Book II, Chapter V, 2

It matters more that a manufacturer’s capital should reside within the country. It necessarily sets more productive labor in motion and adds more value to the annual produce of society’s land and labor. It may, however, be very useful to the country even if it does not reside there. The capitals of British manufacturers who work the flax and hemp imported each year from the Baltic coasts are certainly very useful to the countries that produce those materials. The materials form part of those countries’ surplus produce, which, unless exchanged each year for something demanded there, would be worthless and would soon cease to be produced. The merchants who export them replace the capitals of those who produce them, thereby encouraging continued production; the British manufacturers in turn replace the capitals of those merchants.

Like an individual, a particular country may often lack enough capital both to improve and cultivate all its land, to manufacture and prepare all its raw produce for immediate use and consumption, and to carry the surplus raw or manufactured produce to distant markets, where it can be exchanged for something demanded at home. People in many parts of Great Britain lack enough capital to improve and cultivate all their land. Much of the wool of southern Scotland, for want of capital to manufacture it locally, is manufactured in Yorkshire after a long overland journey on very bad roads. There are many small manufacturing towns in Great Britain whose inhabitants lack enough capital to transport what their industry produces to distant markets where it is wanted and consumed. Any merchants among them are, properly speaking, merely agents of wealthier merchants living in the great commercial cities.

When a country’s capital is insufficient for all three purposes, the greater the share employed in agriculture, the more productive labor it will set in motion within the country, and the more value its employment will add to the annual produce of society’s land and labor. After agriculture, capital employed in manufacturing sets the most productive labor in motion and adds the most value to annual produce. Capital employed in the export trade has the least effect of the three.

A country lacking sufficient capital for all three purposes has, indeed, not reached the degree of wealth for which it seems naturally destined. Yet attempting all three prematurely, with insufficient capital, is certainly no shorter route to acquiring enough capital for a society than it would be for an individual. The combined capital of a nation’s individuals has its limits, just as the capital of one individual does, and can accomplish only certain ends. It grows as an individual’s capital grows: through the continual accumulation and addition of whatever they save from their revenue. It is therefore likely to grow fastest when employed in the way that yields the greatest revenue to all the country’s inhabitants, allowing them the greatest savings. But their revenue is necessarily proportional to the value of the annual produce of their land and labor.

The principal cause of our American colonies’ rapid advance toward wealth and greatness has been that almost all their capital has so far been employed in agriculture. They have no manufactures except the household and coarser kinds that necessarily accompany agricultural progress, produced by the women and children of every household. Most of America’s export and coastal trade is carried on with the capitals of merchants residing in Great Britain. Even many of the stores and warehouses that retail goods in certain provinces, notably Virginia and Maryland, belong to merchants residing in the mother country, providing one of the few instances in which a society’s retail trade is carried on by capital belonging to nonresidents. If Americans, by concerted action or any other kind of coercion, were to halt imports of European manufactures, thereby giving a monopoly to their own countrymen able to manufacture similar goods, and divert a substantial portion of their capital into that employment, they would retard rather than accelerate further growth in the value of their annual produce, and obstruct rather than advance their country’s progress toward real wealth and greatness. This would be still more true if they attempted in the same manner to monopolize their entire export trade.

Indeed, the course of human prosperity seems scarcely ever to have lasted long enough for any great country to acquire capital sufficient for all three purposes, unless perhaps we credit the marvelous accounts of the wealth and cultivation of China, ancient Egypt, and ancient Indostan. Even these three countries, by all accounts the richest that ever existed, are chiefly renowned for their preeminence in agriculture and manufacturing. They do not appear to have distinguished themselves in foreign trade. The ancient Egyptians had a superstitious aversion to the sea; a similar superstition prevails among the Indians; and the Chinese have never excelled in foreign commerce. Most of the surplus produce of all three countries seems always to have been exported by foreigners, who exchanged for it something in demand there, often gold and silver.

Thus the same capital in any country will set in motion more or less productive labor, and add more or less value to the annual produce of its land and labor, according to the proportions in which it is employed in agriculture, manufacturing, and wholesale trade. The difference is also very great according to the kind of wholesale trade in which any portion of it is employed.

All wholesale trade—all buying in order to sell again wholesale—may be divided into three kinds: the home trade, the foreign trade of consumption, and the carrying trade. The home trade buys the products of a country’s industry in one part of that country and sells them in another. It includes both inland and coastal trade. The foreign trade of consumption buys foreign goods for domestic consumption. The carrying trade conducts commerce between foreign countries, carrying one country’s surplus produce to another.

Capital employed to buy the products of a country’s industry in one part of that country for sale in another generally replaces, in each transaction, two distinct capitals, both employed in that country’s agriculture or manufacturing, enabling them to continue their employment. When it sends a certain value of commodities away from the merchant’s place of residence, it generally brings back in exchange at least an equal value of other commodities. When both are the products of domestic industry, every transaction necessarily replaces two distinct capitals, both employed in maintaining productive labor, enabling them to continue that support. The capital that sends Scotch manufactures to London and brings English corn and manufactures back to Edinburgh necessarily replaces, with every transaction, two British capitals, both employed in Great Britain’s agriculture or manufacturing.

