Adam Smith's Simplified Wealth of Nations, Book 4, Chapter 5d: Digression on the Wheat Trade
Chapter 5d: Digression on the wheat trade and wheat laws -- the domestic wheat market
40 The praises for the following are unmerited:
The law which establishes the wheat export bounty
The regulations connected with the bounty
This is demonstrated by examining the nature of:
the wheat trade, and
the British laws related to it
This is a very important subject, justified by this long digression.
41 The wheat merchant's trade is composed of four separate branches which can be done by the same person:
The trade of the inland dealer
The merchant importer for home consumption
The merchant exporter of home produce for foreign consumption
The merchant carrier or importer and re-exporter of wheat
42The interest of the inland dealer is exactly the same with the people's interest even if it may appear opposite even in years of great scarcity.
His interest is to raise wheat prices as high as needed by the season's real scarcity.
It can never be his interest to raise it higher.
He discourages wheat consumption by raising its price.
He puts everybody on thrift and good management, especially the lower class.
If he raises wheat prices too high, he discourages wheat consumption so much that the season's supply will be more than the season's consumption.
The supply will last for some time after the next crop comes in.
He runs the hazard of:
losing a big part of his wheat by natural causes
being obliged to sell what remains for much less
If he does not raise the price high enough, he discourages wheat consumption so little that the season's supply will be less than the season's consumption.
He loses some of the profit he might have made.
He exposes the people to a horrific famine before the season's end, instead of a difficult dearth.
It is the people's interest that their daily, weekly, and monthly consumption should be proportional to the season's supply.
The interest of the inland wheat dealer is the same as the people.
He can sell all his wheat for the highest price and the most profit by supplying them in this proportion, as nearly as he can judge.
He judge the people's real supplies through his knowledge of:
the wheat's state
his daily, weekly, and monthly sales
The Wheat Merchant and The Invisible Hand of Svadharma
Without intending the people's interest, he is necessarily led by a regard to his own interest.
Even in years of scarcity, he treats people in the same way as a prudent shipmaster treats his crew.
He puts them on short allowance when he foresees that provisions will run short.
He sometimes does this unnecessarily.
But all the crew's inconveniences are small compared to the danger from doing otherwise.
In the same way, excessive avarice might cause the inland wheat merchant to raise wheat prices higher than what the season's scarcity requires.
Yet all the people's inconveniences from this secures them from a famine in the season's end.
The suffering is small compared to the suffering created by a more liberal way of dealing with the scarcity.
The wheat merchant will likely suffer the most by this excess of avarice because:
of the indignation against him
he must sell his season's leftover wheat at a lower price if the next season is abundant.
43If one great merchant company got all of a country's crops, it might be its interest to destroy a big part of it to keep up the price of the rest.
This is what the Dutch did to the Moluccas spiceries.
But it is impossible, even by the violence of law, to establish such an extensive monopoly on wheat.
Wherever there is free trade, wheat is the least liable to be engrossed or monopolized by a few large capitals.
Its value far exceeds what the capitals of a few private men can buy.
Even if they were able to buy it, it would be impractical because of the way wheat is produced.
In every civilized country, wheat is the commodity consumed the most annually.
More industry is employed in producing wheat than any other commodity.
When it first comes from the ground, it is divided among more owners than any other commodity.
These owners can never be collected into one place like independent manufacturers.
They are scattered throughout the countryside.
These first owners immediately supply:
the consumers in their own neighbourhood or
other inland dealers who supply those consumers
The inland dealers in wheat include the farmer and the baker.
They are more numerous than the dealers in any other commodity.
Their dispersed situation makes it impossible for them to have a general combination.
If a dealer has more wheat than he could sell during a year of scarcity, he would never keep up its price to his own loss.
He would immediately lower it to get rid of his wheat before the new crop came in.
All dealers would be bound by these same motives and interests.
Generally, it would oblige them all to sell their wheat at the price most suitable to the season.
44Whoever examines the history of European dearths and famines from 16th century to the present will find that a dearth always arose from a real scarcity.
This scarcity was created by:
the fault of the seasons, most frequently
It never arose from any combination of the inland wheat dealers.
A famine only arose from the government's violence in attempting to remedy a dearth improperly.
45In an extensive wheat country with free commerce and communication, the scarcity created by the most unfavourable seasons can never be so great as to produce a famine.
If managed with frugality and economy, the scantiest crop will maintain the same number of people fed during periods of moderate plenty.
Excessive drought or rain are bad for crops.
But wheat grows equally on:
high and low lands, and
wet or dry land
Drought or excessive rains may hurt one part of the country.
But the other part will not have them.
In wet and dry seasons, some of the wheat lost in one part of the country is compensated by the wheat gained in the other.
Rice requires a very moist soil and must be laid underwater.
In rice countries, a drought is much more dismal.
