has exhausted every proper subject of taxation, it must, in cases of urgent necessity, turn to improper ones. The wise republic of Holland has sometimes been forced to resort to taxes as burdensome as most of Spain's. Another war, begun before any significant progress in reducing the public debt, and growing as expensive as the last one, might — out of sheer necessity — make Britain's tax system as oppressive as Holland's, or even Spain's. To our current system's credit, it has so far placed so little burden on industry that, even during the most expensive wars, the thrift and good behavior of individuals seems to have been enough, through saving and accumulation, to repair all the damage that government waste and extravagance inflicted on the nation's total capital. At the end of the Seven Years' War — the most expensive war Britain ever fought — her agriculture was as flourishing, her manufacturers as numerous and fully employed, and her commerce as extensive as they had ever been. The capital supporting all these industries must therefore have been as large as ever. Since the peace, agriculture has improved even further. House rents have risen in every town and village — proof of the people's increasing wealth and income. And the annual yield of most of the old taxes, particularly the major branches of excise and customs, has been steadily rising — equally clear proof of increasing consumption, and consequently of increasing output, which alone could support that consumption. Britain seems to bear with ease a burden that, half a century ago, nobody believed she could support. But let us not rashly conclude from this that she can bear any burden, or even be too confident that she could support, without great hardship, a burden even slightly greater than what she already carries.

Once national debts have accumulated past a certain point, there is scarcely, I believe, a single instance of their having been honestly and completely repaid. The liberation of public revenue, if it has been achieved at all, has always been achieved through bankruptcy — sometimes an openly declared bankruptcy, but always a real one, though frequently disguised as a pretended payment.

The most common trick for disguising a real public bankruptcy as a pretended payment has been to raise the denomination of the currency. If a sixpence, for example, were declared by Parliament or royal proclamation to be worth a shilling, and twenty sixpences to be worth a pound sterling, then someone who had borrowed twenty shillings — about four ounces of silver — under the old system would repay their debt with twenty sixpences, or something less than two ounces of silver. A national debt of roughly 128 million pounds — approximately the total funded and unfunded debt of Great Britain — could in this way be "paid" with about 64 million of our current money. This would of course be only a pretended payment, and the government's creditors would really be cheated of ten shillings in the pound of what was owed to them. The damage would extend far beyond the government's creditors: every private creditor would suffer a proportional loss too. And this would bring no benefit — indeed, in most cases, an additional loss — to the government's creditors. If the government's creditors were themselves heavily in debt to other people, they might partly offset their loss by repaying their own creditors in the same devalued currency. But in most countries, the government's creditors are predominantly wealthy people who are more likely to be owed money than to owe it. A pretended payment of this kind therefore makes the government's creditors worse off rather than better in most cases, while extending the catastrophe to a great number of innocent people. It causes a general and deeply destructive upheaval in private fortunes — typically enriching the idle and wasteful debtor at the expense of the hardworking and frugal creditor, and transferring a large portion of national capital from the hands most likely to grow and improve it to those most likely to squander and destroy it. When a state finds it necessary to declare bankruptcy — just as when an individual must — a fair, open, and acknowledged bankruptcy is always the course that is both least dishonorable to the debtor and least harmful to the creditor. A state's honor is surely very poorly served when, to cover the disgrace of a real bankruptcy, it resorts to a financial trick of this kind — so easily seen through and yet so extremely destructive.

