Sharing Classic Literature: August 2010

Adam Smith:

An Inquiry Into the Nature and Causes

of the Wealth of Nations

QUOTES FOR DISCUSSION

From: Biographical note on Adam Smith, pg.v

1723 – 1790
His father, who had been comptroller of the customs, died five months before the child’s birth, and his mother devoted most of the remaining sixty-one years of her life to caring for her son. His childhood was uneventful except for one incident. In 1726, while visiting his mother’s family, he was kidnapped by gypsies; the prompt action of his uncle soon effected his rescue.

But this proportion must in every nation be regulated by two different circumstances, first, by the skill, dexterity, and judgment with which its labour is generally applied; and secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed. Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, Introduction and Plan of the Work, Great Books Volume 39, pg. 1

Since the downfall of the Roman empire, the policy of Europe has been more favourable to arts, manufactures, and commerce, the industry of towns, than to agriculture, the industry of the country. The circumstances which seem to have introduced and established this policy are explained in the third book.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, Introduction and Plan of the Work, Great Books Volume 39, pg. 2

The division of labour, however, so far as it can be introduced, occasions, in every art, a proportionable increase of the productive powers of labour. This separation of different trades and employments from one another seems to have taken place in consequence of this advantage. This separation, too, is generally carried furthest in those countries which enjoy the highest degree of industry and improvement; what is the work of one man in a rude state of society being generally that of several in an improved one.

I have seen several boys under twenty years of age who had never exercised any other trade but that of making nails, and who, when they exerted themselves, could make, each of them, upwards of two thousand three hundred nails in a day. The making of a nail, however, is by no means one of the simplest operations. The same person blows the bellows, stirs or mends the fires as there is occasion, heats the iron, and forges every part of the nail; in forging the head too, he is obliged to change his tools. The different operations into which the making of a pin, or of a metal button, is subdivided, are all of them much more simple, and the dexterity of the person, of whose life it has been the sole business to perform them, is usually much greater. The rapidity which some of the operations of those manufactures are performed, exceeds what the human hand could by those who had never seen them, be supposed capable of acquiring. Secondly, the advantage which is gained by saving the time commonly lost in passing from one sort of work to another is much greater than we should at first view be apt to imagine it. It is impossible to pass very quickly from one kind of work to another that is carried on in different place and with quite different tools.

A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it

One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his playfellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour.

When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he ahs occasion for.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 3 That the Division of Labour is limited by the Extent of the Market, Great Books Volume 39, pg. 8

But when the division of labour first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. … The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing purchase a part of it. But they have nothing to offer in exchange, except the different production o their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for.

The use of metals in this rude state was attended with two very considerable inconveniences; first, with the trouble of weighing; and secondly, with that of assaying them. In the precious metals, where a small difference in the quantity makes a great difference in the value, even the business of weighing, with proper exactness, requires at least very accurate weights and scales.
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 4 Of the Origin and Use of Money, Great Books Volume 39, pg. 11

William the Conqueror introduced the custom of paying them money. This money, however, was, for a long time, received at the exchequer, by weight and not by tale.

…Servius Tullius, who first coined money at Rome, the Roman as or pondo contained a Roman pound of good copper. It was divided in the same manner as our Troyes pound, into twelve ounces, each of which contained real ounce of good copper.

The shilling too seems originally to have been the denomination of a weight.

By means of those operations princes and sovereign states which performed them were enabled, in appearance, to pay their debts and to fulfill their engagements with smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old.

The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing the other goods which the possession of that object conveys. The one may be called “value in use”; the other, “value in exchange.” The things which have the greatest value in use have frequently little o no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little of no value in use. Nothing is more useful than water; but it will purchase scare anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of other good may frequently be had in exchange for it.

