1)
Of the Nature, Accumulation, and Employment of
Stock
Introduction
·
In the
rude state of society stock is unnecessary.
·
Division
of labour makes it necessary.
·
Accumulation
of stock and division of labour advance together.
·
Accumulation
causes the same quantity of industry to produce more.
·
This Book
treats of the nature of stock, the effects of its accumulation, and its
different employments.
a)
Of the Division of Stock
·
A man does
not think of obtaining revenue from a small stock,
·
but when
he has more than enough for immediate consumption, he endeavours to derive a
revenue from the rest,
·
using it
either as
·
(1)
circulating capital,
·
or (2)
fixed capital.
·
Different
proportions of fixed and circulating capital are required in different trades.
·
The stock
of a society is divided in the same way into
·
(1) the
portion reserved for immediate consumption,
·
(2) the
fixed capital, which consists of
·
(a) useful
machines,
·
(b)
profitable buildings,
·
(c)
improvements of land,
·
and (d)
acquired and useful abilities,
·
and (3)
the circulating capital, which consists of
·
(a) the
money,
·
(b) the
stock of provisions in the possession of the sellers,
·
(c) the
materials of clothes, furniture and buildings,
·
and (d)
completed work in the hands of the merchant of manufacturer.
·
The last
three parts of the circulating capital are regularly withdrawn from it.
·
Every
fixed capital is derived from and supported by a circulating capital,
·
and cannot
yield any revenue without it.
·
The end of
both fixed and circulating capital is to maintain and augment the other part of
the stock.
·
The
circulating capital is kept up by the produce of land, mines and fisheries,
·
which
require both fixed and circulating capitals to cultivate them,
·
and, when
their fertility is equal, yield produce proportionate to the capital employed.
·
When there
is tolerable security all stock is employed in one or other of the three ways.
·
But in
countries where violence prevails much stock is buried and concealed.
b)
Of Money considered as a particular Branch of
the general Stock of the Society, or of the Expence of maintaining the National
Capital
·
Prices are
divided into three parts, wages, profits and rent,
·
and the
whole annual produce is divided into the same three parts;
·
but we may
distinguish between gross and net revenue.
·
Gross rent
is the whole sum paid by the farmer; net rent what is left free to the
landlord.
·
Gross
revenue is the whole annual produce: net revenue what is left free after
deducting the maintenance of fixed and circulating capital.
·
The whole
expence of maintaining the fixed capital must be excluded,
·
since the
only object of the fixed capital is to increase the productive powers of
labour,
·
and any
cheapening or simplification is regarded as a good.
·
The cost
of maintaining the fixed capital is like the cost of repairs on an estate,
·
but the
expence of maintaining the last three parts of the circulating capital is not
to be deducted,
·
the
circulating capital of the society being different in this respect from that of
an individual.
·
The
maintenance of the money alone must be deducted.
·
The money
resembles the fixed capital, since
·
(1) the
maintenance of the stock of money is part of the gross but not of the net
revenue,
·
and (2)
the money itself forms no part of the net revenue.
·
It only
appears to do so from the ambiguity of language,
·
sums of
money being often used to indicate the goods purchasable as well as the coins
themselves.
·
We must
not add both together.
·
If a man
has a guinea a week he enjoys a guinea’s worth of subsistence, &c.
·
and his
real revenue is that subsistence, &c.
·
The same
is true of all the inhabitants of a country.
·
The coins
annually paid to an individual often equal his revenue, but the stock of coin
in a society is never equal to its whole revenue.
·
Money is
therefore no part of the revenue of the society.
·
(3) Every
saving in the cost of maintaining the stock of money is an improvement.
·
The
substitution of paper for gold money is an improvement.
·
Bank notes
are the best sort of paper money.
·
When a
banker lends out 100.000 pound in notes and keeps in hand only 20.000 pound in
gold and silver, 80.000 pound in gold and silver is spared from the
circulation:
·
and if
many bankers do the same, four-fifths of the gold and silver previously
circulating may be sent abroad,
·
and
exchanged for goods,
·
either to
supply the consumption of another country, in which case the profit will be an
addition to the net revenue of the country,
·
or to
supply home consumption (1) of luxuries, (2) of materials, tools and provisions
wherewith industrious people are maintained and employed.
