Book IV, Chapter V, 1

OF BOUNTIES.

In Great Britain, bounties on exports of the produce of particular branches of domestic industry are often petitioned for and sometimes granted. It is claimed that these will enable our merchants and manufacturers to sell their goods as cheaply as, or more cheaply than, their rivals in foreign markets. More goods, it is said, will thus be exported, turning the balance of trade further in our country's favor. We cannot give our workmen a monopoly in foreign markets as we have in the home market. We cannot force foreigners to buy their goods as we have forced our own countrymen. The next best expedient, it has therefore been thought, is to pay foreigners to buy them. This is how the mercantile system proposes to enrich the whole country, putting money into all our pockets through the balance of trade.

Bounties, it is conceded, ought to be given only to branches of trade that cannot be carried on without them. But any branch in which a merchant can sell his goods for a price that repays the entire capital employed in preparing and sending them to market, together with the ordinary profits of stock, can be carried on without a bounty. Such a branch is evidently on a level with all the other branches of trade conducted without bounties, and can no more require one than they do. Only those trades require bounties in which the merchant must sell his goods for a price that fails to repay his capital and the ordinary profit, or for less than it actually cost him to bring them to market. The bounty is given to make up this loss and encourage him to continue, or perhaps begin, a trade whose expenses are supposed to exceed its returns, whose every transaction consumes part of the capital invested in it, and which is of such a nature that, if all other trades resembled it, the country would soon have no capital left.

It should be observed that trades maintained by bounties are the only trades that can persist between two nations for any considerable time while one nation continually and regularly loses, selling its goods for less than it actually cost to bring them to market. If the bounty did not repay the merchant what he would otherwise lose on the price of his goods, his own interest would soon compel him to use his stock in another way, or to find a trade in which the price of the goods repaid, with the ordinary profit, the capital used in bringing them to market. Like all the other devices of the mercantile system, bounties can only force a country's trade into a channel much less advantageous than the one it would naturally follow of its own accord.

The ingenious and well-informed author of the Tracts upon the Corn Trade has shown very clearly that, since the bounty on exports of corn was first established, the price of the corn exported, valued moderately enough, has exceeded that of the corn imported, valued very highly, by a sum much greater than the total bounties paid over that period. He believes that, by the true principles of the mercantile system, this clearly proves the forced corn trade benefits the nation: the value of exports exceeds that of imports by much more than the whole extraordinary expense the public has incurred to secure those exports. He overlooks the fact that this extraordinary expense, the bounty, is the smallest part of what exporting corn actually costs society. The capital the farmer used to grow it must also be counted. Unless the price received for the corn in foreign markets repays not only the bounty but also this capital, together with the ordinary profits of stock, society loses the difference: the national stock is diminished by that much. But the very reason a bounty has been thought necessary is the belief that the price is too low to do this.

It has been said that the average price of corn has fallen considerably since the bounty was established. I have already tried to show that the average price of corn began to fall somewhat toward the end of the last century, and continued to fall through the first sixty-four years of this one. But this development, assuming it is real, as I believe it is, must have occurred in spite of the bounty and cannot possibly have been caused by it. It occurred in France as well as in England, although France had no bounty and, until 1764, generally prohibited exports of corn. This gradual fall in the average price of grain is therefore probably owing in the end neither to one policy nor the other, but to the gradual and almost imperceptible rise in the real value of silver that, as I have tried to show in the first book of this work, has occurred across Europe's general market during the present century. It seems altogether impossible that the bounty could ever help lower the price of grain.

In years of plenty, as already observed, the bounty causes extraordinary exports and necessarily keeps the price of corn in the home market above the level to which it would naturally fall. That was the stated purpose of the policy. In years of scarcity, although the bounty is often suspended, the extensive exports it causes in plentiful years must often prevent, to some extent, one year's plenty from relieving another year's scarcity. In both plentiful and scarce years, therefore, the bounty necessarily tends to raise the money price of corn in the home market somewhat above what it would otherwise be.

I do not think any reasonable person will dispute that the bounty must have this effect under the present state of tillage. Many people, however, have thought it encourages tillage in two different ways. First, they suppose that by opening a wider foreign market for the farmer's corn, it increases demand and consequently production. Second, they suppose that by securing the farmer a better price than he could otherwise expect under the present state of tillage, it encourages tillage. Over many years, they imagine, this double encouragement must increase corn production so much that its price in the home market falls far more than the bounty can raise it in whatever state tillage happens to have reached by the end of that period.

