As this project never was executed, it is hard to say what the consequence might have been; it is, however, obviously liable to the following inconveniences. Taking the land rent of Scotland at five millions per annum, though it be much more, at twenty years' purchase it amounts to an hundred millions; there would then be just so much currency in the country, and if one million was then necessary for circulation there would just be ninety-nine millions for no purpose, as none of it could go abroad; they would not have been able to maintain one man more than formerly, as their food, clothes, and lodging would not have been increased, and every com modity would have risen to ninety-nine times its present value.
Mr. Law, not meeting with the encouragement he expected, went over to France in the year2 1714, and, as was before mentioned, found favour with the Duke of Orleans, then 3 Regent, and got liberty to erect a bank 1 This paragraph appears to be ~ MS. reads 'years.' intended as a summary of ch. vii. 3 'Then' refers not to 1714, but of Money and Trade. to the time when Law found suf- CHEAPNESS OR PLENTY 213 there, which at first was only to the extent of six millions of livres1 or ^32o,o[oo] sterling. From this beginning he carried it on to a very great height, issued out many notes, and in a short time engrossed the whole circulation of France. As Mr. Law's notes were received in payment of the revenue2, this contributed to the success of the scheme. This, too, had a greater effect in France than it could have had here, considering the number of taxes, and the manner in which they are levied. By this and other circumstances, his notes were always at par with gold and silver, especially as they were making continual changes in their coin. About that time twenty-eight livres, which were equal to eight ounces of pure silver, were raised to sixty 3, and as a diminution of coin is always the consequent of a sudden rise4, this was daily expected. Mr. Law made his notes payable in what was called the money of the day 5. Instead of promising to pay his notes, as we would say, in pounds sterling, he did it in crowns and half-crowns, which was a very proper method to make them par with gold and silver. Suppose that our coin were raised to double, a half-crown would become a crown, and so in this manner the bank notes and money \vould rise and fall together0.
ficient favour to get liberty to May, 1718.' Dutot, Reflexions erect a bank. Louis XIV died politiques sur les finances d It on Sept. i, 1715. Orleans had commerce, 1738, in Daire's Econoseen Law, and spoken of him as tnistes financiers, pp. 810, 847; ' un homme de qui il pourrait and Duverney, Examen, torn. i.
tirer des lumieres' before that pp. 216, 217.
Cheruel et Regnier, torn. xiii. p. 8 ' En ecus du poids et litre du 49). jour.' Duverney, Examen, torn.
1 Paris Duverney, Examen du i. p. 209.
livre intitule Reflexions politiques 6 It must be remembered that sur les finances etle commerce, 1740, in Adam Smith's time the pound torn. i. p. 207. sterling was just as much a mere 2 Ibid. p. 210. money of account as the French 1 ' About that time ' apparently livre. Its practical identificastands for ' between 1715 and tion with a particular coin is of PART II: POLICE As Law wanted to make his notes above par, he fell upon the following scheme. He issued out his bank notes payable in livres tournois, by which, when the coin came to be diminished, he would not be obliged to pay above one-half1. The coin was not received in the market or elsewhere, as the diminution was still expected, and did not come for some time. This favoured his design, and kept the notes above par, by which the credit of his bank was established.
The next step Mr. Law fell upon was the relieving of the public debts, which amounted to 2oo[o] millions2. As he saw the diminution must needs come, he took another method to keep up his notes. He got a grant of the exclusive privilege of trading to Canada, and established the Mississippi Company. To this he joined the African, the Turkey, and the East India companies. He also farmed the tobacco and all the public revenues of France at 52 millions 3, for in France the whole later date, and even now that coin is not called a pound, but a sovereign. Raising our coin to double would mean halving the quantity of silver coined into twenty shillings or ' /i.' Law's notes for ecus of a certain weight and fineness resembled Drummond's notes for guineas mentioned in W. of N. bk. i. ch.
