Special Restrictions on Imports From Countries With a Supposedly Unfavorable Trade Balance

To lay extraordinary restraints upon the importation of goods of almost all kinds, from those particular countries with which the balance of trade is supposed to be disadvantageous, is the second expedient by which the commercial system proposes to increase the quantity of gold and silver. Thus, in Great Britain, Silesia lawns may be imported for home consumption, upon paying certain duties; but French cambrics and lawns are prohibited to be imported, except into the port of London, there to be warehoused for exportation. Higher duties are imposed upon the wines of France than upon those of Portugal, or indeed of any other country. By what is called the impost 1692, a duty of five and-twenty per cent. of the rate or value, was laid upon all French goods; while the goods of other nations were, the greater part of them, subjected to much lighter duties, seldom exceeding five per cent. The wine, brandy, salt, and vinegar of France, were indeed excepted; these commodities being subjected to other heavy duties, either by other laws, or by particular clauses of the same law. In 1696, a second duty of twenty-five per cent. the first not having been thought a sufficient discouragement, was imposed upon all French goods, except brandy; together with a new duty of five-and-twenty pounds upon the ton of French wine, and another of fifteen pounds upon the ton of French vinegar. French goods have never been omitted in any of those general subsidies or duties of five per cent. which have been imposed upon all, or the greater part, of the goods enumerated in the book of rates. If we count the one-third and two-third subsidies as making a complete subsidy between them, there have been five of these general subsidies; so that, before the commencement of the present war, seventy-five per cent. may be considered as the lowest duty to which the greater part of the goods of the growth, produce, or manufacture of France, were liable. But upon the greater part of goods, those duties are equivalent to a prohibition. The French, in their turn, have, I believe, treated our goods and manufactures just as hardly; though I am not so well acquainted with the particular hardships which they have imposed upon them. Those mutual restraints have put an end to almost all fair commerce between the two nations; and smugglers are now the principal importers, either of British goods into France, or of French goods into Great Britain. The principles which I have been examining, in the foregoing chapter, took their origin from private interest and the spirit of monopoly; those which I am going te examine in this, from national prejudice and animosity. They are, accordingly, as might well be expected, still more unreasonable. They are so, even upon the principles of the commercial system.

The second method by which the commercial system proposes to increase the quantity of gold and silver is to impose extraordinary restrictions on imports. These restrictions apply to goods of almost all kinds from countries with which the balance of trade is thought to be unfavorable. Thus, in Great Britain, Silesia lawns may be imported for use at home if certain duties are paid. But French cambrics and lawns may be imported only through the port of London, where they must be stored for export. Higher duties are imposed on French wines than on those of Portugal or, indeed, any other country. The law known as the impost of 1692 imposed a duty of 25 percent of the assessed value on all French goods. Most goods from other nations faced much lighter duties, seldom exceeding 5 percent. French wine, brandy, salt, and vinegar were exceptions. These goods were subject to other heavy duties, either under other laws or under particular clauses of the same law. In 1696, a second duty of 25 percent was imposed on all French goods except brandy. The first duty had not been thought sufficient to discourage imports. A new duty of 25 pounds per ton was also imposed on French wine, and another of 15 pounds per ton on French vinegar. French goods have never been exempted from the general subsidies, or duties of 5 percent, imposed on all or most goods listed in the book of rates. If we count the one-third and two-thirds subsidies together as one complete subsidy, there have been five such general subsidies. So, before the present war began, 75 percent may be considered the lowest duty on most goods grown, produced, or manufactured in France. But for most goods, those duties amount to a prohibition. The French, for their part, have, I believe, treated our goods and manufactures just as harshly. I am less familiar, though, with the particular burdens they have imposed on them. These mutual restrictions have ended almost all legitimate commerce between the two nations. Smugglers are now the principal importers of British goods into France and French goods into Great Britain. The principles I examined in the previous chapter arose from private interest and the spirit of monopoly. Those I will examine in this chapter arose from national prejudice and hostility. As might be expected, they are still more unreasonable. They are unreasonable even by the principles of the commercial system.

First, Though it were certain that in the case of a free trade between France and England, for example, the balance would be in favour of France, it would by no means follow that such a trade would be disadvantageous to England, or that the general balance of its whole trade would thereby be turned more against it. If the wines of France are better and cheaper than those of Portugal, or its linens than those of Germany, it would be more advantageous for Great Britain to purchase both the wine and the foreign linen which it had occasion for of France, than of Portugal and Germany. Though the value of the annual importations from France would thereby be greatly augmented, the value of the whole annual importations would be diminished, in proportion as the French goods of the same quality were cheaper than those of the other two countries. This would be the case, even upon the supposition that the whole French goods imported were to be consumed in Great Britain.

First, suppose that free trade between France and England would certainly leave the balance of trade in France's favor. Even so, it would not follow that such trade would disadvantage England. Nor would it follow that the overall balance of England's trade would become less favorable. If French wines are better and cheaper than Portuguese wines, or French linens better and cheaper than German linens, Great Britain would benefit from buying both the wine and the foreign linen it needs from France rather than from Portugal and Germany. This would greatly increase the value of annual imports from France. But the value of all annual imports would fall, to the extent that French goods of the same quality were cheaper than those from Portugal and Germany. This would be true even if all the French goods imported were consumed in Great Britain.

But, Secondly, A great part of them might be re-exported to other countries, where, being sold with profit, they might bring back a return, equal in value, perhaps, to the prime cost of the whole French goods imported. What has frequently been said of the East India trade, might possibly be true of the French; that though the greater part of East India goods were bought with gold and silver, the re-exportation of a part of them to other countries brought back more gold and silver to that which carried on the trade, than the prime cost of the whole amounted to. One of the most important branches of the Dutch trade at present, consists in the carriage of French goods to other European countries. Some part even of the French wine drank in Great Britain, is clandestinely imported from Holland and Zealand. If there was either a free trade between France and England, or if French goods could be imported upon paying only the same duties as those of other European nations, to be drawn back upon exportation, England might have some share of a trade which is found so advantageous to Holland.

But second, a large share of the French goods could be re-exported to other countries and sold at a profit. The returns might perhaps equal the original cost of all the French goods imported. What has often been said of the East India trade might also be true of the French trade. Most East India goods were bought with gold and silver. Yet re-exporting some of them to other countries brought back more gold and silver than all the goods had originally cost the trading country. One of the most important branches of Dutch trade today is carrying French goods to other European countries. Even some of the French wine drunk in Great Britain is secretly imported from Holland and Zealand. England might share in a trade that Holland finds so profitable if trade between France and England were free. England might also share in it if French goods could be imported at the same duties as goods from other European nations, with those duties refunded upon export.

Thirdly, and lastly, There is no certain criterion by which we can determine on which side what is called the balance between any two countries lies, or which of them exports to the greatest value. National prejudice and animosity, prompted always by the private interest of particular traders, are the principles which generally direct our judgment upon all questions concerning it. There are two criterions, however, which have frequently been appealed to upon such occasions, the custom-house books and the course of exchange. The custom-house books, I think, it is now generally acknowledged, are a very uncertain criterion, on account of the inaccuracy of the valuation at which the greater part of goods are rated in them. The course of exchange is, perhaps, almost equally so.

Thirdly and lastly, there is no reliable way to determine the trade balance between two countries. We cannot tell which country exports goods of greater value. National prejudice and hostility generally guide our judgment on all questions about the trade balance. These are always encouraged by the private interests of particular traders. Two measures, however, have often been used to judge the trade balance: customs records and exchange rates. I think it is now generally acknowledged that customs records are a very unreliable measure. This is because the values assigned to most goods in those records are inaccurate. Exchange rates are perhaps almost equally unreliable.

When the exchange between two places, such as London and Paris, is at par, it is said to be a sign that the debts due from London to Paris are compensated by those due from Paris to London. On the contrary, when a premium is paid at London for a bill upon Paris, it is said to be a sign that the debts due from London to Paris are not compensated by those due from Paris to London, but that a balance in money must be sent out from the latter place; for the risk, trouble, and expense, of exporting which, the premium is both demanded and given. But the ordinary state of debt and credit between those two cities must necessarily be regulated, it is said, by the ordinary course of their dealings with one another. When neither of them imports from from other to a greater amount than it exports to that other, the debts and credits of each may compensate one another. But when one of them imports from the other to a greater value than it exports to that other, the former necessarily becomes indebted to the latter in a greater sum than the latter becomes indebted to it: the debts and credits of each do not compensate one another, and money must be sent out from that place of which the debts overbalance the credits. The ordinary course of exchange, therefore, being an indication of the ordinary state of debt and credit between two places, must likewise be an indication of the ordinary course of their exports and imports, as these necessarily regulate that state.

When the exchange rate between two places, such as London and Paris, is at par, it is said to show that the debts owed by each city to the other balance out. But suppose a premium is paid in London for a bill of exchange payable in Paris. This is said to show that London owes Paris more than Paris owes London. The balance must therefore be sent in money from London. The premium is demanded and paid to cover the risk, trouble, and expense of exporting the money. But the usual balance of debts and credits between the two cities must, it is said, be determined by their usual dealings with each other. If neither city imports more from the other than it exports to it, their debts and credits may balance out. But if one city imports more in value from the other than it exports to it, the first city necessarily owes the second more than the second owes it. Their debts and credits do not balance, and money must be sent from the city whose debts exceed its credits. The usual exchange rate is therefore an indication of the usual balance of debts and credits between two places. It must also indicate their usual exports and imports, since these necessarily determine that balance.

But though the ordinary course of exchange shall be allowed to be a sufficient indication of the ordinary state of debt and credit between any two places, it would not from thence follow, that the balance of trade was in favour of that place which had the ordinary state of debt and credit in its favour. The ordinary state of debt and credit between any two places is not always entirely regulated by the ordinary course of their dealings with one another, but is often influenced by that of the dealings of either with many other places. If it is usual, for example, for the merchants of England to pay for the goods which they buy of Hamburg, Dantzic, Riga, etc. by bills upon Holland, the ordinary state of debt and credit between England and Holland will not be regulated entirely by the ordinary course of the dealings of those two countries with one another, but will be influenced by that of the dealings in England with those other places. England may be obliged to send out every year money to Holland, though its annual exports to that country may exceed very much the annual value of its imports from thence, and though what is called the balance of trade may be very much in favour of England.