I answer that any extension of the foreign market caused by the bounty must, in every single year, be entirely at the expense of the home market. Every bushel of corn exported because of the bounty, which would not otherwise have been exported, would have remained in the home market to increase consumption and lower the price of corn. The corn bounty, like every other bounty on exports, imposes two distinct taxes on the people: first, the tax they must contribute to pay the bounty; and second, the tax resulting from the higher price of corn in the home market, which, because everyone buys corn, must be paid by the whole population. In the case of corn, this second tax is much the heavier of the two. Suppose that, averaging one year with another, the bounty of 5s. on the exportation of a quarter of wheat raises its price in the home market only 6d. the bushel, or 4s. the quarter, above what it would otherwise be in the actual state of the crop. Even on this very modest assumption, the great body of the people, besides contributing the tax that pays a bounty of 5s. on every quarter of wheat exported, must pay another tax of 4s. on every quarter they consume themselves. But according to the very well-informed author of the Tracts upon the Corn Trade, the average proportion of corn exported to corn consumed at home is no more than one to thirty-one. For every 5s. they contribute to the first tax, therefore, they must contribute £6:4s. to the second. So heavy a tax on the first necessity of life must either reduce the subsistence of the laboring poor or cause an increase in their money wages proportionate to the rise in the money price of their subsistence. To the extent that it acts in the first way, it reduces the ability of the laboring poor to educate and raise their children, and thus tends to restrain the country's population. To the extent that it acts in the second way, it reduces employers' ability to employ as many poor laborers as they otherwise could, and thus tends to restrain the country's industry. The extraordinary export of corn caused by the bounty, therefore, not only diminishes the home market and home consumption each year by exactly as much as it enlarges the foreign market and consumption, but, by restraining the country's population and industry, ultimately checks the gradual expansion of the home market. In the long run it tends to diminish, rather than increase, the total market for and consumption of corn.

It has been thought, however, that by making corn more profitable for the farmer, this increase in its money price must necessarily encourage its production.

I answer that this might be true if the bounty raised the real price of corn, or enabled the farmer to maintain more laborers with the same amount of corn, on the same scale—generous, moderate, or scanty—on which other laborers in his neighborhood are usually maintained. But neither the bounty nor any other human institution can evidently have such an effect. What the bounty can significantly affect is not the real price of corn but its nominal price. And though the tax that this policy imposes on the whole population may be very burdensome to those who pay it, it offers very little benefit to those who receive it.

The real effect of the bounty is less to raise the real value of corn than to lower the real value of silver: to make the same quantity of silver exchange for less, not only of corn but of every other domestically produced commodity. For the money price of corn governs the money prices of all other domestically produced commodities.

It governs the money price of labor, which must always enable the laborer to buy enough corn to support himself and his family on the generous, moderate, or scanty scale on which the advancing, stationary, or declining circumstances of society oblige his employers to maintain him.

It governs the money price of all the other raw produce of the land, which at every stage of improvement must bear a certain proportion to the price of corn, though that proportion differs from one stage to another. It governs, for example, the money price of grass and hay, butcher's meat, horses and their maintenance, and consequently land carriage, or the greater part of the country's inland commerce.

By governing the money price of all the other raw produce of the land, it governs the price of materials for almost all manufactures; by governing the money price of labor, it governs the price of manufacturing skill and industry; and by governing both, it governs the price of finished manufactures. The money price of labor and of everything produced by either land or labor must necessarily rise or fall in proportion to the money price of corn.

Suppose, therefore, that the bounty enables the farmer to sell his corn for 4s. the bushel instead of 3s:6d., and to pay his landlord a money rent proportionate to this rise in the money price of his produce. If, because corn has risen in price, 4s. will buy no more domestically produced goods of any other kind than 3s. 6d. bought before, this change will do little to improve the circumstances of either farmer or landlord. The farmer will not be able to cultivate much better; the landlord will not be able to live much better. In buying foreign commodities, this rise in the price of corn may give them some small advantage. In buying domestically produced goods it gives them none at all. And nearly all the farmer's spending, and by far the greater part even of the landlord's, is on domestically produced goods.

The fall in the value of silver that results from the fertility of the mines, and that operates equally or nearly equally throughout most of the commercial world, matters very little to any particular country. The resulting rise in all money prices does not make those who receive them really richer, but neither does it make them really poorer. A set of silverware becomes cheaper in real terms, and everything else remains of precisely the same real value as before.

But a fall in the value of silver that results from the particular circumstances or political institutions of one country, and takes place only there, is a matter of great consequence. Far from making anyone really richer, it tends to make everyone really poorer. The rise in money prices of all commodities, peculiar in this case to that country, tends to discourage to some degree every kind of industry conducted within it. It enables foreign nations, which can supply nearly all kinds of goods for less silver than its own workmen can afford to accept, to undersell those workmen not only abroad but even in the home market.