1 There appears to be some mistake or omission here. A diminution of the coin, i. e. a re duction of the number of livres in an ecu of a certain weight and fineness would obviously increase the bullion value of notes for livres. So, if the coin were di minished 50 per cent, and no change made as regards the notes, Law would be obliged to pay double, not half. It may, how ever, have been supposed that the notes would be arbitrarily re duced when the coin was di minished, as an edict was soon issued declaring that this would not under any circumstances take place. The next two sentences in the text above describe the natural effect of this edict (see T)uverney,Ex(inien, torn. i. pp.235, 236), and do not at all follow from the statement that Law would not be obliged to pay above a half.
2 Dutot, in Daire's Economises financiers, p. 806, gives the amount as ' deux milliards soixante-deux millions cent trente-huit mille une livres.'
3 Duverney, Examen, torn. i. p. 249. MS. reads ' 12 millions.'
CHEAPNESS OR PLENTY 215 revenue is farmed by one man, who undertakes it and levies it without excisemen, and the farmers there are the richest in the country, and must be skilled in the finances and public revenues l. Mr. Law undertook this, and, having the whole trade of the country monopolized, it was difficult to say what profits he would make. He wanted to lend the government 80 or 90 millions [sterling], which he could easily do by issuing notes to that value, but then he saw that they would soon return upon him. To prevent this, his invention was set on work, and we shall see how far he succeeded. As the company he erected seemed to be in a very flourishing condition, shares were purchased in it at a very considerable rate. He opened a subscription to it at 500 livres, so that a navy ticket or billet d'etat purchased a share into it, which raised them to a par, as they had for a long time been far below it. The government of France was never in such a miserable condition as then. The interest of the money which should have paid the billets d'etat was seized upon for other purposes. Never was monarch more degraded than Lewis XIV. After the treaty of Utrecht he had occasion to borrow 8 millions of livres from Holland, and not only to give them his bond for 32 millions, but to get some merchants to be security for him -. Since that was the case, we need not be surprised that the billets d'etat sold at great discount, as they bore no interest, and it was quite uncertain when they would be paid. Law published a declaration that one of these, which was granted for 500 livres, should purchase a share in the company, and thus they came again to par. The people still continuing in great expectations of profit, he in a few days opened a new subscription at 5000 livres, 1 Duverney, Exatnen, torn. i. obtained from foreigners on the p. 252. credit of a private person and 2 Dutot, in Daire's Economises his friends, but does not specify financiers, p. 805, mentions these Holland.
terms, and says that the loan was 2l6 PART II: POLICE and afterwards another at 10,000. At this time he was enabled to lend the government 1600 millions of livres at 3 per cent1.
Had he stopped here, it is probable that he would have answered all engagements, but his future proceed ings ruined all. It was impossible that the value of shares could long continue at such a high rate. He thought, however, that it was necessary to do all that he could to keep them up, as the whole fortunes of many people were in the bank. He had issued out notes to double the circulation of the country, which raised the price of everything to an enormous pitch, and conse quently the exchange was against France in all foreign trade. This was principally occasioned by his opening an office to purchase 500 livres shares at 9000 livres '\ which obliged him to issue out many notes. People of prudence who were concerned opposed this scheme, and indeed it was the first thing that made his bank lose credit, and occasioned its dissolution. As he was not obliged to pay the capital sums, only the annual dividend of 200 livres arising from the profits 3, he might have let them fall to their original 500 without any great loss but that of reputation; but his buying up the shares occasioned his issuing out so many notes that they must of necessity return upon him. This was so much the case that he was obliged to open offices in different parts of Paris for the payment of them. When in this manner oppressed, he was making continual changes on the coin, in order to dissuade people from returning on the bank, and disgust them at gold and silver4. He cried up gold, but as coin 1 Duverney, Examen, torn. i. pany, held on Dec. 30, 1719, re pp. 250, 273, 289. solved that the dividend should 2 Ibid. pp. 280, 281. be 40 per cent., or 200 livres per 3 The original fixed interest share. Ibid. pp. 215, 267, 268, 317. was only 4 per cent, or 20 livres * ' Pour degouter les peuples on the shares of 500 livres; but des monnaies d'or et d'argent.' a general meeting of the com- Ibid. p. 316.
