Adam Smith's Simplified Wealth of Nations, Book 4, Chapter 7g: Act of Navigation
Chapter 7g: Monopoly from the Act of Navigation
105 By the act of navigation, England assumed to herself the monopoly of the colony trade.
The foreign capitals employed in it were withdrawn from it.
The English capital which did a part of it now did the whole.
The capital which supplied the colonies with part of the European goods they wanted was now all employed to supply them with the whole.
But English capital could not supply the colonies with all European goods.
Those goods it supplied were sold very dear.
The capital which bought only a part of the surplus produce of the colonies, was now all employed to buy the whole.
But it could not buy the whole produce at the old price.
Whatever it could buy it bought very cheap.
The profit must have been very great because the merchant sold very dear and bought very cheap.
This superiority of profit in the colony trade must have drawn capital from other trades.
This must have gradually increased the competition in the colony trade and lowered the profits.
It must have gradually diminished the competition in other trades and raised their profits.
The profits of all trades must have come to a new level higher than before.
106 This monopoly produced the double effects on its first establishment and has continued ever since:
Drawing capital from all other trades
Raising profit rates higher in all trades
107 This monopoly continually drew capital from all other trades to be employed in the colonies.
108 Though the wealth of Great Britain increased very much since the act of navigation was established, it did not increase in the same proportion as the wealth of the colonies.
"But the foreign trade of every country naturally increases in proportion to its wealth."
Its surplus produce increases in proportion to its whole produce.
Great Britain engrossed to herself almost all of the foreign trade of the colonies.
Her capital did not increase proportionately with the increase of that trade.
She could not carry it on without:
withdrawing some capital from other trades
withholding from other trades more than what would have gone to them
Since the act of navigation was established, the colony trade continually increased.
However, other foreign trades to other parts of Europe continually decayed.
Before the act of navigation, our manufactures for foreign sale were suited to:
the European market
the distant market around the Mediterranean Sea
After the act of navigation, most of them were accommodated to the more distant colony markets.
They went where they have the monopoly instead of where they have many competitors.
The overgrowth of the colony trade is the cause of decay in other foreign trades.
This cause includes the causes which Sir Matthew Decker and other writers attributed the decay to:
The excess and improper mode of taxation
The high price of labour
The increase of luxury, etc.
The mercantile capital of Great Britain was very great but not infinite.
It greatly increased since the act of navigation.
It did not increase proportionally to the colony trade.
That trade could not be carried on without withdrawing some capital from other trades.
Those other trades consequently decayed.
109 England was a great trading country.
Her mercantile capital was very great even before the act of navigation.
In the Dutch war during the Cromwell government, her navy was superior to Holland.
In the war in the beginning of the reign of Charles II, it was equal or superior to the united navies of France and Holland.
Presently its superiority is not greater if the Dutch navy was proportional to the Dutch commerce now as it was before.
This great naval power could not be due to the act of navigation.
During the first of those wars, the plan of that act was just formed.
Before the second war, that act was fully enacted.
No part of it had time to produce any big effect.
The colonies and their trade were inconsiderable then compared to now.
Jamaica was an unwholesome desert, little inhabited, and less cultivated.
New York and New Jersey were possessed by the Dutch.
Half of St. Christopher's was possessed by the French.
Antigua, the two Carolinas, Pennsylvania, Georgia, and Nova Scotia were not planted.
Virginia, Maryland, and New England were planted and thriving.
No one foresaw their rapid progress in wealth, population, and improvement.
Barbados was the only British colony which remained relatively unchanged.
The act of navigation was not very strictly executed for several years.
Even after the act of navigation, the colony trade of England, could not have caused at that time:
the great English trade
the great naval power supported by that trade.
At that time, the trade of Europe and the Mediterranean Sea supported the great English naval power.
Currently, that trade is not able support British naval power.
Had the colony trade been left free to all nations, any British share in the colony trade would have added to the great European trade she had before.
