Book IV, Chapter I, 4

The importation of gold and silver is not the principal benefit a nation gains from foreign trade, still less its only benefit. Wherever such trade is conducted, all the places involved gain two distinct advantages. It carries away the surplus produce of their land and labor for which they have no demand and brings back something they do want. By exchanging their surplus for goods that meet some of their needs and increase their pleasures, it gives that surplus value. Foreign trade also prevents the limits of a domestic market from obstructing the division of labor in any art or manufacture from reaching its highest refinement. By opening a wider market for the part of their output that exceeds domestic consumption, it encourages people to improve their labor's productive power and raise its annual output as far as possible, thereby increasing society's real revenue and wealth. Foreign trade continually performs these great and important services for every country engaged in it. All benefit greatly, though the country where the merchant lives generally benefits most: he is usually more engaged in meeting its needs and exporting its surplus than in doing the same for any other one country. Supplying such gold and silver as countries without mines may need is, no doubt, one function of foreign commerce. But it is a most insignificant one. A country trading abroad solely for this reason would scarcely need to load a ship in a century.

It was not through imports of gold and silver that the discovery of America enriched Europe. The abundance of the American mines made those metals cheaper. A set of plate can now be bought for about a third of the corn or labor it would have cost in the fifteenth century. With the same annual expenditure of labor and goods, Europe can buy about three times as much plate each year as it could then. But when a good sells for a third of its former price, former buyers can not only buy three times as much; it also becomes affordable to many more buyers—perhaps more than ten, perhaps more than twenty times as many. Thus Europe today may have not merely more than three times but more than twenty or thirty times as much plate as it would have had, even at its present level of development, if the American mines had never been found. To this extent Europe has undoubtedly gained a real convenience, though certainly a very slight one. Cheaper gold and silver are rather less suitable as money than before. To make the same purchases, we must carry more of them: a shilling in our pocket where a groat once sufficed. It is hard to say which is more trivial, this inconvenience or its opposite convenience. Neither could have made any fundamental difference to Europe's condition. Yet the discovery of America certainly did make a fundamental difference. By opening a vast new market for all European goods, it made possible new divisions of labor and advances in the arts that could never have arisen within the narrow bounds of the old trade: there had been no market for most of their output. Labor's productive power improved, its output grew throughout the different countries of Europe, and the inhabitants' real revenue and wealth grew with it. Nearly all European goods were new to America, while many American goods were new to Europe. Exchanges never before imagined thus arose. They should naturally have proved as beneficial to the new continent as they certainly were to the old. The savage injustice of Europeans made an event that should have benefited everyone ruinous and destructive to several of those unfortunate countries.

The discovery, at about the same time, of a route to the East Indies around the Cape of Good Hope opened perhaps an even wider field for foreign commerce than the discovery of America, despite the greater distance. Only two nations in America were in any respect more advanced than those described as savages, and they were destroyed almost as soon as they were discovered. The others were deemed savages. But the empires of China, Indostan, and Japan, along with several others in the East Indies, though not possessed of richer gold or silver mines, were in every other respect far richer, better cultivated, and more advanced in all the arts and manufactures than Mexico or Peru. This remains true even if we credit the exaggerated Spanish accounts of those empires' former condition—accounts that plainly deserve no credit. Rich, developed nations, however, can always exchange goods of far greater value with one another than with peoples they call savages and barbarians. Yet Europe has so far gained much less from its commerce with the East Indies than from commerce with America. The Portuguese monopolized East Indian trade for about a century; the other European nations could send or receive goods from that region only indirectly through them. When the Dutch began to challenge them at the beginning of the last century, they placed all their East Indian commerce in the hands of an exclusive company. The English, French, Swedes, and Danes have all followed their example. Thus no great European nation has yet enjoyed free commerce with the East Indies. No other reason is needed for its having been less advantageous than the American trade, which is open to all the subjects of nearly every European nation trading with its own colonies. The exclusive privileges of the East India companies, their great wealth, and the considerable favor and protection it has won them from their governments have aroused much envy. This envy has often portrayed their trade as wholly harmful because it exports large quantities of silver every year from the countries conducting it. Those concerned in the trade have replied that the continual export of silver might indeed impoverish Europe as a whole but not the particular country engaged in it: by exporting some of the goods received to other European countries, that country brings home far more silver each year than it sends away. Both the objection and the reply rest on the popular notion I have just examined; nothing more need be said about either. The annual export of silver to the East Indies probably makes plate somewhat more expensive in Europe than it would otherwise be; coined silver probably buys more labor and goods. The first effect is a very small loss and the second a very small gain; neither warrants public attention. By opening a market for European goods—or, much the same thing, for gold and silver bought with European goods—trade with the East Indies must tend to increase Europe's annual output of goods and therefore its real wealth and revenue. If it has so far increased them only slightly, the restraints imposed on it everywhere are probably the reason.

