Book II, Chapter II, 1

On Money, Considered as a Particular Branch of Society’s General Stock, or on the Expense of Maintaining the National Capital

The First Book showed that the price of most commodities can be divided into three parts: one pays the wages of the labor employed in producing and bringing them to market, another pays the profits on the stock, and a third pays the rent of the land. Some commodities, it is true, have prices made up of only two of these parts, wages and profit; a very few have prices made up entirely of one, wages. But the price of every commodity must consist of one or more of these three parts: whatever does not go to rent or wages must necessarily be somebody’s profit.

Since this holds for each commodity taken separately, it must also hold for all the commodities that together make up the annual produce of a country’s land and labor. The total price, or exchangeable value, of that annual produce must be divided into the same three parts and distributed among the country’s inhabitants as the wages of their labor, the profits of their stock, or the rent of their land.

Yet although the entire value of a country’s annual produce is thus divided among its inhabitants and becomes their revenue, we may distinguish between their gross and net revenue, just as we distinguish between the gross and net rent of a private estate.

The gross rent of a private estate includes everything paid by the farmer. Its net rent is what remains at the landlord’s disposal after the expenses of management, repairs, and all other necessary charges have been deducted: what he can add to his stock reserved for immediate consumption, or spend on his table, carriage and attendants, the decoration of his house and furniture, and his personal pleasures and amusements, without damaging his estate. His real wealth corresponds not to his gross rent but to his net rent.

The gross revenue of all the inhabitants of a great country includes the whole annual produce of their land and labor. Their net revenue is what remains at their disposal after deducting the cost of maintaining, first, their fixed capital and, second, their circulating capital: what they can add to their stock reserved for immediate consumption, or spend on their subsistence, comforts, and amusements, without diminishing their capital. Their real wealth, too, corresponds not to gross but to net revenue.

The entire cost of maintaining fixed capital must plainly be excluded from society’s net revenue. Neither the materials required to maintain its useful machines, instruments of trade, profitable buildings, and the like, nor the products of the labor needed to fashion those materials into their proper forms, can form any part of that revenue. The wages paid for that labor may indeed form part of it, since the workers may put the full value of their wages into their stock reserved for immediate consumption. But with other kinds of labor, both the payment and the product enter this stock: the payment enters the workers’ stock, and the product enters the stock of other people, whose subsistence, comforts, and amusements are increased by the workers’ labor.

The purpose of fixed capital is to increase the productive powers of labor, enabling the same number of laborers to perform much more work. On a farm where all necessary buildings, fences, drains, roads, and the like are in excellent condition, the same number of laborers and working animals will produce much more than on a farm of equal size and equally good soil without equal conveniences. In manufacture, the same number of workers using the best machinery will work up far more goods than they would with less perfect instruments. Money properly spent on fixed capital of any kind is always repaid with a large profit and increases annual produce by far more than the cost of maintaining the improvements. Nevertheless, their maintenance still requires part of that produce. Materials and the labor of workers that might have been used directly to increase society’s food, clothing, housing, subsistence, and comforts are diverted to another purpose—highly beneficial, but different. This is why any mechanical improvement that lets the same number of workers perform the same amount of work with cheaper, simpler machinery than before is always considered beneficial to society. Materials and workers formerly needed to maintain a more complex and expensive machine can then be put to work increasing the output for which that or any other machine exists. A manufacturer spending a thousand a year to maintain his machinery will naturally spend the other five hundred on additional materials and workers if he can cut that expense to five hundred. The work his machinery exists to perform will therefore increase, along with all the benefits and conveniences society derives from it.

The cost of maintaining fixed capital in a great country may aptly be compared to the cost of repairing a private estate. Repairs may often be needed to sustain the estate’s produce, and therefore both the landlord’s gross and net rent. But if better management reduces their cost without reducing the produce, gross rent remains at least unchanged and net rent necessarily rises.