Almost all states, however, ancient as well as modern, have at some point played exactly this trick. The Romans, at the end of the First Punic War, reduced the As — the basic unit by which they valued all their other coins — from twelve ounces of copper to just two. That is, they declared two ounces of copper to be worth what twelve ounces had always been worth before. The Republic was thus able to pay its massive war debts with one-sixth of what it actually owed. Such a sudden and drastic bankruptcy would, we might imagine today, have provoked a furious public outcry. It appears to have provoked none. The law that enacted it was, like all other currency laws, introduced and passed through the popular assembly by a tribune, and was probably very popular. In Rome, as in all the other ancient republics, the poor were constantly in debt to the rich and powerful. To secure votes at the annual elections, the wealthy would lend money to the poor at extortionate interest rates. The debt, never repaid, soon piled up into a sum too large for the debtor to pay — or for anyone else to pay for him. The debtor, fearing harsh enforcement, was forced to vote for whichever candidate his creditor recommended, without any further inducement. Despite all the laws against bribery and corruption, the handouts of candidates, along with the occasional distributions of grain ordered by the Senate, were the main sources from which poorer citizens in the later Roman Republic drew their livelihood. To free themselves from this subjection to their creditors, the poorer citizens constantly demanded either a complete cancellation of debts or what they called "New Tables" — a law entitling them to full discharge upon paying only a fraction of what they'd accumulated in debt. The law that reduced all denominations of the currency to one-sixth of their former value, since it allowed debtors to pay with one-sixth of what they really owed, was equivalent to the most generous possible New Tables. On several occasions, the rich and powerful were forced to consent to laws both for canceling debts and for introducing New Tables, and they were probably persuaded to agree to this particular law for similar reasons — and partly because, by freeing the public revenue, they could restore the vigor of the government they themselves directed. An operation like the Roman one would instantly reduce a debt of 128 million pounds to about 21.3 million. During the Second Punic War, the As was reduced even further — first from two ounces to one, then from one ounce to half an ounce — to one twenty-fourth of its original value. Combining all three Roman devaluations into one, a debt of 128 million in our current money could be reduced at a stroke to about 5.3 million. Even Britain's enormous debt could be "paid" in this way.

Through tricks like these, the currency of virtually every nation has been gradually reduced further and further below its original value, and the same nominal sum has come to contain less and less actual silver.

Nations have sometimes also debased the standard of their currency for the same purpose — that is, they've mixed a greater proportion of base metal into it. If our silver coins, for example, contained eight ounces of alloy per pound weight instead of the current eighteen pennyweight, a pound sterling would be worth little more than six shillings and eightpence of our current money. The silver content of six shillings and eightpence would thus be elevated to the name of a pound sterling. Debasing the standard has exactly the same effect as what the French call an "augmentation" — a direct raising of the currency's face value.

An augmentation, or direct raising of face value, is always an open and acknowledged operation. Smaller, lighter coins are simply called by the same name previously given to heavier ones. Debasing the standard, by contrast, has generally been a secret operation. Coins were issued from the mint with the same names, and as nearly as possible the same weight, size, and appearance, as coins of much greater value that had been circulating before. When King John of France debased his currency to pay his debts, all the officers of his mint were sworn to secrecy. Both operations are unjust. But a simple augmentation is an injustice of open force, while debasement is an injustice of treacherous fraud. The latter, once discovered — and it could never stay hidden for long — has always provoked far greater outrage. After a major augmentation, the currency has very rarely been restored to its former weight. But after the worst debasements, it has almost always been restored to its former purity. The fury and indignation of the people could scarcely be appeased by anything less.

At the end of Henry VIII's reign and the beginning of Edward VI's, the English currency was not only raised in denomination but debased in standard. Similar frauds were practiced in Scotland during the minority of James VI. They have occurred at one time or another in most countries.

It seems utterly hopeless to expect that Britain's public revenue can ever be completely freed from debt, or that any significant progress toward that goal can be made, while the surplus of revenue above the peacetime cost of government remains so very small. This liberation can clearly never happen without either a very substantial increase in public revenue or an equally substantial reduction in public spending.

A more equitable land tax, a more equitable tax on house rents, and the kind of customs and excise reforms I discussed in the previous chapter might — without increasing the burden on most people, but only distributing it more fairly — produce a considerable increase in revenue. But even the most optimistic reformer could hardly convince himself that such an increase would be large enough either to free the public revenue entirely or to make enough progress in peacetime to prevent or offset further debt accumulation in the next war.

By extending the British tax system to all provinces of the empire inhabited by people of British or European descent, a much larger increase in revenue might be expected. But this could hardly be done consistently with the principles of the British constitution without admitting a fair and equal representation of all those provinces into the British Parliament — or, if you prefer, into the States-General of the British Empire — with each province's representation proportional to its tax contributions, just as Britain's representation would be proportional to its own. The private interests of many powerful individuals and the entrenched prejudices of large groups of people currently present obstacles to such a great change that may be very difficult, perhaps completely impossible, to overcome. But without claiming to know whether such a union is practical or not, it may not be out of place — in a theoretical work like this — to consider how far the British tax system might be applied to all provinces of the empire, what revenue it might produce, and how such a union might affect the happiness and prosperity of the various provinces it would encompass. Such a thought experiment can at worst be regarded as a new Utopia — less entertaining, certainly, but no more useless or fanciful than the original.

