CHAPTER 1: THE PRINCIPLE OF THE COMMERCIAL OR MERCANTILE SYSTEM
The popular notion that wealth means money (gold and silver) arises from the fact that money is used both as an instrument of commerce and as a measure of value, in the sense that if we have money, we can readily obtain whatever we need.
A rich country abounds in money. A nation’s consumable goods, on the other hand, may exist in abundance one year and be lacking the next year, due to waste and extravagance.
The governments of Spain and Portugal, the principal exporters of gold and silver throughout Europe, prohibited the export of gold and silver. When these two countries became commercial, merchants found this prohibition to be damaging to trade. They argued that export of these precious metals could only be prevented by addressing the balance of trade: when a country exports a greater value than it imports, a balance is owed by the foreign nations, which is paid in gold and silver, thereby increasing the quantity of these precious metals in the kingdom. On the other hand, when a country imports a greater value than it exports, a balance is owed to the foreign nations, which when paid will diminish the quantity of these precious metals in the kingdom. Furthermore, government prohibition was unable to hinder the exportation of gold and silver since it is easily smuggled.
Government attention was also focused on another, equally fruitless, notion. Home industry and trade, which creates many jobs, was viewed as secondary to foreign trade, since it neither brought money into a country nor sent any out, and as such it was felt that home trade would not increase a country’s wealth.
A country that has the means to buy gold and silver will never have a shortage of these precious metals. The quantity of commodities purchased or produced is always regulated by market demand. But no commodities are more easily regulated by this demand than gold and silver, since its small size and high value mean it is easily transported from one place to another—from a place where it is cheap to a market where it is expensive. The ease with which gold and silver can be transported from locations in which it is plentiful to those in which it is in high demand mean that their price does not fluctuate continually, as is the case with most other commodities.
When money is scarce, traders will barter, though this is not without its inconveniences. Buying and selling on credit is more secure—but the best situation is always a well-regulated supply of money. A lack of money in a country does not necessarily mean a lack of gold and silver pieces in circulation, but rather that many people want those pieces but have nothing to give for them. It is not a lack of gold and silver, but rather the problems people face trying to get loans or reimbursing those loans that lead to complaints about lack of money.
Wealth is not represented by money, gold or silver, but rather what money can purchase, and as such is valuable only for purchasing. Money constitutes part of the national capital, but generally only a small—and the most unprofitable—part. Wealth is not constituted by money, but money is the established instrument of commerce, used to obtain commodities or labor. Furthermore, most commodities are more perishable than money and therefore frequently incur losses. A merchant’s capital sometimes consists entirely of perishable goods intended for trade against money.
Goods can serve many other purposes besides being traded for money, but money can serve no other purpose besides purchasing goods. Men do not desire money for money’s sake, but for what they can purchase with it.
Importing gold and silver is not the sole benefit a nation derives from its foreign trade. Foreign trade also moves out the surplus part of a country’s produce for which there is no demand at home, and brings back something else for which there is a demand. Foreign trade also extends the home market, which enables the division of labor to be carried out to the highest perfection. Broadening the market encourages the country to improve its productive power and to increase its annual produce, thus growing its real revenue and wealth.
In light of this belief that wealth was constituted by gold and silver, and that only balance of trade could bring these into a country which lacked mines, many governments felt it made sense economically to restrain the importation of foreign goods and to increase the exportation of domestic produce. These restraints on foreign imports were placed on goods that could be produced at home, and especially on goods imported from countries with which trade was thought to be disadvantageous. The restraints included high duties and in some cases total prohibition.
Exportation was encouraged through a number of measures including bounties, trade agreements with foreign states, and the establishment of colonies. Bounties encouraged start-up businesses and specialized industries. Under the trade agreements, the country would be granted specific privileges by a foreign state for its commodities. The establishment of colonies created a monopoly of the market for the merchants of the country which established them.
CHAPTER 2: RESTRAINTS UPON IMPORTATION FROM FOREIGN COUNTRIES FOR GOODS THAT CAN BE PRODUCED AT HOME
Placing restrictions on the importation of foreign goods produced at home creates a monopoly for the home market, hence benefitting the producers of these goods; for example, the ban on the import of live cattle gave Britain’s cattle farmers the monopoly of the home market for butcher’s meat; the high duty on importing corn amounts to a prohibition.
Although this monopoly ensures the country a greater share of labor and stock, whether it benefits the society’s industry as a whole is uncertain. Regulation of a society’s commerce cannot increase the quantity of industry beyond what its capital can maintain. It can only divert a portion of the country’s industry into a direction into which it might not otherwise have gone, which will not necessarily be more advantageous to the society than if it had been left unregulated.
Most people endeavor to employ their capital as near to their home market as possible. It is only with a view to making a profit that an individual employs his capital in support of industry, and he will always endeavor to direct that industry so that its produce will be of the greatest possible value. Driven by self-interest and the advantages he can gain from his capital, a man invests in domestic rather than foreign industry, and as such is unintentionally investing in the market that is most advantageous to society.
Imposing a regulation which creates a monopoly for domestic produce is in effect dictating to people how best to employ their capital, and as such is a harmful regulation. If domestic produce can be bought as cheaply as that of foreign industry, such a regulation is obviously useless. If it cannot, the regulation will generally be harmful. No one would build a house that it would cost less for them to buy; just as a tailor does not decide to make his own shoes but buys them from the shoe store. Likewise, if a foreign country can supply a commodity cheaper than it can be produced at home, it makes more sense to buy a foreign product. A country’s industry always grows in proportion to the capital invested in it; this capital will therefore be invested to its maximum advantage. It goes without saying that is not invested to its maximum advantage if used to purchase an object abroad that can be produced cheaper at home.
