On The Principles of Political Economy, and Taxation Part 13

Agriculture like all other trades, and particularly in a commercial country, is subject to a re-action, which, in an opposite direction, succeeds the action of a strong stimulus. Thus, when war interrupts the importation of corn, its consequent high price attracts capital to the land, from the large profits which such an employment of it affords; this will probably cause more capital to be employed, and more raw produce to be brought to market than the demands of the country require.

In such case, the price of corn will fall from the effects of a glut, and much agricultural distress will be produced, till the average supply is brought to a level with the average demand.

CHAPTER XVIII.

VALUE AND RICHES, THEIR DISTINCTIVE PROPERTIES.

"A man is rich or poor," says Adam Smith, "according to the degree in which he can afford to enjoy the necessaries, conveniences, and amus.e.m.e.nts of human life."

Value then essentially differs from riches, for value depends not on abundance, but on the difficulty or facility of production. The labour of a million of men in manufactures, will always produce the same value, but will not always produce the same riches. By the invention of machinery, by improvements in skill, by a better division of labour, or by the discovery of new markets, where more advantageous exchanges may be made, a million of men may produce double, or treble the amount of riches, of "necessaries, conveniences, and amus.e.m.e.nts," in one state of society, that they could produce in another, but they will not on that account add any thing to value; for every thing rises or falls in value, in proportion to the facility or difficulty of producing it, or in other words, in proportion to the quant.i.ty of labour employed on its production. Suppose with a given capital, the labour of a certain number of men produced 1000 pair of stockings, and that by inventions in machinery, the same number of men can produce 2000 pair, or that they can continue to produce 1000 pair, and can produce besides 500 hats; then the value of the 2000 pair of stockings; or of the 1000 pair of stockings, and 500 hats, will be neither more nor less than that of the 1000 pair of stockings before the introduction of machinery; for they will be the produce of the same quant.i.ty of labour. But the value of the general ma.s.s of commodities will nevertheless be diminished; for although the value of the increased quant.i.ty produced in consequence of the improvement will be the same exactly as the value would have been of the less quant.i.ty that would have been produced, had no improvement taken place, an effect is also produced on the portion of goods still unconsumed, which were manufactured previously to the improvement; the value of those goods will be reduced, inasmuch as they must fall to the level, quant.i.ty for quant.i.ty, of the goods produced under all the advantages of the improvement: and the society will, notwithstanding the increased quant.i.ty of its commodities, notwithstanding its augmented riches, and its augmented means of enjoyment, have a less amount of value. By constantly increasing the facility of production, we constantly diminish the value of some of the commodities before produced, though by the same means we not only add to the national riches, but also to the power of future production. Many of the errors in political economy have arisen from errors on this subject, from considering an increase of riches, and an increase of value, as meaning the same thing, and from unfounded notions as to what const.i.tuted a standard measure of value. One man considers money as a standard of value, and a nation grows richer or poorer, according to him, in proportion as its commodities of all kinds can exchange for more or less money. Others represent money as a very convenient medium for the purpose of barter, but not as a proper measure by which to estimate the value of other things: the real measure of value according to them is corn,[27] and a country is rich or poor, according as its commodities will exchange for more or less corn. There are others again, who consider a country rich or poor, according to the quant.i.ty of labour that it can purchase.[28] But why should gold, or corn, or labour, be the standard measure of value, more than coals or iron?--more than cloth, soap, candles, and the other necessaries of the labourer?--why, in short, should any commodity, or all commodities together, be the standard, when such a standard is itself subject to fluctuations in value? Corn, as well as gold, may from difficulty or facility of production, vary 10, 20, or 30 per cent., relatively to other things; why should we always say, that it is those other things which have varied, and not the corn? That commodity is alone invariable, which at all times requires the same sacrifice of toil and labour to produce it.

