Simplified Wealth of Nations by Adam Smith, Book 4, Chapter 3a: Extraordinary Restraints on Disadvantageous Balance of Trade
Chapter 3a: Extraordinary Restraints on Importation from Countries Where the Balance is supposed to be Disadvantageous
Unreasonableness of the Balance of Trade
1 The second expedient of the commercial system to increase the amount of gold and silver is to lay extraordinary restraints on imports from countries where the balance of trade is disadvantageous.
Thus in Great Britain, Silesia lawns may be imported for home consumption on paying certain duties.
But French cambrics and lawns can only be imported in London where they are warehoused for re-exportation.
The impost 1692 laid a duty of 25% on all French goods, except for wine, brandy, salt, and vinegar.
The latter goods were subject to heavy duties by other laws.
Most of the goods of other nations were subjected to lighter duties seldom exceeding 5% listed in the book of rates.
Higher duties are imposed on French wines than on wines of any other country.
In 1696, a second duty of 25% was imposed on all French goods, except brandy, together with:
a new duty of £25 per ton of French wine
another £15 per ton of French vinegar
The book of rates listed the goods which were subject to a 5% general duty.
French goods were never omitted from that book.
There have been five of these general duties.
The duties called the 1/3 and 2/3 subsidies, count as one duty.
Thus, before the start of the current American Revolutionary war, 75% was the lowest duty imposed on most French goods.
Those duties are equivalent to a prohibition.
The French in their turn have treated our goods just as hardly.
Though I am unfamiliar with the hardships they imposed.
Those mutual restraints ended fair commerce between France and England.
Smugglers are now the principal importers of British goods into France or of French goods into Great Britain.
The principles of the restraints in Chapter 2 originate from private interest and the spirit of monopoly.
The principles of the restraints in this chapter originate from national prejudice and animosity.
They are more unreasonable even on the principles of the commercial system.
2It does not follow that a balance of free trade in favour of France would be disadvantageous to England.
It would be better for Great Britain to buy wine and linen from France than from Portugal or Germany if:
French wines are better and cheaper than Portuguese wines, or
French linens are better and cheaper than those of Germany
The value of the annual imports from France would be greatly increased.
But the value of the total imports from France would be less than the former imports from Portugal and Germany, because French goods would be cheaper.
This would be the case even if all of the imported French goods were consumed in Great Britain.
3 Most of those French goods might be re-exported to other countries to be sold at a profit.
It might be enough to pay for the prime cost of those imported French goods.
The East India trade might possibly be true of the French trade.
Most of the East India goods were bought with gold and silver.
Their re-exportation brought back more gold and silver than the prime cost.
Presently, one of the most important Dutch trades is in the transportation of French goods to other European countries.
Some of the French wine drank in Great Britain are clandestinely imported from Holland and Zeeland.
England might have some share of a trade which is advantageous to Holland if:
there were a free trade between France and England
imported French goods had the same duties as those of other European nations, to be drawn back on exportation
4 There is no certain criteria to determine:
which side the balance between any two countries lies, or
which side exports the greatest value
National prejudice and animosity is always prompted by the private interest of particular traders.
These generally direct our judgement concerning this balance.
There are two criteria frequently appealed to:
The custom-house books
The course of exchange.
I think that the custom-house books are a very uncertain criterion.
They have inaccurate valuations for most of the goods rated in them.
The course of exchange is, perhaps, almost equally uncertain.
5 It is said when the exchange between London and Paris is at par, it is a sign that the debts due from London to Paris are compensated by the debts due from Paris to London.
On the contrary, when a premium is paid at London for a bill upon Paris, it is a sign that the debts due from London to Paris are not compensated by the debts due from Paris to London.
It is a sign that a balance in money must be sent out from London.
The premium is demanded and given for the risk, trouble, and cost of exporting.
It is said that the ordinary state of debt and credit between London and Paris must be regulated by the ordinary course of their dealings with one another.
When neither of them imports from the other more than it exports to that other, the debts and credits of each may compensate one another.
But when one of them imports more value from the other, the former becomes indebted to the latter.
The debts and credits of each do not compensate one another
Money must be sent out from where the debts over-balance the credits.
The ordinary course of exchange is an indication of the ordinary state of debt and credit between two places.
It must likewise be an indication of the ordinary course of their exports and imports.
6 The ordinary exchange shows the ordinary state of debt and credit between two places.
But it does not follow that the balance of trade is in favour of the place which had the favourable debt and credit.
The ordinary state of debt and credit between two places is not always regulated entirely by the ordinary course of their exchanges.
It is often influenced by the exchanges between those two places with many other places.