However, even in such countries, the drought is perhaps never so universal to create a famine if the government allows a free trade.
The drought in Bengal a few years ago might have created a very great dearth.
Some improper regulations and restraints imposed by the East India Company on the rice trade perhaps contributed to turn that dearth into a famine.
46 When the government tries to to remedy a dearth by ordering all dealers to sell their wheat at a reasonable price, it:
hinders the dealers from bringing it to market, and
It may then produce a famine
enables the people to consume it so fast.
It produces a famine before the season's end.
The unlimited, unrestrained freedom of the wheat trade is the only effective preventative of a famine.
It is the best palliative of a dearth.
Because the inconveniences of a real scarcity cannot be remedied, it can only be palliated.
Free wheat trade deserves and requires the most protection of the law because no trade is so much exposed to popular odium.
47 In years of scarcity, the lower classes impute their distress to the wheat merchant's avarice.
Instead of profiting from the scarcity, he is often in danger of being ruined.
His magazines are in danger of being plundered and destroyed by violence.
The wheat merchant expects his main profit during years of scarcity when prices are high.
He is in contract with some farmers to furnish him a certain amount of wheat at a certain price for a certain number of years.
This contract price is settled according to the ordinary price which is moderate and reasonable.
Before the recent years of scarcity, it was about 336 pence for the quarter of wheat.
In years of scarcity, the wheat merchant buys most of his wheat for the ordinary price and sells it dearer.
This extraordinary profit is just enough to put his trade on a fair level with other trades.
It compensates his many other losses from:
the wheat's perishable nature, and
the frequent and unforeseen fluctuations of its price
This alone shows why great fortunes are seldom made in the wheat trade.
A popular odium attends the wheat trade in years of scarcity.
It makes people of character and fortune averse to enter into it.
The wheat trade is abandoned to an inferior set of dealers.
The only middlemen that come between the grower and the consumer are:
meal factors [agents? retailers?], together with wretched hucksters [resellers? peddlers?]
48 Europe's ancient policy authorized and encouraged this popular odium against the wheat trade, even if the wheat trade is so beneficial to the public.
49 The 5th and 6th of Edward VI cap. 14 enacted that anyone who buys any wheat or grain with intent to sell it again would be an unlawful engrosser.
For the first fault:
he would be imprisoned for two months, and
the value of his wheat would be forfeited.
For the second:
he would be imprisoned for six months, and
the double value of his wheat would be forfeited.
For the third:
he would be imprisoned in the pillory, and
all his goods and chattels would be forfeited.
The ancient policy of other European countries was no better than that of England.
50Our ancestors imagined that people could buy their wheat cheaper from the farmer than from the wheat merchant.
They were afraid that the wheat merchant would require an exorbitant profit to himself.
They tried to:
annihilate his trade altogether, and
hinder any middle man from coming in between the grower and the consumer, by imposing many restraints.
A wheat carrier could only exercise his trade with a licence proving that he was fair.
Edward VI's statute required three justices of the peace to grant this licence.
The privilege of granting it was further confined to the quarter-sessions by a statute of Elizabeth.
51 In this way, Europe's ancient policy tried to regulate agriculture by maxims different from those which regulated manufactures.
In agriculture, this policy forced the farmer to be both the wheat farmer and merchant or retailer.
It made the end consumers and their wheat carriers as his only customers.
In manufactures on the contrary, this policy banned the manufacturer from selling his own goods by retail or by being his own shopkeeper.
In agriculture, this policy aimed to render wheat cheap without understanding how this was to be done.
In manufactures, this policy protected the shopkeeper's interest by preventing manufacturers from doing retail and underselling them.
Loss of Competitve Advantage From the Division of Capital
52 The manufacturer was allowed to keep a shop and sell his own goods by retail, but he could not have undersold the common shopkeeper.
Whatever capital he placed in his shop must have been withdrawn from his manufacture.
To carry on his business on a level with other manufacturers and shopkeepers, he must have profits from his:
manufacturing capital, and
Let us suppose that 10% was the ordinary profit of manufacturing and shopkeeping in his town.
In this case, he must have added a profit of 20% on each of his goods in his shop.
When he carried them from his workhouse to his shop, he must have priced them at a wholesale price.
The wholesale price is the price he sells them to shopkeepers.
If he valued them lower than the wholesale price, he would lose some of his manufacturing capital's profit.
When he sold them from his shop, he would lose some of the profit of his shopkeeping capital if he sold them cheaper than the retail price of other shopkeepers.
He might appear to make a double profit on the same goods.
But as these goods came from two distinct capitals, he made only a single profit on the whole capital employed.
If he made less than his usual profit, he was a loser.
53 The manufacturer was banned from dividing his capital into two employments.
However, the farmer was forced to divide his capital into two.
One part was in his granaries and stack yard for supplying the market.