I have thought it necessary, even at the risk of tediousness, to examine fully the popular notion that wealth consists of money, or gold and silver. As I have already observed, everyday speech often uses money to mean wealth. This ambiguity has made the popular notion so familiar that even those persuaded of its absurdity are apt to forget their own principles and take it as an unquestionable truth in the course of their arguments. Some of the best English writers on commerce begin by observing that a country's wealth consists not only of gold and silver but also of land, houses, and consumable goods of every kind. Yet as their arguments proceed, land, houses, and consumable goods seem to disappear from memory. They frequently reason as if all wealth were gold and silver and multiplying those metals were the great purpose of national industry and commerce.

Once two principles were accepted—that wealth consisted of gold and silver, and that a country without mines could obtain them only through a favorable balance of trade, by exporting more value than it imported—the principal aim of political economy necessarily became to reduce imports of foreign goods for domestic consumption as far as possible and to increase exports of domestic production as far as possible. Its two great instruments for enriching a country were therefore restrictions on imports and encouragements to exports.

Restrictions on imports took two forms.

First, restrictions on imports of goods for domestic consumption that could be made at home, whatever country supplied them.

Second, restrictions on imports of almost all kinds of goods from particular countries with which the balance of trade was believed unfavorable.

These various restrictions sometimes took the form of high duties and sometimes outright prohibitions.

Exports were encouraged by drawbacks, bounties, favorable commercial treaties with foreign states, and the establishment of colonies in distant lands.

Drawbacks were granted in two circumstances. When domestic manufactures were subject to a duty or excise, all or part of it was often refunded on export. When dutiable foreign goods were imported for reexport, all or part of the duty was sometimes refunded when they were exported.

Bounties were granted to encourage either new manufactures or other kinds of industry thought to merit particular favor.

Favorable commercial treaties secured privileges in foreign states for a country's goods and merchants beyond those granted to other countries.

Establishing colonies in distant lands often secured not only special privileges but a monopoly for the goods and merchants of the country that founded them.

These two kinds of import restriction, together with the four forms of export encouragement, are the six principal means by which the commercial system proposes to increase a country's gold and silver through a favorable balance of trade. I shall examine each in its own chapter. Rather than dwell further on their supposed tendency to bring money into the country, I shall focus chiefly on how each is likely to affect the annual output of its industry. Insofar as they increase or diminish the value of that annual output, they must plainly increase or diminish the country's real wealth and revenue.

A country gains far more from foreign trade than imported gold and silver. Wherever foreign trade takes place, all the places involved gain two distinct benefits. Each can send out the surplus of its land and labor that its own people do not want and bring back something they do want. Trade gives value to excess goods by exchanging them for things that meet people's needs and add to their enjoyment. It also keeps a small home market from limiting how far the division of labor can develop in any craft or manufacture. A wider market for goods beyond what people can use at home encourages producers to improve their ability to produce and raise yearly output as far as possible. This increases society's real revenue and wealth. Foreign trade constantly provides these major benefits to all countries involved. All gain greatly, though the merchant's own country generally gains most, since he usually does more to supply its needs and export its surplus than he does for any other particular country. Foreign trade does, of course, bring needed gold and silver to countries without mines. But this is a tiny part of its business. A country trading abroad for that reason alone would scarcely need to load a ship once in a century.

Europe was not enriched by the discovery of America because it imported gold and silver. The American mines made those metals cheaper. A set of plate now costs about a third as much corn or labor as it did in the fifteenth century. With the same yearly spending on labor and goods, Europe can buy about three times as much plate each year as it could then. But when a good falls to a third of its usual price, previous buyers can buy three times as much, and many more people can afford it—perhaps more than ten or twenty times as many. So Europe may now have not just three times but twenty or thirty times as much plate as it would have had, even at its present level of development, if the American mines had never been found. That is a real convenience, though a very small one. Cheaper gold and silver are somewhat less useful as money than before. To buy the same things, we have to carry more metal: a shilling in our pocket where a groat once sufficed. It is hard to say whether that inconvenience or the corresponding convenience is less important. Neither could have made a major difference to Europe. Yet the discovery of America did make a major difference. It opened a new and seemingly unlimited market for European goods. This led to new divisions of labor and improvements in crafts that could not have developed within the narrow old trading market, which could not have taken most of their output. Labor became more productive and produced more throughout Europe. Its people's real revenue and wealth rose too. Almost all European goods were new to America, and many American goods were new to Europe. New kinds of exchange began that nobody had previously imagined. These should naturally have benefited the new continent as much as they certainly benefited the old one. The Europeans' savage injustice turned what should have benefited everyone into disaster and destruction for several of those unfortunate countries.