The natural advantages a country has over another in terms of producing specific commodities are sometimes so great that the country has a significant edge over its competitors. To produce wine in Scotland, for example, would cost around thirty times the amount it costs to buy it from foreign markets; as such, it would not be beneficial to start producing wine in Scotland. The same can be said with regard to paying higher wages. As long as one country has these advantages and another wants them, it will always be more advantageous to buy than to produce.
Merchants and manufacturers benefit the most from monopoly of the home market. Implementing laws prohibiting the importation of foreign corn and cattle in fact ensures that the country’s population and industry never exceed what its own land can maintain.
Luxury goods are the most easily transported. If the importation of foreign goods was not prohibited, several home industries would suffer and even go bankrupt. There are two cases in which such prohibitions are absolutely necessary. The first is the development of a particular industry that is necessary for the defense of the country. The Navigation Act of Britain gave sailors and the shipping industry a monopoly over their own country’s trade by:
- prohibiting non-British-owned ships and crews from trading with the British settlements, plantations and coastal areas;
- excluding or imposing hefty taxes on goods imported in ships of the country in which they were produced; for example, the Dutch were excluded from importing to Britain the goods of any other European country. Though Britain and the Netherlands were not actually at war, there was violent animosity between the two nations.
CHAPTER 3: THE EXTRAORDINARY RESTRAINTS OF IMPORTING GOODS FROM COUNTRIES WITH AN UNFAVORABLE BALANCE
The second method employed by the trading system to keep gold and silver in a country was by placing restraints on the importation of goods from countries with which the balance of trade is disadvantageous. These included lighter tariffs, rarely exceeding 5%, for certain nations, while France’s goods were taxed 75%—equivalent to a prohibition. As a result, France imposed heavy taxes on our goods, resulting in a breakdown in trading relations between the two countries, with smugglers now the principal importers of French goods into Britain.
This situation arose out of national prejudice and animosity and is unreasonable in a commercial system. Even though free trade between France and Britain would mean the balance of trade would be in France’s favor, it would not be disadvantageous to Britain. If France’s wines are better and cheaper than those of Portugal, it would be advantageous for Britain to purchase wine from France rather than Portugal. Though the value of individual goods imported from France would be increased, the overall total value would be decreased, since French goods of the same quality were cheaper than those of another country. This would be the case even if the imported French goods were entirely for home consumption in Britain, but part of them might be re-exported to other countries and sold at a profit, perhaps covering the initial cost of the imported goods. This was the case with the East India trade: though goods were bought with gold, a portion of them were re-exported to other countries for more gold than the initial cost.
The notion of imposing restraints and other trade regulations to regulate balance of trade is absurd. The notion that when two countries trade and the balance of trade is even neither loses nor gains, but that if balance is in favor of one or the other country, then one will lose and the other gain is false.
Trade under free market conditions, without the imposition of taxes or the constraints of monopolies, is always advantageous, though not necessarily in equal proportion to each country, in terms of the exchangeable value of the annual produce of the land and labor of the country. If there is an equal balance in the home produce traded, each will gain equally and will replace the capital employed in producing this surplus produce.
In a situation where one country is exporting home-produced commodities and another foreign goods, the balance would still be even, with each country exchanging commodities for commodities. Both countries gain, but not equally since the inhabitants of the country importing the home-produced commodities would make a higher profit from this trade. If Britain, for example, imported from France nothing but French-produced commodities, which it paid for with foreign goods such as tobacco rather than home-produced goods, France would made more profit from this transaction than Britain.
Trade between two countries never consists entirely of the exchange of native commodities on both sides, nor of native commodities on one side and foreign goods on the other. Almost all countries exchange partly native and partly foreign goods, with the country trading the most home-produced and least foreign goods always making the most profit.
If, on the other hand, Britain paid for these French imports with gold rather than tobacco, the balance of trade would be uneven since the commodities are being paid for with gold rather than exchanged for other commodities. Once again, both countries would benefit but France more so than Britain. The profit made by Britain would be employed in producing further goods with which to purchase gold, thus replacing that employed. Britain’s capital would be no less as a result of this exportation of gold and silver than it would with the exportation of an equal value of any other commodity; on the contrary, its capital would generally be increased.
Tariffs imposed by Britain on the wine trade appear to favor Portugal over France. The reason for this is it is generally believed that market demand for Britain’s produce is greater in Portugal than it is in France. Preferential trade agreements were established between Britain and Portugal. A successful trader will buy his produce where it is cheap and good quality. These monopolies and trade agreements have led to suspicion and prejudice between trading nations, with each considering its neighbor a competitor—when in fact it is in every man’s interest to buy whatever he wants from whomever sells it cheapest.
Just as it is in the interests of freemen to hinder the rest of the inhabitants from employing any workmen but themselves, it is in the interest of a country’s merchants and manufacturers to secure the monopoly of the home market—leading to heavy duties being placed by Great Britain and most other European countries on almost all imported goods, with high duties and prohibitions on foreign competitors, and restraints upon imported goods from countries with which trade was thought to be disadvantageous.
