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id: book-4-chapter-03 title: "OF THE EXTRAORDINARY RESTRAINTS UPON THE IMPORTATION OF GOODS OF ALMOST ALL KINDS, FROM THOSE COUNTRIES WITH WHICH THE BALANCE IS SUPPOSED TO BE DISADVANTAGEOUS." book: "4" chapter: 3 artifact_type: content
CHAPTER III. OF THE EXTRAORDINARY RESTRAINTS UPON THE IMPORTATION OF GOODS OF ALMOST ALL KINDS, FROM THOSE COUNTRIES WITH WHICH THE BALANCE IS SUPPOSED TO BE DISADVANTAGEOUS.
Part I—Of the Unreasonableness of those Restraints, even upon the
Principles of the Commercial System.
To lay extraordinary restraints upon the importation of goods of almost
all kinds, from those particular countries with which the balance of trade
is supposed to be disadvantageous, is the second expedient by which the
commercial system proposes to increase the quantity of gold and silver.
Thus, in Great Britain, Silesia lawns may be imported for home
consumption, upon paying certain duties; but French cambrics and lawns are
prohibited to be imported, except into the port of London, there to be
warehoused for exportation. Higher duties are imposed upon the wines of
France than upon those of Portugal, or indeed of any other country. By
what is called the impost 1692, a duty of five and-twenty per cent. of the
rate or value, was laid upon all French goods; while the goods of other
nations were, the greater part of them, subjected to much lighter duties,
seldom exceeding five per cent. The wine, brandy, salt, and vinegar of
France, were indeed excepted; these commodities being subjected to other
heavy duties, either by other laws, or by particular clauses of the same
law. In 1696, a second duty of twenty-five per cent. the first not having
been thought a sufficient discouragement, was imposed upon all French
goods, except brandy; together with a new duty of five-and-twenty pounds
upon the ton of French wine, and another of fifteen pounds upon the ton of
French vinegar. French goods have never been omitted in any of those
general subsidies or duties of five per cent. which have been imposed upon
all, or the greater part, of the goods enumerated in the book of rates. If
we count the one-third and two-third subsidies as making a complete
subsidy between them, there have been five of these general subsidies; so
that, before the commencement of the present war, seventy-five per cent.
may be considered as the lowest duty to which the greater part of the
goods of the growth, produce, or manufacture of France, were liable. But
upon the greater part of goods, those duties are equivalent to a
prohibition. The French, in their turn, have, I believe, treated our goods
and manufactures just as hardly; though I am not so well acquainted with
the particular hardships which they have imposed upon them. Those mutual
restraints have put an end to almost all fair commerce between the two
nations; and smugglers are now the principal importers, either of British
goods into France, or of French goods into Great Britain. The principles
which I have been examining, in the foregoing chapter, took their origin
from private interest and the spirit of monopoly; those which I am going
te examine in this, from national prejudice and animosity. They are,
accordingly, as might well be expected, still more unreasonable. They are
so, even upon the principles of the commercial system.
First, Though it were certain that in the case of a free trade between
France and England, for example, the balance would be in favour of France,
it would by no means follow that such a trade would be disadvantageous to
England, or that the general balance of its whole trade would thereby be
turned more against it. If the wines of France are better and cheaper than
those of Portugal, or its linens than those of Germany, it would be more
advantageous for Great Britain to purchase both the wine and the foreign
linen which it had occasion for of France, than of Portugal and Germany.
Though the value of the annual importations from France would thereby be
greatly augmented, the value of the whole annual importations would be
diminished, in proportion as the French goods of the same quality were
cheaper than those of the other two countries. This would be the case,
even upon the supposition that the whole French goods imported were to be
consumed in Great Britain.
But, Secondly, A great part of them might be re-exported to other
countries, where, being sold with profit, they might bring back a return,
equal in value, perhaps, to the prime cost of the whole French goods
imported. What has frequently been said of the East India trade, might
possibly be true of the French; that though the greater part of East India
goods were bought with gold and silver, the re-exportation of a part of
them to other countries brought back more gold and silver to that which
carried on the trade, than the prime cost of the whole amounted to. One of
the most important branches of the Dutch trade at present, consists in the
carriage of French goods to other European countries. Some part even of
the French wine drank in Great Britain, is clandestinely imported from
Holland and Zealand. If there was either a free trade between France and
England, or if French goods could be imported upon paying only the same
duties as those of other European nations, to be drawn back upon
exportation, England might have some share of a trade which is found so
advantageous to Holland.