As owners of the mines, Spain and Portugal occupy the special position of distributing gold and silver to all the other countries of Europe. Those metals should therefore naturally be somewhat cheaper in Spain and Portugal than anywhere else in Europe. The difference, however, should be no more than the cost of freight and insurance. Because these metals have great value in small bulk, their freight is not considerable, and their insurance costs the same as that of any other goods of equal value. Spain and Portugal would therefore suffer very little from their special position if they did not compound its disadvantages through their political institutions.

ON BOUNTIES.

In Great Britain, people often ask for bounties on exports from particular domestic industries, and sometimes receive them. The claim is that these payments will let our merchants and manufacturers sell their goods abroad as cheaply as, or more cheaply than, their competitors. They will then export more, it is said, improving our balance of trade. We cannot give our workers a monopoly in foreign markets as we have at home. We cannot force foreigners to buy their goods as we have forced our own people to do. So the next best approach, people have thought, is to pay foreigners to buy. That is how the mercantile system proposes to make the whole country rich and put money in all our pockets through the balance of trade.

It is agreed that bounties should go only to trades that could not operate without them. But if a merchant can sell goods for enough to recover all the capital spent preparing and shipping them to market, plus the ordinary profit on stock, that trade can operate without a bounty. It is clearly on the same footing as other trades that need no bounties and cannot need one any more than they do. Only a trade in which a merchant must sell for less than the capital spent plus ordinary profit needs a bounty. In other words, the selling price is below the true cost of getting the goods to market. A bounty makes up the loss and encourages the merchant to continue, or perhaps start, that trade. Its costs supposedly exceed its returns. Each transaction consumes some of the capital invested in it, and if every trade worked this way, the country would soon have no capital left.

Notice that trades supported by bounties are the only ones in which two nations can trade for a considerable time while one regularly loses money, selling goods for less than their true cost of delivery to market. If the bounty did not repay the merchant's loss on the selling price, self-interest would soon make him use his stock differently. He would seek a trade whose selling price covered the capital spent on getting goods to market, plus ordinary profit. Like every other device of the mercantile system, bounties can only force a country's trade into a much less beneficial course than it would naturally follow.

The clever, well-informed author of the Tracts upon the Corn Trade has clearly shown that, since the bounty on corn exports began, the exported corn's value, even estimated fairly conservatively, has exceeded the generously estimated value of imported corn by much more than all the bounties paid in that period. By the mercantile system's own principles, he takes this as clear proof that the forced corn trade helps the nation: export value exceeds import value by much more than the public's extra cost of securing those exports. But he overlooks that the bounty is the smallest part of what exporting corn actually costs society. We must also count the capital the farmer used to grow it. Unless the foreign selling price covers both the bounty and that capital, plus the ordinary profits of stock, society loses the difference. Its national stock shrinks by that amount. Yet the very reason for granting a bounty is the belief that the price is not high enough to cover those costs.

People have said that the average price of corn has fallen substantially since the bounty was introduced. I have already tried to show that it began to fall somewhat toward the end of the last century and kept falling over the first sixty-four years of this one. But if this fall really happened, as I believe it did, it happened despite the bounty, not because of it. It happened in France as well as in England, even though France had no bounty and generally prohibited corn exports until 1764. The gradual decline in average grain prices was therefore probably due to neither policy. It probably resulted from the gradual, almost imperceptible rise in the real value of silver across Europe's general market during this century, which I tried to demonstrate in the first book of this work. It seems altogether impossible for the bounty ever to lower grain prices.

As noted earlier, in plentiful years the bounty causes extra exports and necessarily keeps domestic corn prices above the level to which they would otherwise fall. That was its stated purpose. In scarce years the bounty is often suspended. Still, the heavy exports it produces in plentiful years often prevent one year's abundance from doing as much to relieve the next year's shortage. In both plentiful and scarce years, then, the bounty necessarily tends to make the domestic money price of corn somewhat higher than it would otherwise be.

I do not think any reasonable person would dispute that the bounty has this effect given the current state of farming. Many, however, think it encourages farming in two ways. First, they say that a larger foreign market increases demand for the farmer's corn and therefore increases its production. Second, they say that a better price than the farmer could otherwise expect under present farming conditions encourages him to grow it. They imagine that, over many years, these two incentives must increase corn production so much that the domestic price falls by far more than the bounty raises it under the farming conditions then in place.