CHEAPNESS OR PLENTY 217 cannot be kept much above the level of the metal, when it was so much depreciated, it was not taken. If a person had 20,000 guineas, as he was afraid that the coin would not continue at that value, he went to the bank and got it exchanged for notes. The same consideration pre vented them from returning upon the bank, as they would there be paid in coin. By this means he not only prevented his notes from coming upon him, but filled his coffers with almost all the gold in the country. In order to accomplish this part of his scheme more perfectly, he most arbitrarily published an edict prohibiting any persons from keeping by them gold or silver, beyond a certain sum1. He also took away the severe penalties that were in force against the exportation of coin, and every person was allowed to export money free from duty2. By this means much of it went to Holland. He reasoned with himself, some instrument of change is necessary, paper, gold, and silver, at present are the medium; if gold and silver be utterly exported, paper only remains, and may be rendered the sole instrument of commerce. This he thought he had done effectually when by an edict he had swept a part into his coffers, and cleared the country of the remainder. They would therefore be obliged to take paper. At last, however, after a great number of expedients, he found it was im practicable. By paying out great sums, he kept off ruin for some months, but at last published an edict that all bank notes were to be paid only in one half: and indeed if he had stood to this, as some imagined he might have done, it would have been far better than to have suffered the after consequences. Upon this edict the credit of the bank was entirely broken, and the bank notes all on a sudden sunk to nothing3. This ruined an immense number of people. Britain can never be much hurt by 1 Viz. 500 livres. Duverney, Examen, torn. i. p. 335.
2 Ibid. pp. 320, 321. 3 Ibid. torn. ii. pp. 6-8.
2l8 PART II I POLICE the breaking of a bank, because few people keep notes by them to any value1. A man worth £40,000 will scarce ever have £500 of notes by him. But the breaking of this bank in France occasioned the most dreadful confusion. The greatest part of people had their whole fortunes in notes, and were reduced to a state of beggary. The only people who were safe were the stock-jobbers who had sold out in time, or with their bank notes had purchased all the valuable goods and a great deal of land, though at the highest prices. These made immense fortunes by it.
The South Sea scheme incur own country was nothing to this. Nobody was under any obligations of going into it, the government had no share in it, and the loss was but a trifle in comparison. The clamour which Law's last edict made caused it soon to be rescinded 2, and the notes were again declared to be paid at value, but the bank never recovered its credit, and this had no effect. However, by raising the coin and other expedients, he kept it from May to October, and then 3 was obliged to leave France, which with difficulty he accomplished; his goods were confiscated and he died soon after 4. This amazing scheme was founded on these two principles, that public opulence consists in money, and that the value of money is arbitrary, founded upon the common consent of mankind. Consistent with these principles he thought he might easily increase the public opulence if he could annex the idea of money to paper, and the government could never be at any loss to produce any effect that money could do. This scheme of Mr. Law's was by no means contemptible; he really believed in it, and was the dupe of it himself. It was thought he had provided well for himself, but it was found to be otherwise. If the Duke of Orleans had lived only 2 Duverney, Exatnen, torn. ii. 132.
CHEAPNESS OR PLENTY 219 a few days longer it was agreed upon that he was to have been re-established. After his death it was not thought expedient to have it put in execution '.
This scheme of Law's was imitated all over Europe. It gave occasion to the South Sea Company in England, which turned out at last a mere fraud, and, could it have been carried to as great an extent as Law's, would have been productive of the same consequences. It was erected in the latter end of Queen Anne's reign, and the intention of it was to carry on a trade to the South Seas. For this purpose they bought up the greater part of the debts of the nation. Their stock, however, was not great, and the profits which could be expected from it were very inconsiderable; the expectations of the people were never greatly raised, and its fall was not very prejudicial to the nation.
[§ 14. Of Interest.]
We have only two things further to mention relating to the price of commodities, to wit, interest and exchange.