Thirdly, and lastly, There is no certain criterion by which we can
determine on which side what is called the balance between any two
countries lies, or which of them exports to the greatest value. National
prejudice and animosity, prompted always by the private interest of
particular traders, are the principles which generally direct our judgment
upon all questions concerning it. There are two criterions, however, which
have frequently been appealed to upon such occasions, the custom-house
books and the course of exchange. The custom-house books, I think, it is
now generally acknowledged, are a very uncertain criterion, on account of
the inaccuracy of the valuation at which the greater part of goods are
rated in them. The course of exchange is, perhaps, almost equally so.
When the exchange between two places, such as London and Paris, is at par,
it is said to be a sign that the debts due from London to Paris are
compensated by those due from Paris to London. On the contrary, when a
premium is paid at London for a bill upon Paris, it is said to be a sign
that the debts due from London to Paris are not compensated by those due
from Paris to London, but that a balance in money must be sent out from
the latter place; for the risk, trouble, and expense, of exporting which,
the premium is both demanded and given. But the ordinary state of debt and
credit between those two cities must necessarily be regulated, it is said,
by the ordinary course of their dealings with one another. When neither of
them imports from from other to a greater amount than it exports to that
other, the debts and credits of each may compensate one another. But when
one of them imports from the other to a greater value than it exports to
that other, the former necessarily becomes indebted to the latter in a
greater sum than the latter becomes indebted to it: the debts and credits
of each do not compensate one another, and money must be sent out from
that place of which the debts overbalance the credits. The ordinary course
of exchange, therefore, being an indication of the ordinary state of debt
and credit between two places, must likewise be an indication of the
ordinary course of their exports and imports, as these necessarily
regulate that state.
But though the ordinary course of exchange shall be allowed to be a
sufficient indication of the ordinary state of debt and credit between any
two places, it would not from thence follow, that the balance of trade was
in favour of that place which had the ordinary state of debt and credit in
its favour. The ordinary state of debt and credit between any two places
is not always entirely regulated by the ordinary course of their dealings
with one another, but is often influenced by that of the dealings of
either with many other places. If it is usual, for example, for the
merchants of England to pay for the goods which they buy of Hamburg,
Dantzic, Riga, etc. by bills upon Holland, the ordinary state of debt and
credit between England and Holland will not be regulated entirely by the
ordinary course of the dealings of those two countries with one another,
but will be influenced by that of the dealings in England with those other
places. England may be obliged to send out every year money to Holland,
though its annual exports to that country may exceed very much the annual
value of its imports from thence, and though what is called the balance of
trade may be very much in favour of England.
In the way, besides, in which the par of exchange has hitherto been
computed, the ordinary course of exchange can afford no sufficient
indication that the ordinary state of debt and credit is in favour of that
country which seems to have, or which is supposed to have, the ordinary
course of exchange in its favour; or, in other words, the real exchange
may be, and in fact often is, so very different from the computed one,
that, from the course of the latter, no certain conclusion can, upon many
occasions, be drawn concerning that of the former.
When for a sum or money paid in England, containing, according to the
standard of the English mint, a certain number of ounces of pure silver,
you receive a bill for a sum of money to be paid in France, containing,
according to the standard of the French mint, an equal number of ounces of
pure silver, exchange is said to be at par between England and France.
When you pay more, you are supposed to give a premium, and exchange is
said to be against England, and in favour of France. When you pay less,
you are supposed to get a premium, and exchange is said to be against
France, and in favour of England.
But, first, We cannot always judge of the value of the current money of
different countries by the standard of their respective mints. In some it
is more, in others it is less worn, clipt, and otherwise degenerated from
that standard. But the value of the current coin of every country,
compared with that of any other country, is in proportion, not to the
quantity of pure silver which it ought to contain, but to that which it
actually does contain. Before the reformation of the silver coin in King
William’s time, exchange between England and Holland, computed in the
usual manner, according to the standard of their respective mints, was
five-and twenty per cent. against England. But the value of the current
coin of England, as we learn from Mr Lowndes, was at that time rather more
than five-and-twenty per cent. below its standard value. The real
exchange, therefore, may even at that time have been in favour of England,
notwithstanding the computed exchange was so much against it; a smaller
number or ounces of pure silver, actually paid in England, may have
purchased a bill for a greater number of ounces of pure silver to be paid
in Holland, and the man who was supposed to give, may in reality have got
the premium. The French coin was, before the late reformation of the
English gold coin, much less wore than the English, and was perhaps two or
three per cent. nearer its standard. If the computed exchange with France,
therefore, was not more than two or three per cent. against England, the
real exchange might have been in its favour. Since the reformation of the
gold coin, the exchange has been constantly in favour of England, and
against France.
