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    Book I: Chapter 9

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    Chapter 10
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    The rise and fall in the profits of stock depend upon the same causes with
    the rise and fall in the wages of labour, the increasing or declining state
    of the wealth of the society ; but those causes affect the one and the other
    very differently.

    The increase of stock, which raises wages, tends to lower profit. When the
    stocks of many rich merchants are turned into the same trade, their mutual
    competition naturally tends to lower its profit; and when there is a like
    increase of stock in all the different trades carried on in the same
    society, the same competition must produce the same effect in them all.

    It is not easy, it has already been observed, to ascertain what are the
    average wages of labour, even in a particular place, and at a particular
    time. We can, even in this case, seldom determine more than what are the
    most usual wages. But even this can seldom be done with regard to the
    profits of stock. Profit is so very fluctuating, that the person who carries
    on a particular trade, cannot always tell you himself what is the average of
    his annual profit. It is affected, not only by every variation of price in
    the commodities which he deals in, but by the good or bad fortune both of
    his rivals and of his customers, and by a thousand other accidents, to which
    goods, when carried either by sea or by land, or even when stored in a
    warehouse, are liable. It varies, therefore, not only from year to year, but
    from day to day, and almost from hour to hour. To ascertain what is the
    average profit of all the different trades carried on in a great kingdom,
    must be much more difficult; and to judge of what it may have been formerly,
    or in remote periods of time, with any degree of precision, must be
    altogether impossible.

    But though it may be impossible to determine, with any degree of precision,
    what are or were the average profits of stock, either in the present or in
    ancient times, some notion may be formed of them from the interest of money.
    It may be laid down as a maxim, that wherever a great deal can be made by
    the use of money, a great deal will commonly be given for the use of it; and
    that, wherever little can be made by it, less will commonly he given for it.
    Accordingly, therefore, as the usual market rate of interest varies in any
    country, we may be assured that the ordinary profits of stock must vary with
    it, must sink as it sinks, and rise as it rises. The progress of interest,
    therefore, may lead us to form some notion of the progress of profit.

    By the 37th of Henry VIII. all interest above ten per cent. was declared
    unlawful. More, it seems, had sometimes been taken before that. In the reign
    of Edward VI. religious zeal prohibited all interest. This prohibition,
    however, like all others of the same kind, is said to have produced no
    effect, and probably rather increased than diminished the evil of usury. The
    statute of Henry VIII. was revived by the 13th of Elizabeth, cap. 8. and ten
    per cent. continued to be the legal rate of interest till the 21st of James
    I. when it was restricted to eight per cent. It was reduced to six per cent.
    soon after the Restoration, and by the 12th of Queen Anne, to five per cent.
    All these different statutory regulations seem to have been made with great
    propriety. They seem to have followed, and not to have gone before, the
    market rate of interest, or the rate at which people of good credit usually
    borrowed. Since the time of Queen Anne, five per cent. seems to have been
    rather above than below the market rate. Before the late war, the government
    borrowed at three per cent. ; and people of good credit in the capital, and
    in many other parts of the kingdom, at three and a-half, four, and four and
    a-half per cent.

    Since the time of Henry VIII. the wealth and revenue of the country have
    been continually advancing, and in the course of their progress, their pace
    seems rather to have been gradually accelerated than retarded. They seem not
    only to have been going on, but to have been going on faster and faster. The
    wages of labour have been continually increasing during the same period,
    and, in the greater part of the different branches of trade and
    manufactures, the profits of stock have been diminishing.

    It generally requires a greater stock to carry on any sort of trade in a
    great town than in a country village. The great stocks employed in every
    branch of trade, and the number of rich competitors, generally reduce the
    rate of profit in the former below what it is in the latter. But the wages
    of labour are generally higher in a great town than in a country village. In
    a thriving town, the people who have great stocks to employ, frequently
    cannot get the number of workmen they want, and therefore bid against one
    another, in order to get as many as they can, which raises the wages of
    labour, and lowers the profits of stock. In the remote parts of the
    country, there is frequently not stock sufficient to employ all the people,
    who therefore bid against one another, in order to get employment, which
    lowers the wages of labour, and raises the profits of stock.