The real price of everything, what every really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else is the toil and trouble which it can save to himself, and which it can impose upon other people.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 5 Of the Real and Nominal Price of Commodities, or their Price in Labour, and their Price in Money, Great Books Volume 39, pg. 13

Wealth, as Mr. Hobbes says, is power. But the person who either acquires, or succeeds to a great forturne, does not necessarily acquire or succeed to any political power, either civil or military.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 5 Of the Real and Nominal Price of Commodities, or their Price in Labour, and their Price in Money, Great Books Volume 39, pg. 13

Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated an compared. It is the real price; money is their nominal price only.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 5 Of the Real and Nominal Price of Commodities, or their Price in Labour, and their Price in Money, Great Books Volume 39, pg. 14

Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times, and at all places. We cannot estimate, it is allowed, the real value of different commodities from century to century by the quantities of silver which were given for them.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 5 Of the Real and Nominal Price of Commodities, or their Price in Labour, and their Price in Money, Great Books Volume 39, pg. 16

The northern nations who established themselves upon the ruins of the Roman empire, seem to have had silver money from the first beginning of their settlements, and not to have known either gold or copper coins for several ages thereafter. There were silver coins in England in the time of the Saxons; but there was little gold coined till the time of Edward III nor any copper till that of James I of Great Britain.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 5 Of the Real and Nominal Price of Commodities, or their Price in Labour, and their Price in Money, Great Books Volume 39, pg. 17

In the price of corn, for example, one part pays the rent of the landlord, another pays the wages or maintenance of the labourers and laboring cattle employed in producing it, and the third pays the profit of the farmer. The three parts seem either immediately or ultimately to make up the whole price of the corn. A fourth part, it may perhaps be thought is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his laboring cattle, and other instruments of husbandry. But it must be considered that the price for any instrument of husbandry, such as labouring horse, is itself made up of the same three parts, the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer who advances both the rent of this land, and the ages of this labour. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, labour, and profit.

The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give; the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.

A man must always live by this work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.

It is not the actual greatness of national wealth, but is continual increase which occasions a rise in the wages of labour. It is not, accordingly in the richest countries, but in the most thriving or in those which are growing rich, the fastest, that the wages of labour are highest. England is certainly in the present times, a much richer country than any part of North America. The wages of Labour, however, are much higher in North American than in any part of England. In the province of New York, common labourers earn three shillings and sixpence currency, equal to two shillings sterling a day; ship carpenters ten shillings and sixpence currency, with a pint of rum worth sixpence sterling, equal in all to six shillings and sixpence sterling; house carpenters and bricklayers eight shillings currency, equal to four shilling and sixpence sterling journeymen tailor, five shillings currency, equal to about two shillings and tenpence sterling. These prices are all above the London price; and wages are said to be as high in the other colonies as in New York. The price of provisions is everywhere in North America much lower than in England. A dearth has never been known there. In the worst seasons they have always had a sufficiency for themselves, though less for exportation. (This was written in 1773, before the commencement of the late disturbances.)

The condition of artificers is, if possible, still worse. Instead of waiting indolently in their workhouses, for the calls of their customers, as in Europe, they are continually running about the streets with the tools of their respective trades, offering their service, and as if it were begging employment.

The poverty of the lower ranks of people in China far surpasses that of the most beggarly nations in Europe. In the neighbourhood of Canton many hundred , it is commonly said, many thousand families have no habitation on the land, but live constantly in little fishing boats upon the rivers and canals.

The real recompense of labour, the real quantity of the necessaries and conveniences of life which it can procure to the labourer, ahs during the course of the present century, increased perhaps in a still greater proportion than its money price. Not only grain has become somewhat cheaper, but many other things from which the industrious poor derive an agreeable and wholesome variety of food have become a great deal cheaper. Potatoes, for example, do not at present, through the greater part of the kingdom, cost half the price which they used to do thirty or forty years ago. The same may be said of turnips, carrots, cabbages, things which were formerly never raised but by the spade, but which are now commonly raised by the plough. All sorts of garden stuff, too has become cheaper.

Poverty, though it no doubt discourages, does not always prevent marriage. It seems even to be favourable to generation. A half-starved Highland woman frequently bears more than twenty children, which a pampered fine lady is often incapable of bearing any ,and is generally exhausted by two or three. Barrenness, so frequent among women of fashion, is very rare among those of inferior station. Luxury in the fair sex, which it inflames perhaps the passion for enjoyment, seems always to weaken, and frequently to destroy altogether, the powers of generation.

