Book IV, Chapter VII, 8

Second, this monopoly has necessarily helped keep the rate of profit in every branch of British trade above the level it would naturally have reached had all nations been free to trade with the British colonies.

The monopoly of colonial trade necessarily attracted a greater share of Britain's capital into that trade than would have gone there of its own accord; but by excluding all foreign capital, it also necessarily reduced the total capital employed in it below what it would naturally have been under free trade. By reducing competition among capitals in that trade, it necessarily raised the rate of profit there. By reducing competition among British capitals in every other branch of trade, it necessarily raised the rate of British profit in those branches as well. Whatever the amount or condition of Britain's mercantile capital at any given time since the act of navigation was established, so long as that condition lasted, the monopoly of colonial trade must have raised the ordinary rate of British profit above what it would otherwise have been, both in colonial trade and in every other branch. If the ordinary rate of British profit has fallen considerably since the establishment of the act of navigation, as it certainly has, it would have fallen still further without the monopoly established by that act to hold it up.

But whatever raises a country's ordinary rate of profit above the level it would otherwise reach necessarily places that country at both an absolute and a relative disadvantage in every branch of trade it does not monopolize.

It creates an absolute disadvantage because, in those branches, the country's merchants cannot earn the higher profit without selling both the foreign goods they import and their own country's goods they export at higher prices than they otherwise would. Their country must both buy more dearly and sell more dearly; it must buy less and sell less, enjoy less and produce less than it otherwise would.

It creates a relative disadvantage because, in those branches, it sets other countries that do not suffer the same absolute disadvantage either further above it or not so far below it as they would otherwise be. It enables them to enjoy and produce more in comparison with what it enjoys and produces. It increases their superiority or reduces their inferiority. By raising the price of its produce, it allows merchants from other countries to undersell it in foreign markets and thereby crowd it out of nearly every branch of trade it does not monopolize.

Our merchants often complain that high British wages cause their manufactures to be undersold in foreign markets; but they say nothing about the high profits of stock. They complain of other people's excessive gains, but keep silent about their own. Yet the high profits on British stock may raise the price of British manufactures just as much as high British wages in many cases, and perhaps more in some.

In this way, one may fairly say, Britain's capital has been partly drawn and partly driven out of most branches of trade she does not monopolize: in particular, trade with Europe and the countries around the Mediterranean sea.

It has been drawn away from these branches by the attraction of superior profits in colonial trade, as that trade has continually grown and the capital sufficient to conduct it one year has continually proved insufficient the next.

It has also been driven away by the advantage the high rate of profit prevailing in Britain gives other countries in all branches of trade Britain does not monopolize.

Just as the monopoly of colonial trade has drawn out of those other branches some British capital that would otherwise have been employed there, so it has pushed into them much foreign capital that would never have entered them had it not been excluded from colonial trade. In those other branches, it has reduced competition among British capitals and thus raised the British rate of profit above what it would otherwise have been. Conversely, it has increased competition among foreign capitals and thus lowered the foreign rate of profit below what it would otherwise have been. In both ways it must plainly have placed Great Britain at a relative disadvantage in all those other branches of trade.

It might be said, however, that colonial trade is more advantageous to Great Britain than any other trade, and that by forcing into it more British capital than would otherwise have gone there, the monopoly has directed that capital to a use more beneficial to the country than any other available to it.

The most advantageous use of a country's capital is the one that maintains the largest quantity of productive labor there and most increases the annual produce of its land and labor. But, as shown in the second book, the quantity of productive labor that capital employed in the foreign trade of consumption can maintain is exactly proportional to the frequency of its returns. A capital of a thousand pounds, for instance, employed in a foreign trade of consumption whose returns come in regularly once a year, can keep constantly employed in its home country as much productive labor as a thousand pounds can maintain there for a year. If the returns come in twice or three times a year, it can keep constantly employed as much productive labor as two or three thousand pounds can maintain there for a year. For this reason, a foreign trade of consumption with a neighboring country is generally more advantageous than one with a distant country; and for the same reason, as also shown in the second book, a direct foreign trade of consumption is generally more advantageous than an indirect one.

But wherever the monopoly of colonial trade has influenced the use of Britain's capital, it has forced some of that capital away from a foreign trade of consumption with a neighboring country into one with a more distant country; and in many cases it has forced capital out of a direct foreign trade of consumption into an indirect one.

First, in every case the monopoly of colonial trade has forced some British capital from a foreign trade of consumption with a neighboring country into one with a more distant country.

