 Part 3 of Chapter 2 of Book 2 of the Wealth of Nations. Of money considered as a particular branch of the general stock of the society, or of the expense of maintaining the national capital. The operations of this bank seem to have produced effects quite opposite to those which were intended by the particular persons who planned and directed it. They seemed to have intended to support the spirited undertakings for as such they considered them, which were at that time carrying on in different parts of the country, and at the same time by drawing the whole banking business to themselves to supplant all the other scotch banks, particularly those established at Edinburgh, whose backwardness and discounting bills of exchange had given some offence. 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. The operations of this bank, therefore, instead of relieving, in reality, aggravated in the long run the distress which those projectors had brought both upon themselves and upon their country. It would have been much better for themselves, their creditors, and their country had the greater part of them been obliged to stop two years sooner than they actually did. The temporary relief, however, which this bank afforded to those projectors, proved a real and permanent relief to the other scotch banks. All the dealers in circulating bills of exchange, which those other banks had become so backward in discounting, had recourse to this new bank, where they were received with open arms. Those other banks, therefore, were enabled to get very easily out of that fatal circle, from which they could not otherwise have disengaged themselves without incurring a considerable loss, and perhaps, too, even some degree of discredit. 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. At the first setting out of this bank it was the opinion of some people that how fast, so ever, its coffers might be emptied it might easily replenish them by raising money upon the securities of those to whom it had advanced its paper. Experience, I believe, soon convinced them that this method of raising money was by much too slow to answer their purpose, and that coffers which originally were so ill-filled and which emptied themselves so very fast, could be replenished by no other expedient but the ruinous one of drawing bills upon London, and when they became due, paying them by other draws on the same place, with accumulated interest and commission. But though they had been able by this method to raise money as fast as they wanted it, yet instead of making a profit, they must have suffered a loss of every such operation, so that in the long run they must have ruined themselves as a mercantile company, though perhaps not so soon as by the more expensive practice of drawing and redrawing. They could still have made nothing by the interest of the paper, which, being over and above what the circulation of the country could absorb and employ, returned upon them in order to be exchanged for gold and silver, as fast as they issued it, and for the payment of which they were themselves continually obliged to borrow money. On the contrary, the whole expense of this borrowing of employing agents to look out for people who had money to lend, of negotiating with those people, and of drawing the proper bond or assignment must have fallen upon them, and had been so much clear loss upon the balance of their accounts. 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. But though this operation had proved not only practicable, but profitable to the bank, as a mercantile company, yet the country could have derived no benefit from it, but, on the contrary, must have suffered a very considerable loss by it. This operation could not augment, in the smallest degree, the quantity of money to be lent. It could only have erected this bank into a sort of general loan office for the whole country. Those who wanted to borrow must have applied to this bank instead of applying to the private persons who had lent it their money. But a bank which lends money, perhaps to five hundred different people, the greater part of whom its directors can know very little about, is not likely to be more judicious in the choice of its debtors than a private person who lends out his money among a few people whom he knows, and in whose sober and frugal conduct he thinks he has good reason to confide. The debtors of such a bank, as that whose conduct I have been giving some account of, were likely the greater part of them to be comerical projectors. The drawers and redrawers of circulating bills of exchange, who would employ the money in extravagant undertakings, which, with all the assistance that could be given them, they would probably never be able to complete, and which, if they should be completed, would never repay the expense which they had really cost, would never afford a fund capable of maintaining a quantity of labor equal to that which had been employed about them. The sober and frugal debtors of private persons on the contrary would be more likely to employ the money borrowed in sober undertakings which were proportion to their capitals, and which, though they might have less of the grand and the marvelous, would have more of the solid and the profitable, which would repay, with a large profit, whatever had been laid out upon them, and which would thus afford a fund capable of maintaining a much greater quantity of labor than that which had been employed about them. The success of this operation, therefore, without increasing in the smallest degree the capital of the country, would only have transferred a great part of it from prudent and profitable to imprudent and unprofitable undertakings. That the industry of Scotland languished for want of money to employ it was the opinion of the famous Mr. Law. By establishing a bank of a particular kind, which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country, he proposed to remedy this want of money. The Parliament of Scotland, when he first proposed his project, did not think proper to adopt it. It was afterwards adopted with some variations by the Duke of Orleans, at that time, region of France. The idea of the possibility of multiplying paper money to almost any extent was the real foundation of what is called the Mississippi Scheme, the most extravagant project both of banking and stock-jobbing that perhaps the world ever saw. The different operations of this scheme are explained so fully, so clearly, and with so much order and distinctness, by Mr. Duvernay, in his examination of the political reflections upon commerce and finances of Mr. Dutton, that I shall not give any account of them. The principles upon which it was founded are explained by Mr. Law himself, in a discourse concerning money and trade which he published in Scotland when he first proposed his project. The splendid but visionary ideas which are set forth in that and some other works upon the same principles still continue to make an impression upon many people, and have perhaps in part contributed to that excess of banking which has of late been complained of both in Scotland and in other places. The Bank of England is the greatest bank of circulation in Europe. It was incorporated in a pursuance of an act of parliament by a charter under the Great Seal dated the 27th of July 1694. It at that time advanced to the government the sum of one million two hundred thousand pounds for an annuity of one hundred thousand pounds or for ninety-six thousand pounds a year, interest at the rate of eight percent and four thousand pounds a year for the expense of management. The credit of the new government established by the revolution we may believe must have been very low when it was obliged to borrow at so high an interest. In 1697 the bank was allowed to enlarge its capital stock by an engraftment of one million one thousand one hundred and seventy-one pound ten shillings. Its whole capital stock, therefore, amounted at this time to two million two hundred and one thousand one hundred and seventy-one pounds ten shillings. This engraftment is said to have been for the support of public credit. In 1696 tallies had been at forty and fifty and sixty percent discount and bank notes at twenty percent. During the great recoinage of the silver which was going on at this time the bank had thought proper to discontinue the payment of its notes which necessarily occasioned their discredit. In pursuance of the seventh ann, C7, the bank advanced and paid into the exchequer the sum of four hundred thousand pounds, making in all the sum of one million six hundred thousand pounds which it had advanced upon its original annuity of ninety-six thousand pounds interest and four thousand pounds for expensive management. In 1708, therefore, the credit of government was as good as that of private persons since it could borrow at six percent interest, the common legal and market rate of those times. In pursuance of the same act the bank cancelled exchequer bills to the amount of one million seven hundred and seventy-five thousand twenty-seven pounds, seventeen shillings, ten and a half pence at six percent interest, and was at the same time allowed to take in subscriptions for doubling its capital. In 1703, therefore, the capital of the bank amounted to four million four hundred and two thousand three hundred and forty-three pounds, ann it had advanced to the government the sum of three million three hundred and seventy-five thousand twenty-seven pounds, seventeen shillings, ten and a half pence. By a call of fifteen percent in 1709, there was paid in and made stock six hundred and fifty-six thousand two hundred and four pounds, one shilling, nine pence, and by another of ten percent in 1710 five hundred and one thousand four hundred and forty-eight pounds, twelve shillings, eleven pence. In consequence of those two calls, therefore, the bank capital amounted to five million five hundred and fifty-nine thousand nine hundred and ninety-five pounds, fourteen shillings, eight pence. In pursuance of the third, George's first, C-eight, the bank delivered up two millions of Exchequer bills to be canceled. It had at this time, therefore, advanced to government five million three hundred and seventy-five thousand twenty-seven pounds, seventeen shillings, ten pence. In pursuance of the eighth, George the first, C-twenty-one, the bank purchased of the South Sea Company, stocked to the amount of four million pounds, and in seventeen twenty-two, in consequence of the subscriptions which it had taken in for enabling it to make this purchase, its capital stock was increased by three million four hundred thousand pounds. At this time, therefore, the bank had advanced to the public nine million three hundred and seventy-five thousand twenty-seven pounds, seventeen shillings, ten and a half pence, and its capital stock amounted only to eight million nine hundred and fifty-nine thousand nine hundred and ninety-five pounds, fourteen shillings, eight pence. It was upon this occasion that the sum which the bank had advanced to the public, and for which it received interest, began first to exceed its capital stock, or the sum for which it paid a dividend to the proprietors of bank stock, or, in other words, that the bank began to have an undivided capital over and above its divided one. It has continued to have an undivided capital of the same kind ever since. In seventeen forty-six, the bank had, upon different occasions, advanced to the public eleven million six hundred and eighty-six thousand eight hundred pounds, and its divided capital had been raised by different calls and subscriptions to ten million seven hundred and eighty thousand pounds. The state of those two sums has continued to be the same ever since. In pursuance of the fourth of George III, C-25, the bank agreed to pay to government for the renewal of its charter one hundred and ten thousand pounds without interest or repayment. This sum therefore did not increase either of those two other sums. The dividend of the bank has varied according to the variations in the rate of the interest which it has, at different times, received for the money it has advanced to the public, as well