Even if the usual exchange rate adequately indicates the usual balance of debts and credits between two places, another conclusion does not follow. The place with the favorable balance of debts and credits does not necessarily have a favorable balance of trade. The usual balance of debts and credits between two places is not always determined entirely by their dealings with each other. It is often influenced by either place’s dealings with many others. For example, English merchants may usually pay for goods from Hamburg, Dantzic, Riga, and other places with bills drawn on Holland. If so, the usual balance of debts and credits between England and Holland will not depend entirely on their dealings with each other. It will also be influenced by England’s dealings with those other places. England may have to send money to Holland every year, even though its annual exports there greatly exceed its annual imports from Holland. Thus, what is called the balance of trade may be very much in England’s favor.

In the way, besides, in which the par of exchange has hitherto been computed, the ordinary course of exchange can afford no sufficient indication that the ordinary state of debt and credit is in favour of that country which seems to have, or which is supposed to have, the ordinary course of exchange in its favour; or, in other words, the real exchange may be, and in fact often is, so very different from the computed one, that, from the course of the latter, no certain conclusion can, upon many occasions, be drawn concerning that of the former.

Besides, the par of exchange has been calculated in a way that makes the usual exchange rate an unreliable guide to a country's debts and credits. The rate may seem to favor a country, or be assumed to favor it, but this does not sufficiently show that its usual balance of debts and credits is in its favor. In other words, the real exchange rate may be, and often is, very different from the calculated rate. So, on many occasions, the calculated rate cannot tell us for certain what the real rate is.

When for a sum or money paid in England, containing, according to the standard of the English mint, a certain number of ounces of pure silver, you receive a bill for a sum of money to be paid in France, containing, according to the standard of the French mint, an equal number of ounces of pure silver, exchange is said to be at par between England and France. When you pay more, you are supposed to give a premium, and exchange is said to be against England, and in favour of France. When you pay less, you are supposed to get a premium, and exchange is said to be against France, and in favour of England.

Suppose you pay a sum of money in England and receive a bill for a sum payable in France. Under the standards of the English and French mints, each sum contains an equal number of ounces of pure silver. The exchange between England and France is then said to be at par. If you pay more, you are said to pay a premium. The exchange is then said to be against England and in favor of France. If you pay less, you are said to receive a premium. The exchange is then said to be against France and in favor of England.

But, first, We cannot always judge of the value of the current money of different countries by the standard of their respective mints. In some it is more, in others it is less worn, clipt, and otherwise degenerated from that standard. But the value of the current coin of every country, compared with that of any other country, is in proportion, not to the quantity of pure silver which it ought to contain, but to that which it actually does contain. Before the reformation of the silver coin in King William’s time, exchange between England and Holland, computed in the usual manner, according to the standard of their respective mints, was five-and twenty per cent. against England. But the value of the current coin of England, as we learn from Mr Lowndes, was at that time rather more than five-and-twenty per cent. below its standard value. The real exchange, therefore, may even at that time have been in favour of England, notwithstanding the computed exchange was so much against it; a smaller number or ounces of pure silver, actually paid in England, may have purchased a bill for a greater number of ounces of pure silver to be paid in Holland, and the man who was supposed to give, may in reality have got the premium. The French coin was, before the late reformation of the English gold coin, much less wore than the English, and was perhaps two or three per cent. nearer its standard. If the computed exchange with France, therefore, was not more than two or three per cent. against England, the real exchange might have been in its favour. Since the reformation of the gold coin, the exchange has been constantly in favour of England, and against France.

First, we cannot always judge the value of different countries’ circulating money by their official mint standards. In some countries, coins are more worn, clipped, or otherwise degraded than in others. But the value of one country’s coins compared with another’s depends on how much pure silver they actually contain. It does not depend on how much they should contain according to the mint standards. Before the silver coinage was reformed in King William’s time, the exchange rate between England and Holland was calculated in the usual way, according to their mint standards. It stood at 25 percent against England. But, as Mr Lowndes tells us, England’s circulating coins were then worth rather more than 25 percent below their standard value. The real exchange rate may therefore have favored England, even though the calculated rate was so much against it. A smaller number of ounces of pure silver actually paid in England may have bought a bill payable in Holland for a greater number of ounces. The man thought to be paying the premium may in fact have received it. Before the recent reform of English gold coinage, French coins were much less worn than English coins. They were perhaps two or three percent closer to their standard value. If the calculated exchange rate with France was therefore no more than two or three percent against England, the real rate might have favored England. Since the reform of the gold coinage, the exchange rate has consistently favored England over France.

Secondly, In some countries the expense of coinage is defrayed by the government; in others, it is defrayed by the private people, who carry their bullion to the mint, and the government even derives some revenue from the coinage. In England it is defrayed by the government; and if you carry a pound weight of standard silver to the mint, you get back sixty-two shillings, containing a pound weight of the like standard silver. In France a duty of eight per cent. is deducted for the coinage, which not only defrays the expense of it, but affords a small revenue to the government. In England, as the coinage costs nothing, the current coin can never be much more valuable than the quantity of bullion which it actually contains. In France, the workmanship, as you pay for it, adds to the value, in the same manner as to that of wrought plate. A sum of French money, therefore, containing an equal weight of pure silver, is more valuable than a sum of English money containing an equal weight of pure silver, and must require more bullion, or other commodities, to purchase it. Though the current coin of the two countries, therefore, were equally near the standards of their respective mints, a sum of English money could not well purchase a sum of French money containing an equal number of ounces of pure silver, nor, consequently, a bill upon France for such a sum. If, for such a bill, no more additional money was paid than what was sufficient to compensate the expense of the French coinage, the real exchange might be at par between the two countries; their debts and credits might mutually compensate one another, while the computed exchange was considerably in favour of France. If less than this was paid, the real exchange might be in favour of England, while the computed was in favour of France.

Secondly, in some countries, the government pays the cost of making coins. In others, private individuals pay when they take their bullion to the mint. In those countries, the government even earns some revenue from making coins. In England, the government pays the cost. If you take a pound of standard silver to the mint, you receive sixty-two shillings. These coins contain a pound of silver of the same standard. In France, an eight percent charge is deducted for making coins. This charge not only covers the cost but also provides the government with a small revenue. In England, coinage costs nothing, so coins in circulation can never be worth much more than the bullion they contain. In France, you pay for the workmanship, which adds to the coins’ value, just as it does with worked silverware. A sum of French money is therefore worth more than a sum of English money containing the same weight of pure silver. It must also cost more bullion or other goods to purchase. Suppose, then, that the coins in circulation in both countries were equally close to their respective mints’ standards. Even so, a sum of English money could not easily purchase a sum of French money containing the same number of ounces of pure silver. Nor could it purchase a bill payable in France for such a sum. Suppose no more extra money was paid for such a bill than was needed to cover the French coinage charge. In that case, the real exchange between the two countries might be at par. Their debts and credits might balance each other, while the computed exchange was considerably in France’s favor. If less than the coinage charge was paid, the real exchange might favor England, while the computed exchange favored France.

Thirdly, and lastly, In some places, as at Amsterdam, Hamburg, Venice, etc. foreign bills of exchange are paid in what they call bank money; while in others, as at London, Lisbon, Antwerp, Leghorn, etc. they are paid in the common currency of the country. What is called bank money, is always of more value than the same nominal sum of common currency. A thousand guilders in the bank of Amsterdam, for example, are of more value than a thousand guilders of Amsterdam currency. The difference between them is called the agio of the bank, which at Amsterdam is generally about five per cent. Supposing the current money of the two countries equally near to the standard of their respective mints, and that the one pays foreign bills in this common currency, while the other pays them in bank money, it is evident that the computed exchange may be in favour of that which pays in bank money, though the real exchange should be in favour of that which pays in current money; for the same reason that the computed exchange may be in favour of that which pays in better money, or in money nearer to its own standard, though the real exchange should be in favour of that which pays in worse. The computed exchange, before the late reformation of the gold coin, was generally against London with Amsterdam, Hamburg, Venice, and, I believe, with all other places which pay in what is called bank money. It will by no means follow, however, that the real exchange was against it. Since the reformation of the gold coin, it has been in favour of London, even with those places. The computed exchange has generally been in favour of London with Lisbon, Antwerp, Leghorn, and, if you except France, I believe with most other parts of Europe that pay in common currency; and it is not improbable that the real exchange was so too.

Third and last, in some places, such as Amsterdam, Hamburg, and Venice, foreign bills of exchange are paid in bank money. In others, such as London, Lisbon, Antwerp, and Leghorn, they are paid in the country’s common currency. Bank money is always worth more than the same nominal sum in common currency. For example, a thousand guilders in the bank of Amsterdam are worth more than a thousand guilders in Amsterdam currency. The difference is called the bank’s agio, which at Amsterdam is generally about five percent. Suppose the currency of two countries is equally close to the standard of their respective mints. Suppose also that one country pays foreign bills in its common currency, while the other pays them in bank money. The computed exchange rate may then favor the country that pays in bank money. This may be so even though the real exchange rate favors the country that pays in common currency. The reason is the same as when one country pays in better money, closer to its mint’s standard. The computed exchange rate may favor that country, though the real exchange rate favors the country that pays in worse money. Before the recent reform of the gold coinage, the computed exchange rate generally went against London with Amsterdam, Hamburg, and Venice. I believe it also went against London with all other places that pay in bank money. This does not mean, however, that the real exchange rate went against London. Since the reform of the gold coinage, the computed exchange rate has favored London, even with those places. The computed exchange rate has generally favored London with Lisbon, Antwerp, and Leghorn. Except for France, I believe it has also favored London with most other parts of Europe that pay in common currency. It is not improbable that the real exchange rate favored London too.

Digression concerning Banks of Deposit, particularly concerning that of Amsterdam.

A digression on deposit banks, especially the Bank of Amsterdam.

The currency of a great state, such as France or England, generally consists almost entirely of its own coin. Should this currency, therefore, be at any time worn, clipt, or otherwise degraded below its standard value, the state, by a reformation of its coin, can effectually re-establish its currency. But the currency of a small state, such as Genoa or Hamburg, can seldom consist altogether in its own coin, but must be made up, in a great measure, of the coins of all the neighbouring states with which its inhabitants have a continual intercourse. Such a state, therefore, by reforming its coin, will not always be able to reform its currency. If foreign bills of exchange are paid in this currency, the uncertain value of any sum, of what is in its own nature so uncertain, must render the exchange always very much against such a state, its currency being in all foreign states necessarily valued even below what it is worth.

The currency of a great state, such as France or England, generally consists almost entirely of its own coins. These coins may become worn, clipped, or otherwise reduced below their standard value. If so, the state can effectively restore its currency by reforming its coinage. But the currency of a small state, such as Genoa or Hamburg, can seldom consist entirely of its own coins. It must be made up largely of coins from all the neighboring states with which its inhabitants trade continually. Such a state, therefore, cannot always reform its currency by reforming its own coinage. If foreign bills of exchange are paid in this currency, the value of any sum will be uncertain. Because the currency is so uncertain by nature, this must make the exchange rate very unfavorable to such a state. Its currency will necessarily be valued in all foreign states at even less than it is worth.