But poverty, though it does not prevent the generation, is extremely unfavourable to the rearing of children. The tender plant is produced, but is no cold a soil and so severe a climate, soon withers and dies. It is not uncommon, I have been frequently told, in the Highland so Scotland for a mother who has borne twenty children to have two alive. Several officers of great experience have assured me, that so far from recruiting their regiment, they have never been able to supply it with drums and fifes from all the soldier’s children that were born in it. A greater number of children, however, is seldom seen anywhere than about a barrack of soldiers. Very few of them it seems arrive at the age of thirteen or fourteen. In some places on half the children born die before they are four years of age; in many places before they are seven; and in almost all places before they are nine or ten. This great mortality, however, will everywhere be found chiefly among the children of the common people, who cannot afford to tend them with the same care as those of better station. Though their marriages are generally more fruitful than those of people fashion, a smaller proportion of their children arrive a maturity. In foundling hospitals, and among the children brought up by parish charities, the mortality is still greater than among those of the common people.

The wear and tear of a slave, it has been said, is at the expense of his master; but that of a free servant is at his own expense. The wear and tear of the latter, however, is in reality, as much at the expense of his master as that of the former. The wages paid to journeymen and servants of every kind must be such as may enable them, one with another, to continue the race of journeyman and servants, according as the increasing, diminishing, or stationary demand of the society may happen to require. But though the wear and tear of a free servant be equally at the expense of his master, it generally costs him much less than that of a slave. The fund destined for replacing or repairing, if I may say so, the wear and tear of the slave is commonly managed by a negligent master or careless overseer. That destined for performing the same office with regard to the free man, is managed by the free man himself.

Workmen, on the contrary, when they are literally paid by the piece, are very apt to overwork themselves, and to ruin their health and constitution in a few years. A carpenter in London, and I some other place, sis not supposed to last in his utmost vigour above eight years. Something of the same kind happens in many other trades, in which the workmen are paid by the piece, as they are generally are in manufactures, and even in country labour, wherever wages are higher than ordinary. Almost every class of artificers is subject to some peculiar infirmity occasioned by excessive application to their peculiar species of work.

Excessive application during four days of the week is frequently the real cause of the idleness of the other three, so much and so loudly complained of. Great labour, either of mind or body, continued for several days together is in most men naturally followed by a great desire o relaxation, which, if not restrained by force or by some strong necessity, is almost irresistible. It is the call of nature which requires to be relieved by some indulgence, sometimes of ease only, but sometimes, too, of dissipation and diversion. If it is not complied with, the consequences are often dangerous, and sometimes fatal, and such as almost always, sooner or later, brings on the peculiar infirmity of the trade. If masters would always listen to the dictates of reason and humanity, they have frequently occasion rather to moderate than to animate the application of many of their workmen It will be found , I believe, in every sort of trade, that the man who works so moderately as to be able to work constantly not only preserves his health the longest, but in the course of the year, executes the greatest quantity of work.

The poor inhabitants of Cuba and St. Domingo, when they were first discovered by the Spaniards, used to wear little bits of gold as ornaments in their hair and other parts of their dress. They seemed to value them as we would do any little pebbles of somewhat more than ordinary beauty, and to consider them as just worth the picking up, but not worth the refusing to anybody who asked them. They gave them to their new guests at the first request, without seeming to think that they had made them any very valuable present. They were astonished to observed the rage of the Spaniards to obtain them; and had no notion that there could anywhere be a country in which many people had the disposal of so great a superfluity of food, so scanty always among themselves that for a very small quantity of those glittering baubles they would willingly give as much as might maintain a while family for many years. Could they have been made to understand this, the passion of the Spaniards would not have surprised them.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 11 Of the Rent of Land, Part 2 Of the Produce of Land Which Sometimes Does, and Sometimes Does Not, Afford Rent, Great Books Volume 39, pg. 76

... are the two authors who seem to have collected, with the greatest diligence and fidelity, the prices of things in ancient times. It is somewhat curious that, though their opinions are so very different, their facts, so far as they relate to the price of corn at least should coincide so very exactly.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 11 Of the Rent of Land, Part 3 - of the Variations in the Proportion between the respective Values of that Sort of Produce which always affords Rent, and of that which sometimes does and sometimes does not afford Rent. Great Books Volume 39, pg. 81

In every state of society, in every stage of improvement, corn is the production of human industry. But the average produced of every sort of industry is always suited more or less exactly , to the average consumption; the average supply to the average demand.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 11 Of the Rent of Land, Part 3 - of the Variations in the Proportion between the respective Values of that Sort of Produce which always affords Rent, and of that which sometimes does and sometimes does not afford Rent, Great Books Volume 39, pg. 81