My answer is that any foreign market gained through the bounty in a given year comes entirely at the domestic market's expense. Every bushel exported because of the bounty would otherwise have remained at home, increasing domestic consumption and lowering the price. Like every export bounty, the corn bounty places two separate taxes on the people. First they pay the tax that funds the bounty. Second they pay a tax through the higher domestic price of corn. Since everyone buys corn, everyone must pay this second tax on this particular product. For corn, it is by far the heavier of the two. Suppose the bounty of 5s. per quarter of wheat exported raises the domestic price, averaged across years, by only 6d. per bushel, or 4s. per quarter, above what it would otherwise be with the existing crop. Even on that modest assumption, most people must pay not only the tax that funds 5s. for every quarter exported, but another 4s. for every quarter they consume themselves. According to the very well-informed author of the Tracts upon the Corn Trade, no more than one quarter is exported for every thirty-one consumed at home. So for every 5s. the people contribute toward the first tax, they must contribute £6:4s. toward the second. Such a heavy tax on life's most basic necessity must either reduce the food available to working poor people or raise their money wages in proportion to the money price of their food. If it reduces their food, they are less able to raise and educate their children, which holds back population growth. If it raises their wages, employers can hire fewer workers than they otherwise could, which holds back the country's industry. The extra corn exports caused by the bounty thus reduce the domestic market and consumption in each year by exactly as much as they expand the foreign market and consumption. By holding back population and industry, they also ultimately restrict the gradual growth of the domestic market. In the long run, they tend to shrink rather than grow the total market and consumption of corn.

Still, some have thought that a higher money price for corn must encourage its production by making it more profitable for the farmer.

My answer is that this could be true if the bounty raised the real price of corn. Then the same amount of corn would let the farmer support more workers at the usual local standard of living, whether generous, moderate, or meager. But the bounty, like any human institution, clearly cannot do that. It is the nominal, or money, price of corn, not its real price, that the bounty can substantially affect. The tax it places on everyone may be a heavy burden for the people paying it, while providing very little benefit to those receiving it.

The bounty's real effect is less to raise corn's real value than to reduce silver's real value. The same quantity of silver then buys less not just of corn but of all other goods made at home. That is because the money price of corn governs the prices of all other goods made at home.

It governs money wages. Workers must always earn enough money to buy sufficient corn to support themselves and their families at the generous, moderate, or meager level that their employers can afford, depending on whether society is growing, standing still, or declining.

It governs the money price of all other raw products of the land. At each stage of development their prices must bear some relation to the price of corn, although that relation varies from one stage to another. It governs, for example, the money prices of grass and hay, butcher's meat, horses and their upkeep, and therefore land transport and most inland trade in the country.

By governing prices for other raw products of the land, it governs the cost of materials for almost all manufactured goods. By governing money wages, it governs the cost of manufacturing skill and labor. By governing both, it governs the price of finished goods. Money wages and the money prices of everything produced by land or labor must rise or fall in proportion to the money price of corn.

The bounty might let the farmer sell his corn for 4s. the bushel instead of 3s:6d. and pay his landlord a money rent increased in proportion to that higher selling price. But if, because corn costs more, 4s. now buys no more of any other domestically made goods than 3s. 6d. bought before, neither farmer nor landlord gains much. The farmer cannot cultivate much better, and the landlord cannot live much better. The higher corn price may give them a small advantage when buying foreign goods, but none at all when buying goods made at home. Almost all the farmer's spending, and by far most of the landlord's, goes to goods made at home.

When fertile mines reduce the value of silver across all, or nearly all, of the trading world, that matters very little to any one country. The resulting rise in all money prices does not make those receiving the money truly richer, but it does not make them truly poorer either. A set of silver tableware becomes cheaper in real terms, while everything else keeps exactly the same real value.

But when a country's particular location or policies reduce the value of silver in that country alone, the consequences matter a great deal. Far from making anyone truly richer, this tends to make everyone truly poorer. The rise in money prices that is peculiar to that country tends to discourage every kind of domestic industry to some extent. Foreign countries can supply nearly every kind of good for less silver than its own workers can, underselling them both abroad and at home.

Spain and Portugal are in the special position of owning the mines and distributing gold and silver to all the other countries of Europe. Those metals should therefore naturally be somewhat cheaper in Spain and Portugal than elsewhere in Europe. But the difference should be no greater than shipping and insurance costs. Since the metals are very valuable and take up little space, shipping costs little, and insurance costs the same as for other goods of equal value. Spain and Portugal would therefore suffer very little from their position if their policies did not make its disadvantages worse.