Of such a commodity we have no knowledge, but we may hypothetically argue and speak about it, as if we had; and may improve our knowledge of the science, by shewing distinctly the absolute inapplicability of all the standards which have been hitherto adopted. But supposing either of these to be a correct standard of value, still it would not be a standard of riches, for riches do not depend on value. A man is rich or poor, according to the abundance of necessaries and luxuries, which he can command; and whether the exchangeable value of these for money, for corn, or for labour, be high or low, they will equally contribute to the enjoyment of their possessor. It is through confounding the ideas of value and wealth, or riches, that it has been a.s.serted, that by diminishing the quant.i.ty of commodities, that is to say, of the necessaries, conveniences, and enjoyments of human life, riches may be increased. If value were the measure of riches this could not be denied, because by scarcity the value of commodities is raised; but if Adam Smith be correct, if riches consist in necessaries and enjoyments, then they cannot be increased by a diminution of quant.i.ty.

It is true, that the man in possession of a scarce commodity is richer, if by means of it he can command more of the necessaries and enjoyments of human life; but as the general stock out of which each man's riches are drawn, is diminished in quant.i.ty, by all that any individual takes from it, other men's shares must necessarily be reduced in proportion as this favoured individual is able to appropriate a greater quant.i.ty to himself.

Let water become scarce, says Lord Lauderdale, and be exclusively possessed by an individual, and you will increase his riches, because water will then have value; and if wealth be the aggregate of individual riches, you will by the same means also increase wealth. You undoubtedly will increase the riches of this individual, but inasmuch as the farmer must sell a part of his corn, the shoemaker a part of his shoes, and all men give up a portion of their possessions for the sole purpose of supplying themselves with water, which they before had for nothing, they are poorer by the whole quant.i.ty of commodities which they are obliged to devote to this purpose, and the proprietor of water is benefited precisely by the amount of their loss. The same quant.i.ty of water, and the same quant.i.ty of commodities, are enjoyed by the whole society, but they are differently distributed. This is however supposing rather a monopoly of water than a scarcity of it. If it should be scarce, then the riches of the country and of individuals would be actually diminished, inasmuch as it would be deprived of a portion of one of its enjoyments. The farmer would not only have less corn to exchange for the other commodities which might be necessary or desirable to him, but he and every other individual would be abridged in the enjoyment of one of the most essential of their comforts. Not only would there be a different distribution of riches, but an actual loss of wealth.

It may be said then of two countries possessing precisely the same quant.i.ty of all the necessaries and comforts of life, that they are equally rich, but the value of their respective riches would depend on the comparative facility or difficulty with which they were produced.

For if an improved piece of machinery should enable us to make two pair of stockings, instead of one, without additional labour, double the quant.i.ty would be given in exchange for a yard of cloth. If a similar improvement be made in the manufacture of cloth, stockings and cloth will exchange in the same proportions as before, but they will both have fallen in value; for in exchanging them for hats, for gold, or other commodities in general, twice the former quant.i.ty must be given. Extend the improvement to the production of gold, and every other commodity; and they will all regain their former proportions. There will be double the quant.i.ty of commodities annually produced in the country, and therefore the wealth of the country will be doubled, but this wealth will not have increased in value.

Although Adam Smith has given the correct description of riches, which I have more than once noticed, he afterwards explains them differently, and says, "that a man must be rich or poor according to the quant.i.ty of labour which he can afford to purchase." Now this description differs essentially from the other, and is certainly incorrect; for suppose the mines were to become more productive, so that gold and silver fell in value, from the greater facility of their production; or that velvets were to be manufactured with so much less labour than before, that they fell to half their former value; the riches of all those who purchased those commodities would be increased: one man might increase the quant.i.ty of his plate, another might buy double the quant.i.ty of velvet; but with the possession of this additional plate, and velvet, they could employ no more labour than before; because as the exchangeable value of velvet and of plate would be lowered, they must part with proportionally more of these species of riches to purchase a day's labour. Riches then cannot be estimated by the quant.i.ty of labour which they can purchase.

From what has been said, it will be seen that the wealth of a country may be increased in two ways: it may be increased by employing a greater portion of revenue in the maintenance of productive labour,--which will not only add to the quant.i.ty, but to the value of the ma.s.s of commodities; or it may be increased, without employing any additional quant.i.ty of labour, by making the same quant.i.ty more productive,--which will add to the abundance, but not to the value of commodities.

In the first case, a country would not only become rich, but the value of its riches would increase. It would become rich by parsimony; by diminishing its expenditure on objects of luxury and enjoyment; and employing those savings in reproduction.

