Book I, Chapter IX, 1

On the Profits of Stock.

The rise and fall of profits on stock depend on the same causes as the rise and fall of wages—the growth or decline of a society's wealth—but those causes affect profits and wages very differently.

The increase in stock that raises wages tends to reduce profits. When many wealthy merchants invest their stocks in the same trade, competition among them naturally tends to reduce its profits; and when stock increases similarly across all the trades in a society, the same competition must have the same effect in every one.

It is not easy, as already observed, to determine the average wages of labor even in a particular place at a particular time. Even then we can seldom establish more than the usual wage. But with profits on stock, even that is seldom possible. Profit fluctuates so much that a person engaged in a particular trade cannot always say what his own average annual profit is. It is affected not only by every change in the prices of the goods he deals in, but by the good or bad fortune of his competitors and customers, and by countless accidents to which goods are exposed at sea, on land, and even in a warehouse. Profit therefore varies not only from year to year but from day to day, almost from hour to hour. It must be far harder to determine the average profit of all the different trades in a great kingdom; and it must be altogether impossible to estimate with any precision what that average was formerly or in distant ages.

Yet although the average profits on stock, past or present, cannot be determined with any precision, the interest charged on money may give us some idea of them. We may take it as a principle that wherever the use of money can yield a great deal, people will commonly pay a great deal to use it; wherever it can yield little, they will commonly pay less. We may therefore be sure that, as the customary market rate of interest changes in a country, ordinary profits on stock change with it, falling when it falls and rising when it rises. The course of interest can thus give us some idea of the course of profit.

By the 37th of Henry VIII, all interest above ten per cent. was declared unlawful. Higher rates, it seems, had sometimes been charged before then. During the reign of Edward VI, religious zeal prohibited interest altogether. That ban, however, like all others of its kind, is said to have had no effect, and probably made the evil of usury worse rather than better. The statute of Henry VIII was revived by the 13th of Elizabeth, cap. 8. and ten per cent. remained the legal rate of interest until the 21st of James I, when it was limited to eight per cent. It was reduced to six per cent. soon after the Restoration, and to five per cent. by the 12th of Queen Anne. All these statutory changes seem to have been made with excellent judgment. They appear to have followed the market rate of interest—the rate at which creditworthy people usually borrowed—rather than anticipated it. Since Queen Anne's time, five per cent. seems to have been slightly above rather than below the market rate. Before the late war, the government borrowed at three per cent.; creditworthy people in the capital and in many other parts of the kingdom borrowed at three and a-half, four, and four and a-half per cent.

Since the time of Henry VIII, the country's wealth and revenue have continued to grow, and their advance seems gradually to have accelerated rather than slowed. They have not merely kept growing but grown faster and faster. Wages have risen throughout the same period, while profits on stock have declined in most branches of trade and manufacture.

Any trade generally requires more stock in a large town than in a country village. The large stocks invested in every branch of trade, and the number of wealthy competitors, generally push profits in the town below those in the village. Yet wages are generally higher in a large town. In a thriving town, those with large stocks to employ often cannot find all the workers they want. They therefore bid against one another to hire as many as they can, raising wages and lowering profits on stock. In remote rural areas, there is often not enough stock to employ everyone. People then bid against one another for jobs, lowering wages and raising profits on stock.