Although the entire cost of maintaining fixed capital must thus be excluded from society’s net revenue, the same is not true of maintaining circulating capital. This capital has four parts—money, provisions, materials, and finished goods. As already observed, the last three are regularly taken out of circulating capital and put either into society’s fixed capital or into its stock reserved for immediate consumption. Whatever share of these consumable goods is not used to maintain fixed capital enters the latter stock and forms part of society’s net revenue. Maintaining these three parts of circulating capital therefore takes away no part of annual produce from society’s net revenue beyond what is needed to maintain fixed capital.

In this respect, society’s circulating capital differs from an individual’s. None of an individual’s circulating capital forms part of his net revenue, which consists entirely of his profits. But although each individual’s circulating capital forms part of society’s circulating capital, it is not for that reason entirely excluded from society’s net revenue. The whole stock in a merchant’s shop certainly cannot be counted among the goods he reserves for his own immediate consumption. It may, however, enter the stock of others, who can regularly pay him its value and his profit out of revenue drawn from other sources, without reducing either his capital or theirs.

Money, then, is the only part of society’s circulating capital whose maintenance can diminish its net revenue.

Fixed capital and the money portion of circulating capital closely resemble one another in their effects on society’s revenue.

First, machines and instruments of trade cost money both to build and to maintain; both costs, though part of gross revenue, are deductions from society’s net revenue. In the same way, the stock of money circulating in a country costs money both to acquire and to maintain; both costs, though part of gross revenue, are likewise deductions from net revenue. Valuable materials, gold and silver, and highly skilled labor are devoted to maintaining this great but expensive instrument of commerce. They are not used to increase the stock reserved for immediate consumption—the subsistence, comforts, and amusements of individuals—which this instrument distributes in due proportion among all members of society.

Second, the machines and instruments of trade that make up an individual’s or society’s fixed capital form no part of either gross or net revenue. Nor does money, though it serves to distribute society’s entire revenue among its members, itself form any part of that revenue. The great wheel of circulation is quite different from the goods it circulates. Society’s revenue consists of those goods, not of the wheel that circulates them. In calculating either gross or net revenue, we must therefore subtract the entire value of money from the annual circulation of money and goods: not a single farthing of it can form part of either revenue.

Only an ambiguity of language can make this proposition seem doubtful or paradoxical. Once properly explained and understood, it is almost self-evident.

When we speak of a particular sum of money, sometimes we mean only the pieces of metal that compose it; at other times we also vaguely refer to the goods for which it can be exchanged, or the purchasing power its owner possesses. Thus, to say that England’s circulating money has been estimated at eighteen millions is merely to give the amount of coin that some writers have calculated—or rather assumed—to be circulating there. But to say that a man is worth fifty or a hundred pounds a year is generally to speak not only of the coin paid to him annually but of the value of the goods he can buy or consume each year. We generally mean to describe his actual or appropriate standard of living: the quantity and quality of life’s necessities and comforts he can properly afford.

If by a sum of money we mean both its pieces of metal and, less explicitly, the goods they can buy, the wealth or revenue it signifies equals only one of the two values ambiguously indicated by the same expression. It corresponds more properly to the latter than to the former—to the money’s worth rather than the money.

Thus, if someone receives a weekly pension of a guinea, he can use it during that week to purchase a certain amount of subsistence, comforts, and amusements. His real wealth, his real weekly revenue, rises or falls with that amount. His weekly revenue is certainly not both the guinea and the goods it can buy, but only one of these two equal values—more properly the goods’ value, the guinea’s worth rather than the guinea itself.

If he received his pension not in gold but in a weekly bill for a guinea, his revenue would surely consist less in the piece of paper than in what he could obtain for it. A guinea may likewise be considered a bill drawn on all the neighboring tradesmen for a certain amount of necessities and comforts. The recipient’s revenue consists not so much in the gold piece as in what it will obtain, what he can exchange it for. If it could be exchanged for nothing, it would be worth no more than a bill drawn on a bankrupt—no more than a useless piece of paper.