Secondly, In some countries the expense of coinage is defrayed by the
government; in others, it is defrayed by the private people, who carry
their bullion to the mint, and the government even derives some revenue
from the coinage. In England it is defrayed by the government; and if you
carry a pound weight of standard silver to the mint, you get back
sixty-two shillings, containing a pound weight of the like standard
silver. In France a duty of eight per cent. is deducted for the coinage,
which not only defrays the expense of it, but affords a small revenue to
the government. In England, as the coinage costs nothing, the current coin
can never be much more valuable than the quantity of bullion which it
actually contains. In France, the workmanship, as you pay for it, adds to
the value, in the same manner as to that of wrought plate. A sum of French
money, therefore, containing an equal weight of pure silver, is more
valuable than a sum of English money containing an equal weight of pure
silver, and must require more bullion, or other commodities, to purchase
it. Though the current coin of the two countries, therefore, were equally
near the standards of their respective mints, a sum of English money could
not well purchase a sum of French money containing an equal number of
ounces of pure silver, nor, consequently, a bill upon France for such a
sum. If, for such a bill, no more additional money was paid than what was
sufficient to compensate the expense of the French coinage, the real
exchange might be at par between the two countries; their debts and
credits might mutually compensate one another, while 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 was in favour
of France.
Thirdly, and lastly, In some places, as at Amsterdam, Hamburg, Venice,
etc. foreign bills of exchange are paid in what they call bank money;
while in others, as at London, Lisbon, Antwerp, Leghorn, etc. they are
paid in the common currency of the country. What is called bank money, is
always of more value than the same nominal sum of common currency. A
thousand guilders in the bank of Amsterdam, for example, are of more value
than a thousand guilders of Amsterdam currency. The difference between
them is called the agio of the bank, which at Amsterdam is generally about
five per cent. Supposing the current money of the two countries equally
near to the standard of their respective mints, and that the one pays
foreign bills in this common currency, while the other pays them in bank
money, it is evident that the computed exchange may be in favour of that
which pays in bank money, though the real exchange should be in favour of
that which pays in current money; for the same reason that the computed
exchange may be in favour of that which pays in better money, or in money
nearer to its own standard, though the real exchange should be in favour
of that which pays in worse. The computed exchange, before the late
reformation of the gold coin, was generally against London with Amsterdam,
Hamburg, Venice, and, I believe, with all other places which pay in what
is called bank money. It will by no means follow, however, that the real
exchange was against it. Since the reformation of the gold coin, it has
been in favour of London, even with those places. The computed exchange
has generally been in favour of London with Lisbon, Antwerp, Leghorn, and,
if you except France, I believe with most other parts of Europe that pay
in common currency; and it is not improbable that the real exchange was so
too.
Digression concerning Banks of Deposit, particularly concerning that of
Amsterdam.
The currency of a great state, such as France or England, generally
consists almost entirely of its own coin. Should this currency, therefore,
be at any time worn, clipt, or otherwise degraded below its standard
value, the state, by a reformation of its coin, can effectually
re-establish its currency. But the currency of a small state, such as
Genoa or Hamburg, can seldom consist altogether in its own coin, but must
be made up, in a great measure, of the coins of all the neighbouring
states with which its inhabitants have a continual intercourse. Such a
state, therefore, by reforming its coin, will not always be able to reform
its currency. If foreign bills of exchange are paid in this currency, the
uncertain value of any sum, of what is in its own nature so uncertain,
must render the exchange always very much against such a state, its
currency being in all foreign states necessarily valued even below what it
is worth.
In order to remedy the inconvenience to which this disadvantageous
exchange must have subjected their merchants, such small states, when they
began to attend to the interest of trade, have frequently enacted that
foreign bills of exchange of a certain value should be paid, not in common
currency, but by an order upon, or by a transfer in the books of a certain
bank, established upon the credit, and under the protection of the state,
this bank being always obliged to pay, in good and true money, exactly
according to the standard of the state. The banks of Venice, Genoa,
Amsterdam, Hamburg, and Nuremberg, seem to have been all originally
established with this view, though some of them may have afterwards been
made subservient to other purposes. The money of such banks, being better
than the common currency of the country, necessarily bore an agio, which
was greater or smaller, according as the currency was supposed to be more
or less degraded below the standard of the state. The agio of the bank of
Hamburg, for example, which is said to be commonly about fourteen per
cent. is the supposed difference between the good standard money of the
state, and the clipt, worn, and diminished currency, poured into it from
all the neighbouring states.
Before 1609, the great quantity of clipt and worn foreign coin which the
extensive trade of Amsterdam brought from all parts of Europe, reduced the
value of its currency about nine per cent. below that of good money fresh
from the mint. Such money no sooner appeared, than it was melted down or
carried away, as it always is in such circumstances. The merchants, with
plenty of currency, could not always find a sufficient quantity of good
money to pay their bills of exchange; and the value of those bills, in
spite of several regulations which were made to prevent it, became in a
great measure uncertain.