as according to other circumstances. This rate of interest had gradually been reduced from eight to three percent. For some years past, the bank dividend has been at five and a half percent. The stability of the Bank of England is equal to that of the British government. All that it has advanced to the public must be lost before its creditors can sustain any loss. No other banking company in England can be established by active parliament, or can consist of more than six members. It acts not only as an ordinary bank, but as a great engine of state. It receives and pays the greater part of the annuities which are due to the creditors of the public. It circulates exchequer bills and it advances to government the annual amount of the land and malt taxes, which are frequently not paid up till some years thereafter. In these different operations, its duty to the public may sometimes have obliged it without any fault of its directors to overstock the circulation with paper money. It likewise discounts merchants' bills and has, upon several different occasions, supported the credit of the principal houses, not only of England, but of Hamburg and Holland. Upon one occasion in 1763 it is said to have advanced for this purpose in one week about one million six hundred thousand pounds, a great part of it in bullion. I do not, however, pretend to warrant either the greatness of the sum or the shortness of the time. Upon other occasions this great company has been reduced to the necessity of paying in six pence. It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. That part of his capital, which a dealer is obliged to keep by him unemployed and in ready money, for answering occasional demands, is so much dead stock, which, so long as it remains in this situation, produces nothing either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock, into materials to work upon, into tools to work with, and into provisions and subsistence to work for, and to stock which produces something both to himself and to his country. The gold and silver money which circulates in any country, and by means of which the produce of its land and labor is annually circulated and distributed to the proper consumers, is in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock, into stock which produces something to the country. The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market, all the grass and corn of the country produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of wagon way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase, very considerably, the annual produce of its land and labor. The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat augmented, cannot be altogether so secure when they are thus, as it were, suspended upon the didalian wings of paper money, as when they travel about upon the solid ground of gold and silver. Over and above the accidents to which they are exposed from the unskillfulness of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them. An unsuccessful war, for example, in which the enemy got possession of the capital, and consequently of that treasure which supported the credit of the paper money, would occasion a much greater confusion in a country where the whole circulation was carried on by paper, then in one where the greater part of it was carried on by gold and silver. The usual instrument of commerce having lost its value, no exchanges could be made but either by barter or upon credit. All taxes, having been usually paid in paper money, the prince would not have wherewithal either to pay his troops or to furnish his magazines, and the state of the country would be much more irretrievable than if the greater part of its circulation had consisted in gold and silver. A prince, anxious to maintain his dominions at all times in the state in which he can most easily defend them, ought upon this account to guard not only against that excessive multiplication of paper money which ruins the very banks which issue it, but even against that multiplication of it which enables them to fill the greater part of the circulation of the country with it. The circulation of every country may be considered as divided into two different branches, the circulation of the dealers with one another, and the circulation between the dealers and the consumers. Though the same pieces of money, whether paper or metal, may be employed sometimes in the one circulation and sometimes in the other, yet as both are constantly going on at the same time each requires a certain stock of money, of one kind or another, to carry it on. The value of the goods circulating between the different dealers never can exceed the value of those circulated between the dealers and the consumers, whatever is bought by the dealers being ultimately destined to be sold to the consumers. The circulation between dealers, as it is carried on by wholesale, requires generally a pretty large sum for every particular transaction. That between the dealers and the consumers, on the contrary, as it is generally carried on by retail, frequently requires but very small ones, a shilling or even a half penny being often sufficient. But small sums circulate much faster than large ones. 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. Paper money may be so regulated as either to confine itself very much to the circulation between the different dealers, or to extend itself likewise to a great part of that between the dealers and the consumers. Where no banknotes are circulated under ten pound value, as in London, paper money confines itself very much to the circulation between the dealers. When a ten pound banknote comes into the hands of a consumer, he is generally obliged to change it at the first shop where he has occasion to purchase five shillings worth of goods, so that it often returns into the hands of a dealer before the consumer has spent the forty... The circulation between dealers, as it is carried on by wholesale, requires generally a pretty large sum for every particular transaction. That between the dealers and the consumers, on the contrary, as it is generally carried on by retail, frequently requires but very small ones, a shilling, or even a half penny, being often sufficient. But small sums circulate much faster than large ones. 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. Paper money may be so regulated as either to confine itself very much to the circulation between the different dealers, or to extend itself likewise to a great part of that between the dealers and the consumers. Where no banknotes are circulated under ten pound value, as in London, paper money confines itself very much to the circulation between the dealers. When a ten pound banknote comes into the hands of a consumer, he is generally obliged to change it at the first shop where he has occasion to purchase five shillings worth of goods, so that it often returns into the hands of a dealer before the consumer has spent the 40th part of the money. Where banknotes are issued for so small sums as twenty shillings, as in Scotland, paper money extends itself to a considerable part of the circulation between dealers and consumers. Before the act of parliament, which put a stop to the circulation of ten and five shilling notes, it filled a still greater part of that circulation. In the currencies of North America, paper was commonly issued for so small a sum as a shilling, and filled almost the whole of that circulation. In some paper currencies of Yorkshire, it was issued even for so small a sum as a sixpence. Where the issuing of banknotes for such very small sums is allowed and commonly practiced, many mean people are both enabled and encouraged to become bankers. A person whose promissory note for five pounds, or even for twenty shillings, would be rejected by everybody, will get it to be received without scruple when it is issued for so small a sum as a sixpence. But the frequent bankruptcies to which such beggarly bankers must be liable may occasion a very considerable inconvenience, and sometimes even a very great calamity, to many poor people who had received their notes in payment. It were better, perhaps, that no bank notes were issued in any part of the kingdom for a smaller sum than five pounds. Paper money would then probably confine itself in every part of the kingdom to the circulation between the different dealers as much as it does at present in London, where no bank notes are issued under ten pound value. Five pounds being, in most part of the kingdom, a sum which, though it will purchase perhaps a little more than half the quantity of goods, is as much considered and is as seldom spent all at once as ten pounds are amidst the profuse expense of London. Where paper money, it is to be observed, is pretty much confined to the circulation between dealers and dealers as at London, there is always plenty of gold and silver. Where it extends itself to a considerable part of the circulation between dealers and consumers, as in Scotland and still more in North America, it banishes gold and silver almost entirely from the country, almost all the ordinary transactions of its interior commerce being thus carried on by paper. The suppression of ten and five shilling bank notes somewhat relieved the scarcity of gold and silver in Scotland, and the suppression of twenty shilling notes will probably relieve it still more. Those metals are said to have become more abundant in America since the suppression of some of their paper currencies. They are said likewise to have been more abundant before the institution of those currencies. Though paper money should be pretty much confined to the circulation between dealers and dealers, yet banks and bankers might still be able to give nearly the same assistance to the industry and commerce of the country as they had done when paper money filled almost the whole circulation. The ready money which a dealer is obliged to keep by him for answering occasional demands is destined altogether for the circulation between himself and other dealers of whom he buys goods. He has no occasion to keep any by him for the circulation between himself and the consumers, who are his customers, and who bring ready money to him instead of taking any from him. Though no paper money, therefore, was allowed to be issued, but for such sums as would confine it pretty much to the circulation between dealers and dealers, yet partly by discounting real bills of exchange and partly by lending upon cash accounts, banks and bankers might still be able to relieve the greater part of those dealers from the necessity of keeping any considerable part of their stock by them unemployed and in ready money for answering occasional demands. They might still be able to give the utmost assistance which banks and bankers can, with propriety, give to traders of every kind. 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 neighbors 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 respect, a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed. A paper money, consisting in bank notes issued by people of undoubted credit, payable upon demand, without any condition, and, in fact, always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money, since gold and silver money can at any time be had for it. Whatever is either bought or sold for such paper must necessarily be bought or sold as cheap as it could have been for gold and silver. The increase of paper money, it has been said, by augmenting the quantity and consequently diminishing the value of the whole currency necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, provisions never were cheaper in Scotland than in 1759, though from the circulation of 10 and 5 shilling banknotes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland and that in England is the same now as before the great multiplication of banking companies in Scotland. Corn is, upon most occasions, fully as cheap in England as in France, though there is a great deal of paper money in England and scarce any in France. In 1751 and 1752, when Mr. Hume published his political discourses and soon after the great multiplication of paper money in Scotland, there was a very sensible rise in the price of provisions, owing, probably, to the badness of the seasons and not to the multiplication of paper money. It would be otherwise indeed with the paper money consisting in promissory notes of which the immediate payment depended in any respect, either upon the goodwill of those who issued them, or upon a condition which the holder of the notes might not always have it in his power to fulfill, or of which the payment was not exeggable till after a certain number of years and which, in the meantime, bore no interest. Such a paper money would no doubt fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining immediate payment was supposed to be greater or less, or according to the greater or less distance of time at which payment was exeggable. 