The land tax, stamp duties, and the various customs and excise duties are the four main branches of British taxation.

Ireland is certainly as able to pay a land tax as Britain, and our American and West Indian colonies even more so. Where the landowner is subject to neither tithes nor poor rates, he can certainly afford to pay such a tax better than where he bears both those burdens. In most cases, a tithe collected in kind — where there's no fixed cash payment substituted — reduces what would otherwise be the landlord's rent by more than a land tax of five shillings per pound would. Such a tithe typically amounts to more than a quarter of the real rent — what remains after fully covering the farmer's costs and reasonable profit. If all fixed-payment substitutes and all church lands were eliminated, the complete church tithe of Britain and Ireland could hardly be estimated at less than six or seven million pounds. Without the tithe, landlords in Britain and Ireland could afford to pay six or seven million in additional land tax without being more burdened than many of them already are. America pays no tithe and could therefore easily afford a land tax. The lands in America and the West Indies are generally not rented out to tenant farmers, so they couldn't be assessed according to any rent roll. But neither were Britain's lands assessed according to any rent roll in 1692. They were assessed according to a very loose and inaccurate estimate. American lands might be assessed the same way, or according to a fair valuation based on an accurate survey — like those recently carried out in Milan and in the Austrian, Prussian, and Sardinian dominions.

Stamp duties could obviously be applied without any modification in all countries where the legal processes and the documents by which property is transferred are the same or similar.

Extending Britain's customs laws to Ireland and the colonies, provided it came — as justice requires — with an extension of free trade, would be enormously beneficial to both. All the odious restrictions that currently oppress Ireland's trade, and the distinction between enumerated and non-enumerated American goods, would be swept away entirely. The countries north of Cape Finisterre would be as open to every American product as those south of that cape currently are to some of them. Trade between all parts of the British Empire would, thanks to uniform customs laws, be as free as Britain's own coastal trade is today. The British Empire would thus provide within itself a vast internal market for every product of all its provinces. Such an enormous expansion of the market would quickly compensate both Ireland and the colonies for any increase in customs duties.

The excise is the only part of the British tax system that would need any adjustment for different provinces. It could be applied to Ireland without any change, since Ireland's products and consumption are essentially the same as Britain's. Applying it to America and the West Indies, whose products and consumption are very different from Britain's, would require some modifications — similar to those used when applying excise laws to England's cider and beer regions.

For example, a fermented drink called "beer" — though made from molasses and bearing very little resemblance to English beer — makes up a significant part of the common beverage of the American people. Since this drink keeps for only a few days and can't be brewed and stored for sale in large breweries, every family has to brew it themselves, just as they cook their own food. But subjecting every private household to the intrusive visits and inspections of tax collectors — the way we subject pub owners and commercial brewers — would be completely inconsistent with liberty. If, for the sake of fairness, it were thought necessary to tax this drink, it could be taxed by taxing the molasses it's made from, either at the place of manufacture, or — if that proved impractical — by imposing a duty on its importation into the colony where it would be consumed. Besides the one-penny-per-gallon duty that Parliament already imposes on molasses imported into America, there's a provincial tax in Massachusetts of eightpence per hogshead on molasses imported from other colonies, and another in South Carolina of fivepence per gallon on molasses imported from the northern colonies. Or if neither of these methods proved convenient, each family could pay a flat rate based on its consumption, calculated either by the number of family members (as English families do with the malt tax) or by their different ages and sexes (as various Dutch taxes are calculated), or roughly as Sir Matthew Decker proposed for all consumption taxes in England. This method, as I've already observed, isn't very convenient for goods consumed quickly, but it might be adopted when nothing better can be done.

Sugar, rum, and tobacco are goods that are nowhere necessities of life, have become objects of nearly universal consumption, and are therefore ideal subjects for taxation. If a union with the colonies were to take place, these could be taxed either before they leave the manufacturer's or grower's hands, or — if that didn't suit their circumstances — they could be stored in public warehouses at both the place of production and every port in the empire to which they might be shipped. They would remain there under the joint custody of the owner and the revenue officer until delivered to either the consumer, a retailer for domestic sale, or a merchant for export — with no tax due until delivery. Goods delivered for export would be duty-free, with proper guarantees that they'd actually leave the empire. These are perhaps the main commodities whose taxation would require significant changes under a colonial union.