The discovery of the mines of America, it is to be observed, does not seem to have had any very sensible effect upon the prices of things in England till after 570; though even the minds of Potosi had been discovered more than twenty years before.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 11 Of the Rent of Land, Part 3 - of the Variations in the Proportion between the respective Values of that Sort of Produce which always affords Rent, and of that which sometimes does and sometimes does not afford Rent , pg. 83

Before the discovery of the mines of America, the value of fine gold to fine silver as regulated in the different mints of Europe between the proportions of one to ten and one to twelve; that is, an ounce of fine gold was supposed to be worth from ten to twelve ounces of fine silver. About the middle of the last century it came to be regulated, between the proportions of one to fourteen and one to fifteen; that is, an ounce of fine gold came to be supposed to worth between fourteen and fifteen ounces of fine silver. Gold rose in its nominal value, or in the quantity of silver which was given for it. Both metals sunk in their real value, or in the quantity of labour which they could purchase; but silver sunk more than gold. Though both the gold and silver mines of American exceeded in fertility all those which had ever been known before, the fertility of the silver minds had, it seems, been proportionably still greater than that of the gold ones.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 1 Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to Which its Produce is Naturally Distributed Among the Different Ranks of the People], Chapter 11 Of the Rent of Land, Part 3 - of the Variations in the Proportion between the respective Values of that Sort of Produce which always affords Rent, and of that which sometimes does and sometimes does not afford Rent, Great Books Volume 39, pg. 92

Every fixed capital is both originally derived from, and requires to be continually supported by a circulating capital. All useful machines and instruments of trade are originally derived from a circulating capital, which furnishes the materials of which they are made, and the maintenance of the workmen who made them. They require too, a capital of the same kind to keep them in constant repair.
No fixed capital can yield any revenue but by means of a circulating capital. The most useful machines and instruments of trade will produce nothing without the circulating capital which affords the materials they are employed upon, and the maintenance of the workmen who employ them. Land, however improved, will yield no revenue without a circulating capital, which maintains the labourers who cultivate and collect it's produce.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 2 Of the Nature, Accumulation, and Employment of Stock], Chapter 1 Of the Division of Stock, Great Books Volume 39, pg. 120

It is the ambiguity of language only which can make this proposition appear either doubtful or paradoxical. When properly explained and understood, it is almost self-evident.

When we talk of any particular sum of money, we sometimes mean nothing but the metal pieces of which it is composed; and sometimes we include in our meaning some obscure reference to the goods which can be had in exchange for it, or to the power of purchasing which the possession of it conveys. Thus when we say that the circulating money of England has been computed at eighteen millions, we mean only to express the amount of computed or rather have supposed to circulate int hat country. But when we say that a man is worth fifty or a hundred pounds a year, we mean commonly to express not only the amount of the metal pieces which are annually paid to him, but the value of the goods which he can annually purchase or consume. We mean commonly to ascertain what is or ought to be his way of living, or the quantity and quality of the necessaries and conveniencies of life in which he can with propriety indulge himself.

Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book 2 Of the Nature, Accumulation, and Employment of Stock], Chapter 2 Of Money considered as a particular Branch of the general Stock of the Society, or of the Expense of maintaining the National Capital, Great Books Volume 39, pg. 123

When the people of any particular country have such confidence in the fortune, probity, and prudence of particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be hand for them.

The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place; or with (the commerce being supposed the same) would circulate there, if there was no paper money.

Should the circulating paper at any time exceed that sum, as the excess in the circulation of the country, it must immediately return upon the banks to be exchanged for gold and silver. Many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home, and as they could not send it abroad, they would immediately demand payment o it from the banks. When this superfluous paper was converted into gold and silver, they could easily fine a use for it by sending it abroad; but they could find none while it remained in the shape of aper. There would immediately, therefore, be a run upon the banks to the whole extent of this superfluous paper, and if they showed any difficulty or backwardness in payment, to a much greater extent,; the alarm which this would occasion necessarily increasing the run.

A banking company, which issues more paper than can be employed in the circulation of the country, and of which the excess is continually returning upon them for payment, out to increase the quantity of gold and silver, which they keep at all times in their coffers, not only in proportion to this excessive increase of their circulation, but in a much greater proportion; their notes returning upon them much faster than in proportion to the excess of their quantity. Such a company , therefore, ought to increaser the first article of their expense, not only in proportion to this forces increase of their business, but in a much greater proportion.