Capital employed to buy foreign goods for domestic consumption also replaces two distinct capitals in each transaction when it buys them with the products of domestic industry, but only one of the two supports domestic industry. Capital that sends British goods to Portugal and brings Portuguese goods back to Great Britain replaces only one British capital in each transaction. The other is Portuguese. Thus, even if returns from the foreign trade of consumption arrive as quickly as returns from the home trade, the capital employed in it will give only half as much encouragement to the country’s industry or productive labor.

But the returns from the foreign trade of consumption are very seldom as quick as those from the home trade. Returns from the home trade generally arrive before year’s end, and sometimes three or four times in a year. Returns from the foreign trade of consumption seldom arrive before year’s end, and sometimes take two or three years. Capital employed in the home trade may therefore complete twelve transactions—be sent out and returned twelve times—before capital employed in the foreign trade of consumption completes one. If the capitals are equal, the first will therefore give four-and-twenty times as much encouragement and support to the country’s industry as the second.

Foreign goods for domestic consumption may sometimes be purchased not with domestic produce, but with other foreign goods. Those other goods, however, must have been purchased either directly with the products of domestic industry or with something else purchased with those products. Except in cases of war and conquest, foreign goods can only be acquired in exchange for something produced at home, either directly or after two or more successive exchanges. The effects of capital employed in such a roundabout foreign trade of consumption are therefore in every respect the same as those of capital employed in the most direct trade of that kind, except that its final returns are likely to take even longer, since they depend on returns from two or three separate foreign trades. If the hemp and flax of Riga are bought with tobacco from Virginia, which was bought with British manufactures, the merchant must wait for the returns from two distinct foreign trades before he can use the same capital to buy another like quantity of British manufactures. If the Virginia tobacco was bought not with British manufactures but with the sugar and rum of Jamaica, themselves bought with those manufactures, he must wait for the returns from three trades. If two or three separate merchants conduct these two or three trades, the second buying what the first imports and the third buying what the second imports to export it again, each merchant will indeed receive the returns on his own capital more quickly; but the final returns on all the capital employed will be just as slow as ever. Whether all the capital employed in such a roundabout trade belongs to one merchant or three makes no difference to the country, though it may matter to the individual merchants. In either case three times as much capital must be employed to exchange a given value of British manufactures for a given quantity of flax and hemp as would have been needed had the manufactures and the flax and hemp been exchanged directly. All the capital employed in such a roundabout foreign trade of consumption will therefore generally provide less encouragement and support to the country’s productive labor than an equal capital employed in a more direct trade of the same kind.

It matters more that a manufacturer’s capital be located within the country. It necessarily employs more productive labor there and adds more value to the society’s annual output from land and labor. Still, it can greatly benefit a country even when located elsewhere. British manufacturers annually turn flax and hemp imported from the Baltic coasts into goods. Their capital surely benefits the countries that grow those materials. The flax and hemp form part of those countries’ surplus output. Without annual exchanges for things wanted there, they would have no value and would soon stop being produced. The merchants who export them pay back the growers’ capital and encourage continued production. The British manufacturers in turn pay back the merchants’ capital.

A country, like a person, may often lack enough capital to improve and farm all its land, prepare all its raw output for immediate use and consumption, and transport its surplus raw or manufactured products to distant markets where they can be exchanged for things wanted at home. People in many parts of Great Britain lack enough capital to improve and farm all their land. Much of the wool from the southern counties of Scotland is carried a long way over very bad roads to be manufactured in Yorkshire, because there is not enough capital to manufacture it locally. Many small manufacturing towns in Great Britain lack the capital to take their products to distant markets where buyers want and use them. Any local merchants in those towns are really only agents for richer merchants based in large trading cities.

If a country lacks enough capital for all three purposes, the greater the share it invests in agriculture, the more productive labor it will employ at home. It will also add more value to the society’s annual output from land and labor. Manufacturing capital ranks second in productive labor employed and value added to annual output. Capital invested in the export trade has the smallest effect of the three.

A country without enough capital for all three has not yet reached the wealth it seems naturally capable of reaching. But trying to do all three too soon, with too little capital, is certainly not the quickest way for a society to gain enough capital. Nor would it be the quickest way for an individual. The combined capital of a nation’s people has limits, just as one person’s does, and can accomplish only so much. People increase their combined capital in the same way a person increases his: by continually adding to it what they save from their revenue. It will therefore probably grow fastest when invested in a way that brings all the country’s inhabitants the most revenue, enabling them to save the most. But the inhabitants’ total revenue must reflect the value of their land and labor’s annual output.