In every case it has diverted some capital from trade with Europe and the countries around the Mediterranean sea to trade with the more distant regions of America and the West Indies. Returns from the latter must be less frequent not only because of the greater distance but also because of those regions' particular circumstances. New colonies, as already noted, are always short of stock. Their capital is always far less than they could profitably and advantageously employ to improve and cultivate their land. They thus constantly need more capital than they possess; to make good this shortage, they try to borrow as much as possible from the mother country, to which they are consequently always in debt. The colonies most commonly incur this debt not by borrowing against bonds from the wealthy inhabitants of the mother country, though they sometimes do that too, but by falling as far behind in payments to the correspondents who supply them with European goods as those correspondents will permit. Their annual returns often amount to no more than a third of what they owe, and sometimes less. Consequently, all the capital their correspondents advance them seldom returns to Britain in fewer than three years, and sometimes takes four or five. But British capital of a thousand pounds that returns to Great Britain only once every five years can keep constantly employed only one-fifth as much British industry as it could if the whole returned once a year. Instead of keeping employed the quantity of industry a thousand pounds could maintain for a year, it can maintain only the quantity two hundred pounds could maintain for a year. No doubt the planter makes up—and probably more than makes up—any loss his correspondent suffers from this delay, through the high price he pays for European goods, interest on bills payable at distant dates, and commissions on the renewal of bills payable at earlier dates. But although he makes up his correspondent's loss, he cannot make up Great Britain's. In a trade whose returns are very distant, a merchant's profit may be as great as or greater than in a trade whose returns are frequent and prompt; but the benefit to the country where he resides—the quantity of productive labor continually maintained there, and the annual produce of its land and labor—must always be much smaller. Anyone with experience of these branches of trade will readily acknowledge, I imagine, that returns from American trade, and especially from West Indian trade, are generally not only slower but also more irregular and uncertain than those from trade with any part of Europe or even with the countries around the Mediterranean sea.

Second, the monopoly of colonial trade has in many cases forced some British capital out of a direct foreign trade of consumption and into an indirect one.

Among the enumerated commodities that can be sent to no market but Great Britain are several produced in quantities far exceeding Britain's consumption; part of these must therefore be exported to other countries. That cannot be done without forcing some British capital into an indirect foreign trade of consumption. Maryland and Virginia, for example, send Great Britain upwards of ninety-six thousand hogsheads of tobacco a year, while British consumption is said not to exceed fourteen thousand. Upwards of eighty-two thousand hogsheads must therefore be exported to other countries: to France and Holland, and to the countries around the Baltic and Mediterranean seas. The British capital that brings those eighty-two thousand hogsheads to Britain, re-exports them to those other countries, and brings back from them either goods or money in return is employed in an indirect foreign trade of consumption; it is necessarily forced into that use to dispose of this great surplus. To calculate how many years the whole of this capital will likely take to return to Britain, we must add the time taken by returns from those other countries to the time taken by American returns. If the whole capital employed in our direct foreign trade of consumption with America often does not return in fewer than three or four years, the capital employed in this indirect trade is unlikely to return in fewer than four or five. If the former can keep constantly employed only a third or a fourth as much domestic industry as capital returning once a year, the latter can keep employed only a fourth or a fifth as much. At some outports, foreign correspondents receiving the tobacco are commonly granted credit. At the port of London, however, it is commonly sold for immediate payment: the rule is Weigh and pay. Thus at London the final returns of the entire indirect trade are later than the returns from America only by the time the goods remain unsold in the warehouse, though they may sometimes remain there quite a long time. But had the colonies not been restricted to Britain's market for their tobacco, probably little more of it would have come to us than we needed for domestic consumption. The goods Britain now buys for its own consumption with the great surplus of tobacco it exports to other countries would probably instead have been bought with the immediate produce of its own industry or with some of its manufactures. Instead of being adapted almost entirely to one great market, as now, that produce and those manufactures would probably have been suited to many smaller markets. In place of one large indirect foreign trade of consumption, Britain would probably have conducted many small direct foreign trades of the same kind. Because the returns would have been more frequent, a portion—probably only a small portion, perhaps not above a third or a fourth—of the capital now engaged in this large indirect trade might have sufficed for all these small direct trades, kept an equal quantity of British industry constantly employed, and supported the annual produce of Britain's land and labor equally well. With every purpose of this trade thus fulfilled by much less capital, a large amount would have remained available for other purposes: improving land, increasing manufactures, and extending British commerce; or at least competing with the other British capitals employed in these various ways, lowering their rates of profit and thereby giving Great Britain an even greater superiority over other countries in all of them than she currently enjoys.