In the second case, there will not necessarily be either any diminished expenditure on luxuries and enjoyments, or any increased quant.i.ty of productive labour employed, but with the same labour more would be produced; wealth would increase, but not value. Of these two modes of increasing wealth, the last must be preferred, since it produces the same effect without the privation and diminution of enjoyments, which can never fail to accompany the first mode. Capital is that part of the wealth of a country which is employed with a view to future production, and may be increased in the same manner as wealth. An additional capital will be equally efficacious in the production of future wealth, whether it be obtained from improvements in skill and machinery, or from using more revenue reproductively; for wealth always depends on the quant.i.ty of commodities produced, without any regard to the facility with which the instruments employed in production may have been procured. A certain quant.i.ty of clothes and provisions will maintain and employ the same number of men, and will therefore procure the same quant.i.ty of work to be done, whether they be produced by the labour of 100 or of 200 men; but they will be of twice the value if 200 have been employed on their production.

M. Say appears to me to have been singularly unfortunate in his definition of riches and value in the first chapter of his excellent work: the following is the substance of his reasoning: riches, he observes, consist only of things which have a value in themselves: riches are great, when the sum of the values of which they are composed is great. They are small when the sum of their values is small. Two things having an equal value, are riches of equal amount. They are of equal value, when by general consent they are freely exchanged for each other. Now, if mankind attach value to a thing, it is on account of the _uses_ to which it is applicable. This faculty, which certain things have, of satisfying the various wants of mankind, I call utility. To create objects that have a value of any kind is to create riches, since the utility of things is the first foundation of their value, and it is the value of things which const.i.tutes riches. But we do not create objects: all we can do is to reproduce matter under another form--we can give it utility. Production then is a creation, not of matter but of utility, and it is measured by the value arising from the utility of the object produced. The utility of any object, according to general estimation, is pointed out by the quant.i.ty of other commodities for which it will exchange. This valuation, arising from the general estimate formed by society, const.i.tutes what Adam Smith calls value in exchange; what Turgot calls appreciable value; and what we may more briefly designate by the term _value_.

Thus far M. Say, but in his account of value and riches he has confounded two things which ought always to be kept separate, and which are called by Adam Smith, value in use and value in exchange. If by an improved machine I can, with the same quant.i.ty of labour, make two pair of stockings instead of one, I in no way impair the _utility_ of one pair of stockings, though I diminish their value. If then I had precisely the same quant.i.ty of coats, shoes, stockings, and all other things, as before, I should have precisely the same quant.i.ty of useful objects, and should therefore be equally rich, if utility were the measure of riches; but I should have a less amount of value, for my stockings would be of only half their former value. Utility then is not the measure of exchangeable value.

If we ask M. Say in what riches consist, he tells us in the possession of objects having value. If we then ask him what he means by value, he tells us that things are valuable in proportion as they possess utility.

If again we ask him to explain to us by what means we are to judge of the utility of objects, he answers, by their value. Thus then the measure of value is utility, and the measure of utility is value.

M. Say, in speaking of the excellences and imperfections of the great work of Adam Smith, imputes to him, as an error, that "he attributes to the labour of man alone the power of producing value. A more correct a.n.a.lysis shews us that value is owing to the action of labour, or rather the industry of man, combined with the action of those agents which nature supplies, and with that of capital. His ignorance of this principle prevented him from establishing the true theory of the influence of machinery in the production of riches."

In contradiction to the opinion of Adam Smith, M. Say, in the fourth chapter, speaks of the value which is given to commodities by natural agents, such as the sun, the air, the pressure of the atmosphere &c., which are sometimes subst.i.tuted for the labour of man, and sometimes concur with him in producing.[29]

But these natural agents, though they add greatly to _value in use_, never add exchangeable value, of which M. Say is speaking, to a commodity: as soon as by the aid of machinery, or by the knowledge of natural philosophy, you oblige natural agents to do the work which was before done by man, the exchangeable value of such work falls accordingly. If ten men turned a corn mill, and it be discovered that by the a.s.sistance of wind, or of water, the labour of these ten men may be spared, the flour, which is the produce of the work performed by the mill, would immediately fall in value, in proportion to the quant.i.ty of labour saved; and the society would be richer by the commodities which the labour of the ten men could produce, the funds destined for their maintenance being in no degree impaired.