In order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted that foreign bills of exchange of a certain value should be paid, not in common currency, but by an order upon, or by a transfer in the books of a certain bank, established upon the credit, and under the protection of the state, this bank being always obliged to pay, in good and true money, exactly according to the standard of the state. The banks of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg, seem to have been all originally established with this view, though some of them may have afterwards been made subservient to other purposes. The money of such banks, being better than the common currency of the country, necessarily bore an agio, which was greater or smaller, according as the currency was supposed to be more or less degraded below the standard of the state. The agio of the bank of Hamburg, for example, which is said to be commonly about fourteen per cent. is the supposed difference between the good standard money of the state, and the clipt, worn, and diminished currency, poured into it from all the neighbouring states.

To remedy the inconvenience this disadvantageous exchange caused their merchants, small states often passed laws once they began to consider trade. These laws required foreign bills of exchange above a certain value to be paid through a designated bank. Payment had to be made by an order on the bank or a transfer in its books, not in common currency. The bank was established on the credit of the state and under its protection. It was always required to pay in good, genuine money that exactly met the state’s standard. The banks of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg all seem to have been established originally for this purpose. Some of them, though, may later have been used for other purposes. The money of such banks was better than the country’s common currency, so it necessarily carried an agio, or premium. The agio was greater or smaller depending on how far the currency was thought to have fallen below the state’s standard. For example, the agio of the bank of Hamburg is said to be commonly about fourteen percent. This is the supposed difference between the state’s good standard money and the clipped, worn, and diminished currency poured into Hamburg from all the neighboring states.

Before 1609, the great quantity of clipt and worn foreign coin which the extensive trade of Amsterdam brought from all parts of Europe, reduced the value of its currency about nine per cent. below that of good money fresh from the mint. Such money no sooner appeared, than it was melted down or carried away, as it always is in such circumstances. The merchants, with plenty of currency, could not always find a sufficient quantity of good money to pay their bills of exchange; and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain.

Before 1609, Amsterdam's extensive trade brought in large quantities of clipped and worn foreign coins from all parts of Europe. These coins reduced the value of its currency to about nine percent below that of good money fresh from the mint. As soon as good money appeared, it was melted down or carried away, as it always is in such circumstances. Merchants had plenty of currency, but they could not always find enough good money to pay their bills of exchange. As a result, the value of those bills became largely uncertain, despite several regulations meant to prevent this.

In order to remedy these inconveniencies, a bank was established in 1609, under the guarantee of the city. This bank received both foreign coin, and the light and worn coin of the country, at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage and the other necessary expense of management. For the value which remained after this small deduction was made, it gave a credit in its books. This credit was called bank money, which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money. It was at the same time enacted, that all bills drawn upon or negotiated at Amsterdam, of the value of 600 guilders and upwards, should be paid in bank money, which at once took away all uncertainty in the value of those bills. Every merchant, in consequence of this regulation, was obliged to keep an account with the bank, in order to pay his foreign bills of exchange, which necessarily occasioned a certain demand for bank money.

To remedy these problems, a bank was established in 1609 under the city’s guarantee. The bank accepted foreign coins and the country’s light and worn coins. It valued them according to their actual metal content, measured in the country’s good standard money. It deducted only enough to cover the costs of coinage and other necessary management expenses. It then credited the remaining value to the depositor in its books. This credit was called bank money. Because it represented money that exactly met the mint’s standard, it always had the same real value. It was also intrinsically worth more than money in circulation. At the same time, a law required all bills drawn on or negotiated in Amsterdam for 600 guilders or more to be paid in bank money. This immediately removed all uncertainty about the value of those bills. As a result, every merchant had to keep a bank account to pay foreign bills of exchange. This necessarily created a demand for bank money.

Bank money, over and above both its intrinsic superiority to currency, and the additional value which this demand necessarily gives it, has likewise some other advantages, It is secure from fire, robbery, and other accidents; the city of Amsterdam is bound for it; it can be paid away by a simple transfer, without the trouble of counting, or the risk of transporting it from one place to another. In consequence of those different advantages, it seems from the beginning to have borne an agio; and it is generally believed that all the money originally deposited in the bank, was allowed to remain there, nobody caring to demand payment of a debt which he could sell for a premium in the market. By demanding payment of the bank, the owner of a bank credit would lose this premium. As a shilling fresh from the mint will buy no more goods in the market than one of our common worn shillings, so the good and true money which might be brought from the coffers of the bank into those of a private person, being mixed and confounded with the common currency of the country, would be of no more value than that currency, from which it could no longer be readily distinguished. While it remained in the coffers of the bank, its superiority was known and ascertained. When it had come into those of a private person, its superiority could not well be ascertained without more trouble than perhaps the difference was worth. By being brought from the coffers of the bank, besides, it lost all the other advantages of bank money; its security, its easy and safe transferability, its use in paying foreign bills of exchange. Over and above all this, it could not be brought from those coffers, as will appear by and by, without previously paying for the keeping.

Bank money has several advantages beyond its inherent superiority to ordinary currency and the extra value that demand gives it. It is safe from fire, robbery, and other accidents, and the city of Amsterdam guarantees it. It can be paid by a simple transfer, without the trouble of counting it or the risk of transporting it. Because of these advantages, bank money seems to have carried an agio, or premium, from the beginning. It is generally believed that all the money originally deposited in the bank was left there. No one wanted to demand payment of a debt that could be sold at a premium in the market. By demanding payment from the bank, the owner of a bank credit would lose this premium. A shilling fresh from the mint will buy no more goods in the market than an ordinary worn shilling. In the same way, sound money taken from the bank and placed in private hands would be mixed with the country’s ordinary currency. Once mixed, it could no longer easily be distinguished from that currency and would be worth no more. While it remained in the bank, its superiority was known and established. Once in private hands, establishing its superiority might be more trouble than the difference was worth. Taking the money out of the bank also meant losing all the other advantages of bank money. These included its security, its easy and safe transfer, and its use in paying foreign bills of exchange. On top of all this, the money could not be taken out without first paying for its safekeeping, as will become clear later.

Those deposits of coin, or those deposits which the bank was bound to restore in coin, constituted the original capital of the bank, or the whole value of what was represented by what is called bank money. At present they are supposed to constitute but a very small part of it. In order to facilitate the trade in bullion, the bank has been for these many years in the practice of giving credit in its books, upon deposits of gold and silver bullion. This credit is generally about five per cent. below the mint price of such bullion. The bank grants at the same time what is called a recipice or receipt, entitling the person who makes the deposit, or the bearer, to take out the bullion again at any time within six months, upon transferring to the bank a quantity of bank money equal to that for which credit had been given in its books when the deposit was made, and upon paying one-fourth per cent. for the keeping, if the deposit was in silver; and one-half per cent. if it was in gold; but at the same time declaring, that in default of such payment, and upon the expiration of this term, the deposit should belong to the bank, at the price at which it had been received, or for which credit had been given in the transfer books. What is thus paid for the keeping of the deposit may be considered as a sort of warehouse rent; and why this warehouse rent should be so much dearer for gold than for silver, several different reasons have been assigned. The fineness of gold, it has been said, is more difficult to be ascertained than that of silver. Frauds are more easily practised, and occasion a greater loss in the most precious metal. Silver, besides, being the standard metal, the state, it has been said, wishes to encourage more the making of deposits of silver than those of gold.

Those coin deposits, and deposits the bank had to repay in coin, formed the bank’s original capital. They made up the whole value represented by what is called bank money. Today, they are thought to make up only a very small part of that value. To make trading in bullion easier, the bank has for many years given book credit for deposits of gold and silver bullion. This credit is generally about five percent below the mint price of the bullion. At the same time, the bank issues what is called a recipice, or receipt. The receipt entitles the depositor or its bearer to withdraw the bullion at any time within six months. To do so, the bearer must transfer to the bank the same amount of bank money credited when the deposit was made. The bearer must also pay a storage fee of one-quarter percent for silver or one-half percent for gold. But the receipt also states what happens if this payment is not made before the six months expire. The deposit then belongs to the bank at the price at which it was received, or the amount credited in the transfer books. The storage fee may be thought of as a kind of warehouse rent. Several reasons have been given for why this rent should be so much higher for gold than for silver. Gold’s purity, it has been said, is harder to determine than silver’s. Fraud is easier to commit with the more precious metal and causes a greater loss. Silver, moreover, is the standard metal. For this reason, it has been said, the state wishes to encourage deposits of silver more than deposits of gold.

Deposits of bullion are most commonly made when the price is somewhat lower than ordinary, and they are taken out again when it happens to rise. In Holland the market price of bullion is generally above the mint price, for the same reason that it was so in England before the late reformation of the gold coin. The difference is said to be commonly from about six to sixteen stivers upon the mark, or eight ounces of silver, of eleven parts of fine and one part alloy. The bank price, or the credit which the bank gives for the deposits of such silver (when made in foreign coin, of which the fineness is well known and ascertained, such as Mexico dollars), is twenty-two guilders the mark: the mint price is about twenty-three guilders, and the market price is from twenty-three guilders six, to twenty-three guilders sixteen stivers, or from two to three per cent. above the mint price.

Bullion is most often deposited when its price is somewhat lower than usual. It is withdrawn when the price rises. In Holland, the market price of bullion is generally above the mint price. This is for the same reason it was above the mint price in England before the recent reform of the gold coinage. The difference is said to be commonly about six to sixteen stivers per mark. A mark is eight ounces of silver made up of eleven parts pure silver and one part alloy. The bank gives credit at a rate of twenty-two guilders per mark for deposits of such silver. This applies when the silver is in foreign coins of known and established purity, such as Mexico dollars. The mint price is about twenty-three guilders per mark. The market price is from twenty-three guilders and six stivers to twenty-three guilders and sixteen stivers per mark. That is two to three percent above the mint price.

The following are the prices at which the bank of Amsterdam at present {September 1775} receives bullion and coin of different kinds:

As of September 1775, the bank of Amsterdam accepts different kinds of bullion and coins at the following prices:

Bar silver, containing 11-12ths fine silver, 21 Guilders / mark, and in this proportion down to 1-4th fine, on which 5 guilders are given. Fine bars,................. 28 Guilders / mark.

Silver bars containing 11/12 fine silver: 21 guilders per mark. The rate decreases proportionally down to 1/4 fine silver, which receives 5 guilders. Fine silver bars: 28 guilders per mark.

