Wednesday, April 23, 2014

AdamSmith. AnInquiryIntoTheNatureAndCausesOf. WealthOfTheNationsThe. Summary. Divided by the author. BookTwo. ModernLibrary.1994.



1)      Of the Nature, Accumulation, and Employment of Stock
Introduction
·        In the rude state of society stock is unnecessary.
·        Division of labour makes it necessary.
·        Accumulation of stock and division of labour advance together.
·        Accumulation causes the same quantity of industry to produce more.
·        This Book treats of the nature of stock, the effects of its accumulation, and its different employments.
a)      Of the Division of Stock
·        A man does not think of obtaining revenue from a small stock,
·        but when he has more than enough for immediate consumption, he endeavours to derive a revenue from the rest,
·        using it either as
·        (1) circulating capital,
·        or (2) fixed capital.
·        Different proportions of fixed and circulating capital are required in different trades.
·        The stock of a society is divided in the same way into
·        (1) the portion reserved for immediate consumption,
·        (2) the fixed capital, which consists of
·        (a) useful machines,
·        (b) profitable buildings,
·        (c) improvements of land,
·        and (d) acquired and useful abilities,
·        and (3) the circulating capital, which consists of
·        (a) the money,
·        (b) the stock of provisions in the possession of the sellers,
·        (c) the materials of clothes, furniture and buildings,
·        and (d) completed work in the hands of the merchant of manufacturer.
·        The last three parts of the circulating capital are regularly withdrawn from it.
·        Every fixed capital is derived from and supported by a circulating capital,
·        and cannot yield any revenue without it.
·        The end of both fixed and circulating capital is to maintain and augment the other part of the stock.
·        The circulating capital is kept up by the produce of land, mines and fisheries,
·        which require both fixed and circulating capitals to cultivate them,
·        and, when their fertility is equal, yield produce proportionate to the capital employed.
·        When there is tolerable security all stock is employed in one or other of the three ways.
·        But in countries where violence prevails much stock is buried and concealed.
b)      Of Money considered as a particular Branch of the general Stock of the Society, or of the Expence of maintaining the National Capital
·        Prices are divided into three parts, wages, profits and rent,
·        and the whole annual produce is divided into the same three parts;
·        but we may distinguish between gross and net revenue.
·        Gross rent is the whole sum paid by the farmer; net rent what is left free to the landlord.
·        Gross revenue is the whole annual produce: net revenue what is left free after deducting the maintenance of fixed and circulating capital.
·        The whole expence of maintaining the fixed capital must be excluded,
·        since the only object of the fixed capital is to increase the productive powers of labour,
·        and any cheapening or simplification is regarded as a good.
·        The cost of maintaining the fixed capital is like the cost of repairs on an estate,
·        but the expence of maintaining the last three parts of the circulating capital is not to be deducted,
·        the circulating capital of the society being different in this respect from that of an individual.
·        The maintenance of the money alone must be deducted.
·        The money resembles the fixed capital, since
·        (1) the maintenance of the stock of money is part of the gross but not of the net revenue,
·        and (2) the money itself forms no part of the net revenue.
·        It only appears to do so from the ambiguity of language,
·        sums of money being often used to indicate the goods purchasable as well as the coins themselves.
·        We must not add both together.
·        If a man has a guinea a week he enjoys a guinea’s worth of subsistence, &c.
·        and his real revenue is that subsistence, &c.
·        The same is true of all the inhabitants of a country.
·        The coins annually paid to an individual often equal his revenue, but the stock of coin in a society is never equal to its whole revenue.
·        Money is therefore no part of the revenue of the society.
·        (3) Every saving in the cost of maintaining the stock of money is an improvement.
·        The substitution of paper for gold money is an improvement.
·        Bank notes are the best sort of paper money.