M. Say accuses Dr. Smith of having overlooked the value which is given to commodities by natural agents, and by machinery, because he considered that the value of all things was derived from the labour of man; but it does not appear to me, that this charge is made out; for Adam Smith no where under-values the services which these natural agents and machinery perform for us, but he very justly distinguishes the nature of the value which they add to commodities--they are serviceable to us, by increasing the abundance of productions, by making men richer, by adding to value in use; but as they perform their work gratuitously, as nothing is paid for the use of air, of heat, and of water, the a.s.sistance which they afford us, adds nothing to value in exchange. In the first chapter of the second book, M. Say himself gives a similar statement of value, for he says that "utility is the foundation of value, that commodities are only desirable, because they are in some way useful, but that their value depends not on their utility, not on the degree in which they are desired, but on the quant.i.ty of labour necessary to procure them." "The utility of a commodity thus understood, makes it an object of man's desire, makes him wish for it, and establishes a demand for it. When to obtain a thing, it is sufficient to desire it, it may be considered as an article of natural wealth, given to man in an unlimited quant.i.ty, and which he enjoys, without purchasing it by any sacrifice; such are the air, water, the light of the sun. If he obtained in this manner all the objects of his wants and desires, he would be infinitely rich: he would be in want of nothing. But unfortunately this is not the case; the greater part of the things which are convenient and agreeable to him, as well as those which are indispensably necessary in the social state, for which man seems to be specifically formed, are not given to him gratuitously; they could only exist by the exertion of certain labour, the employment of a certain capital, and, in many cases, by the use of land. These are obstacles in the way of gratuitous enjoyment; obstacles from which result a real expense of production; because we are obliged to pay for the a.s.sistance of these agents of production." "It is only when this utility has thus been communicated to a thing (viz. by industry, capital, and land,) that it is a production, _and that it has a value_.

It is its utility which is the foundation of the demand for it, _but the sacrifices, and the charges necessary to obtain it, or in other words, its price_, limits the extent of this demand."

The confusion which arises from confounding the terms "value" and "riches" will best be seen in the following pa.s.sages.[31] His pupil observes: "You have said, besides, that the riches of a society were composed of the sum total of the values which it possessed; it appears to me to follow, that the fall of one production, of stockings for example, by diminishing the sum total of the value belonging to the society, diminishes the ma.s.s of its riches;" to which the following answer is given: "the _sum_ of the society's riches will not fall on that account. Two pair of stockings are produced instead of one; and two pair at three francs, are equally valuable with one pair at six francs.

The income of the society remains the same, because the manufacturer has gained as much on two pair at three francs, as he gained on one pair at six francs." Thus far M. Say, though incorrect, is at least consistent.

If value be the measure of riches, the society is equally rich, because the value of all its commodities is the same as before. But now for his inference. "But when the income remains the same, and productions fall in price, the society is really enriched. If the same fall took place in all commodities at the same time, which is not absolutely impossible, the society by procuring at half their former price, all the objects of its consumption, without having lost any portion of its income, would really be twice as rich as before, and could purchase twice the quant.i.ty of goods."

In the first pa.s.sage we are told, that if every thing fell to half its value, from abundance, the society would be equally rich, because there would be double the quant.i.ty of commodities at half their former value, or in other words, there would be the same value. But in the last pa.s.sage we are informed, that by doubling the quant.i.ty of commodities, although the value of each commodity should be diminished one half, and therefore the value of all the commodities together be precisely the same as before, yet the society would be twice as rich as before. In the first case riches are estimated by the amount of value: in the second, they are estimated by the abundance of commodities contributing to human enjoyments. M. Say further says, "that a man is infinitely rich without valuables, if he can for nothing obtain all the objects he desires;" yet in another place we are told, "that riches consist, not in the product itself, for it is not riches if it have not value, but in its value."

Vol. ii. p. 2.

CHAPTER XIX.

EFFECTS OF ACc.u.mULATION ON PROFITS AND INTEREST.