Because of the monopoly, the increase of the colony trade did not add much to the British trade.
110 This monopoly kept up profit rates in British trade higher than if all nations were allowed a free trade to the British colonies.
111 The monopoly of the colony trade drew more British capital than natural.
By the expulsion of all foreign capitals, it reduced the whole capital employed in that trade below natural as in a free trade.
By lessening the competition of capitals in the colony trade, it raised its profit rate.
By lessening the competition of British capitals in other trades, it raised British profit rates in those other trades.
The monopoly of the colony trade must have raised ordinary British profit rates higher than normal in all British trades.
Since the act of navigation, ordinary British profit rates fell considerably.
It would have fallen still lower if the monopoly established by that act did not keep it up.
Whatever raises the ordinary profit rate in any country higher than it otherwise would be, necessarily subjects that country to an absolute and a relative disadvantage in every trade which she has no monopoly of.
113 It subjects her to an absolute disadvantage.
In trades where she has no monopoly, her merchants cannot get this greater profit without selling her foreign imports and her own exports dearer.
The country must buy dearer and sell dearer.
It must buy less and sell less.
It must enjoy less and produce less.
114 It subjects her to a relative disadvantage.
In trades where she has no monopoly, other countries do not have the same absolute disadvantage.
Other countries are more above or less below her.
It enables them to enjoy more and to produce more.
It renders their superiority greater or their inferiority less.
By raising the price of her produce above the natural, it enables foreign merchants to undersell her in foreign markets.
They jostle her out of trades where she has no monopoly.
115 Our merchants frequently complain of the high British wages as the cause of their manufactures being undersold in foreign markets.
They are silent about their high profits.
"They complain of the extravagant gain of other people, but they say nothing of their own."
High British profits, however, may raise the price of British manufactures perhaps more than high British wages.
116 In this manner, British capital was partly driven from the trades where she has no monopoly:
From the trade of Europe in particular, and around the Mediterranean Sea
117 It was partly drawn from those trades by the attraction of superior profit in the colony trade due to:
the continual increase of that trade
the continual insufficiency of capital needed to carry it on annually
118 It was partly driven from those trades by the high British profit rates.
Those rates gave advantages to other countries in trades where Great Britain has no monopoly.
119 The monopoly of the colony trade drew British capital from other trades.
It forced into those other trades many foreign capitals which would never have gone to them.
In those other trades, it diminished the competition of British capital.
It raised British profit rates higher than natural.
On the contrary, it increased the competition of foreign capitals.
It sunk the rate of foreign profit lower.
In both ways, it must have subjected Great Britain to a relative disadvantage in all those other trades.
120 The colony trade perhaps is more advantageous to Great Britain than any other trade.
The monopoly forced more British capital into the colony trade than what would have gone to it.
It turned that capital into an employment more advantageous to Great Britain than any other trade.
121 "The most advantageous employment of any capital to the country to which it belongs is that which maintains there the greatest quantity of productive labour, and increases the most the annual produce of the land and labour of that country."
It has been shown in the Book 2 that the quantity of productive labour which capital can maintain in the foreign trade of consumption is exactly in proportion to the frequency of its returns.
For example, a capital of 1,000 pounds employed in a foreign trade of consumption with returns of once a year, can maintain and employ what 1,000 pounds can for a year.
If the returns are made twice or thrice a year, it can keep employed what 2,000 or 3,000 pounds can maintain there for a year.
In this case, a foreign trade of consumption done with a neighbouring country is more advantageous than a trade with a distant country.
For the same reason, a direct foreign trade of consumption is in general more advantageous than a round-about one, as shown in Book 2.
122 The monopoly of the colony trade forced some British capital from a foreign trade of consumption with a neighbouring country, to a trade with a more distant country.
In many cases, it forced British capital from a direct foreign trade of consumption to a round-about one.
123 The monopoly of the colony trade forced some British capital from a foreign trade of consumption with a neighbouring country to a trade with a more distant country.