Trade between France and Britain has been subjected to many prohibitions and restraints. If these two countries were to focus on their own interests, without mercantile jealousy or national animosity, France’s commerce might be more advantageous to Britain than that of any other country—and vice versa. France is Britain’s nearest neighbor. Even between the parts of France and Britain most remote from each other, returns would be made at least once in the year—at least three times greater than that for trade with the North American colonies, which experience returns only every three to five years. Furthermore, France’s population stands at twenty-four million, compared to three million in the North American colonies, and France is a far wealthier country than North America, despite its large numbers of poor and beggars, which is due to the unequal distribution of riches.
Despite the popular notion that an unfavorable balance of trade will result in a country’s ruin, this is not the case, as no European country has been negatively affected. On the contrary, balance of trade between two countries is always advantageous.
There is another balance, very different to the balance of trade, which does indeed affect a nation’s prosperity or demise: the balance between production and consumption. If the exchangeable value of production exceeds that of consumption, a society’s capital will increase proportionately; in this case, the society is living within its revenue. If annual produce falls short of annual consumption, a society’s capital will diminish each year.
This balance of production and consumption is entirely different from the balance of trade. It may be constantly in favor of a nation, even if the balance of trade is against it. A nation may have been importing to a greater value than it exports for the past fifty years, yet its real wealth, the exchangeable value of the annual produce of its lands and labor, may have been increasing in a much greater proportion.
CHAPTER 4: DRAWBACKS
Merchants and manufacturers are keen to sell their goods to the most extensive foreign market possible. Since their home country has no jurisdiction in foreign markets, they do not have any monopoly there. As a result, they petition their governments to create incentives for export. Drawbacks are one such incentive and perhaps the most reasonable (rebate of taxes or duties paid on imported goods that have been re-exported).
Enabling a merchant to recuperate the excise or inland duty imposed upon his domestic industry does not direct a greater quantity of goods to be exported than would have been had no duty been imposed. Such incentives tend to preserve the natural division and distribution of labor in a society.
Before the revolt of our North American colonies, we had the monopoly of the tobacco production in Maryland and Virginia. In order to facilitate export of surplus tobacco, drawbacks were introduced, provided the export took place within three years.
We still have the monopoly over sugar production in the West Indian islands. If sugar is exported within a year, therefore, all import duties importing are drawn back.
Some goods are prohibited from importation; they may be imported and stored for export, upon payment of duties, but there will be no drawbacks for exportation once they are exported.
CHAPTER 5: BOUNTIES
(Digression concerning the Corn Trade and Corn Laws ignored)
Bounties upon exportation are frequently used in Britain, enabling the merchants of certain domestic products to sell their goods as cheaply as their competitors in the foreign market.
Since foreigners cannot be forced to buy a country’s goods, they are encouraged to do so by the use of bounties. In this way, the mercantile system aimed to enrich the whole country by establishing balance of trade.
Bounties should be granted only to those trades which cannot be executed without them. But in every branch of trade in which the price the goods fetch covers the ordinary profits of stock as well as the capital employed by the merchant in preparing and sending the goods to market, bounties are not required.
The only trades that actually require bounties are those in which a merchant is obliged to sell his goods for less than it cost him to bring them to market. The bounty is given in order to make up this loss, thus encouraging him to continue or perhaps trade in goods of which the expense is greater than the returns. If this practice were to continue over a period of time, there would be no capital left in the country.
Trading using bounties is the only situation in which one country is always the loser as it sells its goods for less than it cost to bring them to market. If the bounty does not repay to the merchant what he would otherwise have lost on the price of his goods, he would soon find a trade in which the price of his goods would cover this. Bounties are harmful since, over time, they force a country to trade in a way which greatly disadvantages it.
The average price of corn (wheat) has fallen considerably since the establishment of the bounty. But this happened in spite of the bounty, not as a consequence of it—as demonstrated in the case of France, where corn prices fell despite the fact that France had no bounties, although exportation of corn was subjected to a general prohibition until 1764. This gradual fall in the average price of grain is probably due to the gradual rise in the real value of silver; it would appear that bounties never contribute to lowering the price of grain.
In years of abundance, the bounty, by encouraging exportation, maintains corn prices in the home market above what they would normally fall to. Indeed, this was the objective. During years of scarcity, although the bounty is frequently suspended, the volume of exports during years of plenty in fact hinders the abundance of one year from relieving the scarcity of another. Consequently, bounties raise the price of corn in the home market during times of abundance as well as times scarcity.
Expansion of foreign markets through bounties always comes at a loss to the home market since commodities exported thanks to a bounty would otherwise not have been exported but would have remained in the home market, thus increasing home consumption and lowering the price of that commodity. Bounties impose two taxes on those using them: a tax on payment of the bounty and a tax on the resulting higher price of the commodity in the home market. In the case of corn, for example, since it is a commodity bought by the entire population, this tax is paid by each citizen.
In reality, the effect of a bounty is not so much that it raises the nominal value of corn, but rather that it decreases the value of silver, since the amount of silver that corn (or any other commodity, particularly home-produced) exchanges for is increased. The price of corn regulates that of all other such commodities. Consequently, corn also regulates the monetary price of labor, which must always be sufficient to enable a worker to purchase enough corn to maintain him and his family, be it in a liberal, moderate, or meager manner, depending on the current state of the society in which he lives.