From the account which has been given of the profits of stock, it will appear, that no acc.u.mulation of capital will permanently lower profits, unless there be some permanent cause for the rise of wages. If the funds for the maintenance of labour were doubled, trebled, or quadrupled, there would not long be any difficulty in procuring the requisite number of hands, to be employed by those funds; but owing to the increasing difficulty of making constant additions to the food of the country, funds of the same value would probably not maintain the same quant.i.ty of labour. If the necessaries of the workman could be constantly increased with the same facility, there could be no permanent alteration in the rate of profits or wages, to whatever amount capital might be acc.u.mulated. Adam Smith, however, uniformly ascribes the fall of profits to acc.u.mulation of capital, and to the compet.i.tion which will result from it, without ever adverting to the increasing difficulty of providing food for the additional number of labourers which the additional capital will employ. "The increase of stock he says, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual compet.i.tion naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same compet.i.tion must produce the same effect in all." Adam Smith speaks here of a rise of wages, but it is of a temporary rise, proceeding from increased funds before the population is increased; and he does not appear to see, that at the same time that capital is increased, the work to be effected by capital, is increased in the same proportion. M. Say has however most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person. It is not to be supposed that he should, for any length of time, be ill-informed of the commodities which he can most advantageously produce, to attain the object which he has in view, namely, the possession of other goods; and therefore it is not probable that he will continually produce a commodity for which there is no demand.[32]

There cannot then be acc.u.mulated in a country any amount of capital which cannot be employed productively, until wages rise so high in consequence of the rise of necessaries, and so little consequently remains for the profits of stock, that the motive for acc.u.mulation ceases.[33] While the profits of stock are high, men will have a motive to acc.u.mulate. Whilst a man has any wished-for gratification unsupplied he will have a demand for more commodities; and it will be an effectual demand while he has any new value to offer in exchange for them. If ten thousand pounds were given to a man having 100,000_l._ per annum, he would not lock it up in a chest, but would either increase his expenses by 10,000_l._; employ it himself productively, or lend it to some other person for that purpose; in either case, demand would be increased, although it would be for different objects. If he increased his expenses, his effectual demand might probably be for buildings, furniture, or some such enjoyment. If he employed his 10,000_l._ productively, his effectual demand would be for food, clothing, and raw material, which might set new labourers to work; but still it would be demand.[34]

Productions are always bought by productions, money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community, or a part of a community, may have as much corn, and as many hats and shoes, as it is able or may wish to consume, the same cannot be said of every commodity produced by nature or by art.

Some would consume more wine, if they had the ability to procure it.

Others having enough of wine, would wish to increase the quant.i.ty or improve the quality of their furniture. Others might wish to ornament their grounds, or to enlarge their houses. The wish to do all or some of these is implanted in every man's breast; nothing is required but the means, and nothing can afford the means, but an increase of production.

If I had food and necessaries at my disposal, I should not be long in want of workmen who would put me in possession of some of the objects most useful or most desirable to me.

Whether these increased productions, and the consequent demand which they occasion, shall or shall not lower profits, depends solely on the rise of wages; and the rise of wages, excepting for a limited period, on the facility of producing the food and necessaries of the labourer. I say excepting for a limited period, because no point is better established, than that the supply of labourers will always ultimately be in proportion to the means of supporting them.

There is only one case, and that will be temporary, in which the acc.u.mulation of capital with a low price of food may be attended with a fall of profits; and that is, when the funds for the maintenance of labour increase much more rapidly than population;--wages will then be high, and profits low. If every man were to forego the use of luxuries, and be intent only on acc.u.mulation, a quant.i.ty of necessaries might be produced, for which there could not be any immediate consumption. Of commodities so limited in number, there might undoubtedly be an universal glut, and consequently there might neither be demand for an additional quant.i.ty of such commodities, nor profits on the employment of more capital. If men ceased to consume, they would cease to produce.

This admission, does not impugn the general principle. In such a country as England, for example, it is difficult to suppose that there can be any disposition to devote the whole capital and labour of the country to the production of necessaries only.

When merchants engage their capitals in foreign trade, or in the carrying trade, it is always from choice, and never from necessity: it is because in that trade their profits will be somewhat greater than in the home trade.