Another part was in land cultivation.
He could not afford cultivation for less than the ordinary profits of farming stock.
He could as little afford granaries for less than the ordinary profits of mercantile stock.
Whether the stock used in wheat trading belonged to the farmer or the wheat merchant, an equal profit is needed by the owner to:
put his business on a level with other trades
hinder him from changing his business to something more profitable
The farmer was forced to exercise the trade of a wheat merchant.
He could not afford to sell his wheat cheaper than any other wheat merchant, in the case of a free competition.
54 The dealer who can employ his whole stock in one single business has the same advantage as the worker who can employ his whole labour in one single operation.
As the worker acquires the dexterity to perform more work, so the merchant acquires readier methods of buying and disposing of goods.
With the same capital, the merchant can transact more business.
As the merchant can afford the worker's labour cheaper, so the worker can afford the merchant's goods cheaper than if his stock and attention were employed in many various objects.
Most manufacturers would not be able to retail their own goods as cheaply and effectively as an active shopkeeper.
An active shopkeeper's sole business is to buy at wholesale and sell at retail.
Most farmers would be less able to retail their own wheat.
They could not afford to supply the town 4-5 miles away as cheap and as vigilant as an active wheat merchant.
55 The law, which banned the manufacturer from being a shopkeeper, forced this division in the employment of stock faster.
The law, which obliged the farmer to be a wheat merchant, hindered the division of the employment of stock from going on so fast.
Both laws were violations of natural liberty and were therefore unjust and impolitic.
"It is the interest of every society that things of this kind should never either be forced or obstructed."
The man who employs his labour or stock in more ways than necessary, can never hurt his neighbour through underselling.
He may hurt himself by underselling, and he generally does so.
"Jack of all trades will never be rich, says the proverb."
The law should always trust people with the care of their own interest.
Because in their local situations, they must generally be able to judge better of their interest than the legislator.
The law which obliged the farmer to be a wheat merchant was the most harmful of those two laws by far.
56 It obstructed:
the division in the employment of stock which is so advantageous to every society
land improvement and cultivation
By obliging the farmer to do two trades, it forced him to divide his capital into two.
Only one of his capitals could be employed in cultivation.
If he were free to sell his crops to a wheat merchant as fast as he could thresh it out, his whole capital might have returned immediately to the land.
His capital could have been used in:
buying more cattle
hiring more servants to improve it better
By being obliged to sell his wheat by retail, he was obliged to keep most of his capital in his granaries and stack yard through the year.
He could not cultivate so well with the same capital.
obstructed land improvement, and
must have rendered wheat scarcer and dearer.
The Trade Between The Farmer and The wheat Merchant
57After the farmer, the wheat merchant contributes the most to the raising of wheat, if his trade is properly protected and encouraged.
He would support the farmer in the same way the wholesale dealer supports the manufacturer.
58 The wholesale dealer affords a ready market to the manufacturer by taking the manufacturer's goods as fast as the manufacturer can make them.
It enables the manufacturer to keep his whole capital constantly employed in manufacturing.
He can manufacture more goods than if he sold them himself to end consumers or retailers.
The wholesaler's capital is generally enough to replace the capital of many manufacturers.
This intercourse between the dealers and the manufacturers interests the owner of a large capital to support the many owners of small capitals.
The merchant is interested in assisting the manufacturers in their losses which might be ruinous.
59 The same intercourse universally established between farmers and wheat merchants would equally benefit the farmers.
The farmers would be enabled to keep their whole capitals constantly employed in cultivation.
In case of any accidents, they would find that their wealthy wheat merchant customer has an interest and the ability to support them.
The farmers would not be entirely dependent on their landlord, as at present.
It is not very easy to imagine how great, extensive, and sudden would be the improvement to the entire countryside if it were possible to establish this intercourse between farmers and merchants universally and all at once:
If it were possible to withdraw the nation's whole farming stock from other employments and divert it towards land cultivation.
If it were possible to provide another, almost equally great, stock of trading to support this great farming stock.
Perhaps it is not possible.
60 The statute of Edward VI banned any middleman from coming between the grower and the consumer.
It tried to annihilate a trade which, when freely exercised, is the best palliative and preventative of a dearth.
61 This law was softened by several subsequent statutes.
They permitted the engrossing of wheat when the wheat prices should not exceed 240, 288, 384, and 480 pence the quarter.
Finally, the 15th of Charles II. c. 7 declared the engrossing or buying of wheat for re-sale lawful to all, except to forestallers, as long as wheat prices did not exceed 576 pence the quarter relative to other grains.
Forestallers sold wheat again in the same market within three months.
This statute restored all the inland wheat dealer's freedom.
The statute of the 12th of George III repeals almost all the other ancient laws against engrossers and forestallers.
It does not repeal the restrictions of the 15th of Charles II. c 7, which are still in force.