124 It forced some British capital from the trade with Europe and the Mediterranean. to the trade with America and the West Indies, where the returns are less frequent.
New colonies are always understocked.
"Their capital is always much less than what they could employ with great profit and advantage in the improvement and cultivation of their land."
"They have a constant demand, for more capital than they have of their own;"
To supply their deficiency, they borrow as much as they can of the mother country.
They are therefore always in debt to the mother country.
The most common way they contract this debt is by running in arrears to their correspondents as far as possible.
Their correspondents supply them with European goods.
They sometimes borrow on bond of the rich people of the mother country.
But they do not do this commonly because their annual returns frequently are less than a third of what they owe.
The whole capital advanced by their correspondents is seldom returned to Britain in less than three years.
£1,000 of British capital which returned to Great Britain once in five years, can keep only 1/5 British industry constantly employed compared to 5/5 industry if such capital returned once a year.
It can keep only £200 worth of industry employed for each year for those five years.
The planter probably makes up the loss his correspondent sustains by this delay through:
the high price the planter pays for European goods
the interest on the bills the planter grants at distant dates
the commission on the renewal of those bills which the planter grants at near dates
Although he may make up the loss of his correspondent, he cannot make up the loss of Great Britain.
The merchant's profit may be more in a trade where the returns are very distant than in a trade where they are very frequent and near.
But the advantage of the country where he resides must always be much less:
The quantity of productive labour maintained there
The annual produce of its land and labour
The returns of the trade to America and the West Indies are more distant, irregular, and uncertain than those to Europe and the Mediterranean.
125 The monopoly of the colony trade forced some part of British capital from a direct foreign trade of consumption into a round-about one.
126 Enumerated commodities can only be sent to Great Britain.
There are several enumerated commodities which are in excess of what is needed by Great Britain.
It must be exported.
This cannot be done without forcing some British capital into a round-about foreign trade of consumption.
For example, Maryland and Virginia, send more than 96,000 hogsheads of tobacco to Great Britain annually.
The consumption of Great Britain does not exceed 14,000 hogheads.
More than 82,000 hogsheads must be exported to:
The Baltic countries
The Mediterranean countries
The British capital which imports and re-exports those 82,000 hogsheads is employed in a round-about foreign trade of consumption.
It brings back goods or money from those countries in return.
It is forced to dispose of this great surplus.
To compute how many years this capital would come back to Great Britain, we must add the returns from those other countries to the American returns.
If the capital employed in the direct foreign trade of consumption with America does not come back in less than 3-4 years, the capital employed in this round-about trade is not likely to return in less than 4-5 years.
If the capital employed in the direct trade can employ only 1/3 or 1/4 domestic industry, the capital employed in the round-about trade can employ but 1/4 or 1/5 of that industry.
At some ports, a credit is given to the foreign correspondents who buy their tobacco.
At London, this credit is commonly sold for ready money.
"The rule is, Weigh and pay."
At London, the final returns of the round-about trade are more distant than the returns from America by the time the goods lie unsold in the warehouse.
Had the tobacco of the colonies not been confined to the British market, very little of it would probably have come to us than necessary.
Instead of using the surplus tobacco from the colonies to buy the foreign goods she wants at home, she would probably use her own produce.
Instead of being entirely suited to one great market as at present, that produce would probably have been fitted to many smaller markets.
Instead of one great round-about foreign trade of consumption, Great Britain would probably have carried on many small direct foreign trades.
Because of the frequency of the returns, probably 1/3 or 1/4 of the capital presently employed in this great round-about trade might have been sufficient to carry on all those small direct trades.
It might have:
kept an equal quantity of British industry constantly employed
equally supported Great Britain's annual produce.
Since this trade would be supported by a much smaller capital, there would have been a large spare capital for other purposes:
To improve the lands
To increase the manufactures
To extend the commerce of Great Britain
To compete with other British capitals employed in all those different ways
To reduce the profit rate in them all
To give a greater superiority to Great Britain in all of them over other countries.