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 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 will take advantage of it unless such demanders would content themselves with a part of what they demanded. The promissory notes of those banking companies constituted at that time the far greater part of the currency of Scotland, which this uncertainty of payment necessarily degraded below value of gold and silver money. During the continuance of this abuse, which prevailed chiefly in 1762, 1763, and 1764, while the exchange between London and Carlisle was at par, that between London and Dumfries would sometimes be four percent against Dumfries, though this town is not thirty miles distant from Carlisle. But at Carlisle, bills are paid in gold and silver, whereas at Dumfries they were paid in Scotch bank notes, and the uncertainty of getting these bank notes exchanged for gold and silver coin had thus degraded them four percent below the value of that coin. The same act of parliament which suppressed ten and five shilling bank notes suppressed likewise this optional clause, and thereby restore the exchange between England and Scotland to its natural rate, or to what the course of trade and remittances might happen to make it. In the paper currencies of Yorkshire, the payment of so small a sum as six pence sometimes depended upon the condition that the holder of the note should bring the change of a guinea to the person who issued it, a condition which the holders of such notes might frequently find very difficult to fulfill, and which must have degraded this currency below the value of gold and silver money. An act of parliament accordingly declared all such clauses unlawful and suppressed in the same manner as in Scotland, all promissory notes payable to the bearer under twenty shillings value. The paper currencies of North America consisted not in bank notes payable to the bearer on demand, but in a government paper of which the payment was not exeggable till several years after it was issued, and though the colony governments paid no interest to the holders of this paper, they declared it to be, and in fact rendered it a legal tender of payment for the full value for which it was issued. But allowing the colony security to be perfectly good, one hundred pounds payable fifteen years hence, for example, in a country where interest is at six percent, is worth little more than forty pounds ready money. To oblige a creditor therefore, to accept of this as full payment for a debt of one hundred pounds, actually paid down in ready money was an act of such violent injustice as has scarce perhaps been attempted by the government of any other country which pretended to be free. It bears the evident marks of having originally been what the honest and downright Dr. Douglas assures us it was a scheme of fraudulent debtors to cheat their creditors. The government of Pennsylvania indeed pretended upon their first emission of paper money in seventeen twenty two to render their paper of equal value with gold and silver by enacting penalties against all those who made any difference in the price of their goods when they sold them for a colony paper and when they sold them for gold and silver a regulation equally tyrannical but much less effectual than that which it was meant to support. A positive law may render a shilling a legal tender for a guinea because it may direct the courts of justice to discharge the debtor who has made that tender, but no positive law can oblige a person who sells goods and who is at liberty to sell or not to sell as he pleases to accept of a shilling as equivalent to a guinea in the price of them. Notwithstanding any regulation of this kind it appeared by the course of exchange with Great Britain that one hundred pounds sterling was occasionally considered as equivalent in some of the colonies to one hundred and thirty pounds and in others to so great a sum as one thousand one hundred pounds currency. This difference in the value arises from the difference in the quantity of paper emitted in the different colonies and in the distance and probability of the term of its final discharge and redemption. No law therefore could be more equitable than the active parliament so unjustly complained of in the colonies which declared that no paper currency to be emitted there in time coming should be a legal tender of payment. Pennsylvania was always more moderate in its emissions of paper money than any other of our colonies. Its paper currency accordingly is said never to have sunk below the value of the gold and silver which was current in the colony before the first emission of its paper money. Before that emission the colony had raised the denomination of its coin and had by active assembly ordered five shillings sterling to pass in the colonies for six shillings three pence and afterwards for six shillings eight pence. A pound colony currency therefore even when that currency was gold and silver was more than 30 percent below the value of one pound sterling and when that currency was turned into paper it was seldom much more than 30 percent below that value. The pretense for raising the denomination of the coin was to prevent the exportation of gold and silver by making equal quantities of those metals pass for greater sums in the colony than they did in the mother country. It was found however that the price of all goods from the mother country rose exactly in proportion as they raised the denomination of their coin so that their gold and silver were exported as fast as ever. The paper of each colony being received in the payment of the provincial taxes for the full value for which it had been issued it necessarily derived from this use some additional value over and above what it would have had from the real or supposed distance of the term of its final discharge and redemption. This additional value was greater or less according as the quantity of paper issued was more or less above what could be employed in the payment of the taxes of the particular colony which issued it. It was in all the colonies very much above what could be employed in this manner. A prince who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might thereby give a certain value to this paper money even though the term of its final discharge and redemption should depend altogether upon the will of the prince. If the bank which issued this paper was careful to keep the quantity of it always somewhat below what could easily be employed in this manner the demand for it might be such as to make it even bear a premium or sell for somewhat more in the market than the quantity of gold or silver currency for which it was issued. Some people account in this manner for what is called the azio of the bank of Amsterdam or for the superiority of bank money over current money though this bank money as they pretend cannot be taken out of the bank at the will of the owner. The greater part of foreign bills of exchange must be paid in bank money that is by a transfer in the books of the bank and the directors of the bank they allege are careful to keep the whole quantity of bank money always below what this use occasions a demand for. It is upon this account they say the bank money sells for a premium or bears an agio of four or five percent above the same nominal sum of the gold and silver currency of the country. This account of the bank of Amsterdam however it will appear hereafter is an in great measure chimerical. A paper currency which falls below the value of gold and silver coin does not thereby sink the value of those metals or occasion equal quantities of them to exchange for a smaller quantity of goods of any other kind. The proportion between the value of gold and silver and that of goods of any other kind depends in all cases not upon the nature and quantity of any particular paper money which may be current in any particular country but upon the richness or poverty of the minds which happen at any particular time to supply the great market of the commercial world with those metals. It depends upon the proportion between the quantity of labor which is necessary in order to bring a certain quantity of gold and silver to market and that which is necessary in order to bring thither a certain quantity of any other sort of goods. If bankers are restrained from issuing any circulating banknotes 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 banknotes 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 rival ship of so many competitors is always ready to bring upon them. It restrains the circulation of each particular company within a narrower circle and reduces their circulating notes to a smaller number. By 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 labor be advantageous to the public the freer and more general the competition it will always be the more so. There is one sort of labor which adds to the value of the subject upon which it is bestowed there is another which has no such effect the former as it produces a value may be called productive the latter unproductive labor Thus the labor of a manufacturer adds generally to the value of the materials which he works upon that of his own maintenance and of his master's profit The labor of a menial servant on the contrary adds to the value of nothing Though the manufacturer has his wages advanced to him by his master he in reality costs him no expense the value of those wages being generally restored together with the profit in the improved value of the subject upon which his labor is bestowed But the maintenance of a menial servant never is restored A man grows rich by employing a multitude of manufacturers he grows poor by maintaining a multitude of menial servants The labor of the latter however has its value and deserves its reward as well as that of the former But the labor of the manufacturer fixes and realizes itself in some particular subject or vendable commodity which lasts for some time at least after that labor is passed It is, as it were, a certain quantity of labor stocked and stored up to be employed if necessary upon some other occasion That subject or what is the same thing the price of that subject can afterwards if necessary put into motion a quantity of labor equal to that which had originally produced it The labor of the menial servant on the contrary does not fix or realize itself in any particular subject or vendable commodity His services generally perish in the very instant of their performance and seldom leave any trace of value behind them for which an equal quantity of service could afterwards be procured The labor of some of the most respectable orders in the society is, like that of menial servants unproductive of any value and does not fix or realize itself in any permanent subject or vendable commodity which endures after that labor is passed and for which an equal quantity of labor could afterwards be procured The sovereign, for example with all the officers both of justice and war who serve under him the whole army and navy are unproductive laborers They are the servants of the public and are maintained by a part of the annual produce of the industry of other people Their service how honorable how useful or how unnecessary so ever produces nothing for which an equal quantity of service can afterwards be procured The protection, security, and defense of the commonwealth the effect of