Adam Smith has justly observed "that the desire of food is limited in every man by the narrow capacity of the human stomach, but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary." Nature then has necessarily limited the amount of capital which can at any one time be profitably engaged in agriculture, but she has placed no limits to the amount of capital that may be employed in procuring "the conveniences and ornaments" of life. To procure these gratifications in the greatest abundance is the object in view, and it is only because foreign trade, or the carrying trade, will accomplish it better, that men engage in them, in preference to manufacturing the commodities required, or a subst.i.tute for them, at home. If, however, from peculiar circ.u.mstances, we were precluded from engaging capital in foreign trade, or in the carrying trade, we should, though with less advantage, employ it at home; and while there is no limit to the desire of "conveniences, ornaments of building, dress, equipage, and household furniture," there can be no limit to the capital that may be employed in procuring them, except that which bounds our power to maintain the workmen who are to produce them.

Adam Smith however, speaks of the carrying trade as one not of choice, but of necessity; as if the capital engaged in it would be inert if not so employed, as if the capital in the home trade could overflow, if not confined to a limited amount. He says, "when the capital stock of any country is increased to such a degree, _that it cannot be all employed in supplying the consumption, and supporting the productive labour of that particular country_, the surplus part of it naturally disgorges itself into the carrying trade, and is employed in performing the same offices to other countries."

"About ninety-six thousand hogsheads of tobacco are annually purchased with a part of the surplus produce of British industry. But the demand of Great Britain does not require, perhaps, more than fourteen thousand.

If the remaining eighty-two thousand, therefore, could not be sent abroad _and exchanged for something more in demand at home_, the importation of them would cease immediately, _and with it the productive labour of all the inhabitants of Great Britain, who are at present employed in preparing the goods with which these eighty-two thousand hogsheads are annually purchased_." But could not this portion of the productive labour of Great Britain be employed in preparing some other sort of goods, with which something more in demand at home might be purchased? And if it could not, might we not employ this productive labour, though with less advantage, in making those goods in demand at home, or at least some subst.i.tute for them? If we wanted velvets, might we not attempt to make velvets; and if we could not succeed, might we not make more cloth, or some other object desirable to us?

We manufacture commodities, and with them buy goods abroad, because we can obtain a greater quant.i.ty than we could make at home. Deprive us of this trade, and we immediately manufacture again for ourselves. But this opinion of Adam Smith is at variance with all his general doctrines on this subject. "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. _The general industry of the country being always in proportion to the capital which employs it_, will not thereby be diminished, but only left to find out the way in which it can be employed with the greatest advantage."

Again. "Those, therefore, who have the command of more food than they themselves can consume, are always willing to exchange the surplus, or, what is the same thing, the price of it, for gratifications of another kind. What is over and above satisfying the limited desire, is given for the amus.e.m.e.nt of those desires which cannot be satisfied, but seem to be altogether endless. The poor, in order to obtain food, exert themselves to gratify those fancies of the rich; and to obtain it more certainly, they vie with one another in the cheapness and perfection of their work.

The number of workmen increases with the increasing quant.i.ty of food, or with the growing improvement and cultivation of the lands; and as the nature of their business admits of the utmost subdivisions of labours, the quant.i.ty of materials which they can work up increases in a much greater proportion than their numbers. Hence arises a demand for every sort of material which human invention can employ, either usefully or ornamentally, in building, dress, equipage, or household furniture; for the fossils and minerals contained in the bowels of the earth, the precious metals, and the precious stones."

Adam Smith has justly observed, that it is extremely difficult to determine the rate of the profits of stock. "Profit is so fluctuating, that even in a particular trade, and much more in trades in general, it would be difficult to state the average rate of it. To judge of what it may have been formerly, or in remote periods of time, with any degree of precision, must be altogether impossible." Yet since it is evident that much will be given for the use of money, when much can be made by it, he suggests, that "the market rate of interest will lead us to form some notion of the rate of profits, and the history of the progress of interest afford us that of the progress of profits." Undoubtedly if the market rate of interest could be accurately known for any considerable period, we should have a tolerably correct criterion, by which to estimate the progress of profits.

But in all countries, from mistaken notions of policy, the state has interfered to prevent a fair and free market rate of interest, by imposing heavy and ruinous penalties on all those who shall take more than the rate fixed by law. In all countries probably these laws are evaded, but records give us little information on this head, and point out rather the legal and fixed rate, than the market rate of interest.