It's obviously impossible to estimate with any precision what revenue this extended tax system might produce across all provinces of the empire. Under the current system, more than ten million pounds in revenue is raised annually in Britain from fewer than eight million people. Ireland has more than two million people, and according to reports presented to the Continental Congress, the twelve associated American provinces contain more than three million. Those reports may have been exaggerated — either to encourage their own people or to intimidate ours — so let's assume that our North American and West Indian colonies together contain no more than three million, making the total British Empire population in Europe and America no more than thirteen million. If this tax system raises more than ten million from fewer than eight million people, it should raise more than sixteen and a quarter million from thirteen million. From this revenue, we'd need to subtract what's currently raised in Ireland and the colonies for their own civil governments. Ireland's civil and military establishment, including interest on its public debt, averages something less than 750,000 pounds a year. The revenue of the principal American and West Indian colonies, before the current troubles began, amounted to about 142,000 pounds — though this doesn't include Maryland, North Carolina, or any of our recent territorial acquisitions, which might add another thirty or forty thousand. For round numbers, let's say that the revenue needed for the civil government of Ireland and the colonies amounts to one million. This would leave about 15.25 million pounds for the general expenses of the empire and for paying down the public debt. If one million could currently be spared from Britain's existing peacetime revenue for debt repayment, 6.25 million could readily be spared from this improved revenue. This great sinking fund could be augmented every year by the interest saved on the debt paid off the previous year, and could grow so rapidly that within a few years it might discharge the whole debt — completely restoring the currently weakened and languishing vigor of the empire. In the meantime, the people could be relieved of some of the most burdensome taxes — those on the necessities of life or on manufacturing materials. Working people would thus be able to live better, work for lower wages, and send their goods to market more cheaply. The cheapness of their goods would increase demand for them, and consequently for the labor that produced them. This increased demand for labor would both increase the numbers and improve the conditions of the working poor. Their consumption would rise, and with it the revenue from all those consumer goods on which taxes might remain.

However, the revenue from this extended tax system might not immediately grow in proportion to the number of people subjected to it. Considerable leniency would be needed for some time toward provinces newly burdened with unfamiliar taxes. And even when the same taxes were eventually collected as precisely as possible everywhere, they wouldn't produce revenue proportional to population in every province. In a poor country, consumption of the main goods subject to customs and excise is very small. In a thinly populated country, opportunities for smuggling are very great. The consumption of malt beverages among ordinary Scots is very small, and the excise on malt, beer, and ale produces less in Scotland than in England relative to population and tax rates (which differ on malt because of a supposed difference in quality). In these particular excise categories, I don't think there's much more smuggling in one country than the other. But the distillery duties and most customs duties produce less in Scotland relative to population — not only because of lower consumption, but because smuggling is far easier. In Ireland, ordinary people are still poorer than in Scotland, and many parts of the country are almost as thinly settled. So in Ireland, consumption of taxed goods might be even lower relative to population than in Scotland, with smuggling opportunities about the same. In America and the West Indies, white people even of the lowest rank are much better off than people of the same rank in England, and their consumption of the luxuries they typically enjoy is probably much greater. The Black people, however, who make up the majority of the population in both the southern colonies and the West Indian islands, are enslaved and are undoubtedly worse off than even the poorest people in Scotland or Ireland. But we shouldn't imagine that they're worse fed or that their consumption of goods subject to moderate duties is less than that of the lower classes in England. It's in the master's interest that they be well fed and kept in good condition, just as it's in his interest that his work animals be well maintained. Enslaved workers accordingly receive their rations of rum and molasses or spruce beer almost everywhere, just like white servants, and this allowance would probably not be withdrawn even if those goods were subjected to moderate duties. So the consumption of taxed goods relative to population would probably be as great in America and the West Indies as in any part of the British Empire. Smuggling opportunities, however, would be much greater, since America is much more thinly populated relative to its area than either Scotland or Ireland. But if the current duties on malt and malt beverages were replaced by a single duty on malt, smuggling opportunities in the most important branch of the excise would be virtually eliminated. And if customs duties, instead of being imposed on nearly every imported item, were limited to a few widely consumed goods and collected under excise procedures, smuggling opportunities — though not entirely eliminated — would be greatly reduced. As a result of these two apparently simple and easy reforms, the customs and excise duties might produce revenue in the most thinly populated province proportional to what they produce in the most densely populated.