With regard to encouraging the production of a specific commodity, a bounty on production is more effective than one on exportation since it lowers the price of the commodity in the home market. As such, the bounty, rather than imposing a second tax upon the population, reimburses them indirectly for what they contributed to the first tax. Bounties upon production were very rarely granted. The prejudices inherent to the commercial system led to a belief that national wealth is more directly related to exportation than production. As such, exportation has been favored as the more immediate means of bringing money into the country. It is a well-known fact that bounties on exportation have been abused over time, yet they are the most popular aspect of the mercantile system. I have known parties to agree privately amongst themselves to grant a bounty out of their own pockets upon the exportation of their goods. This method proved so successful that it more than doubled the price of their goods in the home market, notwithstanding a very considerable increase in the produce.
Something similar to a bounty upon production was nevertheless granted occasionally. The tonnage bounties for the white herring and whale fisheries are one such case. They tend to render the goods cheaper in the home market than they would otherwise be. In all other respects, their effects are the same as those of bounties upon exportation. These tonnage bounties result in a part of the country’s capital being employed in bringing goods to market, the price of which does not repay the cost, together with the ordinary profits of stock.
Although these tonnage bounties for fisheries do not contribute to a nation’s wealth, they contribute indirectly towards its defense, since they increase the number of sailors and shipping industries. As such, these bounties could be viewed as a cheaper means of contributing towards the nation’s defense than establishing and maintaining an official navy.
Despite these positive aspects, however, the legislature governing the granting of these bounties had some negative aspects too. Firstly, the herring shipping bounty was too great, and the herrings were sometimes cured using Scotch or foreign salt, both of which were delivered, free of excise duty, to the fish-curers. Secondly, the bounty for the white-herring fishery is a tonnage bounty, calculated in proportion to the ship’s cargo rather than the company’s diligence or success in the fishery industry, with the result that these companies were often more focused on obtaining the bounty than on operating conscientiously. Thirdly, the fishing method for which this tonnage bounty in the white herring industry was granted (by ships containing twenty to eighty tons of cargo) was not as well adapted to, for example, Scotland as it was to the Netherlands, the country in which this method originated. Fourthly, in many parts of Scotland, at certain times of the year herrings are a staple of the daily diet of many lower-income families. A bounty which lowered the price of herrings in the home market would significantly help these struggling families. But unfortunately the herring shipping bounty made no such contribution. Rather, it has ruined the fishery industry, which is by far the best adapted for the supply of the home market, with the additional bounty of 2s:8d per barrel for exportation resulting in the majority (over two-thirds) of the produce of the fishery industry going abroad.
A bounty is sometimes no more than a drawback, and consequently is not liable to the same objections as is a true bounty. The bounty, for example, upon refined exported sugar is a drawback of the duties upon the brown and Muscovado sugars from which it is made. Once the sugar has been refined and altered through manufacture, this drawback is called a bounty.
CHAPTER 6: TREATIES OF COMMERCE
When a nation enters into preferential trade agreements with other countries, either permitting the entry of certain goods from just one foreign country, or exempting the goods of just one country from duties, the merchants and manufacturers involved are at a significant advantage over others, enjoying a form of monopoly in the country favoring them.
Although these preferential trade agreements favor these merchants and manufacturers, they disfavor the countries receiving the goods of these individuals. By granting a monopoly to a foreign nation, a country’s citizens are forced to pay more for foreign goods than they would in the case of free competition. The purchasing power of the nation’s annual produce in terms of buying foreign goods consequently diminishes, since there is an imbalance between the nominal and natural prices of the foreign goods. A country therefore loses purchasing power as a result of these preferential trade agreements.
A country sometimes grants a monopoly to a foreign nation for specific goods in the belief that, in the overall commerce between the countries involved, it will in fact sell more than it would buy, therefore procuring a greater amount of gold and silver than it would have otherwise. It was on this basis that the trade agreement between Britain and Portugal was established, with Portugal agreeing to admit Britain’s woolen goods, and Britain Portugal’s wine, with no customs duty.
Annually, Portugal receives a greater quantity of gold from Brazil than can be employed in its domestic commerce. The surplus must be exchanged for something for which there is a more advantageous market at home. A large share of it comes annually to Britain, in return for English commodities.
The annual importation of gold and silver is employed in foreign trade, which can be carried out more advantageously by means of these metals than of other goods since it costs less to transport them from one place to another, and they do not lose value during transportation, unlike certain commodities. Of all the commodities bought in one foreign country with the sole intent of being sold or exchanged for goods in another country, gold and silver is the most convenient.
When a commodity is taxed, although the merchant involved advances the money, he does not truly pay the tax as he recovers it in the price of the commodity. At the end of the day, the tax is paid by the end consumer. But money is a commodity, of which every man is a merchant; nobody buys it with a view solely to selling it again, and it has no end consumer.
CHAPTER 7: COLONIES
The motives for the establishment of the first European colonies in America and the West Indies were not as plain and distinct as for those in ancient Greece and Rome. States in ancient Greece possessed only small territories, which led to overpopulation, with the result that inhabitants were sent elsewhere.
In response to the large demand for land ownership amongst Roman citizens, Rome assigned people land in the conquered provinces of Italy, where they remained subject to Rome’s legislation. The colony established a garrison in a newly conquered province. A Roman colony was altogether different from a Greek one. Even the word “colony” has a very different meaning in the two languages: the Latin word (colonia) signifies simply “a plantation;” the Greek word (apoikia) signifies “a home far away from home.” Both institutions derived their origin either from necessity or utility.
The European colonies in America and the West Indies were not established out of necessity, although they have since proven highly useful. When they were first established, this was not expected and was not the motive behind their establishment.