Bar or ingot gold is received in proportion to its fineness, compared with the above foreign gold coin. Upon fine bars the bank gives 340 per mark. In general, however, something more is given upon coin of a known fineness, than upon gold and silver bars, of which the fineness cannot be ascertained but by a process of melting and assaying.

Gold bars or ingots are accepted according to their fineness, compared with the foreign gold coins mentioned above. The bank gives 340 per mark for fine gold bars. In general, however, it gives slightly more for coins of known fineness than for gold and silver bars. The fineness of bars can only be determined by melting and assaying them.

The proportions between the bank price, the mint price, and the market price of gold bullion, are nearly the same. A person can generally sell his receipt for the difference between the mint price of bullion and the market price. A receipt for bullion is almost always worth something, and it very seldom happens, therefore, that anybody suffers his receipts to expire, or allows his bullion to fall to the bank at the price at which it had been received, either by not taking it out before the end of the six months, or by neglecting to pay one fourth or one half per cent. in order to obtain a new receipt for another six months. This, however, though it happens seldom, is said to happen sometimes, and more frequently with regard to gold than with regard to silver, on account of the higher warehouse rent which is paid for the keeping of the more precious metal.

The proportions between the bank price, the mint price, and the market price of gold bullion are nearly the same. A person can usually sell a receipt for the difference between the mint price and the market price of bullion. A receipt for bullion is almost always worth something. So people very rarely let their receipts expire and allow the bank to take their bullion at its original deposit price. This can happen if they fail to withdraw the bullion before the six months are up. It can also happen if they neglect to pay one quarter or one half of one percent for a new six-month receipt. Though this rarely happens, it is said to happen sometimes. It happens more often with gold than with silver because the storage fee for the more precious metal is higher.

The person who, by making a deposit of bullion, obtains both a bank credit and a receipt, pays his bills of exchange as they become due, with his bank credit; and either sells or keeps his receipt, according as he judges that the price of bullion is likely to rise or to fall. The receipt and the bank credit seldom keep long together, and there is no occasion that they should. The person who has a receipt, and who wants to take out bullion, finds always plenty of bank credits, or bank money, to buy at the ordinary price, and the person who has bank money, and wants to take out bullion, finds receipts always in equal abundance.

A person who deposits bullion receives both bank credit and a receipt. The person uses the bank credit to pay bills of exchange as they come due. The person either sells or keeps the receipt, depending on whether the price of bullion seems likely to rise or fall. The receipt and the bank credit seldom remain together for long, and there is no need for them to do so. A person with a receipt who wants to withdraw bullion can always buy plenty of bank credit, or bank money, at the usual price. A person with bank money who wants to withdraw bullion can always find just as many receipts available.

The owners of bank credits, and the holders of receipts, constitute two different sorts of creditors against the bank. The holder of a receipt cannot draw out the bullion for which it is granted, without re-assigning to the bank a sum of bank money equal to the price at which the bullion had been received. If he has no bank money of his own, he must purchase it of those who have it. The owner of bank money cannot draw out bullion, without producing to the bank receipts for the quantity which he wants. If he has none of his own, he must buy them of those who have them. The holder of a receipt, when he purchases bank money, purchases the power of taking out a quantity of bullion, of which the mint price is five per cent. above the bank price. The agio of five per cent. therefore, which he commonly pays for it, is paid, not for an imaginary, but for a real value. The owner of bank money, when he purchases a receipt, purchases the power of taking out a quantity of bullion, of which the market price is commonly from two to three per cent. above the mint price. The price which he pays for it, therefore, is paid likewise for a real value. The price of the receipt, and the price of the bank money, compound or make up between them the full value or price of the bullion.

Owners of bank credits and holders of receipts are two different kinds of creditors of the bank. A receipt holder cannot withdraw the bullion covered by the receipt without transferring bank money back to the bank. The amount must equal the price at which the bank received the bullion. If the receipt holder has no bank money, he must buy it from someone who does. An owner of bank money cannot withdraw bullion without presenting receipts for the amount he wants. If he has no receipts, he must buy them from someone who does. When a receipt holder buys bank money, he buys the right to withdraw a quantity of bullion. The mint price of that bullion is five percent above the bank price. The five percent agio, or premium, he usually pays for the bank money therefore buys real value, not imaginary value. When an owner of bank money buys a receipt, he buys the right to withdraw a quantity of bullion. The market price of that bullion is usually two to three percent above the mint price. The price he pays for the receipt therefore also buys real value. Together, the price of the receipt and the price of the bank money make up the full value, or price, of the bullion.

Upon deposits of the coin current in the country, the bank grant receipts likewise, as well as bank credits; but those receipts are frequently of no value and will bring no price in the market. Upon ducatoons, for example, which in the currency pass for three guilders three stivers each, the bank gives a credit of three guilders only, or five per cent. below their current value. It grants a receipt likewise, entitling the bearer to take out the number of ducatoons deposited at any time within six months, upon paying one fourth per cent. for the keeping. This receipt will frequently bring no price in the market. Three guilders, bank money, generally sell in the market for three guilders three stivers, the full value of the ducatoons, if they were taken out of the bank; and before they can be taken out, one-fourth per cent. must be paid for the keeping, which would be mere loss to the holder of the receipt. If the agio of the bank, however, should at any time fall to three per cent. such receipts might bring some price in the market, and might sell for one and three-fourths per cent. But the agio of the bank being now generally about five per cent. such receipts are frequently allowed to expire, or, as they express it, to fall to the bank. The receipts which are given for deposits of gold ducats fall to it yet more frequently, because a higher warehouse rent, or one half per cent. must be paid for the keeping of them, before they can be taken out again. The five per cent. which the bank gains, when deposits either of coin or bullion are allowed to fall to it, maybe considered as the warehouse rent for the perpetual keeping of such deposits.

For deposits of coins circulating in the country, the bank gives receipts as well as bank credits. But these receipts are often worthless and fetch no price in the market. Take ducatoons, for example. Each circulates at a value of three guilders and three stivers. The bank gives a credit of only three guilders for each one, or five percent below its current value. The bank also gives a receipt entitling the bearer to withdraw the deposited ducatoons at any time within six months. The bearer must pay one quarter of one percent for their safekeeping. This receipt often fetches no price in the market. Three guilders in bank money generally sell for three guilders and three stivers. That is the full value of the ducatoons if they were withdrawn from the bank. But before they can be withdrawn, one quarter of one percent must be paid for safekeeping. That would be a pure loss to the receipt holder. If the bank's agio, or premium on bank money, ever fell to three percent, such receipts might fetch a price. They might sell for one and three quarters percent. But the bank's agio is now generally about five percent. So these receipts are often allowed to expire, or, as they say, to fall to the bank. Receipts for deposits of gold ducats fall to the bank even more often. This is because a higher storage fee of one half percent must be paid before the ducats can be withdrawn. The five percent the bank gains when deposits of coin or bullion are allowed to fall to it may be regarded as a storage fee for keeping them forever.

The sum of bank money, for which the receipts are expired, must be very considerable. It must comprehend the whole original capital of the bank, which, it is generally supposed, has been allowed to remain there from the time it was first deposited, nobody caring either to renew his receipt, or to take out his deposit, as, for the reasons already assigned, neither the one nor the other could be done without loss. But whatever may be the amount of this sum, the proportion which it bears to the whole mass of bank money is supposed to be very small. The bank of Amsterdam has, for these many years past, been the great warehouse of Europe for bullion, for which the receipts are very seldom allowed to expire, or, as they express it, to fall to the bank. The far greater part of the bank money, or of the credits upon the books of the bank, is supposed to have been created, for these many years past, by such deposits, which the dealers in bullion are continually both making and withdrawing.

The amount of bank money whose receipts have expired must be very large. It must include the bank’s entire original capital. This capital is generally thought to have remained there since it was first deposited. No one cared to renew a receipt or withdraw a deposit. For the reasons already given, either action would have caused a loss. But whatever the amount, it is thought to be a very small part of all bank money. For many years, the bank of Amsterdam has been Europe’s great warehouse for bullion. Receipts for bullion are very seldom allowed to expire or, as they say, to fall to the bank. Bullion dealers continually make and withdraw such deposits. For many years, these deposits are thought to have created by far the greater part of the bank money, or credits in the bank’s books.

No demand can be made upon the bank, but by means of a recipice or receipt. The smaller mass of bank money, for which the receipts are expired, is mixed and confounded with the much greater mass for which they are still in force; so that, though there may be a considerable sum of bank money, for which there are no receipts, there is no specific sum or portion of it which may not at any time be demanded by one. The bank cannot be debtor to two persons for the same thing; and the owner of bank money who has no receipt, cannot demand payment of the bank till he buys one. In ordinary and quiet times, he can find no difficulty in getting one to buy at the market price, which generally corresponds with the price at which he can sell the coin or bullion it entitles him to take out of the bank.

No one can demand payment from the bank without a recipice or receipt. The smaller amount of bank money covered by expired receipts is mixed with the much larger amount covered by valid receipts. So, although a considerable sum of bank money may have no receipts, any part of it may be claimed at any time with a receipt. The bank cannot owe the same thing to two people. An owner of bank money who has no receipt cannot demand payment from the bank until he buys one. In ordinary, quiet times, he can easily buy one at the market price. That price generally matches the price he can get for the coin or bullion the receipt entitles him to withdraw from the bank.

It might be otherwise during a public calamity; an invasion, for example, such as that of the French in 1672. The owners of bank money being then all eager to draw it out of the bank, in order to have it in their own keeping, the demand for receipts might raise their price to an exorbitant height. The holders of them might form extravagant expectations, and, instead of two or three per cent. demand half the bank money for which credit had been given upon the deposits that the receipts had respectively been granted for. The enemy, informed of the constitution of the bank, might even buy them up, in order to prevent the carrying away of the treasure. In such emergencies, the bank, it is supposed, would break through its ordinary rule of making payment only to the holders of receipts. The holders of receipts, who had no bank money, must have received within two or three per cent. of the value of the deposit for which their respective receipts had been granted. The bank, therefore, it is said, would in this case make no scruple of paying, either with money or bullion, the full value of what the owners of bank money, who could get no receipts, were credited for in its books; paying, at the same time, two or three per cent. to such holders of receipts as had no bank money, that being the whole value which, in this state of things, could justly be supposed due to them.