The monopoly of colonial trade has also forced some British capital out of every foreign trade of consumption and into carrying trade: consequently, instead of supporting British industry to some extent, that capital is employed entirely in supporting partly colonial industry and partly the industry of other countries.

Second, the monopoly has necessarily kept profits in every branch of British trade above the level they would naturally have reached if all nations had been free to trade with the British colonies.

The monopoly drew a larger share of Great Britain's stock into colonial trade than would have gone there on its own. But by excluding all foreign stock, it also reduced the total stock used in that trade below what free trade would have brought. Less competition among investors in colonial trade necessarily raised profits there. Less competition among British investors in every other trade also raised British profits in those trades. Whatever the size and condition of Britain's mercantile stock at any given time since the act of navigation was established, the monopoly must have raised ordinary British profits above what they would otherwise have been, both in colonial trade and in every other British trade. Ordinary British profits have certainly fallen considerably since the act was established. Without the monopoly the act created, they would have fallen even further.

Anything that raises a country's ordinary rate of profit above its otherwise natural level necessarily puts that country at both an absolute and a relative disadvantage in every trade it does not monopolize.

It puts the country at an absolute disadvantage because its merchants cannot get those higher profits in such trades without charging more than they otherwise would. They charge more both for foreign goods imported into their country and for their country's goods exported abroad. The country must pay more to buy and charge more to sell. It must buy less and sell less, and its people must both enjoy less and produce less than they otherwise would.

It also puts the country at a relative disadvantage. In trades it does not monopolize, other countries are not burdened by the same absolute disadvantage. They therefore move further ahead of it, or fall less far behind it, than they otherwise would. Compared with it, they can both enjoy more and produce more. Their lead grows, or their deficit shrinks. Because its produce costs more than it otherwise would, merchants from other countries can undercut it in foreign markets and push it out of almost every trade it does not monopolize.

Our merchants often complain that high British wages cause foreign sellers to undercut British manufactures abroad. They say nothing, though, about high profits on stock. They complain that other people earn too much but never mention their own earnings. Yet high profits on British stock may raise the price of British manufactures just as much as high British wages do in many cases, and perhaps even more in some.

That is how Britain's stock has, one can fairly say, been both drawn and driven out of most trades it does not monopolize, especially trade with Europe and the countries around the Mediterranean sea.

It has been drawn out of those trades by the higher profits available in colonial trade. Colonial trade keeps growing, and the stock that conducted it in one year is continually too small to conduct it the next.

It has also been driven out because Britain's high rate of profit gives other countries an advantage in all the trades Britain does not monopolize.

The colonial monopoly has drawn some British stock away from other trades where it would otherwise have been used. It has also pushed into those trades a great deal of foreign stock that would never have entered them if it had not been excluded from colonial trade. It has reduced competition among British investors in these other trades, raising British profits above what they would otherwise be. At the same time, it has increased competition among foreign investors there and driven foreign profits below what they would otherwise be. Both effects clearly put Great Britain at a relative disadvantage in all these other trades.

Someone might say, however, that colonial trade benefits Great Britain more than any other trade. On this view, the monopoly forces a larger share of British stock into colonial trade than would otherwise go there and puts it to better use for the country than it could find anywhere else.

The best use of a country's stock is the one that supports the most productive labor within that country and adds the most to the annual produce of its land and labor. But as the second book showed, the amount of productive labor that stock used in the foreign trade of consumption can support depends exactly on how often it comes back. Suppose a thousand pounds is used in such a trade and comes back regularly once a year. It can continually employ as much productive labor in its home country as a thousand pounds can support there for a year. If it comes back twice or three times a year, it can continually employ as much as two or three thousand pounds can support there for a year. For that reason, the foreign trade of consumption with a nearby country is generally better for a country than such trade with a distant one. For the same reason, as the second book also showed, direct foreign trade of consumption is generally better than indirect trade.

But in every case where the colonial monopoly has affected the use of Britain's stock, it has forced some of that stock away from foreign trade of consumption with nearby countries and into trade with more distant ones. In many cases it has also shifted stock from direct foreign trade of consumption into indirect trade.

First, in every case, the colonial trade monopoly has forced some British stock out of foreign trade of consumption with nearby countries and into trade with more distant countries.