The discovery of the West Indies was made by a Genoese sailor, who undertook the daring project of sailing to the East Indies by the west. In letters to Isabella de Castile and Ferdinand of Aragon, he called the countries which he had discovered “The Indies.” The staple diet of the inhabitants of these islands – Indian corn, yams, potatoes and bananas—were vegetables as yet unknown in Europe.
Further voyages of discovery of “the New World” by the Spanish, subsequent to those of Columbus, seem to have been motivated by the thirst for gold. Upon arrival at any unknown coast, the adventurers’ first inquiry was always whether there was any gold to be found there—and depending on the reply, they either left or settled in the newly discovered country. Indeed, the main motivation behind these voyages of discovery was the prospect of gold and silver mines.
The first English settlers in North America offered the king a fifth of all the gold and silver found there, as a motive for granting them their patents. Sir Waiter Raleigh, companies in London and Plymouth, as well as the council of Plymouth also paid this sum. However, these first settlers’ expectations of finding gold and silver mines, as well as of discovering a north-west passage to the East Indies, did not come to fruition.
A colony established by a developed country on land that has few or no inhabitants will grow wealthy more quickly than that of any other type of society.
The colonists bring with them a sound knowledge of agriculture and other useful arts, and a basic knowledge of their country’s governance (the judicial laws and systems in place), which they deploy and establish in the new settlement.
Each colonist gains a greater surface of land than he could possibly ever cultivate and is not weighed down by rent or taxes. With almost the entirety of his produce being for his own benefit, the colonist is motivated to work hard to produce as much and as efficiently as possible.
In fact, the amount of land is generally so vast that he will seldom be able to use it to its maximum potential, often not reaping even a tenth of what it could yield. In order to capitalize as much as possible from his land, a landowner will hire as many workers as possible and generally pay good wages. But these workers tend to leave and become landlords themselves, in turn employing other workers, who soon leave them for the same reason.
High wages tend to go hand in hand with an increased number of marriages, with children often following in their father’s footsteps. In new colonies, productive, fertile land can be bought very cheaply. Consequently, high wages lead to population growth, and the low prices for land encourage cultivation and improvement, enabling the landowner to pay high wages—all of which lead to real wealth and power.
From the time of the earliest settlements, the Spanish colonies were strictly controlled by their mother country, while those of the other European nations were for a long time left to their own devices. Before the Spanish Conquest, there was no cattle fit for draught—the lama was the only animal used for this purpose—and they had no knowledge of ploughs or even the use of iron.
The Swedes established themselves in New Jersey, but, left to their own devices by Sweden, the colony was soon swallowed up by the Dutch colony of New York, which in 1674 fell under the authority of the English. The Dutch settlements were originally governed by a single company. The colony of Nova Belgia, which is divided into two provinces (New York and New Jersey), would probably have prospered even if it had remained under the governance of the Dutch; at present, the company has the monopoly of the direct trade from Africa to America, which consists almost entirely of the slave trade.
The French colony of Canada was controlled by a single company until the English gained possession of this country. But no colonies have progressed more rapidly than the English colonies in North America. Plenty of good land and the freedom to manage their own affairs seem to be two major factors in new colonies’ prosperity. This is demonstrated in the case of Spain and Portugal, which possess a better quality of land than the English colonies of North America, yet the latter prospered more because the English political institutions were more favorable to the improvement and cultivation of land.
Colony law stipulates that each landowner has a limited amount of time during which to cultivate and improve his lands—failing which the land will be granted to another person. In Pennsylvania, there is no right of primogeniture, and land is divided equally among children. In three provinces of New Britain, the oldest child receives only a double share; in the other English colonies, the right of primogeniture follows English law.
For a new colony, the abundance and cheapness of productive land are the main factors behind rapid prosperity. The labor of the English colonies is employed in improvement and cultivation of land, resulting in greater and more valuable produce than that of the other three nations, where labor is diverted to other employment. Due to the moderate taxes, a greater proportion of this produce belongs to the colonies themselves, and can be stored up and used to employ further laborers.
Colonists have never contributed to the defense of the mother country or the support of its civil government. They have been defended at the expense of the mother country. Payments made to their civil government have always been very moderate—generally a minimal amount towards paying the salaries of the governor, judges and police officers, and maintaining a few of the most useful public works.
The most important part of government expenditure – that of defense and protection—has constantly fallen upon the mother country. Civil government ceremonies do not involve any expensive pomp, and ecclesiastical government is equally frugal, with no taxes contributing towards the support of Church and clergy unheard of; clergy are maintained either by means of moderate stipends or voluntary contributions.
With regard to the disposal of surplus produce; i.e. what is over and above their own consumption, the English colonies have been more favored than other European nations since they have been granted the most extensive market for exportation. Every European nation has endeavored to monopolize the commerce of its colonies, by implementing measures such as prohibiting ships from foreign nations from trading with them, and prohibiting the colonies themselves from importing foreign European goods. The manner in which this monopoly has been executed has varied greatly from nation to nation. Some nations handed over the control of their colonies to a single company, from whom the colonists were obliged to purchase the European goods they needed, and to whom they were obliged to sell all of surplus produce.
Other nations limited the commerce of their colonies to a specific port in the mother country, placing restrictions on ships, which were required to purchase an often costly trading license.
Other nations leave their colonies to their own devices, not imposing any restrictions on ports or requirements for trading licenses. In this case, the sheer volume and geographical spread of the traders increases competition and therefore lowers profits. In this free-trade policy, colonies are able both to sell their own produce and buy European goods at a reasonable price. In Britain, this has been the policy since the dissolution of the Plymouth company, in the very early stages of colonization. France, too, has been adhering to this policy since the dissolution of the Mississippi company in Britain. The result is that profits made from trade between France and Britain with the colonies, though higher than they would be in a free competition situation, are far from spectacular—hence prices for European goods are not particularly high in the majority of French and English colonies.