Although the legal rate of interest in Scotland is the same as in England, its market rate is somewhat higher. Even those with the best credit in Scotland seldom borrow at less than five per cent. Private bankers in Edinburgh pay four per cent. on their promissory-notes, which can be presented for payment, in whole or in part, at any time. Private bankers in London pay no interest on money deposited with them. Few trades cannot be conducted with less stock in Scotland than in England. The ordinary rate of profit must therefore be somewhat higher. As already observed, wages are lower in Scotland than in England. Scotland is not merely much poorer: the steps by which it advances toward a better condition—and it clearly is advancing—also seem much slower. The legal rate of interest in France has not always followed the market rate during this century [See Denisart, Article Taux des Interests, tom. iii, p.13]. In 1720, the rate was reduced from the twentieth to the fiftieth penny, or from five to two per cent. In 1724, it was raised to the thirtieth penny, or to three and a third per cent. In 1725, it rose again to the twentieth penny, or to five per cent. In 1766, under the administration of Mr Laverdy, it was reduced to the twenty-fifth penny, or to four per cent. The Abbé Terray later raised it to the former rate of five per cent. Many of these drastic reductions in interest were supposedly intended to prepare for a reduction in interest on the public debts—an aim sometimes achieved. France today may not be as wealthy as England. Although its legal interest rate has often been lower than England's, the market rate has generally been higher, for people there, as elsewhere, have several easy and very safe ways around the law. British merchants who have traded in both countries assure me that trading profits are higher in France than in England. This must explain why many British subjects prefer to invest their capitals in a country where trade is despised rather than one where it is highly respected. Wages, too, are lower in France than in England. When you pass from Scotland into England, the difference you can see in ordinary people's dress and faces sufficiently shows the difference in their condition. The contrast is greater still when you return from France. Though France is undoubtedly wealthier than Scotland, it seems to advance less rapidly. A common, even popular, opinion in France is that the country is declining. I believe that opinion unfounded even for France; but no one who sees Scotland now and saw it twenty or thirty years ago could possibly hold it about Scotland.

The province of Holland, on the other hand, is wealthier than England in proportion to its territory and population. Its government borrows at two per cent., and private borrowers of good credit at three. Wages are said to be higher in Holland than in England, and the Dutch, as everyone knows, trade on lower profits than any other Europeans. Some have claimed that Dutch trade is declining, and certain branches may well be doing so; but these signs sufficiently show that there is no general decline. When profit falls, merchants are apt to complain that trade is decaying, though falling profit is the natural consequence of prosperity in trade, or of more stock being employed in it than before. During the late war, the Dutch took over all France's carrying trade and still retain a very large share. Their great holdings in both French and English funds—about forty millions in the latter, it is said, though I suspect this is considerably exaggerated—and the great sums they lend to private individuals in countries where interest rates are higher than their own, certainly show that their stock is abundant, having grown beyond what they can invest at a reasonable profit in their country's own business. But they do not show that this business has contracted. An individual's capital may grow beyond what he can invest in the particular trade that produced it even while that trade continues to grow; the same is true of the capital of a great nation.

In our North American and West Indian colonies, not only wages but interest rates, and consequently profits on stock, are higher than in England. Across the colonies, both legal and market interest rates range from six to eight percent. High wages and high profits, however, scarcely ever occur together except under the special conditions of new colonies. For some time, a new colony must have too little stock relative to its land, and too few people relative to its stock, compared with most other countries. Its settlers have more land than they have stock to cultivate it. They therefore apply what stock they possess only to the most fertile and favorably situated land, near the seashore and along navigable rivers. Such land, moreover, is often bought for less than the value even of its natural produce. Stock invested in buying and improving this land must yield very large profits, and can consequently bear very high interest. Its swift accumulation in such profitable use enables the planter to expand his workforce faster than he can find workers in a new settlement. The people he does find are thus generously rewarded. As the colony grows, profits on stock gradually fall. Once the most fertile and best-placed lands have all been taken, less profit can be earned by cultivating land inferior in both soil and situation, and less interest can be paid on stock employed there. Accordingly, in most of our colonies both legal and market interest rates have fallen considerably during the present century. As wealth, improvement, and population have grown, interest has declined. Wages do not fall with profits on stock. Demand for labor grows as stock grows, however small its profits; and even after profits fall, stock can continue growing, and may grow much faster than before. What holds for industrious individuals holds for industrious nations advancing in wealth. A large stock with small profits generally grows faster than a small stock with large profits. Money, as the proverb says, makes money. Once you have a little, it is often easy to get more. The great difficulty is getting that little. The connection between the growth of stock and the growth of industry, or demand for productive labor, has already been partly explained, and will be explained more fully later in the discussion of the accumulation of stock.