their labor this year will not purchase its protection, security, and defense for the year to come In the same class must be ranked some both of the gravest and most important and some of the most frivolous professions Churchmen, lawyers, physicians men of letters of all kinds players, buffoons, musicians opera singers, opera dancers, etc The labor of the meanest of these has a certain value regulated by the very same principles which regulate that of every other sort of labor and that of the noblest and most useful produces nothing which could afterwards purchase or procure an equal quantity of labor Like the declamation of the actor the harangue of the order or the tune of the musician the work of all of them perishes in the very instant of its production Both productive and unproductive laborers and those who do not labor at all are all equally maintained by the annual produce of the land and labor of the country This produce, how great so ever can never be infinite but must have certain limits According therefore as a smaller or greater proportion of it is in any one year employed in maintaining unproductive hands the more in the one case and the less in the other will remain for the productive and the next year's produce will be greater or smaller accordingly The whole annual produce if we accept the spontaneous productions of the earth being the effect of productive labor Though the whole annual produce of the land and labor of every country is no doubt ultimately destined for supply and the consumption of its inhabitants and for procuring a revenue to them yet when it first comes either from the ground or from the hands of the productive laborers it naturally divides itself into two parts One of them and frequently the largest is in the first place destined for replacing a capital or for renewing the provisions materials and finished work which had been withdrawn from a capital The other for constituting a revenue either to the owner of this capital as the profit of his stock or to some other person as the rent of his land Thus of the produce of land one part replaces the capital of the farmer the other pays his profit and the rent of the landlord and thus constitutes a revenue both to the owner of this capital as the profits of his stock and to some other person as the rent of his land of the produce of a great manufacturing in the same manner one part and that always the largest replaces the capital of the undertaker of the work the other pays his profit and thus constitutes a revenue to the owner of this capital That part of the annual produce of the land and labor of any country which replaces a capital never is immediately employed to maintain any but productive hands it pays the wages of productive labor only That which is immediately destined for constituting a revenue either as profit or as rent may maintain indifferently either productive or unproductive hands Whatever part of his stock a man employs as a capital he always expects it to be replaced to him with a profit He employs it therefore in maintaining productive hands only and after having served in the function of capital to him it constitutes a revenue to them Whenever he employs any part of it in maintaining unproductive hands of any kind that part is from that moment withdrawn from his capital and placed in his stock reserved for immediate consumption Unproductive laborers and those who do not labor at all are all maintained by revenue either first by that part of the annual produce which is originally designed for constituting a revenue to some particular persons either as the rent of land or as the profits of stock or secondly by that part which though originally destined for replacing a capital and for maintaining productive laborers only yet when it comes into their hands whatever part of it is over and above their necessary subsistence may be employed in maintaining indifferently either productive or unproductive hands Thus not only the great landlord or the rich merchant but even the common workman if his wages are considerable may maintain a menial servant or he may sometimes go to a play or a puppet show and so contribute his share towards maintaining one set of unproductive laborers or he may pay some taxes and thus help to maintain another set more honorable and useful indeed but equally unproductive No part of the annual produce however which had been originally destined to replace a capital is ever directed towards maintaining unproductive hands till after it has put into motion its full complement of productive labor or all that it could put into motion in the way in which it was employed The workman must have earned his wages by work done before he can employ any part of them in this manner That part too is generally but a small one It is his spare revenue only of which productive laborers have seldom a great deal They generally have some however and in the payment of taxes the greatness of their number may compensate and some measure the smallness of their contribution The rent of land and the profits of stock are everywhere therefore the principal sources from which unproductive hands derive their subsistence These are the two sorts of revenue of which the owners have generally most to spare They might maintain indifferently either productive or unproductive hands They seem however to have some predilection for the latter The expense of a great lord feeds generally more idle than industrious people The rich merchant, though with his capital he maintains industrious people only yet by his expense that is by the employment of his revenue he feeds commonly the very same sort as the great lord The proportion therefore between the productive and unproductive hands depends very much in every country upon the proportion between that part of the annual produce which as soon as it comes either from the ground or from the hands of the productive laborers is destined for replacing a capital and that which is destined for constituting a revenue either as rent or as profit The proportion is very different and rich from what it is in poor countries Thus at present in the opulent countries of Europe a very large, frequently the largest portion of the produce of the land is destined for replacing the capital of the rich and independent farmer the other for paying his profits and the rent of the landlord But anciently during the prevalence of the feudal government a very small portion of the produce was sufficient to replace the capital employed in cultivation It consisted commonly in a few wretched cattle maintained altogether by the spontaneous produce of uncultivated land and which might therefore be considered as a part of that spontaneous produce It generally too belonged to the landlord and was by him advanced to the occupiers of the land All the rest of the produce properly belonged to him too either as rent for his land or as profit upon this paltry capital The occupiers of land were generally bondmen whose persons and effects were equally his property Those who were not bondmen were tenants at will and though the rent which they paid was often nominally little more than a quit and rent it really amounted to the whole produce of the land Their lord could at all times command their labor in peace and their service in war Though they lived at a distance from his house they were equally dependent upon him as his retainers who lived in it But the whole produce of the land undoubtedly belongs to him who can dispose of the labor and service of all those whom it maintains In the present state of Europe the share of the landlord seldom exceeds a third sometimes not a fourth part of the whole produce of the land The rent of land however in all the improved parts of the country has been tripled and quadrupled since those ancient times and this third or fourth part of the annual produce is it seems three or four times greater than the whole had been before In the progress of improvement rent though it increases in proportion to the extent diminishes in proportion to the produce of the land In the opulent countries of Europe great capitals are at present employed in trade and manufacturers In the ancient state the little trade that was stirring and the few homely and coarse manufacturers that were carried on required but very small capitals These however must have yielded very large profits The rate of interest was nowhere less than 10% and their profits must have been sufficient to afford this great interest At present the rate of interest in the improved parts of Europe is nowhere higher than 6% and in some of the most improved it is so low as 4, 3 and 2% Though that part of the revenue of the inhabitants which is derived from the profits of stock is always much greater in rich than in poor countries it is because the stock is much greater In proportion to the stock the profits are generally much less That part of the annual produce therefore which as soon as it comes either from the ground or from the hands of the productive labors is destined for replacing a capital is not only much greater in rich than in poor countries but bears a much greater proportion to that which is immediately destined for constituting their revenue either as rent or as profit The funds destined for the maintenance of productive labor are not only much greater in the former than in the latter but bear a much greater proportion to those which though they may be employed to maintain either productive or unproductive hands have generally a predilection for the latter The proportion between those different funds necessarily determines in every country the general character of the inhabitants as to industry or idleness We are more industrious than our forefathers because in the present times the funds destined for the maintenance of industry are much greater in proportion to those which are likely to be employed in the maintenance of idleness than they were two or three centuries ago Our ancestors were idle for want of a sufficient encouragement to industry It is better, says the proverb, to play 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, disillute, and poor as at Rome, Versailles, Campagne, and Fontainebleu If you accept Raun 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 The great trade of Raun and Bordeaux seems to be altogether the effect of their situation Raun is necessarily the entrepôt of almost all the goods which are brought either from foreign countries or from the maritime provinces of France for the consumption of the great city of Paris Bordeaux is, in the same manner, the entrepôt of the wines which grow upon the banks of the Garonne and of the rivers which run into it one of the richest wine countries in the world and which seems to produce the wine fittest for exportation or best suited to the taste of foreign nations Such advantageous situations necessarily attract a great capital by the great employment which they afforded and the employment of this capital is the cause of the industry of those two cities In the other parliament towns of France very little more capital seems to be employed than what is necessary for supply in their own consumption that is, little more than the smallest capital which can be employed in them The same thing may be said of Paris, Madrid, and Vienna Of those three cities Paris is by far the most industrious but Paris itself is the principal market of all the manufacturers established at Paris and its own consumption is the principal object of all the trade which it carries on London, Lisbon, and Copenhagen are perhaps the only three cities in Europe which are both the constant residents of a court and can at the same time be considered as trading cities or as cities which trade not only for their own consumption but for that of other cities and countries The situation of all the three is extremely advantageous and naturally fits them to be the entrepose of a great part of the goods destined for the consumption of distant places In a city where a great revenue is spent to employ with advantage a capital for any other purpose than for supplying the consumption of that city is probably more difficult than in one in which the inferior ranks