For example, if it is usual for English merchants to pay for the goods of Hamburgh, Danzig, Riga, etc. with bills upon Holland, the ordinary state of debt and credit between England and Holland will not be regulated entirely by the ordinary exchanges between England and Holland.
It will be influenced by the exchanges between England with Hamburgh, Dantzic, Riga, etc.
England may be obliged to send out money annually to Holland.
But England may export more to Holland than it imports from Holland.
The balance of trade may be very much in favour of England.
7 In this way, the ordinary exchange is not a proof that the ordinary state of debt and credit is in favour of the country which has the ordinary exchange in its favour.
In other words, the real exchange may be and often is very different from the computed one.
No certain conclusion can be drawn concerning the state of debt and credit from the course of the ordinary exchange.
8 When you exchange English money, with the English mint standard of pure silver, for a bill for French money with equal ounces of pure silver according to the French mint, the exchange is said to be at par between England and France.
When you pay more English money, it is said you are giving a premium.
The exchange is against England and in favour of France.
When you pay less English money, it is said you are getting a premium.
The exchange is against France and in favour of England.
9But we cannot always judge of the value of the money of different countries by the standard of their respective mints.
In some, it is more degraded from that standard.
In others, it is less worn, clipt, and degenerated.
The value of the coin of every country is proportional to the amount of pure silver it actually contains, not on what it should contain.
Before the reformation of the silver coin in King William's time, the exchange between England and Holland was 25% against England.
This was computed according to the standard of their respective mints.
But according to Mr. Lowndes, the value of the current coin of England was at that time more than 25% below its standard value.
The real exchange at that time may even have been in favour of England.
The computed exchange was so much against it.
Fewer ounces of pure silver paid in England may have bought a bill for more ounces of pure silver to be paid in Holland.
The man who was supposed to give a premium may in reality have gotten a premium.
Before the recent reformation of the English gold coin, the French coin was much less worn than the English coin.
The French coin was perhaps 2% or 3% nearer its standard.
If the computed exchange with France was not more than 2% or 3% against England, the real exchange might have been in favour of France.
Since the reformation of the gold coin, the exchange has constantly been in favour of England and against France.
10 In some countries, the cost of coinage is defrayed by the government.
In others, it is defrayed by the private people who carry their bullion to the mint.
The government even derives some revenue from the coinage.
In England, it is defrayed by the government.
If you carry a pound weight of standard silver to the mint, you get back 62 shillings of a pound weight of standard silver.
In France, a duty of 8% is deducted for the coinage, which:
defrays the cost
affords a small revenue to the government
In England, the coinage costs nothing.
The current coin can never be more valuable than the bullion it actually contains.
In France, the workmanship which you pay for, adds value in the same way as to that of wrought plate.
French money is more valuable than English money of an equal weight of pure silver.
French money must require more bullion or other commodities to purchase it.
The current coins of both countries are equally near the standards of their respective mints.
However, English money could not well purchase French money of equal ounces of pure silver.
English money consequently cannot purchase a bill upon France for such a sum.
The real exchange might be at par between the two countries if such bill was bought with English money that was sufficient to compensate the expence of the French coinage.
In such a case, their debts and credits might mutually compensate one another.
Though the computed exchange was considerably in favour of France.
If less than this was paid, the real exchange might be in favour of England, while the computed exchange was in favour of France.
11 In some places such as Amsterdam, Hamburgh, Venice, etc., foreign bills of exchange are paid in bank money.
In other places, such as London, Lisbon, Antwerp, Leghorn, etc. they are paid in the common currency of the country.
Bank money is always of more value than the same nominal sum of common currency.
For example, 1,000 guilders in the bank of Amsterdam are more valueable than 1,000 guilders of Amsterdam currency.
The difference between them is called the agio of the bank.
The agio at Amsterdam is about 5%.
In a trade between two countries, the computed exchange may be in favour of the country that pays in bank money if:
the current money of two countries are near the standard of their respective mints
one country pays foreign bills in this common currency, while the other pays in bank money
However, the real exchange should be in favour of the country which pays in current money.
Because the computed exchange may be in favour of the country which pays in better money, or in money nearer to its own standard.
Though the real exchange should be in favour of the country which pays in worse money.
Before the recent reformation of the gold coin, the computed exchange was generally against London with other places which pay in bank money, such as Amsterdam, Hamburgh, and Venice.
However, it does not follow that the real exchange was against London.
Since the reformation of the gold coin:
The real exchange has been in favour of London even with Amsterdam, Hamburgh, and Venice.
The computed exchange was in favour of London with Lisbon, Antwerp, Leghorn, and other countries that pay in common currency, except France.
The real exchange was probably in favour of London too.