With regard to Britain’s colonies exporting their surplus produce, certain commodities had restrictions on them confining them to the market of the mother country. Some of these commodities were known as “enumerated commodities,” due to the enumeration process used during transportation. The remainder, the “non-enumerated” goods, could be exported directly to other countries, provided they were transported in British or plantation ships of which the owners and three-quarters of the crew were British subjects.
These non-enumerated commodities included some of the most important productions of America and the West Indies: grain, lumber, salt, fish, sugar and rum. Grain is the major culture within all new colonies. By providing an extensive market for it, the law encourages colonies to extend this cultivation beyond just their own consumption needs, with the result that there is always sufficient to provide for a continually growing population.
In a densely forested country, in which timber is plentiful and therefore of little value, the expense of clearing a forest is a major obstacle to improvement. By providing an extensive market for colonies’ timber, the law endeavors to facilitate improvement by raising the price of a commodity which would otherwise be of little value, enabling them to make a profit from something that would otherwise have cost them money.
Countries with a low population density tend to have a surplus of cattle above and beyond their consumption needs, and as such the cattle are of little value. In order for a country to be improved, the price of cattle must be on a par with that of corn; by providing an extensive market for American cattle, the law endeavors to raise its value.
Legislature focused heavily on increasing Britain’s shipping and naval power by extending its colonies’ fisheries. The New Britain fishery was one of the world’s most sizeable fisheries. To this day, the whale fishery in New Britain operates for the most part without any bounties. Fish is a major export commodity from North America to Spain, Portugal, and the Mediterranean.
Sugar was originally an enumerated commodity, which could only be exported to Britain. But after the lobby by sugar-planters in 1751, its exportation was permitted worldwide; however, the restrictions imposed on its exportation, coupled with the high price of sugar in Britain, rendered this measure ineffectual. Britain and its colonies remain to this day practically the sole market for all sugar produced in the British plantations.
Rum is a major export commodity from America to the coast of Africa, where it is traded for Negro slaves.
If America’s entire surplus produce, including grain, salt and fish, had been enumerated and thereby forced into Britain’s market, it would have interfered significantly with the latter’s home industry. Prompted most likely by resentment about this interference, rather than a concern for America’s interests, major commodities were not only kept out of the enumeration process, but the importation into Britain of all grain (with the exception of rice) and all salt provisions was prohibited.
There are two sorts of enumerated commodities. Firstly, those native to America, which cannot be or are not produced in the mother country. These include molasses, coffee, cocoa-nuts, tobacco, pimento, ginger, whale fins, raw silk, cotton, wool, beaver, and other animal pelts of America, indigo, fustic, and other dyeing woods. Secondly, those not native to America, but which are and can be produced in the mother country, though not in sufficient quantities to meet demand, which is principally supplied from foreign countries. These include naval stores, masts, yards and bowsprits, tar, pitch, and turpentine, pig and bar iron, copper ore, hides and skins, pot and pearl ashes.
Even a heavy importation of commodities of the first group would not discourage the growth or interfere with the sale of any of the mother country’s produce. By confining these goods to the home market, it was believed that merchants would be able to buy them for less in the plantations and consequently sell them for a better profit at home; and also that this would establish good trading relations between the plantations and foreign countries, of which Britain was to be the centre or emporium, as the European country into which these commodities were first imported.
The free trade arrangement between the British colonies of America and the West Indies, both in enumerated and non-enumerated commodities, works perfectly, with each finding an extensive market for all of its produce.
Britain’s liberal views towards trade by its colonies apply mainly to goods in their crude state or in the first stage of manufacture. More advanced and refined goods were reserved for Britain, and laws were established to prevent their manufacture within the colonies, through measures such as high duties and sometimes prohibition.
Although Britain encourages the manufacture of pig and bar iron in America by exempting these products of import duties, it prohibits the establishment of any steel furnaces or slit-mills in its American plantations, requiring the colonies to purchase these goods from the home country’s merchants and forbidding them to work themselves in these more refined industries.
Britain also prohibits the exportation of American produce from one province to another, be it by water, horseback or cart, of hats, wools and woolen goods – a regulation which effectively prevents the manufacture of such commodities for distant sale, confining the colonies’ industry to basic household commodities.
Although these prohibitions may be unjust, they did not negatively affect the colonies. Land there is still so cheap, and consequently labor so costly, that they can import from the mother country almost all of the more refined goods for less than they could produce them themselves.
In everything except foreign trade, the English colonists were free to manage their own affairs, which were conducted in the same manner as business in the mother country, overseen by an assembly of representatives of the people, who are the body responsible for imposing taxes paid to the colony government.
In all European colonies, sugar-cane cultivation is carried out by Negro slaves. The profit and success of the plantations is directly dependent on the good management of these slaves—and in this respect, the French are significantly superior to the English. The law, which provides only weak protection to the slave against violence from his master, is likely to be better adhered to in a colony in which government is arbitrary than in one where it is free. In countries with established laws on slavery, magistrates often intervene in a master’s management of his slaves—whereas in a free country, where the master is perhaps a member of the colony assembly or an elector of such a member, magistrates do not tend to intervene, with this hierarchy making it more difficult for them to protect the slave.