In order to remedy these inconveniencies, a bank was established in 1609,
under the guarantee of the city. This bank received both foreign coin, and
the light and worn coin of the country, at its real intrinsic value in the
good standard money of the country, deducting only so much as was
necessary for defraying the expense of coinage and the other necessary
expense of management. For the value which remained after this small
deduction was made, it gave a credit in its books. This credit was called
bank money, which, as it represented money exactly according to the
standard of the mint, was always of the same real value, and intrinsically
worth more than current money. It was at the same time enacted, that all
bills drawn upon or negotiated at Amsterdam, of the value of 600 guilders
and upwards, should be paid in bank money, which at once took away all
uncertainty in the value of those bills. Every merchant, in consequence of
this regulation, was obliged to keep an account with the bank, in order to
pay his foreign bills of exchange, which necessarily occasioned a certain
demand for bank money.
Bank money, over and above both its intrinsic superiority to currency, and
the additional value which this demand necessarily gives it, has likewise
some other advantages, It is secure from fire, robbery, and other
accidents; the city of Amsterdam is bound for it; it can be paid away by a
simple transfer, without the trouble of counting, or the risk of
transporting it from one place to another. In consequence of those
different advantages, it seems from the beginning to have borne an agio;
and it is generally believed that all the money originally deposited in
the bank, was allowed to remain there, nobody caring to demand payment of
a debt which he could sell for a premium in the market. By demanding
payment of the bank, the owner of a bank credit would lose this premium.
As a shilling fresh from the mint will buy no more goods in the market
than one of our common worn shillings, so the good and true money which
might be brought from the coffers of the bank into those of a private
person, being mixed and confounded with the common currency of the
country, would be of no more value than that currency, from which it could
no longer be readily distinguished. While it remained in the coffers of
the bank, its superiority was known and ascertained. When it had come into
those of a private person, its superiority could not well be ascertained
without more trouble than perhaps the difference was worth. By being
brought from the coffers of the bank, besides, it lost all the other
advantages of bank money; its security, its easy and safe transferability,
its use in paying foreign bills of exchange. Over and above all this, it
could not be brought from those coffers, as will appear by and by, without
previously paying for the keeping.
Those deposits of coin, or those deposits which the bank was bound to
restore in coin, constituted the original capital of the bank, or the
whole value of what was represented by what is called bank money. At
present they are supposed to constitute but a very small part of it. In
order to facilitate the trade in bullion, the bank has been for these many
years in the practice of giving credit in its books, upon deposits of gold
and silver bullion. This credit is generally about five per cent. below
the mint price of such bullion. The bank grants at the same time what is
called a recipice or receipt, entitling the person who makes the deposit,
or the bearer, to take out the bullion again at any time within six
months, upon transferring to the bank a quantity of bank money equal to
that for which credit had been given in its books when the deposit was
made, and upon paying one-fourth per cent. for the keeping, if the deposit
was in silver; and one-half per cent. if it was in gold; but at the same
time declaring, that in default of such payment, and upon the expiration
of this term, the deposit should belong to the bank, at the price at which
it had been received, or for which credit had been given in the transfer
books. What is thus paid for the keeping of the deposit may be considered
as a sort of warehouse rent; and why this warehouse rent should be so much
dearer for gold than for silver, several different reasons have been
assigned. The fineness of gold, it has been said, is more difficult to be
ascertained than that of silver. Frauds are more easily practised, and
occasion a greater loss in the most precious metal. Silver, besides, being
the standard metal, the state, it has been said, wishes to encourage more
the making of deposits of silver than those of gold.
Deposits of bullion are most commonly made when the price is somewhat
lower than ordinary, and they are taken out again when it happens to rise.
In Holland the market price of bullion is generally above the mint price,
for the same reason that it was so in England before the late reformation
of the gold coin. The difference is said to be commonly from about six to
sixteen stivers upon the mark, or eight ounces of silver, of eleven parts
of fine and one part alloy. The bank price, or the credit which the bank
gives for the deposits of such silver (when made in foreign coin, of which
the fineness is well known and ascertained, such as Mexico dollars), is
twenty-two guilders the mark: the mint price is about twenty-three
guilders, and the market price is from twenty-three guilders six, to
twenty-three guilders sixteen stivers, or from two to three per cent.
above the mint price.
The following are the prices at which the bank of Amsterdam at present
{September 1775} receives bullion and coin of different kinds:
SILVER
Mexico dollars ................. 22 Guilders / mark
French crowns .................. 22
English silver coin............. 22
Mexico dollars, new coin........ 21 10
Ducatoons....................... 3 0
Rix-dollars..................... 2 8
Bar silver, containing 11-12ths fine silver, 21 Guilders / mark, and in
this proportion down to 1-4th fine, on which 5 guilders are given. Fine
bars,................. 28 Guilders / mark.