·
If to
supply luxuries, prodigality and consumption are increased;
·
if to
supply materials, &c., a permanent fund for supporting consumption is
provided.
·
The
greater part of the gold and silver sent abroad purchases materials, &c.
·
The
quantity of industry which the circulating capital can employ is determined by
the provisions, materials, and finished work, and not at all by the quantity of
money.
·
The
substitution of paper for gold and silver increases the materials, tools, and
maintenance at the expence of the gold and silver money.
·
The
quantity of money bears a small proportion to the whole produce, but a large
one to that part destined to maintain industry.
·
An
operation of this kind has been carried out in Scotland with excellent effects.
·
There was
at the Union at least a million sterling of gold and silver money, and now
there is not half a million.
·
Notes are
ordinarily issued by discounting bills,
·
but the
Scotch banks invented the system of cash accounts,
·
which
enable them to issue notes readily,
·
and make
it possible for every merchant to carry on a greater trade than he otherwise
could.
·
The Scotch
banks can of course discount bills when required.
·
The whole
of the paper money can never exceed the gold and silver which would have been
required in its absence.
·
The
peculiar expenses of a banks are (1) the keeping and (2) the replenishing of a
stock of money with which to repay notes.
·
A bank
which issues too much paper will much increase both the first
·
and the
second expense,
·
as may be
shown by an example.
·
Banks have
sometimes not understood this,
·
e.g. the
Bank of England,
·
and the
Scotch banks.
·
The
excessive circulation was caused by overtrading.
·
A bank
ought not to advance more than the amount which merchants would otherwise have
to keep by them in cash.
·
The limit
is observed when only real bills of exchange are discounted.
·
Cash
accounts should be carefully watched to secure the same end.
·
as they
were for a long time by the scotch banks, which required frequent and regular
operations,
·
and thus
(1) were able to judge of the circumstances of their debtors,
·
and (2)
were secured against issuing too much paper.
·
Bankers’s
loans ought to be only for moderate periods of time.
·
More than
twenty-five years ago the proper amount of paper money had been reached in
Scotland,
·
but the
traders were not content,
·
and some
of them resorted to drawing and redrawing,
·
which
shall be explained.
·
Bills of
exchange have extraordinary legal privileges.
·
So two
persons, one in London and one in Edinburgh, would draw bills on each other.
·
Much money
was raised in this expensive way.
·
The bill
on London would be discounted in Edinburgh, and the bill on Edinburgh
discounted in London,
·
and each
was always replaced by another.
·
The amount
thus advanced by the banks was in excess of the limit laid down above, but this
was not perceived at first.
·
When the
banks found it out they made difficulties about discounting,
·
which
alarmed and enraged the projectors;
·
then the
Ayr bank was established and advanced money very freely,
·
but soon
got into difficulties,
·
and was
obliged to stop in two years.
·
Its action
and failure increased the distress of projectors and the country generally,
·
but
relieved the other Scotch banks.
·
Another
plan would have been to raise money on the securities pledged by borrowers:
·
this would
have been a losing business,
·
and even
if profitable would have been hurtful to the country.
·
Law’s
scheme has been sufficiently explained by Du Verney and Du Tot.
·
The bank
of England was established in 1694,
·
enlarged
its stock in 1697,
·
in 1708,
·
in 1709
and 1710,
·
in 1717
and later.
·
The rate
of interest received by it from the public has been reduced from 8 to 3 per
cent, and its dividend has lately been 51.1/2 per cent.
·
It acts as
a great engine of state.
·
The
operations of banking turn dead stock into productive capital,
·
but make
commerce and industry somewhat less secure.
·
Precautions
should be taken to prevent the greater part of the circulation being filled
with paper.
·
Circulation
may be divided into that between dealers and that between dealers and consumers.
·
The
circulation of paper may be confined to the former by not allowing notes for
small sums.
·
The issue
of such notes enables mean people to become bankers.
·
None for
less than 5 pound should be issued.