of people have no other maintenance but what they derive from the employment of such a capital The idleness of the greater part The situation of all the three is extremely advantageous and naturally fits them to be the entrepose of a great part of the goods destined for the consumption of distant places In a city where a great revenue is spent to employ with advantage a capital for any other purpose than for supplying the consumption of that city is probably more difficult than in one in which the inferior ranks of people have no other maintenance but what they derive from the employment of such a capital The idleness of the greater part of the people who are maintained by the expense of revenue corrupts it is probable the industry of those who ought to be maintained by the employment of capital and renders it less advantageous to employ a capital there than in other places There was little trade or industry in Edinburgh before the union When the Scotch Parliament was no longer to be assembled in it when it ceased to be the necessary residents of the principal nobility and gentry of Scotland it became a city of some trade and industry It still continues, however, to be the residents of the principal courts of justice in Scotland of the boards of customs and excise, etc. A considerable revenue, therefore, still continues to be spent in it In trade and industry it is much inferior to Glasgow of which the inhabitants are chiefly maintained by the employment of capital The inhabitants of a large village it has sometimes been observed after having made considerable progress and manufacturers have become idle and poor in consequence of the great lords having taken up residence in their neighbourhood The proportion between capital and revenue, therefore, seems everywhere to regulate the proportion between industry and idleness Wherever capital predominates industry prevails Wherever revenue, idleness Every increase or diminution of capital, therefore, naturally tends to increase or diminish the real quantity of industry the number of productive hands and, consequently, the exchangeable value of the annual produce of the land and labour of the country the real wealth and revenue of all its inhabitants Capitals are increased by parsimony and diminished by prodigality and misconduct Whatever a person saves from his revenue he adds to his capital and either employs it himself in maintaining an additional number of productive hands or enables some other person to do so by lending it to him for an interest that is, for a share of the profits As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains so the capital of a society which is the same with that of all the individuals who compose it can be increased only in the same manner Parsimony and not industry is the immediate cause of the increase of capital Industry, indeed, provides the subject which parsimony accumulates but whatever industry might acquire if parsimony did not save and store up the capital would never be the greater Parsimony, by increasing the fund which is destined for the maintenance of productive hands tends to increase the number of those hands whose labour adds to the value of the subject upon which it is bestowed It tends, therefore, to increase the exchangeable value of the annual produce of the land and labour of the country It puts into motion an additional quantity of industry which gives an additional value to the annual produce What is annually saved is as regularly consumed as what is annually spent and nearly in the same time, too but it is consumed by a different set of people That portion of his revenue which a rich man annually spends is, in most cases, consumed by idle guests and menial servants who leave nothing behind them in return for their consumption That portion which he annually saves as, for the sake of the profit it is immediately employed as a capital is consumed in the same manner and nearly in the same time, too but by a different set of people by labourers, manufacturers, and artificers who reproduce with a profit the value of their annual consumption His revenue, we shall suppose, is paid him in money Had he spent the whole the food, clothing, and lodging which the whole could have purchased would have been distributed among the former set of people By saving a part of it, as that part is for the sake of the profit immediately employed as a capital either by himself or by some other person the food, clothing, and lodging which may be purchased with it are necessarily reserved for the latter The consumption is the same but the consumers are different By what a frugal man annually saves he not only affords maintenance to an additional number of productive hands for that of the ensuing year but like the founder of a public workhouse he establishes, as it were, a perpetual fund for the maintenance of an equal number in all times to come The perpetual allotment and destination of this fund indeed is not always guarded by any positive law by any trust right or deed of mortemain It is always guarded, however, by a very powerful principle the plain and evident interest of every individual to whom any share of it shall ever belong No part of it can ever afterwards be employed to maintain any but productive hands without an evident loss to the person who thus perverts it from its proper destination The prodigal perverts it in this manner by not confining his expense with 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 his forefathers had, as it were, consecrated to the maintenance of industry By diminishing the funds destined for the employment of productive labor he necessarily diminishes, so far as it depends upon him, the quantity of that labor which adds a value to the subject upon which it is bestowed and, consequently, the value of the annual produce of the land and labor of the whole country the real wealth and revenue of its inhabitants If the prodigality of some were not compensated by the frugality of others the conduct of every prodigal by feeding the idle with the bread of the industrious would tend not only to beggar himself but to impoverish his country Though the expense of the prodigal should be altogether in home made and in no part of it in foreign commodities its effect upon the productive funds of the society would still be the same Every year there would still be a certain quantity of food and clothing which ought to have maintained productive employed and maintaining unproductive hands Every year therefore there would still be some diminution in what would otherwise have been the value of the annual produce of the land and labor of the country This expense it may be said, indeed, not being in foreign goods and not occasioning any exportation of gold and silver the same quantity of money would remain in the country as before But if the quantity of food and clothing which were thus consumed by unproductive had been distributed among productive hands they would have reproduced together with a profit the full value of their consumption The same quantity of money would, in this case, equally have remained in the country and there would besides have been a reproduction of an equal value of consumable goods There would have been two values instead of one End of Book 2, Chapter 3, Part 1 Part 2 of Chapter 3 of Book 2 of the Wealth of Nations This is a LibriVox recording All LibriVox recordings are in the public domain For more information or to volunteer please visit LibriVox.org Recording by Stephen Escalera The Wealth of Nations by Adam Smith Part 2 of Chapter 3 of Book 2 of the Accumulation of Capital or of Productive and Unproductive Labor The same quantity of money besides cannot long remain in any country in which the value of the annual produce diminishes The sole use of money is to circulate consumable goods By means of it, provisions, materials, and finished work are bought and sold and distributed to their proper consumers The quantity of money, therefore, which can be annually employed in any country must be determined by the value of the consumable goods annually circulated within it These must consist, either in the immediate produce of the land and labor of the country itself or in something which had been purchased with some part of that produce Their value, therefore, must diminish as the value of that produce diminishes and, along with it, the quantity of money which can be employed in circulating them But the money which, by this annual diminution of produce, is annually thrown out of domestic circulation will not be allowed to lie idle The interest of whoever possesses it requires that it should be employed But having no employment at home it will, in spite of all laws and prohibitions, be sent abroad and employed in purchasing consumable goods which may be of some use at home Its annual exportation will, in this manner, continue for some time to add something to the annual consumption of the country beyond the value of its own annual produce What, in the days of its prosperity, had been saved from that annual produce and employed in purchasing gold and silver will contribute for some little time to support its consumption in adversity The exportation of gold and silver is, in this case, not the cause but the effect of its declension and may even, for some little time, alleviate the misery of that declension The quantity of money, on the contrary, must in every country naturally increase as the value of the annual produce increases The value of the consumable goods annually circulated within the society being greater will require a greater quantity of money to circulate them A part of the increased produce, therefore, will naturally be employed in purchasing wherever it is to be had the additional quantity of gold and silver necessary for circulating the rest The increase of those metals will, in this case, be the effect, not the cause, of the public prosperity Gold and silver are purchased everywhere in the same manner The food, clothing, and lodging The revenue and maintenance of all those whose labor or stock is employed in bringing them from the mine to the market is the price paid for them in Peru as well as in England The country which has this price to pay will never belong without the quantity of those metals which it has occasion for and no country will ever long retain a quantity which it has no occasion for Whatever, therefore, we may imagine the real wealth and revenue of a country to consist in whether in the value of the annual produce of its land and labor as plain reason seems to indicate or in the quantity of the precious metals which circulate within it as vulgar prejudice is supposed In either view of the matter every protocol appears to be a public enemy and every frugal man a public benefactor The effects of misconduct are often the same as those of prodigality Every injudicious and unsuccessful project in agriculture, mines, fisheries, trade, or manufacturers tends in the same manner to diminish the funds destined for the maintenance of productive labor In every such project though the capital is consumed by productive hands only yet as by the injudicious manner in which they are employed they do not reproduce the full value of their consumption there must always be some diminution in what would otherwise have been the productive funds of the society It can seldom happen, indeed, that the circumstances of a great nation can be much affected either by the prodigality or misconduct of individuals the perfusion or imprudence of some being always more than compensated by the frugality and good conduct of others With regard to perfusion the principle which prompts to expense is the passion for present enjoyment which, though sometimes violent and very difficult to be restrained is in general only momentary and occasional But the principle which prompts to save is the desire of bettering our condition a desire which, though generally calm and dispassionate, comes with us from the womb and never leaves us till we go into the grave In the whole interval which separates those two moments there is scarce perhaps a single instance in which any man is so perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement of any kind An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition It is the means the most vulgar and the most obvious and the most likely way of augmenting their fortune is to save and accumulate some part of what they acquire either regularly and annually or upon some extraordinary occasion Though the principle of expense therefore prevails in almost all men upon some occasions and in some men upon almost all occasions yet in the greater part of men taking the whole course of their life at an average the principle of frugality seems not only to predominate but to predominate very greatly With regard to misconduct the number of prudent and successful undertakings is everywhere much greater than that of injudicious and unsuccessful ones After all our complaints of the frequency of bankruptcies the unhappy men who fall into this misfortune make but a very small part of the whole number engaged in trade and all other sorts of business Not much more perhaps than one in a thousand 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 whole or almost the whole public revenue is in most countries employed in maintaining unproductive hands Such are the people who compose a numerous and splendid court a great ecclesiastical establishment great fleets and armies who in time of peace produce nothing and in time of war acquire nothing which can compensate the expense of maintaining them even while the war lasts Such people as they themselves produce nothing are all maintained by the produce of other men's labor When multiplied therefore to an unnecessary number they may in a particular year consume so great a share of this produce as not to leave a sufficiency for maintaining the productive laborers who should reproduce it next year The next year's produce therefore will be less than that of the foregoing and if the same disorder should continue that of the third year will be still less than that of the second Those unproductive hands who should be maintained by a part only of the spare revenue of the people may consume so great a share of their whole revenue and thereby oblige so great a number to encroach upon their capitals upon the funds destined for the maintenance of productive labor that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment This frugality and good conduct however is upon most occasions it appears from experience sufficient to compensate not only the private prodigality and misconduct of individuals but the public extravagance of government The uniform, constant and uninterrupted effort of every man to better his condition the principle from which public and national as well as private opulence is originally derived is frequently powerful enough to maintain the natural progress of things toward improvement in spite both of the extravagance of government and of the greatest errors of administration like the unknown principle of animal life it frequently restores health and vigor to the constitution in spite not only of the disease but of the absurd prescriptions of the doctor The annual produce of the land and labor of any nation can be increased in its value by no other means but by increasing either the number of its productive laborers or the productive powers of those laborers who had before been employed The number of its productive laborers it is evident can never be much increased but in consequence of an increase of capital or of the funds destined for maintaining them The productive powers of the same number of laborers cannot be increased but in consequence either of some addition and improvement to those machines and instruments which facilitate and abridge labor or of more proper division and distribution of employment In either case an additional capital is almost always required It is by means of an additional capital only that the undertaker of any work can either provide his workmen with better machinery or make a more proper distribution of employment among them When the work to be done consists of a number of parts to keep every man constantly employed in one way requires a much greater capital than where every man is occasionally employed in every different part of the work When we compare therefore the state of a nation at two different periods and find that the annual produce of its land and labor is evidently greater at the latter than at the former that its lands are better cultivated its manufacturers more numerous and more flourishing and its trade more extensive we may be assured that its capital must have increased during the interval between those two periods and that more must have been added to it by the good conduct of some than had been taken from it either by the private misconduct of others or by the public extravagance of government But we should find this to have been the case of almost all nations and all tolerably quiet and peaceable times even of those who have not enjoyed the most prudent and parsimonious governments To form a right judgment of it indeed we must compare the state of the country at periods somewhat distant from one another The progress is frequently so gradual that at near periods the improvement is not only not sensible but from the declension either of certain branches of industry or of certain districts of the country things which sometimes happen though the country in general is in great prosperity there frequently arises a suspicion that the riches and industry of the whole are decaying The annual produce of the land and labor of England for example is certainly much greater than it was a little more than a century ago at the restoration of Charles II Though at present few people I believe doubt of this yet during this period five years have seldom passed away in which some book or pamphlet has not been published written to with such abilities as to gain some authority with the public and pretending to demonstrate that the wealth of the nation was fast declining that the country was depopulated agriculture neglected manufacturers decaying and trade undone Nor have these publications been all party pamphlets the wretched offspring of a falsehood and venality Many of them have been written by very candid and very intelligent people who wrote nothing but what they believed and for no other reason but because they believed it The annual produce of the land and labor of England again was certainly much greater at the restoration than we can suppose it to have been about a hundred years before at the ascension of Elizabeth At this period too we have all reason to believe the country was much more advanced in improvement than it had been about a century before towards the close of the dissensions between the houses of York and Lancaster Even then it was probably in a better condition than it had been at the Norman Conquest and at the Norman Conquest then during the confusion of the Saxon-Heptarchy Even at this early period it was certainly a more improved country than at the invasion of Julius Caesar when its inhabitants were nearly in the same state with the savages in North America In each of those periods however there was not only much private and public perfusion many expensive and unnecessary wars great perversion of the annual produce for maintaining productive to maintain unproductive hands but sometimes in the confusion of civil discord such absolute waste and destruction of stock as might be supposed not only to retard as it certainly did the natural accumulation of riches but to have left the country at the end of the period poorer than at the beginning Thus in the happiest and most fortunate period of the Moll that which has passed since the restoration how many disorders and misfortunes have occurred which could they have been foreseen not only the impoverishment but the total ruin of the country would have been expected from them The fire and the plague of London the two Dutch wars the disorders of the revolution the war in Ireland the four expensive French wars of 1688 1701 1742 and 1756 together with the two rebellions of 1715 and 1745 In the course of the four French wars the nation has contracted more than 145 million pounds of debt over and above all the other extraordinary annual expense which they occasioned so that the whole cannot be computed at less than 200 million pounds So great a share of the annual produce of the land and labor of the country has since the revolution been employed upon different occasions in maintaining an extraordinary number of unproductive hands but had not those wars given this particular direction to so large a capital the greater part of it would naturally have been employed in maintaining productive hands whose labor would have replaced with a profit the whole value of their consumption The value of the annual produce of the land and labor of the country would have been considerably increased by it every year and every year's increase would have augmented still more that of the following year More houses would have been built more lands would have been improved and those which had been improved before would have been better cultivated more manufacturers would have been established and those which had been established before would have been more extended and to what height the real wealth and revenue of the country might by this time have been raised it is not perhaps very easy even to imagine but though the profusion of government must undoubtedly have retarded the natural progress of England towards wealth and improvement it has not been able to stop it The annual produce of its land and labor is undoubtedly much greater at present than it was either at the restoration or at the revolution The capital therefore annually employed in cultivating this land and in maintaining this labor must likewise be much greater In the midst of all the exactions of government this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals by their universal, continual, and uninterrupted effort to better their own condition It is this effort protected by law and allowed by liberty to exert itself in the manner that is most advantageous which has maintained the progress of England towards opulence and improvement in almost all former times and which it is to be hoped will do so in all future times England however as it has never been blessed with a very parsimonious government so parsimony has at no time been the characteristic virtue of its inhabitants It is the highest impertinence and presumption therefore in kings and ministers to pretend to watch over the economy of private people and to restrain their expense either by sumptuary laws or by prohibiting the importation of foreign luxuries They are themselves always and without any exception the greatest spin-thrifts in the society Let them look well after their own expense and they may safely trust private people with theirs If their own extravagance does not ruin the state that of the subject never will As frugality increases and prodigality diminishes the public capital so the conduct of those whose expense just equals their revenue without either accumulating or encroaching neither increases nor diminishes it Some modes of expense however seem to contribute more to the growth of public opulence than others The revenue of an individual may be spent either in things which are consumed immediately and in which one day's expense can neither alleviate nor support that of another or it may be spent in things more durable which can therefore be accumulated and in which every day's expense may as he chooses either alleviate or support and heighten the effect of that of the following day A man of fortune for example may either spend his revenue in a perfuse and sumptuous table and in maintaining a great number of menial servants and a multitude of dogs and horses or contending himself with a frugal table and a few attendants he may lay out the greater part of it in adorning his house or his country villa in useful or ornamental buildings in useful or ornamental furniture and collecting books statues pictures or in things more frivolous jewels bobbles and genius trinkets of different kinds or what is most trifling of all in amassing a great wardrobe of fine clothes like the favorite and minister