On the Profits of Stock

Profits on stock rise and fall for the same reasons that wages rise and fall: society's wealth grows or declines. But these changes affect profits and wages very differently.

An increase in stock raises wages but tends to lower profit. When many wealthy merchants put their stock into the same trade, they compete and naturally drive down its profit. When stock increases similarly in every trade in a society, competition has the same effect on profits in all of them.

As already noted, even in one place at one time, average wages are hard to determine. Usually we can say no more than what wages are most common. It is rarely possible to say even that much about profits on stock. Profit changes so much that someone running a business cannot always tell you its average annual profit. Profit depends not only on every price change in the goods he trades, but also on the luck of his competitors and customers. It is affected by countless mishaps that can befall goods at sea, on land, or even in a warehouse. So profit changes not only from year to year but from day to day, and almost hour to hour. Finding the average profit for every trade across a large kingdom must be much harder. Accurately estimating profits long ago, or in distant periods, must be impossible.

Still, although we cannot precisely measure average profits on stock now or in the past, interest rates can give us some idea. We can take this as a rule: where people can earn a lot by using money, they will generally pay a lot to borrow it. Where they can earn little, they will generally pay less. So when the usual market interest rate changes in a country, ordinary profits on stock must change with it. Profits must fall when interest falls and rise when it rises. The course of interest rates can therefore tell us something about the course of profits.

By the 37th of Henry VIII, interest above ten per cent. was made illegal. Apparently lenders had sometimes charged more before then. Under Edward VI, religious zeal banned all interest. But like other such bans, this one reportedly had no effect, and probably increased rather than reduced the evil of usury. The law of Henry VIII was restored by the 13th of Elizabeth, cap. 8. Ten per cent. remained the legal rate until the 21st of James I, when the limit fell to eight per cent. It dropped to six per cent. soon after the Restoration, and to five per cent. by the 12th of Queen Anne. All these legal changes seem to have been sensible. They appear to have followed, not preceded, the market interest rate at which trustworthy people normally borrowed. Since Queen Anne's time, five per cent. seems to have been a little above the market rate, not below it. Before the late war, the government borrowed at three per cent. In the capital and many other places, trustworthy private borrowers paid three and a-half, four, or four and a-half per cent.

Since Henry VIII's time, the country's wealth and revenue have steadily grown. Growth seems gradually to have sped up rather than slowed down. Wealth and revenue have not merely kept growing; they have grown faster and faster. Wages have steadily risen over the same period, while profits on stock have fallen in most branches of trade and manufacturing.

Running almost any trade in a large town generally requires more stock than running it in a rural village. Large amounts of stock invested in each trade, and many wealthy competitors, generally keep town profits below village profits. But wages are generally higher in a large town than a rural village. In a thriving town, people with large amounts of stock to put to work often cannot find enough workers. They bid against each other to hire as many as they can. This raises wages and lowers profits on stock. In remote rural areas, there is often too little stock to employ everyone. People then compete for jobs, which lowers wages and raises profits on stock.