The route to the East Indies around the Cape of Good Hope was discovered at roughly the same time. Despite the greater distance, it may have opened a wider field for foreign trade than America did. Only two nations in America were in any way more advanced than the peoples called savages, and both were destroyed almost as soon as they were discovered. The rest were regarded as savages. But China, Indostan, Japan, and several other East Indian empires were far richer in every respect except gold and silver mines than Mexico or Peru. Their lands were better cultivated, and their crafts and manufactures more developed. That remains true even if we believe the Spanish writers' exaggerated accounts of the ancient condition of Mexico and Peru, though those accounts plainly do not deserve belief. Rich, developed nations can always exchange far more with each other than with peoples they call savages and barbarians. Still, Europe has so far benefited much less from trade with the East Indies than from trade with America. The Portuguese kept the East India trade to themselves for about a century. Other Europeans could send or receive goods from there only indirectly through Portugal. When the Dutch began to challenge the Portuguese early in the last century, they put all their East India trade in the hands of an exclusive company. The English, French, Swedes, and Danes did the same. As a result, no major European nation has yet enjoyed free trade with the East Indies. This alone explains why that trade has brought less benefit than trade with America. Trade between nearly every European country and its own American colonies is open to all its subjects. The East India companies' exclusive rights and vast wealth have won them strong government favor and protection, and have also made them widely envied. Their critics often call their trade entirely harmful because it sends so much silver out of the trading countries every year. The companies answer that this constant export of silver might impoverish Europe as a whole, but not the particular country carrying on the trade. They say they sell some of the goods brought back to other European countries and thus bring home much more silver each year than they send out. Both sides rely on the common belief I have just examined, so I need say no more about their arguments. Annual silver exports to the East Indies probably make plate a little more expensive in Europe than it otherwise would be. Silver coins probably also buy a little more labor and goods. The first effect is a very small loss and the second a very small gain. Neither deserves public attention. East Indian trade opens a market for European goods, or almost equivalently for the gold and silver bought with those goods. It must therefore tend to increase Europe's yearly production of goods, and hence its real wealth and revenue. If it has increased them so little until now, the restrictions placed on it everywhere are probably to blame.

At the risk of being tedious, I felt it necessary to examine fully the common belief that wealth consists of money, or gold and silver. As I have noted, people often use the word money to mean wealth. That ambiguity makes the belief so familiar that even people who know it is absurd often forget their own principles and assume in their arguments that it is an undeniable truth. Some of the best English writers on trade begin by saying that a country's wealth includes not just gold and silver but land, houses, and all kinds of goods people can use. As they continue, however, they seem to forget the land, houses, and goods. Their arguments often assume that gold and silver are all the wealth there is, and that increasing their quantity is the main goal of a country's industry and trade.

Once two claims were accepted—that wealth consists of gold and silver, and that a country without mines can obtain them only by a favorable balance of trade, exporting goods worth more than it imports—the chief goal of political economy became clear. It was to cut imports for domestic use as much as possible and raise exports of domestically produced goods as much as possible. Its two main tools for enriching the country were import restrictions and export incentives.

There were two kinds of import restrictions.

First were restrictions on imports for home use that could be produced at home, no matter which country supplied them.

Second were restrictions on nearly all kinds of goods from particular countries with which the balance of trade was thought unfavorable.

These restrictions sometimes took the form of high duties and sometimes outright bans.

Exports were encouraged through drawbacks, bounties, favorable trade treaties with foreign states, and the establishment of colonies far away.

Drawbacks were paid in two situations. When domestic manufactures were subject to a duty or excise, exporters were often refunded all or part of it. When imported foreign goods subject to duty were exported again, exporters were sometimes refunded all or part of that duty too.

Bounties were paid to encourage either new manufacturing industries or other kinds of industry thought to deserve special support.

Favorable trade treaties obtained special rights in a foreign state for a country's goods and merchants, beyond those given to other countries.

Establishing distant colonies often secured not just special rights but a monopoly for the goods and merchants of the country that established them.

The two kinds of import restrictions and four export incentives are the six main ways the commercial system seeks to increase a country's gold and silver by turning the balance of trade in its favor. I will discuss each in its own chapter. Rather than dwell further on whether they bring money into the country, I will chiefly examine their likely effects on the yearly produce of its industry. To the extent that they raise or lower the value of that output, they must raise or lower the country's real wealth and revenue.