GOLD
Portugal coin................. 310 Guilders / mark
Guineas....................... 310
Louis d’ors, new.............. 310
Ditto old.............. 300
New ducats.................... 4 19 8 per ducat
Bar or ingot gold is received in proportion to its fineness, compared with
the above foreign gold coin. Upon fine bars the bank gives 340 per mark.
In general, however, something more is given upon coin of a known
fineness, than upon gold and silver bars, of which the fineness cannot be
ascertained but by a process of melting and assaying.
The proportions between the bank price, the mint price, and the market
price of gold bullion, are nearly the same. A person can generally sell
his receipt for the difference between the mint price of bullion and the
market price. A receipt for bullion is almost always worth something, and
it very seldom happens, therefore, that anybody suffers his receipts to
expire, or allows his bullion to fall to the bank at the price at which it
had been received, either by not taking it out before the end of the six
months, or by neglecting to pay one fourth or one half per cent. in order
to obtain a new receipt for another six months. This, however, though it
happens seldom, is said to happen sometimes, and more frequently with
regard to gold than with regard to silver, on account of the higher
warehouse rent which is paid for the keeping of the more precious metal.
The person who, by making a deposit of bullion, obtains both a bank credit
and a receipt, pays his bills of exchange as they become due, with his
bank credit; and either sells or keeps his receipt, according as he judges
that the price of bullion is likely to rise or to fall. The receipt and
the bank credit seldom keep long together, and there is no occasion that
they should. The person who has a receipt, and who wants to take out
bullion, finds always plenty of bank credits, or bank money, to buy at the
ordinary price, and the person who has bank money, and wants to take out
bullion, finds receipts always in equal abundance.
The owners of bank credits, and the holders of receipts, constitute two
different sorts of creditors against the bank. The holder of a receipt
cannot draw out the bullion for which it is granted, without re-assigning
to the bank a sum of bank money equal to the price at which the bullion
had been received. If he has no bank money of his own, he must purchase it
of those who have it. The owner of bank money cannot draw out bullion,
without producing to the bank receipts for the quantity which he wants. If
he has none of his own, he must buy them of those who have them. The
holder of a receipt, when he purchases bank money, purchases the power of
taking out a quantity of bullion, of which the mint price is five per
cent. above the bank price. The agio of five per cent. therefore, which he
commonly pays for it, is paid, not for an imaginary, but for a real value.
The owner of bank money, when he purchases a receipt, purchases the power
of taking out a quantity of bullion, of which the market price is commonly
from two to three per cent. above the mint price. The price which he pays
for it, therefore, is paid likewise for a real value. The price of the
receipt, and the price of the bank money, compound or make up between them
the full value or price of the bullion.
Upon deposits of the coin current in the country, the bank grant receipts
likewise, as well as bank credits; but those receipts are frequently of no
value and will bring no price in the market. Upon ducatoons, for example,
which in the currency pass for three guilders three stivers each, the bank
gives a credit of three guilders only, or five per cent. below their
current value. It grants a receipt likewise, entitling the bearer to take
out the number of ducatoons deposited at any time within six months, upon
paying one fourth per cent. for the keeping. This receipt will frequently
bring no price in the market. Three guilders, bank money, generally sell
in the market for three guilders three stivers, the full value of the
ducatoons, if they were taken out of the bank; and before they can be
taken out, one-fourth per cent. must be paid for the keeping, which would
be mere loss to the holder of the receipt. If the agio of the bank,
however, should at any time fall to three per cent. such receipts might
bring some price in the market, and might sell for one and three-fourths
per cent. But the agio of the bank being now generally about five per
cent. such receipts are frequently allowed to expire, or, as they express
it, to fall to the bank. The receipts which are given for deposits of gold
ducats fall to it yet more frequently, because a higher warehouse rent, or
one half per cent. must be paid for the keeping of them, before they can
be taken out again. The five per cent. which the bank gains, when deposits
either of coin or bullion are allowed to fall to it, maybe considered as
the warehouse rent for the perpetual keeping of such deposits.
The sum of bank money, for which the receipts are expired, must be very
considerable. It must comprehend the whole original capital of the bank,
which, it is generally supposed, has been allowed to remain there from the
time it was first deposited, nobody caring either to renew his receipt, or
to take out his deposit, as, for the reasons already assigned, neither the
one nor the other could be done without loss. But whatever may be the
amount of this sum, the proportion which it bears to the whole mass of
bank money is supposed to be very small. The bank of Amsterdam has, for
these many years past, been the great warehouse of Europe for bullion, for
which the receipts are very seldom allowed to expire, or, as they express
it, to fall to the bank. The far greater part of the bank money, or of the
credits upon the books of the bank, is supposed to have been created, for
these many years past, by such deposits, which the dealers in bullion are
continually both making and withdrawing.