A compassionate approach to managing slaves renders them not only more faithful but more intelligent – and ultimately more useful. Such slaves act more as free servants, often with integrity and concern for their masters’ interests—virtues generally more associated with free servants, and which will never be seen in a slave who is treated as slaves commonly are in countries in which the master is free and secure.
America’s discovery and colonization provided other countries with an extensive market for their surplus produce.
When trade is limited exclusively to the mother countries, the level of enjoyments and progress of industry is diminished because it decreases consumption, ultimately cramping the industry of the colonies. Consequently, commodities are more expensive for trading partners, which not only excludes other countries from a particular market, but confines colonies to particular markets. There is a great difference between being excluded from a particular market when other markets are open, and being confined to a particular market when others are shut. Colonization has therefore served to increase the enjoyments and progress the industries of Europe, though when trade is limited to the mother countries, the level of enjoyments and progress of industry is decreased below its natural level.
One of the advantages each colonizing country derives from its colonies is the military force they furnish for its defense and the revenue they contribute towards the support of its civil government. America’s European colonies have never yet furnished military support to their mother country, with the result that America’s military power has never been sufficient to guarantee its colonies’ defense. During times of war, the deployment of military forces to defend colonies has historically put a strain on mother countries’ military forces. In this respect, therefore, European colonies have been a cause of weakness rather than of strength to their respective mother countries, with the taxes levied on colonies, of Britain in particular, rarely covering the expense incurred even during times of peace, let alone during wartime. Such colonies, therefore, have been a source of expense rather than revenue for their respective mother countries.
The advantages mother countries derive from their colonies are mainly due to agreements on exclusive trade. The surplus produce of the British colonies that is classed as enumerated commodities can be sent only to Britain. Other countries then purchase from Britain. These commodities must be sold for less, therefore, in Britain than in other countries, and must contribute more to increase the enjoyments of Britain than to those of other countries. They must also contribute more towards the progress of Britain’s industry. Britain must get a better price for these enumerated commodities than other countries could get for the same commodities produced in their countries. Industries in Britain, for example, will be able to purchase a greater quantity of sugar and tobacco from its colonies than the same industries in foreign countries can purchase. Since both Britain’s and other countries’ produce is exchanged for sugar and tobacco produced by British colonies, this higher price guarantee ensures that Britain benefits more from this situation.
Britain’s monopoly on tobacco from Maryland and Virginia means it obtains it at a lower price than, for example, France, to whom Britain sells a considerable part of it. Had France and other European countries had a free trade agreement with Maryland and Virginia, the prices would likely have dropped, both for these European countries and for Britain.
Britain’s monopoly over trade with its colonies, established through the Navigation Acts, meant that foreign capital previously employed in this trade was withdrawn. England’s capital that had previously been employed for just part of it was now to cover the entirety. But this was insufficient, and consequently commodities were sold at very high prices. The capital which had previously bought just part of the colonies’ surplus produce was now employed to buy the entirety—but it could not buy such a volume at anything near the old price, and therefore bought at cheaper prices. The merchants benefited from this, buying cheap and selling for a high price, making a higher profit than the usual rate.
Britain’s monopoly over its colonies’ external trade, and the fact that the country’s capital has not increased in proportion to this trade, has meant that it has had to withdraw from other branches of trade part of the capital previously employed in them, in order to employ it in its colony trade. Consequently, colony trade has increased, while many other branches of foreign trade have diminished. The country’s commodities intended for foreign sale, instead of being traded with neighboring European markets, as was the case prior to the Navigation Acts, have been traded instead with the colonies—the market in which they have the monopoly, rather than to that in which they have many competitors. As such, the demise of foreign trade is a direct result of the extensive growth of colony trade; these other branches of trade have naturally suffered as a result of the country drawing some of its mercantile capital from them and investing it in its colonies.
CHAPTER 8: CONCLUSION OF THE MERCANTILE SYSTEM
The mercantile system, by encouraging exportation and discouraging importation, gives a country’s laborers an advantage, enabling them to undersell those in foreign markets.
Measures used to encourage the importation of materials for manufacture include exemption from duties to which other goods are subject, and bounties for goods from the British colonies, mainly restricted to American plantations.
The first such bounties were granted on the importation of naval stores from America, which included timber for masts, yards, and bowsprits; hemp, tar, pitch, and turpentine. The second bounty was on indigo from the British plantations. Others, which were granted at the time Britain started to experience problems with its American colonies, were on the importation of hemp, undressed flax and wood from America; raw silk, pipe, hogshead, and barrel-staves from the British plantations; and hemp from Ireland. Britain viewed the wealth of its American colonies as belonging to the mother country.
Some of the measures used to discourage the exportation of materials for manufacture include full prohibitions and high duties. The inland wool trade, for example, is subject to onerous and heavy restrictions; for instance, wool can only be packaged in packs of leather or pack-cloth, labeled “WOOL” or “YARN;” it cannot be loaded on any horse or cart, or physically transported by land within five miles of the coast at night. These regulations are in force throughout Britain.
The effect of these regulations has been to lower the price of British wool − which, indeed, was the purpose of the regulations. To negatively affect the interests of one group of citizens just to promote another, however, is unjust.
The exportation of all goods for manufacture was rendered duty free, except for instruments of trade. In the case of coal, which is used both in manufacture and as an instrument of trade, heavy export duties were imposed—which in fact amounted to more than the original value of the commodity at the coalmine.