It has been said that the Americans have no gold or silver money — that their domestic commerce runs on paper currency, and that whatever gold and silver reaches them is all sent to Britain in exchange for the goods we ship them. Without gold and silver, the argument goes, there's no way to pay taxes. We already get all the gold and silver they have. How can we take from them what they don't possess?

The current scarcity of gold and silver in America isn't caused by that country's poverty or its people's inability to purchase those metals. In a country where wages are so much higher and food prices so much lower than in England, most people could surely afford to buy more gold and silver if they needed or wanted it. The scarcity of those metals is therefore a matter of choice, not necessity.

Gold and silver are necessary or convenient for conducting either domestic or foreign business.

As I showed in Book II, a country's domestic business can, at least in peacetime, be conducted through paper currency with nearly the same convenience as through gold and silver. It's convenient for Americans — who can always profitably invest more capital in improving their land than they can easily get — to save as much as possible on the costly medium of exchange that gold and silver represent, and to use the surplus output that would otherwise go to buying those metals to instead buy tools of trade, clothing materials, household furniture, and the ironwork needed for building and expanding their settlements and farms. In other words, they prefer to buy active and productive capital rather than dead capital. Colonial governments find it in their interest to supply the people with enough paper money to fully handle their domestic business — and generally more than enough. Some governments, Pennsylvania's in particular, earn revenue by lending this paper money to their citizens at interest. Others, like Massachusetts, issue paper money in emergencies to cover public expenses and later redeem it at the depreciated value it has gradually fallen to. In 1747, Massachusetts paid off most of its public debts this way, at one-tenth of the face value for which the bills had been issued. It suits the planters to save the expense of using gold and silver domestically, and it suits the colonial governments to supply them with a medium that — despite some very significant drawbacks — enables them to save that expense. The excess of paper money necessarily drives gold and silver out of domestic transactions in the colonies, for the same reason it drove those metals out of most domestic transactions in Scotland. In both countries, it's not poverty but the enterprising, ambitious spirit of the people — their desire to put all the capital they can get into active, productive use — that has caused this surplus of paper money.

In the colonies' foreign trade with Britain, gold and silver are used exactly in proportion to how much they're needed. Where those metals aren't necessary, they rarely appear. Where they are, they're generally found.

In trade between Britain and the tobacco colonies, British goods are typically sold on long credit and later paid for in tobacco at an agreed price. It's more convenient for the colonists to pay in tobacco than in gold and silver — just as it would be more convenient for any merchant to pay his suppliers in whatever goods he happens to deal in rather than in cash. Such a merchant would never need to keep idle cash on hand; he could keep more goods in his shop and do more business. But it rarely works out that all of a merchant's suppliers find it convenient to accept payment in his particular goods. The British merchants who trade with Virginia and Maryland happen to be the rare exception — a group for whom it's more convenient to be paid in tobacco than in gold and silver. They expect to make a profit selling the tobacco; they'd make none selling gold and silver. Gold and silver therefore rarely figure in trade between Britain and the tobacco colonies. Maryland and Virginia have as little use for those metals in their foreign trade as in their domestic commerce. They're said to have less gold and silver money than any other American colonies. Yet they're considered as prosperous, and consequently as wealthy, as any of their neighbors.

In the northern colonies — Pennsylvania, New York, New Jersey, the four New England governments, and so on — the value of what they export to Britain is less than the value of the manufactures they import for themselves and for other colonies they serve as carriers. A balance must therefore be paid to the mother country in gold and silver, and they generally find it.

In the sugar colonies, the value of goods exported annually to Britain is much greater than the value of everything imported from there. If the sugar and rum sent to the mother country were paid for within those colonies, Britain would have to ship out a very large balance in cash every year — and certain types of politicians would consider the West Indian trade extremely unfavorable. But it happens that many of the major sugar plantation owners live in Britain. Their rents are sent to them as sugar and rum, the produce of their estates. The sugar and rum that West Indian merchants buy in those colonies on their own account are worth less than the goods they sell there annually. A balance must therefore be paid to them in gold and silver, and it generally is.