No demand can be made upon the bank, but by means of a recipice or
receipt. The smaller mass of bank money, for which the receipts are
expired, is mixed and confounded with the much greater mass for which they
are still in force; so that, though there may be a considerable sum of
bank money, for which there are no receipts, there is no specific sum or
portion of it which may not at any time be demanded by one. The bank
cannot be debtor to two persons for the same thing; and the owner of bank
money who has no receipt, cannot demand payment of the bank till he buys
one. In ordinary and quiet times, he can find no difficulty in getting one
to buy at the market price, which generally corresponds with the price at
which he can sell the coin or bullion it entitles him to take out of the
bank.
It might be otherwise during a public calamity; an invasion, for example,
such as that of the French in 1672. The owners of bank money being then
all eager to draw it out of the bank, in order to have it in their own
keeping, the demand for receipts might raise their price to an exorbitant
height. The holders of them might form extravagant expectations, and,
instead of two or three per cent. demand half the bank money for which
credit had been given upon the deposits that the receipts had respectively
been granted for. The enemy, informed of the constitution of the bank,
might even buy them up, in order to prevent the carrying away of the
treasure. In such emergencies, the bank, it is supposed, would break
through its ordinary rule of making payment only to the holders of
receipts. The holders of receipts, who had no bank money, must have
received within two or three per cent. of the value of the deposit for
which their respective receipts had been granted. The bank, therefore, it
is said, would in this case make no scruple of paying, either with money
or bullion, the full value of what the owners of bank money, who could get
no receipts, were credited for in its books; paying, at the same time, two
or three per cent. to such holders of receipts as had no bank money, that
being the whole value which, in this state of things, could justly be
supposed due to them.
Even in ordinary and quiet times, it is the interest of the holders of
receipts to depress the agio, in order either to buy bank money (and
consequently the bullion which their receipts would then enable them to
take out of the bank ) so much cheaper, or to sell their receipts to those
who have bank money, and who want to take out bullion, so much dearer; the
price of a receipt being generally equal to the difference between the
market price of bank money and that of the coin or bullion for which the
receipt had been granted. It is the interest of the owners of bank money,
on the contrary, to raise the agio, in order either to sell their bank
money so much dearer, or to buy a receipt so much cheaper. To prevent the
stock-jobbing tricks which those opposite interests might sometimes
occasion, the bank has of late years come to the resolution, to sell at
all times bank money for currency at five per cent. agio, and to buy it in
again at four per cent. agio. In consequence of this resolution, the agio
can never either rise above five, or sink below four per cent.; and the
proportion between the market price of bank and that of current money is
kept at all times very near the proportion between their intrinsic values.
Before this resolution was taken, the market price of bank money used
sometimes to rise so high as nine per cent. agio, and sometimes to sink so
low as par, according as opposite interests happened to influence the
market.
The bank of Amsterdam professes to lend out no part of what is deposited
with it, but for every guilder for which it gives credit in its books, to
keep in its repositories the value of a guilder either in money or
bullion. That it keeps in its repositories all the money or bullion for
which there are receipts in force for which it is at all times liable to
be called upon, and which in reality is continually going from it, and
returning to it again, cannot well be doubted. But whether it does so
likewise with regard to that part of its capital for which the receipts
are long ago expired, for which, in ordinary and quiet times, it cannot be
called upon, and which, in reality, is very likely to remain with it for
ever, or as long as the states of the United Provinces subsist, may
perhaps appear more uncertain. At Amsterdam, however, no point of faith is
better established than that, for every guilder circulated as bank money,
there is a correspondent guilder in gold or silver to be found in the
treasures of the bank. The city is guarantee that it should be so. The
bank is under the direction of the four reigning burgomasters who are
changed every year. Each new set of burgomasters visits the treasure,
compares it with the books, receives it upon oath, and delivers it over,
with the same awful solemnity to the set which succeeds; and in that sober
and religious country, oaths are not yet disregarded. A rotation of this
kind seems alone a sufficient security against any practices which cannot
be avowed. Amidst all the revolutions which faction has ever occasioned in
the government of Amsterdam, the prevailing party has at no time accused
their predecessors of infidelity in the administration of the bank. No
accusation could have affected more deeply the reputation and fortune of
the disgraced party; and if such an accusation could have been supported,
we may be assured that it would have been brought. In 1672, when the
French king was at Utrecht, the bank of Amsterdam paid so readily, as left
no doubt of the fidelity with which it had observed its engagements. Some
of the pieces which were then brought from its repositories, appeared to
have been scorched with the fire which happened in the town-house soon
after the bank was established. Those pieces, therefore, must have lain
there from that time.