    In Scotland, though the legal rate of interest is the same as in England,
    the market rate is rather higher. People of the best credit there seldom
    borrow under five per cent. Even private bankers in Edinburgh give four per
    cent. upon their promissory-notes, of which payment, either in whole or in
    part may be demanded at pleasure. Private bankers in London give no interest
    for the money which is deposited with them. There are few trades which
    cannot be carried on with a smaller stock in Scotland than in England. The
    common rate of profit, therefore, must be somewhat greater. The wages of
    labour, it has already been observed, are lower in Scotland than in England.
    The country, too, is not only much poorer, but the steps by which it
    advances to a better condition, for it is evidently advancing, seem to be
    much slower and more tardy.
    The legal rate of interest in France has not during the course of the present century, been
    always regulated by the market rate { See Denisart, Article Taux des Interests, tom. iii, p.13}.
    In 1720, interest was reduced from the twentieth to the fiftieth penny, or from five to two per
    cent. In 1724, it was raised to the thirtieth penny, or to three and a third per cent. In 1725, it
    was again raised to the twentieth penny, or to five per cent. In 1766, during the administration
    of Mr Laverdy, it was reduced to the twenty-fifth penny, or to four per cent. The Abbé Terray
    raised it afterwards to the old rate of five per cent. The supposed purpose of many of those
    violent reductions of interest was to prepare the way for reducing that of the public debts ; a
    purpose which has sometimes been executed. France is, perhaps, in the present times, not so
    rich a country as England; and though the legal rate of interest has in France frequently been
    lower than in England, the market rate has generally been higher; for there, as in other
    countries, they have several very safe and easy methods of evading the law. The profits of
    trade, I have been assured by British merchants who had traded in both countries, are higher
    in France than in England ; and it is no doubt upon this account, that many British subjects
    chuse rather to employ their capitals in a country where trade is in disgrace, than in one where
    it is highly respected. The wages of labour are lower in France than in England. When you go
    from Scotland to England, the difference which you may remark between the dress and
    countenance of the common people in the one country and in the other, sufficiently indicates
    the difference in their condition. The contrast is still greater when you return from France.
    France, though no doubt a richer country than Scotland, seems not to be going forward so fast.
    It is a common and even a popular opinion in the country, that it is going backwards ; an
    opinion which I apprehend, is ill-founded, even with regard to France, but which nobody can
    possibly entertain with regard to Scotland, who sees the country now, and who saw it twenty
    or thirty years ago.

    The province of Holland, on the other hand, in proportion to the extent of
    its territory and the number of its people, is a richer country than
    England. The government there borrow at two per cent. and private people of
    good credit at three. The wages of labour are said to be higher in Holland
    than in England, and the Dutch, it is well known, trade upon lower profits
    than any people in Europe. The trade of Holland, it has been pretended by
    some people, is decaying, and it may perhaps be true that some particular
    branches of it are so; but these symptoms seem to indicate sufficiently that
    there is no general decay. When profit diminishes, merchants are very apt to
    complain that trade decays, though the diminution of profit is the natural
    effect of its prosperity, or of a greater stock being employed in it than
    before. During the late war, the Dutch gained the whole carrying trade of
    France, of which they still retain a very large share. The great property
    which they possess both in French and English funds, about forty millions,
    it is said in the latter (in which, I suspect, however, there is a
    considerable exaggeration ), the great sums which they lend to private
    people, in countries where the rate of interest is higher than in their own,
    are circumstances which no doubt demonstrate the redundancy of their stock,
    or that it has increased beyond what they can employ with tolerable profit
    in the proper business of their own country; but they do not demonstrate
    that that business has decreased. As the capital of a private man, though
    acquired by a particular trade, may increase beyond what he can employ in
    it, and yet that trade continue to increase too, so may likewise the capital
    of a great nation.