In Scotland, the legal interest rate is the same as in England, but the market rate is somewhat higher. Even the most trustworthy borrowers there rarely pay less than five per cent. Private bankers in Edinburgh even pay four per cent. on their promissory notes, which can be redeemed, in whole or in part, whenever the holder wishes. Private bankers in London pay no interest on deposits. Few trades require as much stock to operate in Scotland as in England. The usual profit rate must therefore be somewhat higher. As already noted, wages are lower in Scotland than in England. Scotland is also much poorer. Though it is plainly improving, its progress seems much slower. In France, the legal rate of interest has not always followed the market rate during this century [See Denisart, Article Taux des Interests, tom. iii, p.13]. In 1720, it fell from the twentieth to the fiftieth penny, or from five to two per cent. In 1724, it rose to the thirtieth penny, or to three and a third per cent. In 1725, it rose again to the twentieth penny, or to five per cent. In 1766, under Mr Laverdy, it fell to the twenty-fifth penny, or to four per cent. The Abbé Terray later raised it to the old five per cent. rate. Many of these sharp interest-rate cuts were supposedly intended to prepare for cuts to the interest on public debts. Sometimes that aim was achieved. France may not now be as rich as England. Though its legal interest rate has often been lower than England's, its market rate has generally been higher. In France, as elsewhere, there are several safe and easy ways around the law. British merchants who have traded in both countries have told me that trading profits are higher in France than in England. That must be why many British people choose to employ their capitals in a country where trade is looked down on rather than one where it is highly respected. Wages are lower in France than in England. When you travel from Scotland to England, the difference in ordinary people's clothes and appearance makes their different circumstances clear. Returning from France, you see a still greater contrast. France is no doubt richer than Scotland, but seems to be improving less quickly. Many people in France even believe it is declining. I think that belief is mistaken, even for France. No one who has seen Scotland both now and twenty or thirty years ago could possibly believe it of Scotland.

The province of Holland, by contrast, is richer than England relative to its area and population. Its government borrows at two per cent., and trustworthy private borrowers at three. Wages are said to be higher in Holland than England. As everyone knows, the Dutch trade at lower profits than anyone else in Europe. Some say Dutch trade is declining. Some branches may indeed be declining, but these signs strongly suggest that trade is not declining overall. When profits fall, merchants often complain that trade is shrinking. Yet lower profits are a natural effect of flourishing trade, when more stock than before has been invested in it. During the late war, the Dutch took over all France's carrying trade and still retain a very large share. They own large holdings in both French and English funds. Their holdings in the latter are said to be about forty millions, though I suspect this figure is considerably exaggerated. They also lend large sums to private people in countries with higher interest rates than their own. All this certainly shows they have more stock than they can invest at an acceptable profit in their own country's normal business. It does not show that this business has shrunk. A person's capital may grow beyond what can be used in the trade that created it, even while that trade keeps growing. The same can happen to a great nation's capital.

In our North American and West Indian colonies, wages, interest rates, and therefore profits on stock are all higher than in England. In the different colonies, both legal and market interest rates range from six to eight percent. High wages and high profits, however, perhaps almost never occur together except under the special conditions of new colonies. For a while a new colony must have too little stock for its land area, and too few people for its stock, compared with most other countries. Colonists have more land than they have stock to cultivate it. They therefore use that stock only on the most fertile, best-placed land, near the seashore and along navigable rivers. Such land is also often bought for less than even its natural produce is worth. Stock invested in buying and improving this land must earn a very high profit. It can therefore pay very high interest. In such a profitable use, stock grows quickly. A planter can then increase his need for workers faster than he can find them in a new settlement. He therefore pays the workers he does find very well. As the colony grows, profits on stock gradually fall. Once all the best-placed and most fertile land is taken, cultivating poorer and less conveniently located land brings smaller profits. Less interest can then be paid on stock invested in it. In most of our colonies, both the legal and market interest rates have accordingly fallen considerably over this century. As wealth, improvement, and population have grown, interest has declined. Wages do not fall along with profits on stock. Demand for labor grows as stock grows, whatever profit it brings. Even after profits fall, stock may continue to grow, and may grow much faster than before. The same is true of hardworking people and hardworking nations that are becoming richer. A large stock earning small profits generally grows faster than a small stock earning large profits. Money makes money, as the saying goes. Once you have a little, it is often easy to get more. Getting that first little bit is the hard part. I have already explained part of the connection between growing stock and growing industry, or demand for useful labor. I will explain it more fully later when discussing the accumulation of stock.