The rapid rise of our American colonies toward wealth and greatness has chiefly come from their use of almost all their capital in agriculture. They have no manufacturing apart from the household production and simpler kinds that necessarily grow alongside agriculture, done by women and children in individual households. Merchants living in Great Britain supply most of the capital for America’s export and coastal trade. Merchants in the mother country even own many of the stores and warehouses selling goods at retail in certain provinces, especially Virginia and Maryland. This is one of the few examples of a society’s retail trade being financed by people who do not live there. Suppose Americans joined together or used some other form of force to stop imports of European manufactured goods. Their own manufacturers would gain a monopoly on comparable goods, drawing a substantial share of American capital into manufacturing. That would slow, not speed up, further growth in the value of their annual output. It would hinder, not advance, their country’s progress toward real wealth and greatness. The harm would be even greater if they tried by the same means to monopolize all their export trade as well.

Periods of human prosperity hardly ever seem to have lasted long enough for a large country to accumulate sufficient capital for all three purposes. Perhaps we could make exceptions if we believe the remarkable accounts of the wealth and cultivation of China, ancient Egypt, and ancient Indostan. Yet even these three, described as the richest countries the world has ever known, are chiefly celebrated for their superiority in farming and manufacturing. They do not appear to have excelled in foreign trade. The ancient Egyptians had a superstitious aversion to the sea. A similar superstition is common among Indians, and the Chinese have never excelled at foreign commerce. Foreigners seem always to have exported most of these countries’ surplus output, exchanging it for other things in demand there, often gold and silver.

The same capital, then, will employ more or less productive labor and add more or less value to a country’s annual output from land and labor according to the shares invested in agriculture, manufacturing, and wholesale trade. It also makes a great difference which kind of wholesale trade receives any portion of that capital.

All wholesale trade—that is, buying to resell wholesale—falls into three kinds: domestic trade, foreign trade supplying home consumption, and carrying trade. Domestic trade buys goods made within a country in one part of it and sells them in another. It includes both inland and coastal trade. Foreign trade supplying home consumption buys foreign goods for use at home. Carrying trade handles trade between foreign countries by transporting the surplus output of one to another.

Capital that buys a country’s products in one of its regions to sell them in another generally repays two separate amounts of capital with each transaction. Both were invested in that country’s agriculture or manufacturing, and repayment lets both continue operating. The merchant sends a certain value of goods from his home base and usually receives at least an equal value of other goods in return. When both sets of goods are produced at home, each transaction necessarily repays two separate capitals used to support productive labor and lets them continue doing so. Capital that sends Scottish manufactured goods to London and brings English corn and manufactured goods back to Edinburgh repays two British capitals with each transaction. Both were invested in Great Britain’s agriculture or manufacturing.

Capital that buys foreign goods for consumption at home also repays two separate capitals with each transaction if the purchase uses domestically produced goods. But only one of those capitals supports domestic industry. The capital that sends British goods to Portugal and brings Portuguese goods to Great Britain repays only one British capital in each transaction; the other belongs to Portugal. Even if this foreign trade brought returns as quickly as domestic trade, the capital used in it would give only half as much support to the country’s productive labor and industry.

Returns from foreign trade supplying home consumption are rarely as quick as returns from domestic trade. Domestic trade generally brings returns before the year is over, sometimes three or four times a year. Foreign trade supplying home consumption rarely brings returns before year’s end and sometimes takes two or three years. Capital invested in domestic trade may therefore complete twelve transactions—go out and come back twelve times—before capital invested in foreign trade completes one. If the two amounts of capital are equal, the first will support and encourage the country’s industry four-and-twenty times as much as the second.

Foreign goods consumed at home may sometimes be bought with other foreign goods rather than products of domestic industry. But those other foreign goods must themselves have been bought either directly with domestically produced goods or with something bought with such goods. Apart from war and conquest, foreign goods can only be obtained in exchange for something produced at home, whether directly or after two or more exchanges. Capital used in this indirect kind of foreign trade for home consumption thus has the same effects in every respect as capital used in the most direct kind, except that the final returns are likely to take longer. They must wait on the returns from two or three different foreign trades. Suppose a merchant buys hemp and flax from Riga with Virginia tobacco, which he bought with British manufactured goods. He must wait for the returns from two separate foreign trades before he can use the same capital to buy a similar amount of British manufactured goods again. If he bought the Virginia tobacco with Jamaican sugar and rum, and bought those with British manufactured goods, he must wait for returns from three trades. Now suppose two or three merchants carry out those trades separately: the second buys the first merchant’s imports, and the third buys the second’s, then exports them again. Each merchant will recover his own capital more quickly. But the final return of all the capital invested in the trade will take just as long. Whether one merchant or three owns all the capital in such an indirect trade makes no difference to the country, though it matters to the individual merchants. In either case, exchanging a given value of British manufactured goods for a given quantity of flax and hemp requires three times as much capital as a direct exchange would. So capital invested in such indirect foreign trade for home consumption will generally give less support and encouragement to the country’s productive labor than an equal amount invested in a more direct trade of the same kind.