    In our North American and West Indian colonies, not only the wages of
    labour, but the interest of money, and consequently the profits of stock,
    are higher than in England. In the different colonies, both the legal and
    the market rate of interest run from six to eight percent. High wages of
    labour and high profits of stock, however, are things, perhaps, which scarce
    ever go together, except in the peculiar circumstances of new colonies. A
    new colony must always, for some time, be more understocked in proportion to
    the extent of its territory, and more underpeopled in proportion to the
    extent of its stock, than the greater part of other countries. They have
    more land than they have stock to cultivate. What they have, therefore, is
    applied to the cultivation only of what is most fertile and most favourably
    situated, the land near the sea-shore, and along the banks of navigable
    rivers. Such land, too, is frequently purchased at a price below the value
    even of its natural produce. Stock employed in the purchase and improvement
    of such lands, must yield a very large profit, and, consequently, afford to
    pay a very large interest. Its rapid accumulation in so profitable an
    employment enables the planter to increase the number of his hands faster
    than he can find them in a new settlement. Those whom he can find,
    therefore, are very liberally rewarded. As the colony increases, the profits
    of stock gradually diminish. When the most fertile and best situated lands
    have been all occupied, less profit can be made by the cultivation of what
    is inferior both in soil and situation, and less interest can be afforded
    for the stock which is so employed. In the greater part of our colonies,
    accordingly, both the legal and the market rate of interest have been
    considerably reduced during the course of the present century. As riches,
    improvement, and population, have increased, interest has declined. The
    wages of labour do not sink with the profits of stock. The demand for labour
    increases with the increase of stock, whatever be its profits; and after
    these are diminished, stock may not only continue to increase, but to
    increase much faster than before. It is with industrious nations, who are
    advancing in the acquisition of riches, as with industrious individuals. A
    great stock, though with small profits, generally increases faster than a
    small stock with great profits. Money, says the proverb, makes money. When
    you have got a little, it is often easy to get more. The great difficulty is
    to get that little. The connection between the increase of stock and that of
    industry, or of the demand for useful labour, has partly been explained
    already, but will be explained more fully hereafter, in treating of the
    accumulation of stock.

    The acquisition of new territory, or of new branches of trade, may sometimes
    raise the profits of stock, and with them the interest of money, even in a
    country which is fast advancing in the acquisition of riches. The stock of
    the country, not being sufficient for the whole accession of business which
    such acquisitions present to the different people among whom it is divided,
    is applied to those particular branches only which afford the greatest
    profit. Part of what had before been employed in other trades, is
    necessarily withdrawn from them, and turned into some of the new and more
    profitable ones. In all those old trades, therefore, the competition comes
    to be Jess than before. The market comes to be less fully supplied with many
    different sorts of goods. Their price necessarily rises more or less, and
    yields a greater profit to those who deal in them, who can, therefore,
    afford to borrow at a higher interest. For some time after the conclusion of
    the late war, not only private people of the best credit, but some of the
    greatest companies in London, commonly borrowed at five per cent. who,
    before that, had not been used to pay more than four, and four and a half
    per cent. The great accession both of territory and trade by our
    acquisitions in North America and the West Indies, will sufficiently account
    for this, without supposing any diminution in the capital stock of the
    society. So great an accession of new business to be carried on by the old
    stock, must necessarily have diminished the quantity employed in a great
    number of particular branches, in which the competition being less, the
    profits must have been greater. I shall hereafter have occasion to mention
    the reasons which dispose me to believe that the capital stock of Great
    Britain was not diminished, even by the enormous expense of the late war.

    The diminution of the capital stock of the society, or of the funds destined
    for the maintenance of industry, however, as it lowers the wages of labour,
    so it raises the profits of stock, and consequently the interest of money.
    By the wages of labour being lowered, the owners of what stock remains in
    the society can bring their goods at less expense to market than before ;
    and less stock being employed in supplying the market than before, they can
    sell them dearer. Their goods cost them less, and they get more for them.
    Their profits, therefore, being augmented at both ends, can well afford a
    large interest. The great fortunes so suddenly and so easily acquired in
    Bengal and the other British settlements in the East Indies, may satisfy us,
    that as the wages of labour are very low, so the profits of stock are very
    high in those ruined countries. The interest of money is proportionably so.
    In Bengal, money is frequently lent to the farmers at forty, fifty, and
    sixty per cent. and the succeeding crop is mortgaged for the payment. As the
    profits which can afford such an interest must eat up almost the whole rent
    of the landlord, so such enormous usury must in its turn eat up the greater
    part of those profits. Before the fall of the Roman republic, a usury of the
    same kind seems to have been common in the provinces, under the ruinous
    administration of their proconsuls. The virtuous Brutus lent money in Cyprus
    at eight-and-forty per cent. as we learn from the letters of Cicero.

