Simplified Wealth of Nations by Adam Smith, Book 4, Chapter 1d: International Trade
31 The importation of gold and silver is not the main nor the sole benefit a nation derives from its foreign trade.
All nations derive two benefits from it:
It carries out their surplus national produce which has no demand at home
It brings back something else for which there is a demand.
It gives a value to their nations' superfluities by exchanging them for something else to satisfy their wants.
The narrowness of the home market hinders the division of labour from being perfected.
This hindrance is removed by foreign trade.
By opening a more extensive market for their surplus produce, they are encouraged to:
increase their produce and
increase their society's real wealth.
Foreign trade continually performs this important service to all countries which trade.
They all derive great benefit from trade.
The country where the merchant resides derives the greatest benefit.
The merchant supplies his own wants, over those of other countries.
The most insignificant part of the business of foreign commerce is to import the gold and silver wanted by countries which have no mines.
A country which does foreign trade only for this purpose will not likely freight a ship in a century.
The Benefits of the Discovery of the Americas and the East Indies
32 The discovery of America enriched Europe, but not through the importation of gold and silver.
The abundance of the American mines rendered gold and silver cheaper.
A plate can now be bought for 1/3 of the wheat or 1/3 of the labour it cost in the 15th century.
With the same annual expence, Europe can annually buy three times more plate than before.
The commodity becomes available to perhaps 10-20 times more buyers.
There would then be more than 20-30 times more plate in Europe.
Europe has gained a real but very trifling convenience.
The cheapness of gold and silver renders those metals less fit for use as money than before.
To make the same purchases, we must load ourselves with more metals.
We must carry a shilling in our pocket where a groat* would have done before.
It is difficult to say whether the convenience of having more plates is more trifling than the inconvenience of having to carry more metal money.
Neither could have made any very essential change in Europe.
The discovery of America certainly made a most essential change.
The opening of a new and inexhaustible market to all European commodities created new divisions of labour and improvements of art.
These improvements could never have happened, because of the narrowness of the ancient commerce.
The narrow market prevented the sale of most of their produce.
The discovery of America improved European productivity.
European produce increased, with it the real revenue and wealth of its people.
The European commodities were new to America.
Many America commodities were new to Europe.
A new set of exchanges began which was never thought of before.
It was naturally advantageous and beneficial to both.
However, the Europeans' savage injustice rendered this event ruinous to several American countries.
* a coin with a smaller value
33 The discovery of a passage to the East Indies by the Cape of Good Hope happened around the same time.
It opened perhaps a more extensive foreign commerce than that of America despite its greater distance.
There were only two American nations superior to savages: Mexico and Peru
Their arts and manufactures were exaggerated by Spanish writers.
These two nations were destroyed almost as soon as they were discovered.
The rest were mere savages.
But the empires of China, India, Japan, and several others in the East Indies:
had no richer mines of gold or silver,
were much richer,
were better cultivated, and
were more advanced in all arts and manufactures than Mexico or Peru.
But rich and civilized nations can always exchange more value with one another than with savages and barbarians.
However, Europe has derived much less advantage from its commerce with the East Indies than from America.
The Portuguese monopolized the East India trade to themselves for about a century.
It was only through them that the other Europeans could send or receive goods from the East Indies.
In the start of the last century, the Dutch began to encroach on the Portuguese.
They vested all their East India commerce in an exclusive company.
The English, French, Swedes, and Danes have all followed their example.
No great European nation has yet benefited from a free commerce to the East Indies.
The Portuguese monopoly is the only reason why it has never been so advantageous as the trade to America.
The trade to America is free to all the subjects of European nations and colonies.
Great envy against the Portuguese East India companies was caused by:
their exclusive privileges
their great riches
the great favour and protection these have procured them from their governments
The envious people frequently said that the Portuguese trade was harmful because of the great amount of silver they export.
The Portuguese replied that their trade might impoverish Europe by this continual silver exportation.
But it would not impoverish the European country which exports the produce of the East Indies, because such trade actually brings in more silver to it.
Both the objection and the reply were founded in the popular notion that wealth consists in money.
By the silver exportation to the East Indies, plate probably became dearer in Europe than it might have been.
Coined silver probably buys more labour and commodities.
The increase in the price of plate is a very small loss.
The increase in the value of silver coin is a very small advantage.
Both are too insignificant to deserve the public attention.
The trade to the East Indies opened a market to:
the gold and silver bought with those commodities
Such trade increases the production of European commodities and the real wealth of Europe.
The current restraints of the monopoly has probably limited the growth of European wealth from the East India trade.
Wealth and Metal Money
34 I thought it necessary, at the hazard of being tedious, to fully examine this popular notion that wealth consists in gold and silver.
Money in common language frequently signifies wealth.
This ambiguity of expression has rendered this popular notion so familiar to us.
Even they who are convinced of its absurdity are very apt to forget their own principles.
In the course of their reasonings, they take it for granted as an undeniable truth.
Some of the best English commerce writers start by observing that the country's wealth consists in its lands, houses, and goods, and not in its gold and silver only.
In the course of their reasonings, the lands, houses, and goods seem to slip out of their memory.
Their argument frequently supposes that all wealth consists in gold and silver.
They supposed that the great object of national industry and commerce is to multiply those metals.
Restraints and Encouragements as the Effect of the Idea that Money is Wealth
35 The great object of political economy became to reduce foreign imports for home consumption and increase the exports of domestic produce.
This was due to the following ideas:
Wealth consisted in gold and silver
Those metals could be brought into a country only through the balance of trade or by exporting a bigger value of rude produce than it imported.
It thus became necessary for the political economy to:
reduce foreign imports for home consumption as much as possible
increase the domestic exports as much as possible
Its two great engines for enriching the country were:
Restraints on importation
Encouragements to exportation
36 There were two kinds of restraints on importation.
37 Restraints on the foreign imports for home consumption which could be produced at home.
38 Restraints on the imports of goods from countries with which the balance of trade was disadvantageous.
39 Those different restraints consisted sometimes in high duties, sometimes in absolute prohibitions.
40 Exportation was encouraged sometimes by:
advantageous commercial treaties with foreign states
the establishment of colonies in distant countries
41 Drawbacks were given on two occasions.
When the home manufactures were subject to any duty or excise, all or a part of it was frequently drawn back on exportation.
When foreign goods liable to a duty were imported to be exported again, all or a part of this duty was sometimes given back on exportation.
42 Bounties were given for:
the encouragement of some startup manufactures
industries which deserved particular favour
43 Particular privileges were given to some foreign countries for their merchants or their goods, through advantageous commercial treaties.
44 Particular privileges and a monopoly was frequently given for the goods and merchants of the country which established colonies in distant countries.
45The commercial system proposes to increase the amount of gold and silver in any country by turning the balance of trade in its favour, through six principal means:
Two restraints on importation
Four encouragements to exportation
I shall examine each in a particular chapter.
I shall examine chiefly their effects on the country's real wealth.
I will not examine in depth how they bring money into the country.