Things might be different during a public calamity, such as the French invasion of 1672. Owners of bank money would all be eager to withdraw it and keep it themselves. Demand for receipts might then drive their price exorbitantly high. Receipt holders might expect an extravagant price. Instead of two or three percent, they might demand half the bank money credited against the deposits covered by their receipts. Knowing how the bank worked, the enemy might even buy up the receipts to prevent the treasure from being carried away. In such emergencies, it is supposed that the bank would abandon its usual rule of paying only receipt holders. Receipt holders who had no bank money must have received within two or three percent of the value of their deposits. It is therefore said that the bank would have no hesitation in paying owners who could not obtain receipts. It would pay them, in money or bullion, the full value of the bank money credited to them in its books. At the same time, it would pay two or three percent to receipt holders who had no bank money. In these circumstances, that was the full value they could justly be supposed to be owed.

Even in ordinary and quiet times, it is the interest of the holders of receipts to depress the agio, in order either to buy bank money (and consequently the bullion which their receipts would then enable them to take out of the bank ) so much cheaper, or to sell their receipts to those who have bank money, and who want to take out bullion, so much dearer; the price of a receipt being generally equal to the difference between the market price of bank money and that of the coin or bullion for which the receipt had been granted. It is the interest of the owners of bank money, on the contrary, to raise the agio, in order either to sell their bank money so much dearer, or to buy a receipt so much cheaper. To prevent the stock-jobbing tricks which those opposite interests might sometimes occasion, the bank has of late years come to the resolution, to sell at all times bank money for currency at five per cent. agio, and to buy it in again at four per cent. agio. In consequence of this resolution, the agio can never either rise above five, or sink below four per cent.; and the proportion between the market price of bank and that of current money is kept at all times very near the proportion between their intrinsic values. Before this resolution was taken, the market price of bank money used sometimes to rise so high as nine per cent. agio, and sometimes to sink so low as par, according as opposite interests happened to influence the market.

Even in ordinary, quiet times, receipt holders benefit from lowering the agio, or premium on bank money. A lower agio lets them buy bank money more cheaply. Their receipts then allow them to withdraw bullion from the bank. Alternatively, they can sell their receipts for more to bank money owners who want to withdraw bullion. A receipt’s price generally equals the difference between the market price of bank money and that of the coin or bullion for which the receipt was issued. Owners of bank money, by contrast, benefit from raising the agio. A higher agio lets them sell their bank money for more or buy a receipt for less. These opposing interests could sometimes lead to stock market manipulation. To prevent such tricks, the bank has recently decided always to sell bank money for currency at a five percent agio. It also buys bank money back at a four percent agio. As a result, the agio can never rise above five percent or fall below four percent. The ratio between the market prices of bank money and currency therefore stays very close to the ratio between their intrinsic values. Before the bank adopted this policy, the market price of bank money sometimes rose to a nine percent agio. At other times, it fell as low as par, depending on which opposing interests influenced the market.

The bank of Amsterdam professes to lend out no part of what is deposited with it, but for every guilder for which it gives credit in its books, to keep in its repositories the value of a guilder either in money or bullion. That it keeps in its repositories all the money or bullion for which there are receipts in force for which it is at all times liable to be called upon, and which in reality is continually going from it, and returning to it again, cannot well be doubted. But whether it does so likewise with regard to that part of its capital for which the receipts are long ago expired, for which, in ordinary and quiet times, it cannot be called upon, and which, in reality, is very likely to remain with it for ever, or as long as the states of the United Provinces subsist, may perhaps appear more uncertain. At Amsterdam, however, no point of faith is better established than that, for every guilder circulated as bank money, there is a correspondent guilder in gold or silver to be found in the treasures of the bank. The city is guarantee that it should be so. The bank is under the direction of the four reigning burgomasters who are changed every year. Each new set of burgomasters visits the treasure, compares it with the books, receives it upon oath, and delivers it over, with the same awful solemnity to the set which succeeds; and in that sober and religious country, oaths are not yet disregarded. A rotation of this kind seems alone a sufficient security against any practices which cannot be avowed. Amidst all the revolutions which faction has ever occasioned in the government of Amsterdam, the prevailing party has at no time accused their predecessors of infidelity in the administration of the bank. No accusation could have affected more deeply the reputation and fortune of the disgraced party; and if such an accusation could have been supported, we may be assured that it would have been brought. In 1672, when the French king was at Utrecht, the bank of Amsterdam paid so readily, as left no doubt of the fidelity with which it had observed its engagements. Some of the pieces which were then brought from its repositories, appeared to have been scorched with the fire which happened in the town-house soon after the bank was established. Those pieces, therefore, must have lain there from that time.

The bank of Amsterdam claims that it lends out none of the money deposited with it. For every guilder credited in its books, it claims to hold a guilder’s value in money or bullion in its vaults. It can hardly be doubted that the bank holds all the money or bullion covered by receipts still in force. The bank can be called upon to pay these receipts at any time. In fact, this money and bullion is continually leaving the bank and returning to it. But the same may be less certain for the part of its capital whose receipts expired long ago. In ordinary, peaceful times, the bank cannot be called upon to pay it out. In fact, it is very likely to remain with the bank forever, or as long as the states of the United Provinces exist. In Amsterdam, however, no belief is more firmly established than this: for every guilder circulated as bank money, a corresponding guilder in gold or silver can be found in the bank’s vaults. The city guarantees that this is so. The bank is directed by the four serving burgomasters, who change every year. Each new group of burgomasters inspects the treasure, compares it with the books, and accepts it under oath. They then hand it over to their successors with the same solemn ceremony. And in that sober and religious country, oaths are not yet disregarded. This rotation alone seems sufficient protection against practices that cannot be openly admitted. Throughout all the upheavals caused by factions in Amsterdam’s government, the party in power has never accused its predecessors of dishonesty in managing the bank. No accusation could have damaged the reputation and fortune of the disgraced party more deeply. If such an accusation could have been supported, we may be sure it would have been made. In 1672, when the French king was at Utrecht, the bank of Amsterdam paid so promptly that there was no doubt it had faithfully kept its commitments. Some coins brought from its vaults then appeared to have been scorched by the fire at the town hall soon after the bank was established. Those coins, therefore, must have lain there since that time.

What may be the amount of the treasure in the bank, is a question which has long employed the speculations of the curious. Nothing but conjecture can be offered concerning it. It is generally reckoned, that there are about 2000 people who keep accounts with the bank; and allowing them to have, one with another, the value of £1500 sterling lying upon their respective accounts (a very large allowance), the whole quantity of bank money, and consequently of treasure in the bank, will amount to about £3,000,000 sterling, or, at eleven guilders the pound sterling, 33,000,000 of guilders; a great sum, and sufficient to carry on a very extensive circulation, but vastly below the extravagant ideas which some people have formed of this treasure.

The amount of treasure in the bank has long been a subject of curious speculation. But nothing can be offered except a guess. It is generally estimated that about 2,000 people keep accounts with the bank. Suppose they have an average of £1,500 sterling in their accounts, a very generous estimate. The total amount of bank money, and therefore of treasure in the bank, would be about £3,000,000 sterling. At eleven guilders to the pound sterling, that is 33,000,000 guilders. This is a large sum, enough to support a very extensive circulation. But it is far below the extravagant estimates some people have made of this treasure.

The city of Amsterdam derives a considerable revenue from the bank. Besides what may be called the warehouse rent above mentioned, each person, upon first opening an account with the bank, pays a fee of ten guilders; and for every new account, three guilders three stivers; for every transfer, two stivers; and if the transfer is for less than 300 guilders, six stivers, in order to discourage the multiplicity of small transactions. The person who neglects to balance his account twice in the year, forfeits twenty-five guilders. The person who orders a transfer for more than is upon his account, is obliged to pay three per cent. for the sum overdrawn, and his order is set aside into the bargain. The bank is supposed, too, to make a considerable profit by the sale of the foreign coin or bullion which sometimes falls to it by the expiring of receipts, and which is always kept till it can be sold with advantage. It makes a profit, likewise, by selling bank money at five per cent. agio, and buying it in at four. These different emoluments amount to a good deal more than what is necessary for paying the salaries of officers, and defraying the expense of management. What is paid for the keeping of bullion upon receipts, is alone supposed to amount to a neat annual revenue of between 150,000 and 200,000 guilders. Public utility, however, and not revenue, was the original object of this institution. Its object was to relieve the merchants from the inconvenience of a disadvantageous exchange. The revenue which has arisen from it was unforeseen, and may be considered as accidental. But it is now time to return from this long digression, into which I have been insensibly led, in endeavouring to explain the reasons why the exchange between the countries which pay in what is called bank money, and those which pay in common currency, should generally appear to be in favour of the former, and against the latter. The former pay in a species of money, of which the intrinsic value is always the same, and exactly agreeable to the standard of their respective mints; the latter is a species of money, of which the intrinsic value is continually varying, and is almost always more or less below that standard.

The city of Amsterdam earns considerable revenue from the bank. Besides the warehouse rent mentioned above, each person pays ten guilders when first opening an account. Each new account costs three guilders and three stivers, and each transfer costs two stivers. But transfers of less than 300 guilders cost six stivers, to discourage a large number of small transactions. Anyone who fails to balance their account twice a year must pay twenty-five guilders. Anyone who orders a transfer for more than their account contains must pay three percent on the amount overdrawn. The transfer order is also rejected. The bank is also believed to make a considerable profit from selling foreign coin or bullion. These sometimes become the bank’s property when receipts expire. The bank always keeps them until it can sell them at a profit. The bank also profits by selling bank money at a five percent agio, or premium, and buying it at four percent. Together, these earnings amount to much more than the cost of salaries and management. The fees paid for holding bullion against receipts alone are believed to produce net annual revenue of between 150,000 and 200,000 guilders. Public benefit, however, not revenue, was the bank’s original purpose. It was meant to relieve merchants of the inconvenience of an unfavorable exchange rate. The revenue it has produced was unforeseen and may be considered accidental. But it is now time to return from this long digression. I was drawn into it without noticing while trying to explain the exchange between two kinds of countries. Some pay in what is called bank money, while others pay in common currency. The exchange between them generally appears to favor the former countries and work against the latter. The former pay in a kind of money whose intrinsic value is always the same. It also exactly matches the standard of their respective mints. The latter pay in a kind of money whose intrinsic value is constantly changing. Its value is almost always somewhat below that standard.

In the foregoing part of this chapter, I have endeavoured to show, even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous.

Earlier in this chapter, I tried to show that these extra restrictions on imports are unnecessary, even by the principles of the commercial system. They are unnecessary for goods from countries with which the balance of trade is thought to be unfavorable.

Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce, are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses, and the other gains, in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade, which is forced by means of bounties and monopolies, may be, and commonly is, disadvantageous to the country in whose favour it is meant to be established, as I shall endeavour to show hereafter. But that trade which, without force or constraint, is naturally and regularly carried on between any two places, is always advantageous, though not always equally so, to both.