Some stock has always been shifted from trade with Europe and the countries around the Mediterranean sea to trade with the more distant regions of America and the West Indies. Stock comes back less often from there, not only because they are farther away but also because of their particular circumstances. New colonies, as already noted, always have too little stock. They have far less than they could use very profitably to improve and cultivate their land. They therefore always need more stock than they own and try to make up the difference by borrowing as much as possible from the mother country. They are consequently always in debt to it. Colonies most often incur these debts not by borrowing from rich people in the mother country against bonds, although they sometimes do that, but by delaying payment as long as their European suppliers will allow. Their annual payments often do not cover more than a third of what they owe, and sometimes cover even less. As a result, the full stock advanced to them by those suppliers seldom returns to Britain in less than three years, and sometimes takes four or five. Take a thousand pounds of British stock that returns to Great Britain only once every five years. It can continually employ only one-fifth as much British industry as it could if it came back once a year. Instead of continually employing as much industry as a thousand pounds can support for a year, it can employ only as much as two hundred pounds can support for a year. The planter no doubt makes up, and probably more than makes up, any loss the supplier suffers from the delay. The planter pays high prices for European goods, interest on bills payable far in the future, and commissions to renew bills payable sooner. But although the planter covers the supplier's loss, he cannot cover Great Britain's loss. The merchant's profit from a trade in which stock takes a long time to come back may match or exceed his profit from one in which it comes back frequently and quickly. Yet the benefit to the country where he lives—the productive labor continually supported there and the annual produce of its land and labor—must always be much smaller. I imagine anyone experienced in these trades will agree that stock used in trade with America, and even more in trade with the West Indies, generally comes back not only later but also less regularly and less reliably than stock used in trade with any part of Europe or even with the countries around the Mediterranean sea.

Second, the colonial trade monopoly has in many cases forced some British stock out of direct foreign trade of consumption and into indirect trade.

Several of the enumerated commodities, which can be sent to no market but Great Britain, are produced in quantities far greater than Britain consumes. Some must therefore be exported again to other countries. Doing this forces some British stock into indirect foreign trade of consumption. Maryland and Virginia, for example, send upwards of ninety-six thousand hogsheads of tobacco to Great Britain every year. Britain's consumption is said not to exceed fourteen thousand. Upwards of eighty-two thousand hogsheads must therefore be exported to other countries: to France, Holland, and the countries around the Baltic and Mediterranean seas. Some British stock brings those eighty-two thousand hogsheads to Britain, exports them again to those other countries, and brings goods or money back to Britain in payment. That stock is used in indirect foreign trade of consumption; it has to be used this way to dispose of such a large surplus. To calculate how many years it will take for all this stock to return to Britain, we must add the time required for the goods or money to come back from those other countries to the time required for the American shipment. In our direct foreign trade of consumption with America, all the stock used often takes three or four years to come back. In this indirect trade, it is unlikely to come back in less than four or five. If the direct trade can continually employ only a third or fourth as much domestic industry as stock that returns once a year, the indirect trade can employ only a fourth or fifth as much. At some ports outside London, merchants usually give credit to the foreign buyers to whom they export the tobacco. At the port of London, it is usually sold for cash: the rule is Weigh and pay. So at London the final proceeds of the entire indirect trade arrive later than the American proceeds only by however long the tobacco remains unsold in the warehouse. It can sometimes remain there quite a long time. But if the colonies had not been restricted to Britain's market for their tobacco, probably little more than what Britain itself consumed would have reached us. Britain now buys goods for its own consumption with the large tobacco surplus it exports to other countries. Without the restriction, it would probably have bought those goods with the direct produce of its own industry or some of its own manufactures. Instead of being adapted almost entirely to one large market, as they are now, those goods and manufactures would probably have been adapted to many smaller markets. Rather than conducting one large indirect foreign trade of consumption, Britain would probably have conducted many smaller direct trades of the same kind. Because the stock would have returned more often, some—and probably only a small—part of the stock now used in this large indirect trade might have sufficed for all those smaller direct trades. Perhaps no more than a third or fourth would have been needed. It could have kept just as much British industry continually employed and supported just as much annual produce from Britain's land and labor. The same purposes of trade could thus have been met with much less stock. A large amount would have been left for other uses: improving land, increasing manufactures, and expanding Britain's commerce. At the very least, this stock would have competed with other British stock used in all those ways. It would have lowered the rate of profit in all of them and given Britain an even greater advantage over other countries than it has now.

The colonial trade monopoly has also forced some British stock out of every kind of foreign trade of consumption and into a carrying trade. Instead of supporting more or less British industry, that stock is used entirely to support some industry in the colonies and some in other countries.