of a great prince who died a few years ago were two men of equal fortune to spend their revenue the one chiefly in the one way the other in the other the magnificence of the person whose expense had been chiefly in durable commodities would be continually increasing every day's expense contributing something to support and heighten the effect of that of the following day that of the other on the contrary would be no greater at the end of the period than at the beginning the former two would at the end of the period be the richer man of the two he would have a stock of goods of some kind or other which though it might not be worth all that it cost would always be worth something no trace or vestige of the expense of the latter would remain and the effects of 10 or 20 years per fusion would be as completely annihilated as if they had never existed as the one mode of expense is more favorable than the other to the opulence of an individual so it is likewise to that of a nation 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 becomes universal among men of fortune and countries which have long been rich you will frequently find the inferior ranks of people in possession both of 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 in upon the Bath Road the marriage bed of James I of Great Britain which his queen brought with her from Denmark as a present fit for a sovereign to make to a sovereign was a few years ago the ornament of an ale house at Dunfermline in some ancient cities which either have been long stationary or have gone somewhat to decay you will sometimes scarce find a single house which could have been built for its present inhabitants if you go into those houses too you will frequently find many excellent though antiquated pieces of furniture which are still very fit for use and which could as little have been made for them noble palaces magnificent villas great collections of books statues pictures and other curiosities are frequently both an ornament and an honor not only to the neighborhood but to the whole country to which they belong Versailles is an ornament and an honor to France Stowe and Wilton to England Italy still continues to command some sort of veneration by the number of monuments of this kind which it possesses though the wealth which produced them has decayed and though the genius which planned them seems to be extinguished perhaps from not having the same employment the expense too which is laid out in durable commodities is favorable not only to accumulation but to frugality 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 neighbors and which are supposed to imply some acknowledgement 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 but if a person has at any time been at too great an expense in building in furniture in books or pictures no imprudence can be inferred from his changing his conduct these are things in which further expenses frequently rendered unnecessary by former expense and when a person stopped short he appears to do so not because he has exceeded his fortune but because he has satisfied his fancy the expense besides that has laid out in durable commodities gives maintenance commonly to a greater number of people than that which is employed in the most profuse hospitality of two or three hundred weight of provisions which may sometimes be served up at a great festival one half perhaps is thrown to the downhill and there is always a great deal wasted and abused but if the expense of this entertainment had been employed in setting to work masons carpenters upholsterers mechanics etc a quantity of provisions of equal value would have been distributed among a still greater number of people who would have bought them in pennies worth and pound weights and not have lost or thrown away a single ounce of them in the one way besides this expense maintains productive in the other unproductive hands in the one way therefore it increases in the other it does not increase the exchangeable value of the annual produce of the land and labor of the country I would not however by all this be understood to mean that the one species of expense always be tokens a more liberal or generous spirit than the other when a man of fortune spends his revenue chiefly in hospitality he shares the greater part of it with his friends and companions but when he employs it in purchasing such durable commodities he often spends the whole upon his own person and gives nothing to anybody without an equivalent the latter species of expense therefore especially when directed towards frivolous objects the little ornaments of dress and furniture jewels trinkets goo galls frequently indicates not only a trifling but a base and selfish disposition all that I mean is that the one sort of expense as it always occasions some accumulation of valuable commodities as it is more favorable to private frugality and consequently to the increase of the public capital and as it maintains productive rather than unproductive hands conduces more than the other to the growth of public opulence end of book two chapter three part two chapter four of book two of the wealth of nations this is a LibraVox recording all LibraVox recordings are in the public domain for more information or to volunteer please visit LibraVox.org recording by Steven Escalera the wealth of nations by Adam Smith chapter four of book two of stock lint at interest the stock which is lint at interest is always considered as a capital by the lender he expects that in due time it is to be restored to him and that in the meantime the borrower is to pay him a certain annual rent for the use of it the borrower may use it either as a capital or as a stock reserved for immediate consumption if he uses it as a capital he employs it in the maintenance of productive laborers who reproduce the value with a profit he can in this case both restore the capital and pay the interest without alienating or encroaching upon any other source of revenue if he uses it as a stock reserved for immediate consumption he acts the part of a prodigal and dissipates in the maintenance of the idol what was destined for the support of the industrious he can in this case neither restore the capital nor pay the interest without either alienating or encroaching upon some other source of revenue such as the property or the rent of land the stock which is lent at interest is no doubt occasionally employed in both these ways but in the former much more frequently than in the latter the man who borrows in order to spend will soon be ruined and he who lends to him will generally have occasion to repent of his folly to borrow or to lend for such a purpose therefore is in all cases where gross usury is out of the question contrary to the interest of both parties and though it no doubt happens sometimes that people do both the one and the other yet from the regard that all men have for their own interest we may be assured that it cannot happen so frequently as we are sometimes apt to imagine asking a rich man of common prudence to which of the two sorts of people he has lent the greater part of the stock to those who he thinks will employ profitably or to those who will spend it idly and he will laugh at you for proposing the question even among borrowers therefore not the people in the world most famous for frugality the number of the frugal and industrious surpasses considerably that of the prodigal and idle the only people to whom stock is commonly lent without there being expected to make any very profitable use of it are country gentlemen who borrow upon mortgage even they scarce ever borrow merely to spend what they borrow one may say is commonly spent before they borrow it they have generally consumed so great a quantity of goods advance to them upon credit by shopkeepers and tradesmen that they find it necessary to borrow at interest in order to pay the debt the capital borrowed replaces the capital of those shopkeepers and tradesmen which the country gentlemen could not have replaced from the rents of their estates it is not properly borrowed in order to be spent but in order to replace a capital which had been spent before almost all loans at interest are made in money either of paper or of gold and silver but what the borrower really wants and what the lender readily supplies him with is not the money but the money's worth or the goods which it can purchase if he wants it as a stock for immediate consumption it is those goods only which he can place in that stock if he wants it as a capital for employing industry it is from those goods only that the industrious can be furnished with the tools materials and maintenance necessary for carrying on their work by means of the loan the lender as it were assigns to the borrower his right to a certain portion of the annual produce of the land and labor of the country to be employed as the borrower places the quantity of stock therefore or as it is commonly expressed of money which can be lent at interest in any country is not regulated by the value of the money whether paper or coin which serves as the instrument of the different loans made in that country but by the value of that part of the annual produce which as soon as it comes either from the ground or from the hands of the productive laborers is destined not only for replacing a capital but such a capital as the owner does not care to be at the trouble of employing himself as such capitals are commonly lent out and paid back in money they constitute what is called the moneyed interest it is distinct not only from the landed but from the trading and manufacturing interest as in these last the owners themselves employ their own capitals even in the moneyed interest however the money is as it were but the deed of assignment which conveys from one hand to another those capitals which the owners do not care to employ themselves those capitals may be greater in almost any proportion than the amount of the money which serves as the instrument of their conveyance the same pieces of money successfully serving for many different loans as well as for many different purchases A for example lends to W one thousand pounds with which W immediately purchases of B one 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 one thousand pounds worth of goods C in the same manner and for the same reason lends them to Y who again purchases goods with them of D in the same manner the same pieces either of coin or of paper may in the course of a few days serve as the instrument of three different loans and of three different purchases each of which is in value equal to the whole amount of those pieces what the three moneyed men A, B and C assigned to the three borrowers W, X and Y is the power of making those purchases in this power consists both the value and the use of the loans the stock lent by the three moneyed men is equal to the value of the goods which can be purchased with it and is three times greater than that of the money with which the purchases are made those loans however may be all perfectly well secured the goods purchased by the different debtors being so employed as in due time to bring back with a profit an equal value either of coin or of paper and as the same pieces of money can thus serve as the instrument of different loans to three or for the same reason to 30 times their value so they may likewise successfully serve as the instrument of repayment a capital lent at interest may in this manner be considered as an assignment from the lender to the borrower of a certain considerable portion of the annual produce upon condition that the borrower in return shall during the continuance of the loan annually assigned to the lender a small portion called the interest and at the end of it a portion equally considerable with that which had originally been assigned to him called the repayment though money either coin or paper serves generally as the deed of assignment both to the smaller and to the more considerable portion it is itself altogether different from what is assigned by it in proportion as that share of the annual produce which as soon as it comes either from the ground or from the hands of the productive