·
This would
secure the circulation of plenty of gold and silver,
·
and would
not prevent banks from giving sufficient assistance to traders.
·
A law
against small notes would be a violation of natural liberty necessary for the
security of the society.
·
Paper
money payable on demand is equal to gold and silver,
·
and does
not raise prices;
·
but paper
not repayable on demand would fall below gold and silver,
·
as
happened in Scotland during the prevalence of the Optional Clause,
·
and must
have happened in regard to the Yorkshire currencies when small sums were
repayable in guineas.
·
The North
American paper currencies consisted of government notes repayable at a distant
date,
·
and
depreciated the currency to a great degree.
·
They were
therefore justly prohibited.
·
Pennsylvania
was moderate in its issues, and its currency never went below the real par.
·
The
colonial paper was somewhat supported by being received in payment of taxes.
·
A
requirement that certain taxes should be paid in particular paper money might
give that paper a certain value even if it was irredeemable.
·
A paper currency
depreciated below the value of the coin does not sink the value of gold and
silver.
·
The only
restrictions on banking which are necessary are the prohibition of small bank
notes and the requirement that all notes shall be repaid on demand.
c)
Of the Accumulation of Capital, or of productive
and unproductive Labour
·
There are
two sorts of labour, productive and unproductive.
·
Many kinds
of labour besides menial service are unproductive.
·
The
proportion of the produce employed in maintaining productive hands determines
the next year’s produce.
·
Part of
the produce replaces capital, part constitutes profit and rent.
·
That which
replaces capital employs none but productive hands,
·
while
unproductive hands and those who do not labour are supported by revenue.
·
So the
proportion of productive hands depends on the proportion between profit with
rent and the part of produce which replaces capital.
·
Rent
anciently formed a larger proportion of the produce of agriculture than now.
·
Profits
were anciently a larger share of the produce of manufactures,
·
so the
proportion of produce required for replacing capital is greater than it was.
·
The
proportion between the funds determines whether the inhabitants of the country
shall be industrious or idle.
·
Increase
or diminution of the capital of a country consequently increases or diminishes
its annual produce.
·
Capitals
are increased by parsimony or saving.
·
What is
saved is consumed by productive hands.
·
The frugal
man establishes a perpetual fund for the employment of productive hands.
·
The
prodigal perverts such funds to other uses.
·
Whether he
spends on home or foreign commodities makes no difference.
·
If he had
not spent there would have been just as much money in the country and the goods
produced by productive hands as well.
·
Besides,
when the annual produce diminishes, money will go abroad;
·
and on the
other hand money will come in when the annual produce increases.
·
So even if
the real wealth of a country consisted of its money, the prodigal would be a
public enemy.
·
Injudicious
employment of capital has the same effect as prodigality.
·
Frugality
and prudence predominate.
·
Prodigality
is more intermittent than the desire to better our condition.
·
Imprudent
undertakings are small in number compared to prudent ones.
·
Public
prodigality and imprudence are more to be feared than private,
·
but are
counteracted by private frugality and prudence.
·
To
increase the produce of a nation an increase of capital is necessary.
·
If,
therefore the produce has increased, we may be sure the capital has increased.
·
This has
been the case of almost all nations in peaceable times.
·
England
for example from 1660 to 1776,
·
or from
1558 to 1660.
·
though
there was much public and private profusion, and many other disorders and
misfortunes occurred.
·
Private
frugality and prudence have silently counteracted these circumstances.
·
Apart from
increase or diminution of capital different kinds of expense may be
distinguished.
·
An
individual who spends on durable commodities will be richer than one who spends
on perishable ones.
·
The same
thing is true of a nation.
·
The former
expence is easier to bring to an end,
·
and gives
maintenance to more people.
·
It does
not follow that it betokens a more generous spirit.
d)
Of Stock lent at Interest
·
Stock lent
at interest is a capital to the lender, but may or may not be so to the
borrower.
·
Generally
it is so to the borrower,
·
except in
case of mortgages effected by country gentlemen.
·
Loans are
made in money, but what the borrower wants and gets is goods.
·
So the
quantity of stock which can be lent is determined by the value of that part of
the produce which replaces such capital as the owner does not himself employ.