The exportation of instruments of trade was restrained by prohibitions; the exportation of frames and engines for knitting woolen goods was prohibited, as were tools used in the manufacture of cotton, linen, woolen and silk.
A person who poaches a skilled craftsman from a British manufacturer to go and work abroad, whether to exercise or teach his trade, is liable to be fined up to a thousand pounds and subject to two years’ imprisonment. Any craftsman who moves abroad to exercise or teach his trade must return within six months—otherwise he will forfeit his land, goods, and chattels to the king and will be declared an alien in every respect, no longer eligible for the king’s protection.
Man’s liberty is so plainly sacrificed by the futile interests of our merchants and manufacturers. The motive of all these regulations is to extend our country’s industries—not by improving them but by repressing our neighbors and destroying competition.
But the laws governing our American and West Indian colonies sacrifice the interests of the home consumer in favor of those of the producer. Indeed, a whole empire has been established for the sole purpose of obliging consumers to buy from the homeland’s producers, to benefit these producers. But the slight profit this monopoly ensures our producers is paid for heavily by the home consumers, who contribute towards the maintenance and defense of the empire.
As a result, the last two last wars incurred expenses of over two hundred million with a new debt of over a hundred and seventy million over and above that spent during previous wars. The interest of this debt alone amounts to more than the profit made through the monopoly of the colony trade—indeed, it surpasses the entire value of the colony trade, or the whole value of the goods annually exported to the colonies.
CHAPTER 9: THE AGRICULTURAL SYSTEMS AS THE PRINCIPAL SOURCE OF REVENUE AND WEALTH OF EVERY COUNTRY
The line of thought, particularly amongst scholars in France, was that agricultural development was the sole source of a country’s revenue and wealth. Mr. Colbert, the famous minister of Louis XIV, however, embraced all of the prejudices of the mercantile system, and regulated the country’s industry and commerce on the same model as that of departments of a public office, rather than allowing men free rein. He prohibited the exportation of corn and excluded the country’s inhabitants from foreign trade, thus discouraging and suppressing the country’s agriculture, favoring industry over agriculture.
His thinking was directly opposed to that of the French scholars who believed that agricultural development represented the basis of a country’s wealth; whereas Mr. Colbert’s line of thought favored industry over agriculture, these French intellectuals favored agriculture over industry.
Under Mr. Colbert’s system, people were divided into three classes: landowners, cultivators (the productive class), artificers and merchants (the unproductive class). Landowners contribute to production by investing in improving the land, buildings, drains, enclosures, etc. (ground expenses).
Cultivators contribute by investing in instruments of husbandry, cattle, seed, and maintenance of the farmer’s family, servants and cattle. The produce of the land left over for the farmer once he has paid the rent should to be sufficient to cover all of his expenses, together with ordinary profits. Under this system, initial outlay expenses and annual expenses are called “productive expenses” since they go towards the end net produce. The ground expenses of the landlord, together with the original outlay and annual expenses of the farmer, are the only three expenses deemed productive. Under this system, all other expenses and all other classes of people, even those who are the most productive, are viewed as unproductive. Artificers and manufacturers in particular, whose work significantly improves the crude produce of the land, are viewed as barren and unproductive under this system.
The capital error of this system is its inaccurate representation of the class consisting of craftsmen, manufacturers and merchants as altogether barren and unproductive.
This system, with all its imperfections, has numerous followers, particularly the economists of France. Literature on this system was nevertheless the nearest approximation to the truth published at that time on the subject of political economy, and as such provides valuable information for anyone studying the principles of this topic. Although its suggestion that agricultural labor is the only productive labor is a somewhat narrow and confined notion, its recognition that a nation’s wealth consists not of the money but rather of the consumable goods produced annually by the labor of its society is a better, more liberal notion.
The Netherlands draws a great part of its subsistence from other countries; live cattle from Holstein and Jutland, and corn from all over Europe. A trading and manufacturing country is able to purchase a large volume of unfinished produce from other countries with just a small part of its own manufactured produce. On the contrary, a country with no trade or manufacturing is generally obliged to use a major part of its own produce to purchase a very small part of other countries’ manufactured produce.
European countries’ political economy favors manufacturing industries and foreign trade over agriculture, whereas other countries have tended to favor agriculture over manufacturing industries and foreign trade.
The major form of commerce of every nation is that between the inhabitants of the town and the country. The town purchases unfinished produce from the country, which it pays for by returning a portion of it manufactured and prepared for immediate use. The trade between these two different sets of people involves unfinished crude produce being exchanged for manufactured produce. When prices of manufactured goods rise, those of crude land-produced goods drop, thereby discouraging agriculture. When the number of craftsmen and manufacturers drops, the home market tends to diminish. Since this is the most important market for home-produced crude produce, agriculture is further discouraged.
The systems which favor agriculture and impose restraints on manufacturing and foreign trade indirectly discourage the very industry they are aiming to promote. They are more inconsistent than the mercantile system, which, by encouraging manufacturing and foreign trade over agriculture, channels a portion of a society’s capital away from a more profitable industry towards a less profitable one.
Any system which endeavors to channel a greater share of capital towards a particular industry than would naturally go to it is actually going against the very process it is endeavoring to promote. This approach hinders rather than accelerates a society’s progress towards real wealth and power, diminishing the real value of the annual produce of its land and labor.
When a system of either preferential agreements or restrictions is removed, a system of natural liberty establishes itself of its own accord. Any man, as long as he does not break the law, is left free to pursue his own interests in his own way, and to compete with others through industry and capital.