·        When a banker lends out 100.000 pound in notes and keeps in hand only 20.000 pound in gold and silver, 80.000 pound in gold and silver is spared from the circulation:
·        and if many bankers do the same, four-fifths of the gold and silver previously circulating may be sent abroad,
·        and exchanged for goods,
·        either to supply the consumption of another country, in which case the profit will be an addition to the net revenue of the country,
·        or to supply home consumption (1) of luxuries, (2) of materials, tools and provisions wherewith industrious people are maintained and employed.
·        If to supply luxuries, prodigality and consumption are increased;
·        if to supply materials, &c., a permanent fund for supporting consumption is provided.
·        The greater part of the gold and silver sent abroad purchases materials, &c.
·        The quantity of industry which the circulating capital can employ is determined by the provisions, materials, and finished work, and not at all by the quantity of money.
·        The substitution of paper for gold and silver increases the materials, tools, and maintenance at the expence of the gold and silver money.
·        The quantity of money bears a small proportion to the whole produce, but a large one to that part destined to maintain industry.
·        An operation of this kind has been carried out in Scotland with excellent effects.
·        There was at the Union at least a million sterling of gold and silver money, and now there is not half a million.
·        Notes are ordinarily issued by discounting bills,
·        but the Scotch banks invented the system of cash accounts,
·        which enable them to issue notes readily,
·        and make it possible for every merchant to carry on a greater trade than he otherwise could.
·        The Scotch banks can of course discount bills when required.
·        The whole of the paper money can never exceed the gold and silver which would have been required in its absence.
·        The peculiar expenses of a banks are (1) the keeping and (2) the replenishing of a stock of money with which to repay notes.
·        A bank which issues too much paper will much increase both the first
·        and the second expense,
·        as may be shown by an example.
·        Banks have sometimes not understood this,
·        e.g. the Bank of England,
·        and the Scotch banks.
·        The excessive circulation was caused by overtrading.
·        A bank ought not to advance more than the amount which merchants would otherwise have to keep by them in cash.
·        The limit is observed when only real bills of exchange are discounted.
·        Cash accounts should be carefully watched to secure the same end.
·        as they were for a long time by the scotch banks, which required frequent and regular operations,
·        and thus (1) were able to judge of the circumstances of their debtors,
·        and (2) were secured against issuing too much paper.
·        Bankers’s loans ought to be only for moderate periods of time.
·        More than twenty-five years ago the proper amount of paper money had been reached in Scotland,
·        but the traders were not content,
·        and some of them resorted to drawing and redrawing,
·        which shall be explained.
·        Bills of exchange have extraordinary legal privileges.
·        So two persons, one in London and one in Edinburgh, would draw bills on each other.
·        Much money was raised in this expensive way.
·        The bill on London would be discounted in Edinburgh, and the bill on Edinburgh discounted in London,
·        and each was always replaced by another.
·        The amount thus advanced by the banks was in excess of the limit laid down above, but this was not perceived at first.
·        When the banks found it out they made difficulties about discounting,
·        which alarmed and enraged the projectors;
·        then the Ayr bank was established and advanced money very freely,
·        but soon got into difficulties,
·        and was obliged to stop in two years.
·        Its action and failure increased the distress of projectors and the country generally,
·        but relieved the other Scotch banks.
·        Another plan would have been to raise money on the securities pledged by borrowers:
·        this would have been a losing business,
·        and even if profitable would have been hurtful to the country.
·        Law’s scheme has been sufficiently explained by Du Verney and Du Tot.
·        The bank of England was established in 1694,
·        enlarged its stock in 1697,
·        in 1708,
·        in 1709 and 1710,
·        in 1717 and later.
·        The rate of interest received by it from the public has been reduced from 8 to 3 per cent, and its dividend has lately been 51.1/2 per cent.
·        It acts as a great engine of state.
·        The operations of banking turn dead stock into productive capital,
·        but make commerce and industry somewhat less secure.
·        Precautions should be taken to prevent the greater part of the circulation being filled with paper.
·        Circulation may be divided into that between dealers and that between dealers and consumers.
·        The circulation of paper may be confined to the former by not allowing notes for small sums.