The Wealth of Nations by Adam Smith
Book Two
Of the Nature, Accumulation, and Employment of Stock

When two people who are continually drawing and redrawing upon one another, discount their bills always with the same banker, he must immediately discover what they are about, and see clearly that they are trading, not with any capital of their own, but with the capital which he advances to them. But this discovery is not altogether so easy when they discount their bills sometimes with one banker, and sometimes with another, and when the same two persons do not constantly draw and redraw upon one another, but occasionally run the round of a great circle of projectors, who find it for their interests to assist one another in this method of raising money, and to render it, upon that account, as difficult as possible to distinguish between a real and fictitious bill of exchange; between a bill drawn by a real creditor upon a real debtor, and a bail for which there was no properly no real creditor, but the bank which discounted it , nor any real debtor but the projector who made use of the money. When a banker had even made this discovery, he might sometimes make it too late, and might find that he had already discounted the bills by refusing the discount any more, he would necessarily make them all bankrupts, and thus, but ruining them, might perhaps ruin himself. For this own interest and safety, therefore, he might find it necessary, in this very perilous situation, to going on for some time, endeavouring, however, to withdraw gradually, and upon that account making every day greater and greater difficulties about discounting, in order to force those projectors by degrees to have recourse, either to other bankers, or to other methods of raising money; so that he himself might, as soon as possible, get out of the circle.

Adam Smith, The Wealth of Nations, Book Two, Of the Nature, Accumulation and Employment of Stock, Chapter 2, Of Money considered as a particular Branch of the general Stock of the Society, or of the Expense of maintaining the National Capital, Great Books Volume 39, pg. 134

This bank was more liberal than any other had ever been, both in grating cash accounts, and in discounting bills of exchange.

But those bank notes being, the greater part of them, over and above what the circulation of the country could easily absorb and employ, returned upon it, in order to be exchanged for gold and silver as fast as they were issued. Its coffers were never well filled.

But had the coffers of this bank been filled ever so well, its excessive circulation must have emptied them faster than they could have been replenished by any other expedient but the ruinous one of drawing upon London, and when the bill became due, paying it, together with the interest and commission, by another draft upon the same place. Its coffers having been filled so very ill it is said to have been driven to this resources within a very few months after it began to do business.

This bank no doubt, gave some temporary relief to those projectors, and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt, so that, when ruin came, it fell so much the heavier both upon them and upon their creditors.

In the long-run, therefore, the operations of this bank increased the real distress of the country, which it meant to relieve; and effectually relieved from a very great distress those rivals whom it meant to supplant.

The project of replenishing their coffers in this manner may be compared to that of a man who had a water-pond from which a stream was continually running out, and into which no stream was continually running, but who proposed to keep it always equally full by employing a number of people to go continually with buckets to a well at some miles distance in order to bring water to replenish it.

A shilling changes masters more frequently than a guinea, and a half-penny more frequently than a shilling. Though the annual purchases of all the consumers, therefore, are at least equal in value to those of all the dealers, they can generally be transacted with a much smaller quantity of money; the same pieces, by a more rapid circulation, serving as the instrument of many more purchases of the one kind than of the other.

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the law of all governments, of the most free as well as of the most despotical.

Some years ago, the different banking companies of Scotland were in the practice of inserting into their bank notes, what they called an Optional Clause, by which they promised payment to the bearer, either as soon as the note should be presented, or in the option of the directors, six months after such presentment, together with the legal interest for the said six months. The directors of some of the those banks sometimes took advantage of this optional clause, and sometimes threatened those who demanded gold and silver in exchange for a considerable number of their notes that they would take advantage of it, unless such demanders would content themselves with a part of what they demanded.

If bankers are restrained from issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum, and if they are subjected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free. The late multiplication of banking companies in both parts of the United kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. It obliges all of them to be more circumspect in their conduct and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs which the rivalship of so many competitors is always ready to bring upon them. It restrains the circulation of each and reduces their circulating notes to a small number. Bu dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.