Nothing, however, could be more absurd than the whole doctrine of the balance of trade. These restrictions and almost all other trade regulations are based on it. According to this doctrine, when two places trade evenly with each other, neither loses or gains. But if the balance leans to either side, one loses and the other gains by the same amount. Both assumptions are false. Trade forced by subsidies and monopolies may harm the country it is meant to benefit, and usually does. I shall try to show this later. But trade that takes place naturally and regularly between two places, without force or constraint, always benefits both. It does not, however, always benefit them equally.

By advantage or gain, I understand, not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants.

By advantage or gain, I do not mean an increase in the amount of gold and silver. I mean an increase in the exchange value of what the country’s land and labor produce each year, or in the annual income of its inhabitants.

If the balance be even, and if the trade between the two places consist altogether in the exchange of their native commodities, they will, upon most occasions, not only both gain, but they will gain equally, or very nearly equally; each will, in this case, afford a market for a part of the surplus produce of the other; each will replace a capital which had been employed in raising and preparing for the market this part of the surplus produce of the other, and which had been distributed among, and given revenue and maintenance to, a certain number of its inhabitants. Some part of the inhabitants of each, therefore, will directly derive their revenue and maintenance from the other. As the commodities exchanged, too, are supposed to be of equal value, so the two capitals employed in the trade will, upon most occasions, be equal, or very nearly equal; and both being employed in raising the native commodities of the two countries, the revenue and maintenance which their distribution will afford to the inhabitants of each will be equal, or very nearly equal. This revenue and maintenance, thus mutually afforded, will be greater or smaller, in proportion to the extent of their dealings. If these should annually amount to £100,000, for example, or to £1,000,000, on each side, each of them will afford an annual revenue, in the one case, of £100,000, and, in the other, of £1,000,000, to the inhabitants of the other.

If the balance of trade is even, and the two places trade only goods they produce themselves, both will usually gain. They will also gain equally, or nearly equally. Each place will provide a market for some of the other’s surplus goods. Each will replenish capital used to produce and prepare those goods for market. That capital had been distributed among a number of the other place’s inhabitants, giving them income and support. Some inhabitants of each place will therefore receive their income and support directly from the other. The goods traded are also assumed to be equal in value. The two amounts of capital used in the trade will therefore usually be equal, or nearly equal. Both amounts of capital are used to produce goods in the two countries. So their distribution will provide equal, or nearly equal, income and support to the inhabitants of each country. The income and support they thus provide to each other will be greater or smaller according to the extent of their trade. Suppose, for example, that each trades £100,000 worth of goods annually, or £1,000,000 worth. In the first case, each will provide the other’s inhabitants with £100,000 in annual income. In the second, each will provide the other’s inhabitants with £1,000,000.

If their trade should be of such a nature, that one of them exported to the other nothing but native commodities, while the returns of that other consisted altogether in foreign goods; the balance, in this case, would still be supposed even, commodities being paid for with commodities. They would, in this case too, both gain, but they would not gain equally; and the inhabitants of the country which exported nothing but native commodities, would derive the greatest revenue from the trade. If England, for example, should import from France nothing but the native commodities of that country, and not having such commodities of its own as were in demand there, should annually repay them by sending thither a large quantity of foreign goods, tobacco, we shall suppose, and East India goods; this trade, though it would give some revenue to the inhabitants of both countries, would give more to those of France than to those of England. The whole French capital annually employed in it would annually be distributed among the people of France; but that part of the English capital only, which was employed in producing the English commodities with which those foreign goods were purchased, would be annually distributed among the people of England. The greater part of it would replace the capitals which had been employed in Virginia, Indostan, and China, and which had given revenue and maintenance to the inhabitants of those distant countries. If the capitals were equal, or nearly equal, therefore, this employment of the French capital would augment much more the revenue of the people of France, than that of the English capital would the revenue of the people of England. France would, in this case, carry on a direct foreign trade of consumption with England; whereas England would carry on a round-about trade of the same kind with France. The different effects of a capital employed in the direct, and of one employed in the round-about foreign trade of consumption, have already been fully explained.

Suppose one country exported only its own goods to another, while the other paid entirely in foreign goods. The balance would still be considered even, since goods were paid for with goods. Both countries would gain, but not equally. The people of the country exporting only its own goods would earn the greater revenue from the trade. For example, suppose England imported only goods produced in France. Suppose also that England had no goods of its own that were in demand there. Each year, England would instead pay for the French goods by sending France a large quantity of foreign goods. These might be tobacco and East India goods. Though this trade would provide some revenue to people in both countries, it would provide more to those in France. All the French capital employed in the trade each year would be distributed among the people of France. But only part of the English capital would be distributed each year among the people of England. That would be the part used to produce the English goods with which the foreign goods were purchased. Most of the English capital would replace capital employed in Virginia, Indostan, and China. That capital had provided revenue and a living for the people of those distant countries. If the capitals were equal, or nearly equal, this use of French capital would increase the revenue of the people of France much more than the use of English capital would increase the revenue of the people of England. In this case, France would carry on a direct foreign trade for consumption with England. England, by contrast, would carry on an indirect trade of the same kind with France. The different effects of capital employed in direct and indirect foreign trade for consumption have already been fully explained.

There is not, probably, between any two countries, a trade which consists altogether in the exchange, either of native commodities on both sides, or of native commodities on one side, and of foreign goods on the other. Almost all countries exchange with one another, partly native and partly foreign goods. That country, however, in whose cargoes there is the greatest proportion of native, and the least of foreign goods, will always be the principal gainer.

Probably no two countries trade entirely in goods produced in both countries, or in domestic goods from one and foreign goods from the other. Almost all countries trade both domestic and foreign goods with one another. However, the country whose cargoes contain the highest proportion of domestic goods and the lowest proportion of foreign goods will always gain the most.

If it was not with tobacco and East India goods, but with gold and silver, that England paid for the commodities annually imported from France, the balance, in this case, would be supposed uneven, commodities not being paid for with commodities, but with gold and silver. The trade, however, would in this case, as in the foregoing, give some revenue to the inhabitants of both countries, but more to those of France than to those of England. It would give some revenue to those of England. The capital which had been employed in producing the English goods that purchased this gold and silver, the capital which had been distributed among, and given revenue to, certain inhabitants of England, would thereby be replaced, and enabled to continue that employment. The whole capital of England would no more be diminished by this exportation of gold and silver, than by the exportation of an equal value of any other goods. On the contrary, it would, in most cases, be augmented. No goods are sent abroad but those for which the demand is supposed to be greater abroad than at home, and of which the returns, consequently, it is expected, will be of more value at home than the commodities exported. If the tobacco which in England is worth only £100,000, when sent to France, will purchase wine which is in England worth £110,000, the exchange will augment the capital of England by £10,000. If £100,000 of English gold, in the same manner, purchase French wine, which in England is worth £110,000, this exchange will equally augment the capital of England by £10,000. As a merchant, who has £110,000 worth of wine in his cellar, is a richer man than he who has only £100,000 worth of tobacco in his warehouse, so is he likewise a richer man than he who has only £100,000 worth of gold in his coffers. He can put into motion a greater quantity of industry, and give revenue, maintenance, and employment, to a greater number of people, than either of the other two. But the capital of the country is equal to the capital of all its different inhabitants; and the quantity of industry which can be annually maintained in it is equal to what all those different capitals can maintain. Both the capital of the country, therefore, and the quantity of industry which can be annually maintained in it, must generally be augmented by this exchange. It would, indeed, be more advantageous for England that it could purchase the wines of France with its own hardware and broad cloth, than with either the tobacco of Virginia, or the gold and silver of Brazil and Peru. A direct foreign trade of consumption is always more advantageous than a round-about one. But a round-about foreign trade of consumption, which is carried on with gold and silver, does not seem to be less advantageous than any other equally round-about one. Neither is a country which has no mines, more likely to be exhausted of gold and silver by this annual exportation of those metals, than one which does not grow tobacco by the like annual exportation of that plant. As a country which has wherewithal to buy tobacco will never be long in want of it, so neither will one be long in want of gold and silver which has wherewithal to purchase those metals.

Suppose England paid for the goods it imported from France each year with gold and silver rather than tobacco and East India goods. The balance of trade would then be considered uneven. Goods would be paid for with gold and silver, not with other goods. Yet, as in the previous case, the trade would provide some income to people in both countries. It would provide more to those in France than to those in England. It would provide some income to people in England. Capital had been used to produce the English goods that bought the gold and silver. That capital had been distributed among certain people in England and had given them income. The trade would replace that capital, allowing it to continue supporting that work. England’s total capital would be no more reduced by exporting gold and silver than by exporting other goods of equal value. On the contrary, in most cases it would increase. Goods are sent abroad only when demand for them is expected to be greater there than at home. The goods received in return are therefore expected to be worth more at home than the goods exported. Suppose tobacco worth only £100,000 in England is sent to France. There it buys wine worth £110,000 in England. The exchange will increase England’s capital by £10,000. Suppose, in the same way, that £100,000 of English gold buys French wine worth £110,000 in England. This exchange will likewise increase England’s capital by £10,000. A merchant with £110,000 worth of wine in his cellar is richer than one with only £100,000 worth of tobacco in his warehouse. He is also richer than one with only £100,000 worth of gold in his coffers. He can set more industry in motion and provide income, support, and employment to more people than either of them. But the country’s capital equals the capital of all its individual inhabitants. And the amount of industry it can support each year equals the amount all those individual capitals can support. Therefore, this exchange must generally increase both the country’s capital and the amount of industry it can support each year. It would indeed be more advantageous for England to buy French wine with its own hardware and broadcloth. That would be better than buying it with either Virginia tobacco or gold and silver from Brazil and Peru. Direct foreign trade for consumption is always more advantageous than trade that takes a roundabout route. But roundabout foreign trade for consumption using gold and silver seems no less advantageous than any other equally roundabout trade. A country without mines is no more likely to run out of gold and silver by exporting them each year than a country that does not grow tobacco is to run out of tobacco by exporting it each year. A country that has the means to buy tobacco will never lack it for long. Likewise, a country that has the means to buy gold and silver will never lack those metals for long.