laborers is destined for replacing a capital increases in any country what is called the moneyed interest naturally increases with it the increase of those particular capitals from which the owners wish to derive a revenue without being at the trouble of employing them themselves naturally accompanies the general increase of capitals or in other words as stock increases the quantity of stock to be lent at interest grows gradually greater and greater as the quantity of stock to be lent at interest increases the interest or the price which must be paid for the use of that stock necessarily diminishes not only from those general causes which make the market price of things commonly diminished as their quantity increases but from other causes which are peculiar to this particular case as capitals increase in any country the profits which can be made by employing them necessarily diminish it becomes gradually more and more difficult to find within the country a profitable method of employing any new capital there arises and consequence a competition between different capitals the owner of one endeavoring to get possession of that employment which is occupied by another but upon most occasions he can hope to jostle that other out of this employment by no other means but by dealing upon more reasonable terms he must not only sell what he deals in somewhat cheaper but in order to get it to sell he must sometimes too buy it dearer the demand for productive labor by the increase of the funds which are destined for maintaining it grows every day greater and greater laborers easily find employment but the owners of capitals find it difficult to get laborers to employ their competition raises the wages of labor and sinks the profits of stock but when the profits which can be made by the use of a capital are in this manner diminished as it were at both ends the price which can be paid for the use of it that is the rate of interest must necessarily be diminished with them Mr. Locke Mr. Law and Mr. Montesquieu as well as many other writers seem to have imagined that the increase of the quantity of gold and silver and consequence of the discovery of the Spanish West Indies was the real cause of the lowering of the rate of interest through the greater part of Europe those metals they say having become of less value themselves the use of any particular portion of them necessarily became of less value too and consequently the price which could be paid for it this notion which at first sight seems so plausible has been so fully exposed by Mr. Hume that it is perhaps unnecessary to say anything more about it the following very short and plain argument however may serve to explain more distinctly the fallacy which seems to have misled those gentlemen before the discovery of the Spanish West Indies 10% seems to have been the common rate of interest through the greater part of Europe it has since that time in different countries sunk to 6, 5, 4 and 3% let us suppose that in every particular country the value of silver has sunk precisely in the same proportion as the rate of interest and that in those countries for example where interest has been reduced from 10 to 5% the same quantity of silver can now purchase just half the quantity of goods which it could have purchased before this supposition will not I believe be found anywhere agreeable to the truth but it is the most favorable to the opinion which we are going to examine and even upon this supposition it is utterly impossible that the lowering of the value of silver could have the smallest tendency to lower the rate of interest if 100 pounds are in those countries now of no more value than 50 pounds were then 10 pounds must now be of no more value than 5 pounds were then whatever were the causes which lower the value of the capital the same must necessarily have lowered that of the interest and exactly in the same proportion the proportion between the value of the capital and that of the interest must have remained the same though the rate had never been altered by altering the rate on the contrary the proportion between those two values is necessarily altered if 100 pounds now are worth no more than 50 pounds were then 5 pounds now can be worth no more than 2 pounds 10 shillings were then by reducing the rate of interest therefore from 10 to 5 percent we give for the use of a capital which is supposed to be equal to one half of its former value an interest which is equal to one fourth only of the value of the former interest an increase in the quantity of silver while that of the commodities circulated by means of it remain the same could have no other effect than to diminish the value of that metal the nominal value of all sorts of goods would be greater but their real value would be precisely the same as before they would be exchanged for a greater number of pieces of silver but the quantity of labor which they could command the number of people whom they could maintain and employ would be precisely the same the capital of the country would be the same though a greater number of pieces might be requisite for conveying any equal portion of it from one hand to another the deeds of assignment like the conveyances of a verbose attorney would be more cumbersome but the thing assigned would be precisely the same as before and could produce only the same effects the funds for maintaining productive labor being the same the demand for it would be the same its prices or wages therefore though nominally greater would really be the same they would be paid in a greater number of pieces of silver but they would purchase only the same quantity of goods the profits of stock would be the same both nominally and really the wages of labor are commonly computed by the quantity of silver which is paid to the laborer when that is increased therefore his wages appear to be increased though they may sometimes be no greater than before but the profits of stock are not computed by the number of pieces of silver with which they are paid but by the proportion which those pieces bear to the whole capital employed thus in a particular country five shillings a week are said to be the common wages of labor and ten percent the common profits of stock but the whole capital of the country being the same as before the competition between the different capitals of individuals and to which it was divided would likewise be the same they would all trade with the same advantages and disadvantages the common proportion between capital and profit therefore would be the same and consequently the common interest of money what can commonly be given for the use of money being necessarily regulated by what can commonly be made by the use of it any increase in the quantity of commodities annually circulated within the country while that of the money which circulated them remain the same would on the contrary produce many other important effects besides that of raising the value of the money the capital of the country though it might nominally be the same would really be augmented it might continue to be expressed by the same quantity of money but it would command a greater quantity of labor the quantity of productive labor which it could maintain and employ it would be increased and consequently the demand for that labor its wages would naturally rise with the demand and yet might appear to sink they might be paid with a smaller quantity of money but that smaller quantity might purchase a greater quantity of goods and then a greater had done before the profits of stock would be diminished both really and in appearance the whole capital of the country being augmented the competition between the different capitals of which it was composed would naturally be augmented along with it the owners of those particular capitals would be obliged to content themselves with a smaller proportion of the produce of that labor which their respective capitals employed the interest of money keeping pace always with the profits of stock might in this manner be greatly diminished though the value of money or the quantity of goods which any particular sum could purchase was greatly augmented 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 he is obliged if one may say so to ensure his creditor from the penalties of usury in countries where interest is permitted the law in order to prevent the extortion of usury generally fixes the highest rate which can be taken without incurring a penalty this rate ought always to be somewhat above the lowest market price or the price which is commonly paid for the use of money by those who can give the most undoubted security if this legal rate should be fixed below the lowest market rate the effects of this fixation must be nearly the same as those of a total prohibition of interest the creditor will not lend his money for less than the use of it is worth and the debtor must pay him for the risk which he runs by accepting the full value of that use if it is fixed precisely at the lowest market price it ruins with honest people who respect the laws of their country the credit of all those who cannot give the very best security and obliges them to have recourse to exorbitant users in a country such as great britain where money is lent to government at three percent and to private people upon good security at four and four and a half the present legal rate five percent is perhaps as proper as any the legal rate it is to be observed though it ought to be somewhat above ought not to be much above the lowest market rate if the legal rate of interest in great britain for example was fixed so high as eight or ten percent the greater part of the money which was to be lent would be lent to protocols and projectors who alone would be willing to give this high interest sober people who will give for the use of money no more than a part of what they are likely to make by the use of it would not venture into the competition a great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it and thrown into those which were most likely to waste and destroy it where the legal rate of interest on the contrary is fixed but a very little above the lowest market rate sober people are universally preferred as borrowers to protocols and projectors the person who lends money gets nearly as much interest from the former as he dares to take from the latter and his money is much safer in the hands of the one set of people than in those of the other a great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage no law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made not withstanding the edict of 1766 by which the French king attempted to reduce the rate of interest from five to four percent money continued to be lent in France at five percent the law being evaded in several different ways the ordinary market price of land it is to be observed depends everywhere upon the ordinary market rate of interest the person who has a capital from which he wishes to derive a revenue without taking the trouble to employ it himself deliberates whether he should buy land with it or lend it out at interest the superior security of land together with some other advantages which almost everywhere attend upon this species of property will generally dispose him to content himself with a smaller revenue from land than what he might have by lending out his money at interest these advantages are sufficient to compensate a certain difference of revenue but they will compensate a certain difference only and if the rent of land should fall short of the interest of money by a greater difference nobody would buy land which would soon reduce its ordinary price on the contrary if the advantages should much more than compensate the difference everybody would buy land which again would soon raise its ordinary price when interest was at 10% land was commonly sold for 10 or 12 years purchase as interest sunk to six five and four percent the price of land rose to 20 five and 20 and 30 years purchase the market rate of interest is higher in France than in England and the common price of land is lower in England it commonly sells at 30 in France at 20 years purchase end of book two chapter four