·        The issue of such notes enables mean people to become bankers.
·        None for less than 5 pound should be issued.
·        This would secure the circulation of plenty of gold and silver,
·        and would not prevent banks from giving sufficient assistance to traders.
·        A law against small notes would be a violation of natural liberty necessary for the security of the society.
·        Paper money payable on demand is equal to gold and silver,
·        and does not raise prices;
·        but paper not repayable on demand would fall below gold and silver,
·        as happened in Scotland during the prevalence of the Optional Clause,
·        and must have happened in regard to the Yorkshire currencies when small sums were repayable in guineas.
·        The North American paper currencies consisted of government notes repayable at a distant date,
·        and depreciated the currency to a great degree.
·        They were therefore justly prohibited.
·        Pennsylvania was moderate in its issues, and its currency never went below the real par.
·        The colonial paper was somewhat supported by being received in payment of taxes.
·        A requirement that certain taxes should be paid in particular paper money might give that paper a certain value even if it was irredeemable.
·        A paper currency depreciated below the value of the coin does not sink the value of gold and silver.
·        The only restrictions on banking which are necessary are the prohibition of small bank notes and the requirement that all notes shall be repaid on demand.
c)      Of the Accumulation of Capital, or of productive and unproductive Labour
·        There are two sorts of labour, productive and unproductive.
·        Many kinds of labour besides menial service are unproductive.
·        The proportion of the produce employed in maintaining productive hands determines the next year’s produce.
·        Part of the produce replaces capital, part constitutes profit and rent.
·        That which replaces capital employs none but productive hands,
·        while unproductive hands and those who do not labour are supported by revenue.
·        So the proportion of productive hands depends on the proportion between profit with rent and the part of produce which replaces capital.
·        Rent anciently formed a larger proportion of the produce of agriculture than now.
·        Profits were anciently a larger share of the produce of manufactures,
·        so the proportion of produce required for replacing capital is greater than it was.
·        The proportion between the funds determines whether the inhabitants of the country shall be industrious or idle.
·        Increase or diminution of the capital of a country consequently increases or diminishes its annual produce.
·        Capitals are increased by parsimony or saving.
·        What is saved is consumed by productive hands.
·        The frugal man establishes a perpetual fund for the employment of productive hands.
·        The prodigal perverts such funds to other uses.
·        Whether he spends on home or foreign commodities makes no difference.
·        If he had not spent there would have been just as much money in the country and the goods produced by productive hands as well.
·        Besides, when the annual produce diminishes, money will go abroad;
·        and on the other hand money will come in when the annual produce increases.
·        So even if the real wealth of a country consisted of its money, the prodigal would be a public enemy.
·        Injudicious employment of capital has the same effect as prodigality.
·        Frugality and prudence predominate.
·        Prodigality is more intermittent than the desire to better our condition.
·        Imprudent undertakings are small in number compared to prudent ones.
·        Public prodigality and imprudence are more to be feared than private,
·        but are counteracted by private frugality and prudence.
·        To increase the produce of a nation an increase of capital is necessary.
·        If, therefore the produce has increased, we may be sure the capital has increased.
·        This has been the case of almost all nations in peaceable times.
·        England for example from 1660 to 1776,
·        or from 1558 to 1660.
·        though there was much public and private profusion, and many other disorders and misfortunes occurred.
·        Private frugality and prudence have silently counteracted these circumstances.
·        Apart from increase or diminution of capital different kinds of expense may be distinguished.
·        An individual who spends on durable commodities will be richer than one who spends on perishable ones.
·        The same thing is true of a nation.
·        The former expence is easier to bring to an end,
·        and gives maintenance to more people.
·        It does not follow that it betokens a more generous spirit.
d)      Of Stock lent at Interest
·        Stock lent at interest is a capital to the lender, but may or may not be so to the borrower.
·        Generally it is so to the borrower,
·        except in case of mortgages effected by country gentlemen.
·        Loans are made in money, but what the borrower wants and gets is goods.