It is a losing trade, it is said, which a workman carries on with the alehouse; and the trade which a manufacturing nation would naturally carry on with a wine country, may be considered as a trade of the same nature. I answer, that the trade with the alehouse is not necessarily a losing trade. In its own nature it is just as advantageous as any other, though, perhaps, somewhat more liable to be abused. The employment of a brewer, and even that of a retailer of fermented liquors, are as necessary divisions of labour as any other. It will generally be more advantageous for a workman to buy of the brewer the quantity he has occasion for, than to brew it himself; and if he is a poor workman, it will generally be more advantageous for him to buy it by little and little of the retailer, than a large quantity of the brewer. He may no doubt buy too much of either, as he may of any other dealers in his neighbourhood; of the butcher, if he is a glutton; or of the draper, if he affects to be a beau among his companions. It is advantageous to the great body of workmen, notwithstanding, that all these trades should be free, though this freedom may be abused in all of them, and is more likely to be so, perhaps, in some than in others. Though individuals, besides, may sometimes ruin their fortunes by an excessive consumption of fermented liquors, there seems to be no risk that a nation should do so. Though in every country there are many people who spend upon such liquors more than they can afford, there are always many more who spend less. It deserves to be remarked, too, that if we consult experience, the cheapness of wine seems to be a cause, not of drunkenness, but of sobriety. The inhabitants of the wine countries are in general the soberest people of Europe; witness the Spaniards, the Italians, and the inhabitants of the southern provinces of France. People are seldom guilty of excess in what is their daily fare. Nobody affects the character of liberality and good fellowship, by being profuse of a liquor which is as cheap as small beer. On the contrary, in the countries which, either from excessive heat or cold, produce no grapes, and where wine consequently is dear and a rarity, drunkenness is a common vice, as among the northern nations, and all those who live between the tropics, the negroes, for example on the coast of Guinea. When a French regiment comes from some of the northern provinces of France, where wine is somewhat dear, to be quartered in the southern, where it is very cheap, the soldiers, I have frequently heard it observed, are at first debauched by the cheapness and novelty of good wine; but after a few months residence, the greater part of them become as sober as the rest of the inhabitants. Were the duties upon foreign wines, and the excises upon malt, beer, and ale, to be taken away all at once, it might, in the same manner, occasion in Great Britain a pretty general and temporary drunkenness among the middling and inferior ranks of people, which would probably be soon followed by a permanent and almost universal sobriety. At present, drunkenness is by no means the vice of people of fashion, or of those who can easily afford the most expensive liquors. A gentleman drunk with ale has scarce ever been seen among us. The restraints upon the wine trade in Great Britain, besides, do not so much seem calculated to hinder the people from going, if I may say so, to the alehouse, as from going where they can buy the best and cheapest liquor. They favour the wine trade of Portugal, and discourage that of France. The Portuguese, it is said, indeed, are better customers for our manufactures than the French, and should therefore be encouraged in preference to them. As they give us their custom, it is pretended we should give them ours. The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of a great empire; for it is the most underling tradesmen only who make it a rule to employ chiefly their own customers. A great trader purchases his goods always where they are cheapest and best, without regard to any little interest of this kind.

People say that a worker loses money by doing business with an alehouse. They say the same about the trade a manufacturing nation would naturally carry on with a wine-producing country. I answer that trade with an alehouse does not necessarily lose money. By its nature, it is just as beneficial as any other trade, though perhaps somewhat more open to abuse. Brewing, and even selling fermented drinks by retail, are as necessary parts of the division of labor as any others. A worker will generally benefit more by buying the amount he needs from a brewer than by brewing it himself. If he is poor, he will generally benefit more by buying it a little at a time from a retailer than by buying a large quantity from the brewer. He may, of course, buy too much from either, just as he may from any other local dealer. He may buy too much from the butcher if he is a glutton, or from the cloth merchant if he likes to dress up among his companions. Even so, it benefits the great body of workers to leave all these trades free. People may abuse this freedom in every trade, though perhaps more readily in some than in others. Individuals may sometimes ruin their fortunes by drinking too much fermented liquor. But there seems to be no risk that a nation will do so. In every country, many people spend more than they can afford on such drinks. But there are always many more who spend less than they can afford. It is also worth noting that experience suggests cheap wine encourages sobriety, not drunkenness. The people of wine-producing countries are generally the most sober in Europe. Consider the Spaniards, the Italians, and the inhabitants of the southern provinces of France. People rarely indulge to excess in what they consume every day. Nobody tries to appear generous and sociable by freely sharing a drink as cheap as small beer. By contrast, some countries produce no grapes because they are either too hot or too cold. Wine is therefore expensive and rare there, and drunkenness is a common vice. This is true among the northern nations and all those who live between the tropics, the negroes on the coast of Guinea, for example. A French regiment may be stationed in the south after coming from a northern province of France, where wine is somewhat expensive. I have often heard that the soldiers are at first led into excess by the cheapness and novelty of good wine in the south. But after a few months there, most become as sober as the other inhabitants. If the duties on foreign wines and the excise taxes on malt, beer, and ale were removed all at once, something similar might happen in Great Britain. Drunkenness might become fairly widespread for a time among the middle and lower ranks. This would probably soon be followed by lasting and almost universal sobriety. At present, drunkenness is by no means the vice of fashionable people or those who can easily afford the most expensive drinks. A gentleman drunk on ale has scarcely ever been seen among us. Moreover, Britain's restrictions on the wine trade do not seem designed to stop people from going, if I may put it this way, to the alehouse. Rather, they seem designed to stop people from going where they can buy the best and cheapest drink. The restrictions favor the wine trade of Portugal and discourage that of France. People do say that the Portuguese are better customers for our manufactured goods than the French. They argue that we should therefore favor the Portuguese. Since the Portuguese buy from us, we are supposedly obliged to buy from them. In this way, the sly practices of petty tradesmen are made into political principles for governing a great empire. For only the pettiest tradesmen make a rule of buying chiefly from their own customers. A great trader always buys goods where they are cheapest and best, without regard for such petty interests.

By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity. The capricious ambition of kings and ministers has not, during the present and the preceding century, been more fatal to the repose of Europe, than the impertinent jealousy of merchants and manufacturers. The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy: but the mean rapacity, the monopolizing spirit, of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot, perhaps, be corrected, may very easily be prevented from disturbing the tranquillity of anybody but themselves.

Such principles, however, have taught nations that their interest lies in impoverishing all their neighbors. Each nation has been led to view the prosperity of all its trading partners with envy. Each has come to see their gains as its own losses. Trade should naturally unite nations in friendship, just as it should unite individuals. Instead, it has become the richest source of conflict and hostility. In this century and the last, the reckless ambition of kings and ministers has done great harm to Europe’s peace. But the unwarranted jealousy of merchants and manufacturers has done no less harm. The violence and injustice of humanity’s rulers are an ancient evil. I fear that the nature of human affairs hardly allows a remedy. But merchants and manufacturers are petty and greedy, and they seek monopolies. They neither are nor ought to be the rulers of humanity. Their behavior may be impossible to correct. Even so, we can very easily prevent them from disturbing anyone’s peace but their own.

That it was the spirit of monopoly which originally both invented and propagated this doctrine, cannot be doubted and they who first taught it, were by no means such fools as they who believed it. In every country it always is, and must be, the interest of the great body of the people, to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves; so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. Hence, in Great Britain, and in most other European countries, the extraordinary duties upon almost all goods imported by alien merchants. Hence the high duties and prohibitions upon all those foreign manufactures which can come into competition with our own. Hence, too, the extraordinary restraints upon the importation of almost all sorts of goods from those countries with which the balance of trade is supposed to be disadvantageous; that is, from those against whom national animosity happens ta be most violently inflamed.

There can be no doubt that the desire for monopoly first invented and spread this doctrine. Those who first taught it were by no means as foolish as those who believed it. In every country, it is always in the interest of the great majority of people to buy what they want from whoever sells it cheapest. It must always be so. This is so obvious that it seems ridiculous to take any trouble to prove it. No one could ever have questioned it if merchants and manufacturers had not confused people’s common sense with self-serving arguments. In this respect, the interests of merchants and manufacturers are directly opposed to those of the great majority of people. The freemen of a corporation have an interest in preventing other inhabitants from employing any workers but themselves. In the same way, merchants and manufacturers in every country have an interest in securing a monopoly of their home market. This explains the extraordinary duties in Great Britain and most other European countries on almost all goods imported by foreign merchants. It also explains the high duties and prohibitions on all foreign manufactured goods that could compete with our own. It explains, too, the extraordinary restrictions on importing almost all kinds of goods from countries with which the balance of trade is supposed to be unfavorable. These are the countries against which national hostility happens to be most fiercely inflamed.

The wealth of neighbouring nations, however, though dangerous in war and politics, is certainly advantageous in trade. In a state of hostility, it may enable our enemies to maintain fleets and armies superior to our own; but in a state of peace and commerce it must likewise enable them to exchange with us to a greater value, and to afford a better market, either for the immediate produce of our own industry, or for whatever is purchased with that produce. As a rich man is likely to be a better customer to the industrious people in his neighbourhood, than a poor, so is likewise a rich nation. A rich man, indeed, who is himself a manufacturer, is a very dangerous neighbour to all those who deal in the same way. All the rest of the neighbourhood, however, by far the greatest number, profit by the good market which his expense affords them. They even profit by his underselling the poorer workmen who deal in the same way with him. The manufacturers of a rich nation, in the same manner, may no doubt be very dangerous rivals to those of their neighbours. This very competition, however, is advantageous to the great body of the people, who profit greatly, besides, by the good market which the great expense of such a nation affords them in every other way. Private people, who want to make a fortune, never think of retiring to the remote and poor provinces of the country, but resort either to the capital, or to some of the great commercial towns. They know, that where little wealth circulates, there is little to be got; but that where a great deal is in motion, some share of it may fall to them. The same maxim which would in this manner direct the common sense of one, or ten, or twenty individuals, should regulate the judgment of one, or ten, or twenty millions, and should make a whole nation regard the riches of its neighbours, as a probable cause and occasion for itself to acquire riches. A nation that would enrich itself by foreign trade, is certainly most likely to do so, when its neighbours are all rich, industrious and commercial nations. A great nation, surrounded on all sides by wandering savages and poor barbarians, might, no doubt, acquire riches by the cultivation of its own lands, and by its own interior commerce, but not by foreign trade. It seems to have been in this manner that the ancient Egyptians and the modern Chinese acquired their great wealth. The ancient Egyptians, it is said, neglected foreign commerce, and the modern Chinese, it is known, hold it in the utmost contempt, and scarce deign to afford it the decent protection of the laws. The modern maxims of foreign commerce, by aiming at the impoverishment of all our neighbours, so far as they are capable of producing their intended effect, tend to render that very commerce insignificant and contemptible.