    In a country which had acquired that full complement of riches which the
    nature of its soil and climate, and its situation with respect to other
    countries, allowed it to acquire, which could, therefore, advance no
    further, and which was not going backwards, both the wages of labour and the
    profits of stock would probably be very low. In a country fully peopled in
    proportion to what either its territory could maintain, or its stock employ,
    the competition for employment would necessarily be so great as to reduce
    the wages of labour to what was barely sufficient to keep up the number of
    labourers, and the country being already fully peopled, that number could
    never be augmented. In a country fully stocked in proportion to all the
    business it had to transact, as great a quantity of stock would be employed
    in every particular branch as the nature and extent of the trade would
    admit. The competition, therefore, would everywhere be as great, and,
    consequently, the ordinary profit as low as possible.

    But, perhaps, no country has ever yet arrived at this degree of opulence.
    China seems to have been long stationary, and had, probably, long ago
    acquired that full complement of riches which is consistent with the nature
    of its laws and institutions. But this complement may be much inferior to
    what, with other laws and institutions, the nature of its soil, climate, and
    situation, might admit of. A country which neglects or despises foreign
    commerce, and which admits the vessel of foreign nations into one or two of
    its ports only, cannot transact the same quantity of business which it might
    do with different laws and institutions. In a country, too, where, though
    the rich, or the owners of large capitals, enjoy a good deal of security,
    the poor, or the owners of small capitals, enjoy scarce any, but are liable,
    under the pretence of justice, to be pillaged and plundered at any time by
    the inferior mandarins, the quantity of stock employed in all the different
    branches of business transacted within it, can never be equal to what the
    nature and extent of that business might admit. In every different branch,
    the oppression of the poor must establish the monopoly of the rich, who, by
    engrossing the whole trade to themselves, will be able to make very large
    profits. Twelve per cent. accordingly, is said to be the common interest of
    money in China, and the ordinary profits of stock must be sufficient to
    afford this large interest.

    A defect in the law may sometimes raise the rate of interest considerably
    above what the condition of the country, as to wealth or poverty, would
    require. When the law does not enforce the performance of contracts, it puts
    all borrowers nearly upon the same footing with bankrupts, or people of
    doubtful credit, in better regulated countries. The uncertainty of
    recovering his money makes the lender exact the same usurious interest which
    is usually required from bankrupts. Among the barbarous nations who overran
    the western provinces of the Roman empire, the performance of contracts was
    left for many ages to the faith of the contracting parties. The courts of
    justice of their kings seldom intermeddled in it. The high rate of interest
    which took place in those ancient times, may, perhaps, be partly accounted
    for from this cause.

    When the law prohibits interest altogether, it does not prevent it. Many
    people must borrow, and nobody will lend without such a consideration for
    the use of their money as is suitable, not only to what can be made by the
    use of it, but to the difficulty and danger of evading the law. The high
    rate of interest among all Mahometan nations is accounted for by M.
    Montesquieu, not from their poverty, but partly from this, and partly from
    the difficulty of recovering the money.

    The lowest ordinary rate of profit must always be something more than what
    is sufficient to compensate the occasional losses to which every employment
    of stock is exposed. It is this surplus only which is neat or clear profit.
    What is called gross profit, comprehends frequently not only this surplus,
    but what is retained for compensating such extraordinary losses. The
    interest which the borrower can afford to pay is in proportion to the clear
    profit only. The lowest ordinary rate of interest must, in the same manner,
    be something more than sufficient to compensate the occasional losses to
    which lending, even with tolerable prudence, is exposed. Were it not, mere
    charity or friendship could be the only motives for lending.