The difficulty and irregularity of payments from the various colonies to Britain haven't been proportional to the size of their respective trade balances. Payments have generally been more regular from the northern colonies than from the tobacco colonies, even though the former usually owe a sizable cash balance while the latter owe either nothing or much less. The difficulty of getting payment from the sugar colonies has been greater or smaller not so much in proportion to the balances they owe, but in proportion to how much uncultivated land they contain — that is, in proportion to how strong the temptation has been for planters to overextend themselves by trying to settle and develop more waste land than their capital can handle. Returns from the great island of Jamaica, where there's still much uncultivated land, have generally been more irregular and uncertain than from the smaller islands of Barbados, Antigua, and Saint Kitts, which have been fully cultivated for many years and therefore offer less scope for speculative ventures. The new acquisitions of Grenada, Tobago, Saint Vincent, and Dominica have opened fresh territory for such speculation, and returns from those islands have lately been as irregular and uncertain as Jamaica's.

It is not, therefore, poverty that causes the current scarcity of gold and silver in most of the colonies. Their strong demand for active, productive capital makes it convenient to keep as little dead capital as possible, and leads them to accept a cheaper, though less convenient, medium of exchange than gold and silver. This frees them to convert the value of that gold and silver into tools of trade, clothing materials, household furniture, and the ironwork needed for building and expanding their settlements. In businesses that actually require gold and silver, they can always find the necessary amounts. When they fail to do so, it's generally the result not of genuine poverty but of excessive and overambitious enterprise. Their payments are irregular and uncertain not because they're poor, but because they're too eager to get rich. Even if all colonial tax revenue above what's needed for local government were remitted to Britain in gold and silver, the colonies have more than enough resources to buy the necessary amounts. They'd simply be forced to exchange some of the surplus output they now invest in productive capital for dead capital. In domestic business, they'd have to use an expensive medium of exchange instead of a cheap one, and the cost of buying this expensive medium might somewhat dampen the enthusiasm of their excessive enterprise in land improvement. But it probably wouldn't be necessary to remit any of the American revenue in gold and silver at all. It could be remitted through bills of exchange drawn on and accepted by specific merchants or companies in Britain, to whom American surplus produce had been consigned. These firms would pay the American revenue into the treasury in cash, having themselves received its value in goods. The entire business could frequently be conducted without exporting a single ounce of gold or silver from America.

It is not unjust for both Ireland and America to contribute toward paying off Britain's public debt. That debt was incurred in support of the government established by the Glorious Revolution — a government to which the Protestants of Ireland owe not only their current authority in their own country, but every guarantee they possess for their liberty, property, and religion. It's a government to which several American colonies owe their current charters and consequently their constitutions, and to which all American colonies owe the liberty, security, and property they've enjoyed ever since. That public debt was contracted in defending not Britain alone, but all the different provinces of the empire. The immense debt from the Seven Years' War in particular, and a great part of the debt from the war before it, were both properly incurred in defense of America.

Through a union with Britain, Ireland would gain, besides freedom of trade, other advantages much more important — advantages that would far more than compensate for any tax increase accompanying the union. Through the union with England, the middle and lower classes in Scotland gained complete liberation from the power of an aristocracy that had always oppressed them. Through a union with Britain, the great majority of people at all social levels in Ireland would gain an equally complete liberation from a much more oppressive aristocracy — one founded not, like Scotland's, on the natural and respectable distinctions of birth and fortune, but on the most hateful of all distinctions: those of religious and political prejudice. These are distinctions that, more than any others, inflame both the arrogance of the oppressors and the hatred and fury of the oppressed, and that typically make the inhabitants of the same country more hostile to one another than the people of different countries ever are. Without a union with Britain, the people of Ireland are unlikely for many generations to consider themselves one nation.