The wealth of neighboring nations, though dangerous in war and politics, is certainly an advantage in trade. In a time of hostility, it may enable our enemies to maintain larger fleets and armies than ours. But in a time of peace and trade, it must also enable them to trade more with us. It gives them a better market for the direct products of our industry, or for whatever we buy with those products. A rich man is likely to be a better customer than a poor man for the working people in his neighborhood. The same is true of a rich nation. A rich man who is himself a manufacturer is indeed a very dangerous neighbor to others in the same business. But everyone else in the neighborhood, by far the greater number, profits from the good market his spending provides. They even profit when he sells more cheaply than the poorer workers in the same business. In the same way, the manufacturers of a rich nation may no doubt be dangerous rivals to those of neighboring nations. But this very competition benefits the great body of the people. They also profit greatly from the good market such a nation's large spending provides in every other way. People who want to make a fortune never think of settling in the country's remote, poor provinces. Instead, they go to the capital or to one of the great commercial towns. They know there is little to gain where little wealth circulates. But where much wealth is in motion, some of it may come their way. This same principle would guide the common sense of one, ten, or twenty individuals. It should also guide the judgment of one, ten, or twenty million people. It should lead a whole nation to see its neighbors' riches as a probable cause and opportunity for gaining riches itself. A nation seeking to grow rich through foreign trade is certainly most likely to succeed when all its neighbors are rich, industrious, and engaged in trade. A great nation surrounded on all sides by wandering savages and poor barbarians might no doubt grow rich by farming its own land and trading within its own borders. But it could not grow rich through foreign trade. This seems to be how the ancient Egyptians and the modern Chinese gained their great wealth. The ancient Egyptians, it is said, neglected foreign trade. The modern Chinese, as is well known, hold it in the utmost contempt. They hardly trouble themselves to give it decent protection under the law. Modern principles of foreign trade aim to impoverish all our neighbors. To the extent that they succeed, they tend to make that very trade insignificant and contemptible.

It is in consequence of these maxims, that the commerce between France and England has, in both countries, been subjected to so many discouragements and restraints. If those two countries, however, were to consider their real interest, without either mercantile jealousy or national animosity, the commerce of France might be more advantageous to Great Britain than that of any other country, and, for the same reason, that of Great Britain to France. France is the nearest neighbour to Great Britain. In the trade between the southern coast of England and the northern and north-western coast of France, the returns might be expected, in the same manner as in the inland trade, four, five, or six times in the year. The capital, therefore, employed in this trade could, in each of the two countries, keep in motion four, five, or six times the quantity of industry, and afford employment and subsistence to four, five, or six times the number of people, which all equal capital could do in the greater part of the other branches of foreign trade. Between the parts of France and Great Britain most remote from one another, the returns might be expected, at least, once in the year; and even this trade would so far be at least equally advantageous, as the greater part of the other branches of our foreign European trade. It would be, at least, three times more advantageous than the boasted trade with our North American colonies, in which the returns were seldom made in less than three years, frequently not in less than four or five years. France, besides, is supposed to contain 24,000,000 of inhabitants. Our North American colonies were never supposed to contain more than 3,000,000; and France is a much richer country than North America; though, on account of the more unequal distribution of riches, there is much more poverty and beggary in the one country than in the other. France, therefore, could afford a market at least eight times more extensive, and, on account of the superior frequency of the returns, four-and-twenty times more advantageous than that which our North American colonies ever afforded. The trade of Great Britain would be just as advantageous to France, and, in proportion to the wealth, population, and proximity of the respective countries, would have the same superiority over that which France carries on with her own colonies. Such is the very great difference between that trade which the wisdom of both nations has thought proper to discourage, and that which it has favoured the most.

These principles have led both France and England to place many obstacles and restrictions on trade between them. But suppose the two countries considered their real interests, free from commercial jealousy and national hostility. Trade with France might then benefit Great Britain more than trade with any other country. For the same reason, trade with Great Britain might benefit France more than trade with any other country. France is Great Britain's nearest neighbor. Trade between southern England and northern and northwestern France might yield returns four, five, or six times a year, just like domestic trade. In each country, therefore, capital invested in this trade could support four, five, or six times as much industry. It could also provide employment and a living for four, five, or six times as many people. An equal amount of capital in most other branches of foreign trade could not do as much. Even trade between the most distant parts of France and Great Britain might yield returns at least once a year. In this respect, it would be at least as advantageous as most other branches of our foreign trade with Europe. It would be at least three times more advantageous than our much-praised trade with our North American colonies. That trade rarely yielded returns in less than three years, and often took four or five. France, moreover, is thought to have 24,000,000 inhabitants. Our North American colonies were never thought to have more than 3,000,000. France is also much richer than North America. Yet France has much more poverty and begging because wealth is distributed less equally there. France could therefore provide a market at least eight times as large as our North American colonies ever provided. And because returns would come more often, that market would be at least twenty-four times as advantageous. Trade with Great Britain would be just as advantageous to France. In proportion to the wealth, population, and closeness of the countries involved, it would have the same advantage over France's trade with its own colonies. Such is the great difference between the trade that the wisdom of both nations has chosen to discourage and the trade it has favored most.

But the very same circumstances which would have rendered an open and free commerce between the two countries so advantageous to both, have occasioned the principal obstructions to that commerce. Being neighbours, they are necessarily enemies, and the wealth and power of each becomes, upon that account, more formidable to the other; and what would increase the advantage of national friendship, serves only to inflame the violence of national animosity. They are both rich and industrious nations; and the merchants and manufacturers of each dread the competition of the skill and activity of those of the other. Mercantile jealousy is excited, and both inflames, and is itself inflamed, by the violence of national animosity, and the traders of both countries have announced, with all the passionate confidence of interested falsehood, the certain ruin of each, in consequence of that unfavourable balance of trade, which, they pretend, would be the infallible effect of an unrestrained commerce with the other.

But the very circumstances that would have made open and free trade so beneficial to both countries have created the main barriers to it. Because they are neighbors, they are necessarily enemies. As a result, each country finds the other’s wealth and power more threatening. What would make friendship between the nations more beneficial only makes their hostility more violent. Both are wealthy and industrious nations. The merchants and manufacturers of each fear the competition from the skill and enterprise of the other’s. Commercial jealousy is stirred up. It both fuels the fierce hostility between the nations and is fueled by it. Traders in both countries have declared that each country would certainly be ruined by an unfavorable balance of trade. They claim that unrestricted trade with the other country would inevitably produce such a balance. They make this claim with all the passionate confidence of a self-interested lie.

There is no commercial country in Europe, of which the approaching ruin has not frequently been foretold by the pretended doctors of this system, from all unfavourably balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour, and against their neighbours, it does not appear that any one nation in Europe has been, in any respect, impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it. Though there are in Europe indeed, a few towns which, in same respects, deserve the name of free ports, there is no country which does so. Holland, perhaps, approaches the nearest to this character of any, though still very remote from it; and Holland, it is acknowledged, not only derives its whole wealth, but a great part of its necessary subsistence, from foreign trade.

The self-proclaimed experts of this system have often predicted the approaching ruin of every commercial country in Europe. They have blamed an unfavorable balance of trade. Yet for all the anxiety they have caused, no European nation appears to have grown poorer because of it. This is true despite the futile efforts of almost all trading nations to turn the balance in their own favor and against their neighbors. On the contrary, every town and country has grown richer in proportion to how widely it has opened its ports to all nations. Free trade has not ruined them, as the principles of the commercial system would lead us to expect. A few towns in Europe do deserve to be called free ports in some respects, but no country does. Holland perhaps comes closer than any other country, though it is still far from being one. It is acknowledged that Holland derives not only all its wealth from foreign trade, but also much of what it needs to live.

There is another balance, indeed, which has already been explained, very different from the balance of trade, and which, according as it happens to be either favourable or unfavourable, necessarily occasions the prosperity or decay of every nation. This is the balance of the annual produce and consumption. If the exchangeable value of the annual produce, it has already been observed, exceeds that of the annual consumption, the capital of the society must annually increase in proportion to this excess. The society in this case lives within its revenue; and what is annually saved out of its revenue, is naturally added to its capital, and employed so as to increase still further the annual produce. If the exchangeable value of the annual produce, on the contrary, fall short of the annual consumption, the capital of the society must annually decay in proportion to this deficiency. The expense of the society, in this case, exceeds its revenue, and necessarily encroaches upon its capital. Its capital, therefore, must necessarily decay, and, together with it, the exchangeable value of the annual produce of its industry.

There is another balance, as already explained, that is very different from the balance of trade. Whether it is favorable or unfavorable, it necessarily brings prosperity or decline to every nation. This is the balance between annual production and consumption. As noted earlier, annual production may have a higher exchangeable value than annual consumption. If it does, society’s capital must increase each year in proportion to the excess. In this case, society lives within its income. What it saves from its income each year is naturally added to its capital. This capital is then used to increase annual production still further. On the other hand, annual production may have a lower exchangeable value than annual consumption. If it does, society’s capital must decline each year in proportion to the shortfall. In this case, society spends more than its income and must draw on its capital. Its capital must therefore decline, along with the exchangeable value of what its industry produces each year.

This balance of produce and consumption is entirely different from what is called the balance of trade. It might take place in a nation which had no foreign trade, but which was entirely separated from all the world. It may take place in the whole globe of the earth, of which the wealth, population, and improvement, may be either gradually increasing or gradually decaying.

The balance between production and consumption is entirely different from what is called the balance of trade. This balance could exist in a nation with no foreign trade, entirely separated from the rest of the world. It can also exist across the whole globe. The world’s wealth, population, and development may be gradually increasing or gradually declining.

The balance of produce and consumption may be constantly in favour of a nation, though what is called the balance of trade be generally against it. A nation may import to a greater value than it exports for half a century, perhaps, together; the gold and silver which comes into it during all this time, may be all immediately sent out of it; its circulating coin may gradually decay, different sorts of paper money being substituted in its place, and even the debts, too, which it contracts in the principal nations with whom it deals, may be gradually increasing; and yet its real wealth, the exchangeable value of the annual produce of its lands and labour, may, during the same period, have been increasing in a much greater proportion. The state of our North American colonies, and of the trade which they carried on with Great Britain, before the commencement of the present disturbances, {This paragraph was written in the year 1775.} may serve as a proof that this is by no means an impossible supposition.

A nation’s production may consistently exceed its consumption, even though its so-called balance of trade is generally against it. A nation may import more by value than it exports for perhaps half a century. All the gold and silver it receives during that time may be sent straight out again. Its circulating coins may gradually diminish as various kinds of paper money replace them. Its debts to the principal nations it trades with may also gradually increase. Yet during the same period, its real wealth may have increased by a much greater proportion. That wealth is the exchangeable value of the annual produce of its land and labor. The state of our North American colonies shows that this possibility is by no means impossible. So does the trade they carried on with Great Britain before the present disturbances began. {This paragraph was written in 1775.}