It is commonly supposed that the premium of interest depends upon the value of gold and silver2. The value of these are regulated by their quantity, for as the quantity increases, the value diminishes, and as the quantity de- 1 In W. of N. bk. ii. ch. ii. vol. exposed by Mr. Hume, that it is i. p. 318, Adam Smith declines perhaps unnecessary to say any- to give any account of the 'differ- thing more about it.' See Locke, ent operations ' of Law's scheme Some Considerations of the Con- because they have been so fully sequences of the Lowering of and clearly explained by Du- Interest and Raising the Value of verney. Money, 2nd ed., 1696, pp. 6, 10, ii; 2 In IV. of N. bk. ii. ch. iv. vol. Law, Money and Trade Considered, i. p. 357, the common opinion is 2nd ed., p. 17, and Me'inoires sur attributed to Locke, Law, Monies- les banques in Daire's Econotnistes quieu, and 'many other writers,' financiers, p. 518; Montesquieu, and it is remarked that ' this Esprit des lot's, liv. xxii. ch. vi; notion, which at first sight seems Hume, ' Of Interest,' Political so plausible, has been so fully Discourses, 1752, pp. 61 78.
220 PART II I POLICE creases, the value rises. If we attend to it, however, we shall find that the premium of interest is regulated by the quantity of stock. About the time of the discovery of the West Indies it is to be observed that common interest was at 10 or 12 per cent, and since that time it has gradually diminished. The plain reason is this. Under the feudal constitution there could be very little accumulation of stock, which will appear from considering the situation of those three orders of men, which made up the whole body of the people: the peasants, the landlords, and the merchants. The peasants had leases which depended upon the caprice of their masters; they could never increase in wealth, because the landlord was ready to squeeze it all from them, and therefore they had no motive to acquire it. As little could the landlords increase their wealth, as they lived so indolent a life, and were involved in perpetual wars l. The merchants again were oppressed by all ranks, and were not able to secure the produce of their industry from rapine and violence. Thus there could be little accumulation of wealth at all; but after the fall of the feudal government these obstacles to industry were removed, and the stock of commodities began gradually to increase.
We may further observe that what one trade lends to another is not so much to be considered as money, as commodities2. No doubt it is generally money which one man delivers another in loan, but then it is immediately turned into stock, and thus the quantity of stock enables you to make a greater number of loans. The price of interest is entirely regulated by this circumstance. If there be few who have it in their power to lend money, and a great number of people who want to borrow it, the price of interest must be high; but if the quantity of stock on hand be so great as to enable a great number to lend, it must fall proportionably.
1 Above, pp. 36, 37; W. of N. bk. iii. ch. ii. vol. i. pp. 389, 390.
2 Ibid. bk. ii. ch. iv. vol. i. p. 354.
CHEAPNESS OR PLENTY 221 [$15. Of Exchange.} Exchange is a method invented by merchants to faci litate the payment of money at a distance. Suppose I owe £100 to a merchant at London, I apply to a banker in Glasgow for a bill upon another merchant in London, payable to my creditor. For this I must not only give the banker.£100, but I must also reward him for his trouble. This reward is called the price, or premium, of exchange. Between Glasgow and London it is sometimes at 2 per cent., sometimes more, some times less. Between London and Glasgow again it is sometimes 4 or 5 per cent, below par; and between Glasgow and the West India colonies it is often at 50 per cent, below par. The value of exchange is always regulated by the risk of sending money between two places. It is often, however, greater than the risk can be supposed to be, and this is owing to paper circulation. Between Glasgow and London one can easily get;£ioo carried for fifteen or sixteen shillings; but as paper in Scotland makes a great part of the currency, and as there is an inconveniency in getting bank notes exchanged for gold and silver, a merchant chooses rather to pay 2 per cent, than take the trouble of changing the notes for cash, and sending the money '. This too is the cause of the high price of exchange between Virginia and Glasgow. In the American colonies the currency is paper, and their notes are 40 or 50 per cent, below par. because the funds are not sufficient. In every exchange you must pay the price, the risk, some profit to the banker, and so much for the degra dation of money in notes. This is the cause of the rise of exchange. Whenever it rises beyond the price of insurance it is owing to the money of one country being lower than that of another. This was the cause of the high price of 1 W. of N. bk. ii. ch. ii. vol. i. pp. 327. 328.
222 PART II: POLICE exchange between France and Holland about the time of the Mississippi Company. It was then at 80 or 90 per cent. All the money had been expelled from France by the scheme of Mr. Law, and the whole circulation was paper, and the credit of the bank had fallen. All these reasons conspired to raise the exchange to such an enormous pitch.