·        So the quantity of stock which can be lent is determined by the value of that part of the produce which replaces such capital as the owner does not himself employ.
·        This may be much greater than the actual money employed.
·        The money is altogether different from what is actually assigned either as principal or interest.
·        The stock to be lent at interest naturally grows as the whole quantity of stock increases.
·        Interest falls as the quantity of stock to be lent increases,
·        because profits diminish as it becomes more difficult to find a profitable method of employing new capital.
·        The notion that it was the discovery of the West Indies which lowered interest has been refuted by Hume.
·        If 100 pounds are now required to purchase what 50 pounds would have purchased them, 10 pounds must now be required to purchase what 5 pounds would have purchased them.
·        An increase in the quantity of silver could only diminish its value.
·        Nominal wages would be greater, but real wages the same; profits would be the same nominally and really.
·        An increase in the goods anually circulated would cause a fall of profits and consequently of interest.
·        The prohibition of interest is wrong, and increases the evil of usury.
·        Where a maximum rate is fixed, this should be somewhat above the market rate on good security,
·        but not much above, or the greater part of loans would be to prodigals and projectors.
·        No law can reduce interest below the market rate.
·        The number of years’s purchase commonly paid for land depends on the rate of interest.
e)      Of the different Employment of Capitals
·        The quantity of labour put in motion and the value added to the annual produce by capitals vary with their employment.
·        There are four different ways of employing capital,
·        all of which are necessary:
·        (1) procuring rude produce,
·        (2) manufacturing,
·        (3) transportation,
·        and (4) distribution.
·        The employers of such capitals are productive labourers:
·        the capital of the retailer employs only himself;
·        the capital of the merchant employs sailors and carriers;
·        the capital of the manufacturer employ his workmen;
·        the capital of the farmer employs his servants and his cattle, and adds a much greater value to the annual produce than other capital.
·        Capitals employed in agriculture and retail trade must reside within the country;
·        the capital of the merchant may reside anywhere;
·        the capital of the manufacturer must be where the manufacture is, but that is not necessarily determined.
·        Whether the merchant who exports belongs to the country or not makes little difference.
·        The capital of the manufacturer will put into motion more native labour if it resides within the country, but may be useful even if outside it.
·        Particular countries often have not enough capital for cultivation, manufacturers, and transportation.
·        In such cases the larger the proportion employed in agriculture, the larger will be the annual produce.
·        The quickest way to make the capital sufficient for all these purpose is to begin with the most profitable.
·        That they have done so is the principal cause of the progress of the American colonies.
·        Great countries have scarcely ever acquired sufficient capital for all those purposes.
·        Different kinds of wholesale trade employ different quantities of productive labour and add different amounts to the annual produce.
·        There are three different kinds of trade: home, foreign and carrying.
·        Capital employed in buying on one part of the country to sell in another replaces two domestic capitals.
·        Capital employed in importation replaces one domestic and one foreign capital.
·        Its returns are not so quick as those of home trade.
·        Roundabout foreign trade has the same effect as direct.
·        Foreign trade carried on by means of gold and silver is in no way different from the rest.
·        Capital employed in the carrying trade replaces two foreign capitals.
·        It may employ ships and sailors belonging to the country, but this is not always the case,
·        and equal capital employed in importation or coasting trade may employ as many ships and men.
·        Capital in home trade therefore supports more productive labour than capital employed in foreign trade, which, however, supports more than capital in the carrying trade.
·        Political economy ought consequently not to allure capital into the foreign or the carrying trade.
·        though each is advantageous when naturally introduced.
·        The surplus of the produce of particular branches of industry must be sent abroad.
·        Foreign goods obtained in exchange must often be re-exported.
·        When the other employments are full, the surplus capital disgorges itself into the carrying trade, which is a symptom rather than a cause of great national wealth.
·        The possible extent of the carrying trade is much the greatest.
·        Agriculture does not yield sufficient profit to attract all the capital which it might absorb.
·        The reason will be explained in the next two books.

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