What may be the amount of the treasure in the bank, is a question which
has long employed the speculations of the curious. Nothing but conjecture
can be offered concerning it. It is generally reckoned, that there are
about 2000 people who keep accounts with the bank; and allowing them to
have, one with another, the value of £1500 sterling lying upon their
respective accounts (a very large allowance), the whole quantity of bank
money, and consequently of treasure in the bank, will amount to about
£3,000,000 sterling, or, at eleven guilders the pound sterling, 33,000,000
of guilders; a great sum, and sufficient to carry on a very extensive
circulation, but vastly below the extravagant ideas which some people have
formed of this treasure.
The city of Amsterdam derives a considerable revenue from the bank.
Besides what may be called the warehouse rent above mentioned, each
person, upon first opening an account with the bank, pays a fee of ten
guilders; and for every new account, three guilders three stivers; for
every transfer, two stivers; and if the transfer is for less than 300
guilders, six stivers, in order to discourage the multiplicity of small
transactions. The person who neglects to balance his account twice in the
year, forfeits twenty-five guilders. The person who orders a transfer for
more than is upon his account, is obliged to pay three per cent. for the
sum overdrawn, and his order is set aside into the bargain. The bank is
supposed, too, to make a considerable profit by the sale of the foreign
coin or bullion which sometimes falls to it by the expiring of receipts,
and which is always kept till it can be sold with advantage. It makes a
profit, likewise, by selling bank money at five per cent. agio, and buying
it in at four. These different emoluments amount to a good deal more than
what is necessary for paying the salaries of officers, and defraying the
expense of management. What is paid for the keeping of bullion upon
receipts, is alone supposed to amount to a neat annual revenue of between
150,000 and 200,000 guilders. Public utility, however, and not revenue,
was the original object of this institution. Its object was to relieve the
merchants from the inconvenience of a disadvantageous exchange. The
revenue which has arisen from it was unforeseen, and may be considered as
accidental. But it is now time to return from this long digression, into
which I have been insensibly led, in endeavouring to explain the reasons
why the exchange between the countries which pay in what is called bank
money, and those which pay in common currency, should generally appear to
be in favour of the former, and against the latter. The former pay in a
species of money, of which the intrinsic value is always the same, and
exactly agreeable to the standard of their respective mints; the latter is
a species of money, of which the intrinsic value is continually varying,
and is almost always more or less below that standard.
PART II.—Of the Unreasonableness of those extraordinary Restraints,
upon other Principles.
In the foregoing part of this chapter, I have endeavoured to show, even
upon the principles of the commercial system, how unnecessary it is to lay
extraordinary restraints upon the importation of goods from those
countries with which the balance of trade is supposed to be
disadvantageous.
Nothing, however, can be more absurd than this whole doctrine of the
balance of trade, upon which, not only these restraints, but almost all
the other regulations of commerce, are founded. When two places trade with
one another, this doctrine supposes that, if the balance be even, neither
of them either loses or gains; but if it leans in any degree to one side,
that one of them loses, and the other gains, in proportion to its
declension from the exact equilibrium. Both suppositions are false. A
trade, which is forced by means of bounties and monopolies, may be, and
commonly is, disadvantageous to the country in whose favour it is meant to
be established, as I shall endeavour to show hereafter. But that trade
which, without force or constraint, is naturally and regularly carried on
between any two places, is always advantageous, though not always equally
so, to both.
By advantage or gain, I understand, not the increase of the quantity of
gold and silver, but that of the exchangeable value of the annual produce
of the land and labour of the country, or the increase of the annual
revenue of its inhabitants.
If the balance be even, and if the trade between the two places consist
altogether in the exchange of their native commodities, they will, upon
most occasions, not only both gain, but they will gain equally, or very
nearly equally; each will, in this case, afford a market for a part of the
surplus produce of the other; each will replace a capital which had been
employed in raising and preparing for the market this part of the surplus
produce of the other, and which had been distributed among, and given
revenue and maintenance to, a certain number of its inhabitants. Some part
of the inhabitants of each, therefore, will directly derive their revenue
and maintenance from the other. As the commodities exchanged, too, are
supposed to be of equal value, so the two capitals employed in the trade
will, upon most occasions, be equal, or very nearly equal; and both being
employed in raising the native commodities of the two countries, the
revenue and maintenance which their distribution will afford to the
inhabitants of each will be equal, or very nearly equal. This revenue and
maintenance, thus mutually afforded, will be greater or smaller, in
proportion to the extent of their dealings. If these should annually
amount to £100,000, for example, or to £1,000,000, on each side, each of
them will afford an annual revenue, in the one case, of £100,000, and, in
the other, of £1,000,000, to the inhabitants of the other.