Our ancestors were idle for want of a sufficient encouragement to industry It is better, says the proverb, to pay for nothing than to work for nothing. In mercantile and manufacturing towns, where the inferior ranks of people are chiefly maintained by the employment of capital, they are in general industrious, sober, and thriving; as in many English, and in most Dutch towns. In those towns which are principally supported by the constant or occasional residence of a court, and in which the inferior ranks of people are chiefly maintained by the spending of revenue, they are in general idle, dissolute, and poor; as at Rome, Versailles, Compiegne, and Fontainebleu. If you except Rouen and Bordeaux, there is little trade or industry in any of the parliament towns of France; and the inferior ranks of people, being chiefly maintained by the expense of the members of the courts of justice, and of those who come to plead before them are in general idle and poor.

Adam Smith, The Wealth of Nations, Book Two, Of the Nature, Accumulation and Employment of Stock, Chapter 3, Of the Accumulation of Capital, or of Productive and Unproductive Labour, Great Books Volume 39, pg. 145

The prodigal perverts it in this manner. By not confining his expense within his income, he encroaches upon his capital. Like him who perverts the revenues of some pious foundation to profane purposes, he pays the wages of idleness with those funds which the frugality of this forefathers had, as it were, consecrated to the maintenance of industry. By diminishing the funds destined for the employment of productive labour, he necessarily diminishes, so far as it depends upon him, the quantity of that labour which adds a value to the subject upon which it is bestowed, and consequently the value of the annual produce of the land and labour of the whole country, the real wealth and revenue of its inhabitants. If the prodigality of some was not compensated by the frugality of the others, the conduct of every prodigal, by feeding the idle with the bread of the industrious, tends not only to beggar himself, but to impoverish his country.

Bankruptcy is perhaps the greatest and most humiliating calamity which can befall an innocent man. The greater part of men, therefore, are sufficiently careful to avoid it. Some, indeed, do not avoid it; as some do not avoid the gallows.

Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct.

The houses, the furniture, the clothing of the rich, in a little time, become useful to the inferior and middling ranks of people. They are able to purchase them when their superiors grow weary of them, and the general accommodation of the whole people is thus gradually improved, when this mode of expense become universal among men of fortune. In countries which have long been rich, you will frequently find the inferior ranks of people in possession of both houses and furniture perfectly good and entire, but of which neither the one could have been built, nor the other have been made for their use. What was formerly a seat of the family of Seymour is now an inn upon the Bath road.

If a person should at any time exceed in it, he can easily reform without exposing himself to the censure of the public. To reduce very much the number of his servants, to reform his table from great profusion to great frugality, to lay down his equipage after he has once set it up, are changes which cannot escape the observation of his neighbours, and which are supposed to imply some acknowledgment of preceding bad conduct. Few, therefore, of those who have once been so unfortunate as to launch out too far into this sort of expense, have afterwards the courage to reform, till ruin and bankruptcy oblige them.

A, for example, lends to W a thousand pounds, with which W immediately purchases of B a thousand pounds’ worth of goods. B having no occasion for the money himself, lends the identical pieces to X, with which X immediately purchases of C another thousand pounds’ worth of goods. C in the same manner and for the same reason lends them to Y, who again purchases good with them of D. In this manner the same pieces, either of coin or paper, may in the course of a few days, serve as the instrument of three different loans, and in value, equal to the whole amount of those pieces. What the three monied men A, B, and C assign to the three borrowers, W, X, Y, is the power of making those purchase. In this power consist both the value and the use of the loans.

Adam Smith, The Wealth of Nations, Book Two, Of the Nature, Accumulation and Employment of Stock, Chapter 4, Of Stock Lent at Interest, Great Books Volume 39, pg. 152

In some countries the interest of money has been prohibited by law. But as something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it. This regulation, instead of preventing , has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of the money, but for the risk which his creditor runs by accepting a compensation for that use. His is obliged, if one may say so, to insure his creditor from the penalties of usury.

Adam Smith, The Wealth of Nations, Book Two, Of the Nature, Accumulation and Employment of Stock, Chapter 4, Of Stock Lent at Interest, pg. 154

Vocabulary Adam Smith, Wealth of Nations

Exigible, Great Books Volume 39, pg. 141

VOCABULARY
liable: to be exacted or required part of the debt is exigible this month. [from French, from exiger to demand, from Latin exigere; see exigent.

that can be demanded or exacted.

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Tuesday, August 24, 2010

SMITH, ADAM: An Inquiry Into the Nature and Causes of the Wealth of Nations

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