Likewise, although the weekly or yearly revenues of a country’s inhabitants may be, and often are, paid in money, their collective real wealth—their real weekly or yearly revenue—must always depend on how many consumable goods they can buy with it. Their total revenue clearly does not equal both the money and the consumable goods, but only one of these two values, and more properly the latter.

When we describe a person’s revenue by the metal pieces paid to him each year, we do so because their amount determines his purchasing power, or the value of the goods he can afford to consume annually. We still regard his revenue as consisting in the power to purchase or consume, not in the pieces that convey that power.

On Money as a Part of Society’s General Stock, and on the Cost of Maintaining the Nation’s Capital

The First Book showed that the price of most goods has three parts. One pays wages for the labor used to produce them and bring them to market. Another pays profit on the stock used, and the third pays rent on the land used. Some goods have only two of these parts: wages and profit. A very few have only wages. But every price must consist of one or more of these three parts. Any part that pays neither rent nor wages must be someone’s profit.

What holds for each good separately must also hold for all the goods produced each year by a country’s land and labor taken together. The total price, or exchange value, of that yearly output must be divided among the country’s people as wages for their labor, profits on their stock, or rent from their land.

All the value produced each year by a country’s land and labor is thus divided among its people and becomes their revenue. But we can distinguish between their gross and net revenue, just as we distinguish between the gross and net rent from a private estate.

An estate’s gross rent includes everything the farmer pays. Its net rent is what the landlord has left after paying for management, repairs, and all other necessary costs. It is what the landlord can put into stock for immediate consumption, or spend on food, transportation, household decorations and furniture, personal pleasures, and entertainment without damaging the estate. The landlord’s real wealth depends on net rent, not gross rent.

A large country’s gross revenue includes everything its people’s land and labor produce each year. Its net revenue is what remains after the cost of maintaining, first, fixed capital and, second, circulating capital. This is what people can put into stock for immediate consumption or spend on necessities, comforts, and entertainment without using up their capital. Their real wealth likewise depends on net revenue, not gross revenue.

Every cost of maintaining fixed capital must be left out of society’s net revenue. The materials needed to maintain useful machines, tools, productive buildings, and so on cannot count as part of it. Neither can the output of the labor that shapes those materials for their intended use. The wages paid for that labor can count, because the workers may put the full value of their wages into their stock for immediate consumption. With other kinds of labor, both the wages and the output can go into that stock. The wages go into the workers’ stock, while the output goes into other people’s stock and increases their necessities, comforts, and pleasures.

Fixed capital is meant to make labor more productive, allowing the same number of workers to do much more work. Take two farms of equal size with equally good soil. With buildings, fences, drains, roads, and the like in excellent condition, the same number of workers and working animals will produce far more on one farm than on the other if it lacks those improvements. In manufacturing, the same number of workers using the best machinery will process far more goods than workers using poorer tools. Money properly spent on any kind of fixed capital pays back a large profit. It raises annual output by much more than the cost of maintaining the improvements. Still, some of that output must be spent on maintenance. Materials and workers’ labor that could directly increase society’s food, clothing, housing, and comforts are put to another use. That use is highly beneficial, but it is different. This is why any mechanical improvement that lets the same number of workers do the same amount of work with simpler, cheaper machinery is good for society. Materials and workers previously needed to maintain more complicated and expensive machinery can instead increase the amount of work done with that machinery, or with any other machinery. Suppose the owner of a large factory spends a thousand pounds a year maintaining its machinery and can cut that expense to five hundred. He will naturally spend the other five hundred on additional materials for additional workers to process. The work the machinery is meant to help accomplish will increase, along with all the benefit and comfort society receives from that work.

The cost of maintaining a large country’s fixed capital is much like the cost of repairs on a private estate. Repairs are often necessary to maintain the estate’s output and therefore the landlord’s gross and net rent. But if better management can lower repair costs without reducing output, gross rent stays at least the same, while net rent necessarily rises.