[J 1 6. Of the Causes of the slow Progress of Opulence.']
We come now to the next thing proposed, to examine the causes of the slow progress of opulence. When one considers the effects of the division of labour, what an immediate tendency it has to improve the arts, it appears somewhat surprising that every nation should continue so long in a poor and indigent state as we find it does. The causes of this may be considered under these two heads: first, natural impediments; and secondly, the oppression of civil government.
A rude and barbarous people are ignorant of the effects of the division of labour, and it is long before one person, by continually working at different things, can produce any more than is necessary for his daily subsistence. Before labour can be divided some accumulation of stock is neces sary; a poor man with no stock can never begin a manufac ture. Before a man can commence farmer, he must at least have laid in a year's provision, because he does not receive the fruits of his labour till the end of the season. Agreeably to this, in a nation of hunters or shepherds no person can quit the common trade in which he is employed, and which affords him daily subsistence, till he have some stock to maintain him, and begin the new trade. Every one knowrs how difficult it is, even in a refined society, to raise one's self to moderate circumstances. It is still more difficult to raise one's self by those trades which require no art nor CHEAPNESS OR PLENTY 223 ingenuity. A porter or day-labourer must continue poor for ever. In the beginnings of society this is still more difficult. Bare subsistence is almost all that a savage can procure, and having no stock to begin upon, nothing to maintain him but what is produced by the exertion of his own strength, it is no wonder he continues long in an indigent state. The meanest labourer in a polished society has in many respects an advantage over a savage: he has more assistance in his labour; he has only one particular thing to do, which, by assiduity, he attains a facility in performing; he has also machines and instruments which greatly assist him. An Indian has not so much as a pick axe, a spade, or a shovel, nor anything else but his own labour. This is one great cause of the slow progress of opulence in every country; till some stock be produced there can be no division of labour, and before a division of labour take place there can be very little accumulation of stock1.
The other cause that was assigned was the nature of civil government. In the infancy of society, as has been often observed, government must be \veak and feeble, and it is long before its authority can protect the industry of individuals from the rapacity of their neighbours. When people find themselves every moment in danger of being robbed of all they possess, they have no motive to be industrious. There could belittle accumulation of stock, because the indolent, which would be the greatest number, would live upon the industrious, and spend whatever they produced. When the power of government becomes so great as to defend the produce of industry, another obstacle arises from a different quarter. Among neighbouring nations in a barbarous state there are perpetual wars, one continually invading and plundering the other, and though private property be secured from the violence of neigh bours, it is in danger from hostile invasions. In this 1 W. of N. bk. ii. Introduction, vol. i. pp. 273-275.
224 PART II I POLICE manner it is next to impossible that any accumulation of stock can be made. It is observable that among savage nations there are always more violent convulsions than among those farther advanced in refinement. Among the Tartars and Arabs, great bands of barbarians are always roaming from one place to another in quest of plunder, and they pillage every country as they go along. Thus large tracts of country are often laid waste, and all the effects carried away. Germany too was in the same con dition about the fall of the Roman Empire; nothing can be more an obstacle to the progress of opulence.
We shall next consider the effect of oppressive measures, first, with regard to agriculture, and then with regard to commerce.
Agriculture is of all other arts the most beneficent to society, and whatever tends to retard its improvement is extremely prejudicial to the public interest. The produce of agriculture is much greater than that of any other manufacture. The rents of the whole lands in England amount to about 24 millions1, and as the rent is generally about a third of the produce, the whole annual produce of the lands must be about 72 millions. This is much more than the produce of either the linen or woollen manufactures, for, as the annual consumption is computed to be about 100 millions, if you deduce from this the 72 millions, the produce of agriculture, there will remain only 28 millions for all the other manufactures of the nation. Whatever measures therefore discourage the improvement of this art are extremely prejudicial to the progress of opulence.
One great hindrance to the progress of agriculture is the throwing great tracts of land into the hands of single persons. If any man's estate be more than he is able to cultivate, a part of it is in a manner lost. When a nation 1 Twenty millions is the estimate mentioned in W. of N. bk. v.
CHEAPNESS OR PLENTY 225