    In a country which had acquired its full complement of riches, where, in
    every particular branch of business, there was the greatest quantity of
    stock that could be employed in it, as the ordinary rate of clear profit
    would be very small, so the usual market rate of interest which could be
    afforded out of it would be so low as to render it impossible for any but
    the very wealthiest people to live upon the interest of their money. All
    people of small or middling fortunes would be obliged to superintend
    themselves the employment of their own stocks. It would be necessary that
    almost every man should be a man of business, or engage in some sort of
    trade. The province of Holland seems to be approaching near to this state.
    It is there unfashionable not to be a man of business. Necessity makes it
    usual for almost every man to be so, and custom everywhere regulates
    fashion. As it is ridiculous not to dress, so is it, in some measure, not to
    be employed like other people. As a man of a civil profession seems awkward
    in a camp or a garrison, and is even in some danger of being despised there,
    so does an idle man among men of business.

    The highest ordinary rate of profit may be such as, in the price of the
    greater part of commodities, eats up the whole of what should go to the rent
    of the land, and leaves only what is sufficient to pay the labour of
    preparing and bringing them to market, according to the lowest rate at which
    labour can anywhere be paid, the bare subsistence of the labourer. The
    workman must always have been fed in some way or other while he was about
    the work, but the landlord may not always have been paid. The profits of the
    trade which the servants of the East India Company carry on in Bengal may
    not, perhaps, be very far from this rate.

    The proportion which the usual market rate of interest ought to bear to the
    ordinary rate of clear profit, necessarily varies as profit rises or falls.
    Double interest is in Great Britain reckoned what the merchants call a good,
    moderate, reasonable profit; terms which, I apprehend, mean no more than a
    common and usual profit. In a country where the ordinary rate of clear profit
    is eight or ten per cent. it may be reasonable that one half of it should go
    to interest, wherever business is carried on with borrowed money. The stock
    is at the risk of the borrower, who, as it were, insures it to the lender ;
    and four or five per cent. may, in the greater part of trades, be both a
    sufficient profit upon the risk of this insurance, and a sufficient
    recompence for the trouble of employing the stock. But the proportion
    between interest and clear profit might not be the same in countries where
    the ordinary rate of profit was either a good deal lower, or a good deal
    higher. If it were a good deal lower, one half of it, perhaps, could not be
    afforded for interest ; and more might be afforded if it were a good deal

    In countries which are fast advancing to riches, the low rate of profit may,
    in the price of many commodities, compensate the high wages of labour, and
    enable those countries to sell as cheap as their less thriving neighbours,
    among whom the wages of labour may be lower.

    In reality, high profits tend much more to raise the price of work than high
    wages. If, in the linen manufacture, for example, the wages of the different
    working people, the flax-dressers, the spinners, the weavers, etc. should all
    of them be advanced twopence a-day, it would be necessary to heighten the
    price of a piece of linen only by a number of twopences equal to the number
    of people that had been employed about it, multiplied by the number of days
    during which they had been so employed. That part of the price of the
    commodity which resolved itself into the wages, would, through all the
    different stages of the manufacture, rise only in arithmetical proportion to
    this rise of wages. But if the profits of all the different employers of
    those working people should be raised five per cent. that part of the price
    of the commodity which resolved itself into profit would, through all the
    different stages of the manufacture, rise in geometrical proportion to this
    rise of profit. The employer of the flax dressers would, in selling his
    flax, require an additional five per cent. upon the whole value of the
    materials and wages which he advanced to his workmen. The employer of the
    spinners would require an additional five per cent. both upon the advanced
    price of the flax, and upon the wages of the spinners. And the employer of
    the weavers would require alike five per cent. both upon the advanced price
    of the linen-yarn, and upon the wages of the weavers. In raising the price of
    commodities, the rise of wages operates in the same manner as simple
    interest does in the accumulation of debt. The rise of profit operates like
    compound interest. Our merchants and master manufacturers complain much of
    the bad effects of high wages in raising the price, and thereby lessening
    the sale of their goods, both at home and abroad. They say nothing
    concerning the bad effects of high profits ; they are silent with regard to
    the pernicious effects of their own gains; they complain only of those of
    other people.
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