Although the entire cost of maintaining fixed capital must be left out of society’s net revenue, maintaining circulating capital is different. Circulating capital has four parts: money, provisions, materials, and finished goods. As already noted, the last three are regularly taken out of it and put either into society’s fixed capital or into stock for immediate consumption. Any of these consumable goods not used to maintain fixed capital go into that stock and become part of society’s net revenue. Maintaining these three parts of circulating capital therefore takes nothing from the annual output that could count as net revenue, beyond what fixed capital needs for maintenance.

In this respect, society’s circulating capital differs from an individual’s. None of an individual’s circulating capital can count as that person’s net revenue, which consists entirely of profits. But although each person’s circulating capital is part of society’s circulating capital, that does not mean it is entirely excluded from society’s net revenue. A merchant cannot put all the goods in his shop into his own stock for immediate consumption. But other people can put them into theirs. They can use revenue from other sources to pay the merchant regularly for the goods and his profit, without reducing either his capital or theirs.

Money, then, is the only part of society’s circulating capital whose maintenance can reduce its net revenue.

Fixed capital and the money part of circulating capital have much in common in the ways they affect society’s revenue.

First, machines, tools, and similar things cost money to set up and then to maintain. Both costs are part of society’s gross revenue but must be deducted to calculate its net revenue. Likewise, the money circulating in a country costs money to obtain and then to maintain. These costs, too, are part of gross revenue but deductions from net revenue. Valuable materials, gold and silver, and highly skilled labor are used to maintain this large but expensive instrument of commerce. Instead, they could have increased the stock available for immediate consumption: the necessities, comforts, and pleasures of individuals. This instrument is what distributes those things regularly to each person in the proper amounts.

Second, the machines, tools, and similar items that make up an individual’s or a society’s fixed capital are not part of either gross or net revenue. Neither is the money that distributes society’s whole revenue among its members. The great wheel that keeps goods circulating is not the goods it circulates. Society’s revenue consists of those goods, not the wheel. When calculating gross or net revenue, we must subtract the full value of the money from the yearly circulation of money and goods. Not a single farthing of that money can count as revenue.

This point only seems doubtful or strange because the word money has more than one meaning. Once explained, the point is almost obvious.

When we mention a sum of money, sometimes we mean only the metal coins. At other times we also mean, less clearly, the goods those coins can buy, or the buying power they give their owner. When we say England’s circulating money has been estimated at eighteen millions, we mean the quantity of coins that some writers have calculated, or rather guessed, are circulating there. But when we say someone is worth fifty or a hundred pounds a year, we usually mean more than the coins paid to that person each year. We mean the value of the goods that person can buy or use each year. We usually mean to describe that person’s way of life, or the amount and quality of necessities and comforts the person can reasonably enjoy.

If a sum of money refers both to coins and, less clearly, to the goods they can buy, the wealth or revenue it represents equals just one of those two values. More accurately, it equals the value of the goods, not the coins: what the money is worth rather than the money itself.

Suppose someone receives a guinea as a weekly pension. During the week, that person can buy a certain amount of necessities, comforts, and pleasures with it. The amount determines that person’s real wealth and real weekly revenue. Weekly revenue is not both the guinea and the things it buys. It equals just one of those two equal values, more accurately the value of what the guinea buys than the guinea itself.

If the pension came as a weekly bill for a guinea instead of gold, the person’s revenue would not really be the paper but what it could buy. A guinea can be thought of as a bill presented to all the local merchants for a certain amount of necessities and comforts. The recipient’s revenue is not so much the gold coin as the things it can buy or be exchanged for. If it could buy nothing, it would be no more valuable than a useless scrap of paper, like a bill drawn on someone bankrupt.

Likewise, a country’s people may all receive their weekly or yearly revenue in money, and often do. But their combined real wealth and real weekly or yearly revenue depend on how many consumable goods they can buy with it. Their combined revenue cannot equal both the money and the goods it buys. It equals just one of those two values, more accurately the goods than the money.

We often express someone’s revenue as the number of coins paid to that person each year because that number determines their buying power, or the value of the goods they can consume each year. Yet we still understand revenue to consist of that power to buy or consume, not the coins that provide it.