No oppressive aristocracy has ever taken hold in the colonies. Even so, the colonies would gain considerably in happiness and stability from a union with Britain. At the very least, it would free them from the bitter and toxic factions that are inseparable from small democracies, and that have so frequently divided their people and disrupted the peace of their nearly democratic governments. In the event of a total separation from Britain — which, unless prevented by such a union, seems very likely to happen — those factions would become ten times more virulent. Before the current troubles began, the mother country's power had always been able to keep those factions from breaking out into anything worse than crude insults and intimidation. If that power were entirely removed, they would probably soon erupt into open violence and bloodshed. In all great countries united under a single government, the spirit of faction typically burns less fiercely in the remote provinces than at the center of the empire. Their distance from the capital — from the main arena where the great scramble of faction and ambition plays out — makes them less involved in the contests of any party and more detached and impartial observers of everyone's conduct. The spirit of faction burns less fiercely in Scotland than in England. In the event of a union, it would probably burn even less in Ireland than in Scotland. And the colonies would probably soon enjoy a degree of harmony and unity currently unknown in any part of the British Empire. Both Ireland and the colonies would admittedly be subject to heavier taxes than they now pay. But if the public revenue were diligently and faithfully applied to paying off the national debt, most of those taxes wouldn't need to last long, and Britain's public revenue might soon be reduced to what was needed for maintaining only a moderate peacetime establishment.

The territorial acquisitions of the East India Company — which are undoubtedly the rightful property of the Crown, that is, of the state and people of Great Britain — might provide yet another source of revenue, potentially more abundant than all those I've already mentioned. Those countries are described as more fertile, more extensive, and — in proportion to their size — much richer and more densely populated than Britain. To draw a large revenue from them, it probably wouldn't be necessary to introduce any new tax system into countries that are already taxed enough and more than enough. It might actually be better to lighten the burden on those unfortunate countries, drawing revenue from them not by imposing new taxes but by preventing the embezzlement and misuse of most of the taxes they already pay.

If it proves impossible for Britain to draw any significant additional revenue from any of these sources, the only remaining option is to reduce spending. In both collecting and spending public revenue — though there may still be room for improvement in both — Britain seems to be at least as economical as any of her neighbors. The military establishment she maintains for her own defense in peacetime is more modest than that of any European state that can claim to rival her in wealth or power. None of these areas seems to offer much room for spending cuts. The peacetime cost of maintaining the colonies, before the current troubles began, was very considerable and is an expense that can, and — if no revenue can be drawn from them — certainly should be eliminated entirely. But this constant peacetime expense, though very large, is insignificant compared to what defending the colonies has cost us in wartime. The Seven Years' War, fought entirely on account of the colonies, cost Britain upwards of ninety million pounds, as I've already noted. The Spanish War of 1739 was also fought mainly on their account, and in that war and the French war that followed, Britain spent upwards of forty million — a great part of which should rightly be charged to the colonies. In those two wars, the colonies cost Britain more than double the total national debt that existed before the first one started. Without those wars, the debt might well have been — probably would have been — completely paid off by now. And without the colonies, the first of those wars might not have been fought, and the second certainly would not have been.

It was because the colonies were supposed to be provinces of the British Empire that this expense was incurred on their behalf. But countries that contribute neither revenue nor military force toward supporting the empire cannot be considered provinces. They might perhaps be considered appendages — a kind of splendid and showy accessory of the empire. But if the empire can no longer afford the expense of maintaining this accessory, it certainly ought to give it up. If it cannot raise its revenue to match its expenses, it ought at least to bring its expenses in line with its revenue. If the colonies, despite their refusal to submit to British taxes, are still to be treated as provinces of the empire, their defense in some future war may cost Britain as much as it ever has.

The rulers of Great Britain have, for more than a century, entertained the people with the fantasy that they possessed a great empire on the west side of the Atlantic. This empire, however, has so far existed only in their imaginations. It has been not an empire, but the project of an empire; not a gold mine, but the project of a gold mine — a project that has cost, continues to cost, and if pursued in the same way, is likely to go on costing immense sums, without being likely to bring any return. For the effects of the monopoly on colonial trade, as I have shown, amount to pure loss rather than profit for the great body of the people. Surely it is now time for our rulers either to make this golden dream a reality — a dream in which they have been indulging themselves, perhaps, as much as the people — or to wake up from it and try to wake the people too. If the project cannot be completed, it ought to be abandoned. If any of the provinces of the British Empire cannot be made to contribute toward supporting the whole empire, it is surely time for Great Britain to free herself from the expense of defending those provinces in war and of supporting any part of their civil or military establishments in peace, and to adjust her future plans and ambitions to the real modesty of her circumstances.

This modernized edition was produced using Claude by Anthropic, following the original 1776 text from Standard Ebooks. The original work is in the public domain.