During the present war, exchequer and navy bills have frequently been at so high a discount, as to afford the purchasers of them 7, 8 per cent., or a greater rate of interest for their money. Loans have been raised by Government at an interest exceeding 6 per cent., and individuals have been frequently obliged, by indirect means, to pay more than 10 per cent., for the interest of money; yet during this same period the legal rate of interest has been uniformly at 5 per cent. Little dependance for information then can be placed on that which is the fixed and legal rate of interest, when we find it may differ so considerably from the market rate. Adam Smith informs us, that from the 37th of Henry VIII., to 21st of James I., 10 per cent. continued to be the legal rate of interest.

Soon after the restoration, it was reduced to 6 per cent., and by the 12th of Anne, to 5 per cent. He thinks the legal rate followed, and did not precede the market rate of interest. Before the American War, Government borrowed at 3 per cent., and the people of credit in the capital, and in many other parts of the kingdom at 3-1/2, 4, and 4-1/2 per cent.

The rate of interest, though ultimately and permanently governed by the rate of profit, is however subject to temporary variations from other causes. With every fluctuation in the quant.i.ty and value of money, the prices of commodities naturally vary. They vary also, as we have already shewn, from the alteration in the proportion of supply to demand, although there should not be either greater facility or difficulty of production. When the market prices of goods fall from an abundant supply, from a diminished demand, or from a rise in the value of money, a manufacturer naturally acc.u.mulates an unusual quant.i.ty of finished goods, being unwilling to sell them at very depressed prices. To meet his ordinary payments, for which he used to depend on the sale of his goods, he now endeavours to borrow on credit, and is often obliged to give an increased rate of interest. This however is but of temporary duration; for either the manufacturer's expectations were well grounded, and the market price of his commodities rises, or he discovers that there is a permanently diminished demand, and he no longer resists the course of affairs: prices fall, and money and interest regain their real value. If by the discovery of a new mine, by the abuses of banking, or by any other cause, the quant.i.ty of money be greatly increased, its ultimate effect is to raise the prices of commodities in proportion to the increased quant.i.ty of money; but there is probably always an interval, during which some effect is produced on the rate of interest.

The price of funded property is not a steady criterion by which to judge of the rate of interest. In time of war, the stock market is so loaded by the continual loans of Government, that the price of stock has not time to settle at its fair level before a new operation of funding takes place, or it is affected by antic.i.p.ation of political events. In time of peace, on the contrary, the operations of the sinking fund, the unwillingness, which a particular cla.s.s of persons feel to divert their funds to any other employment than that to which they have been accustomed, which they think secure, and in which their dividends are paid with the utmost regularity, elevates the price of stock, and consequently depresses the rate of interest on these securities below the general market rate. It is observable too, that for different securities, Government pays very different rates of interest. Whilst 100_l._ capital in 5 per cent. stock is selling for 95_l._, an exchequer bill of 100_l._, will be sometimes selling for 100_l._ 5_s._, for which exchequer bill, no more interest will be annually paid than 4_l._ 11_s._ 3_d._: one of these securities pays to a purchaser at the above prices, an interest of more than 5-1/4 per cent., the other but little more than 4-1/4; a certain quant.i.ty of these exchequer bills is required as a safe and marketable investment for bankers; if they were increased much beyond this demand, they would probably be as much depreciated as the 5 per cent. stock. A stock paying 3 per cent. per annum will always sell at a proportionally greater price than stock paying 5 per cent., for the capital debt of neither can be discharged but at par, or 100_l._ money for 100_l._ stock. The market rate of interest may fall to 4 per cent., and Government would then pay the holder of 5 per cent. stock at par, unless he consented to take 4 per cent., or some diminished rate of interest under 5 per cent.: they would have no advantage from so paying the holder of 3 per cent. stock, till the market rate of interest had fallen below 3 per cent. per annum. To pay the interest on the national debt, large sums of money are withdrawn from circulation four times in the year for a few days. These demands for money being only temporary, seldom affect prices; they are generally surmounted by the payment of a large rate of interest.[36]