·
This may
be much greater than the actual money employed.
·
The money
is altogether different from what is actually assigned either as principal or
interest.
·
The stock
to be lent at interest naturally grows as the whole quantity of stock
increases.
·
Interest
falls as the quantity of stock to be lent increases,
·
because
profits diminish as it becomes more difficult to find a profitable method of employing
new capital.
·
The notion
that it was the discovery of the West Indies which lowered interest has been
refuted by Hume.
·
If 100
pounds are now required to purchase what 50 pounds would have purchased them,
10 pounds must now be required to purchase what 5 pounds would have purchased
them.
·
An
increase in the quantity of silver could only diminish its value.
·
Nominal
wages would be greater, but real wages the same; profits would be the same
nominally and really.
·
An
increase in the goods anually circulated would cause a fall of profits and
consequently of interest.
·
The
prohibition of interest is wrong, and increases the evil of usury.
·
Where a
maximum rate is fixed, this should be somewhat above the market rate on good
security,
·
but not
much above, or the greater part of loans would be to prodigals and projectors.
·
No law can
reduce interest below the market rate.
·
The number
of years’s purchase commonly paid for land depends on the rate of interest.
e)
Of the different Employment of Capitals
·
The
quantity of labour put in motion and the value added to the annual produce by
capitals vary with their employment.
·
There are
four different ways of employing capital,
·
all of
which are necessary:
·
(1)
procuring rude produce,
·
(2)
manufacturing,
·
(3)
transportation,
·
and (4)
distribution.
·
The
employers of such capitals are productive labourers:
·
the
capital of the retailer employs only himself;
·
the
capital of the merchant employs sailors and carriers;
·
the
capital of the manufacturer employ his workmen;
·
the
capital of the farmer employs his servants and his cattle, and adds a much
greater value to the annual produce than other capital.
·
Capitals
employed in agriculture and retail trade must reside within the country;
·
the
capital of the merchant may reside anywhere;
·
the
capital of the manufacturer must be where the manufacture is, but that is not
necessarily determined.
·
Whether
the merchant who exports belongs to the country or not makes little difference.
·
The
capital of the manufacturer will put into motion more native labour if it
resides within the country, but may be useful even if outside it.
·
Particular
countries often have not enough capital for cultivation, manufacturers, and
transportation.
·
In such
cases the larger the proportion employed in agriculture, the larger will be the
annual produce.
·
The
quickest way to make the capital sufficient for all these purpose is to begin
with the most profitable.
·
That they
have done so is the principal cause of the progress of the American colonies.
·
Great
countries have scarcely ever acquired sufficient capital for all those
purposes.
·
Different
kinds of wholesale trade employ different quantities of productive labour and
add different amounts to the annual produce.
·
There are
three different kinds of trade: home, foreign and carrying.
·
Capital
employed in buying on one part of the country to sell in another replaces two
domestic capitals.
·
Capital
employed in importation replaces one domestic and one foreign capital.
·
Its
returns are not so quick as those of home trade.
·
Roundabout
foreign trade has the same effect as direct.
·
Foreign
trade carried on by means of gold and silver is in no way different from the
rest.
·
Capital
employed in the carrying trade replaces two foreign capitals.
·
It may
employ ships and sailors belonging to the country, but this is not always the
case,
·
and equal
capital employed in importation or coasting trade may employ as many ships and
men.
·
Capital in
home trade therefore supports more productive labour than capital employed in
foreign trade, which, however, supports more than capital in the carrying
trade.
·
Political
economy ought consequently not to allure capital into the foreign or the
carrying trade.
·
though
each is advantageous when naturally introduced.
·
The
surplus of the produce of particular branches of industry must be sent abroad.
·
Foreign
goods obtained in exchange must often be re-exported.
·
When the
other employments are full, the surplus capital disgorges itself into the
carrying trade, which is a symptom rather than a cause of great national
wealth.
·
The
possible extent of the carrying trade is much the greatest.
·
Agriculture
does not yield sufficient profit to attract all the capital which it might
absorb.
·
The reason
will be explained in the next two books.
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