If their trade should be of such a nature, that one of them exported to
the other nothing but native commodities, while the returns of that other
consisted altogether in foreign goods; the balance, in this case, would
still be supposed even, commodities being paid for with commodities. They
would, in this case too, both gain, but they would not gain equally; and
the inhabitants of the country which exported nothing but native
commodities, would derive the greatest revenue from the trade. If England,
for example, should import from France nothing but the native commodities
of that country, and not having such commodities of its own as were in
demand there, should annually repay them by sending thither a large
quantity of foreign goods, tobacco, we shall suppose, and East India
goods; this trade, though it would give some revenue to the inhabitants of
both countries, would give more to those of France than to those of
England. The whole French capital annually employed in it would annually
be distributed among the people of France; but that part of the English
capital only, which was employed in producing the English commodities with
which those foreign goods were purchased, would be annually distributed
among the people of England. The greater part of it would replace the
capitals which had been employed in Virginia, Indostan, and China, and
which had given revenue and maintenance to the inhabitants of those
distant countries. If the capitals were equal, or nearly equal, therefore,
this employment of the French capital would augment much more the revenue
of the people of France, than that of the English capital would the
revenue of the people of England. France would, in this case, carry on a
direct foreign trade of consumption with England; whereas England would
carry on a round-about trade of the same kind with France. The different
effects of a capital employed in the direct, and of one employed in the
round-about foreign trade of consumption, have already been fully
explained.
There is not, probably, between any two countries, a trade which consists
altogether in the exchange, either of native commodities on both sides, or
of native commodities on one side, and of foreign goods on the other.
Almost all countries exchange with one another, partly native and partly
foreign goods. That country, however, in whose cargoes there is the
greatest proportion of native, and the least of foreign goods, will always
be the principal gainer.
If it was not with tobacco and East India goods, but with gold and silver,
that England paid for the commodities annually imported from France, the
balance, in this case, would be supposed uneven, commodities not being
paid for with commodities, but with gold and silver. The trade, however,
would in this case, as in the foregoing, give some revenue to the
inhabitants of both countries, but more to those of France than to those
of England. It would give some revenue to those of England. The capital
which had been employed in producing the English goods that purchased this
gold and silver, the capital which had been distributed among, and given
revenue to, certain inhabitants of England, would thereby be replaced, and
enabled to continue that employment. The whole capital of England would no
more be diminished by this exportation of gold and silver, than by the
exportation of an equal value of any other goods. On the contrary, it
would, in most cases, be augmented. No goods are sent abroad but those for
which the demand is supposed to be greater abroad than at home, and of
which the returns, consequently, it is expected, will be of more value at
home than the commodities exported. If the tobacco which in England is
worth only £100,000, when sent to France, will purchase wine which is in
England worth £110,000, the exchange will augment the capital of England
by £10,000. If £100,000 of English gold, in the same manner, purchase
French wine, which in England is worth £110,000, this exchange will
equally augment the capital of England by £10,000. As a merchant, who has
£110,000 worth of wine in his cellar, is a richer man than he who has only
£100,000 worth of tobacco in his warehouse, so is he likewise a richer man
than he who has only £100,000 worth of gold in his coffers. He can put
into motion a greater quantity of industry, and give revenue, maintenance,
and employment, to a greater number of people, than either of the other
two. But the capital of the country is equal to the capital of all its
different inhabitants; and the quantity of industry which can be annually
maintained in it is equal to what all those different capitals can
maintain. Both the capital of the country, therefore, and the quantity of
industry which can be annually maintained in it, must generally be
augmented by this exchange. It would, indeed, be more advantageous for
England that it could purchase the wines of France with its own hardware
and broad cloth, than with either the tobacco of Virginia, or the gold and
silver of Brazil and Peru. A direct foreign trade of consumption is always
more advantageous than a round-about one. But a round-about foreign trade
of consumption, which is carried on with gold and silver, does not seem to
be less advantageous than any other equally round-about one. Neither is a
country which has no mines, more likely to be exhausted of gold and silver
by this annual exportation of those metals, than one which does not grow
tobacco by the like annual exportation of that plant. As a country which
has wherewithal to buy tobacco will never be long in want of it, so
neither will one be long in want of gold and silver which has wherewithal
to purchase those metals.
It is a losing trade, it is said, which a workman carries on with the
alehouse; and the trade which a manufacturing nation would naturally carry
on with a wine country, may be considered as a trade of the same nature. I
answer, that the trade with the alehouse is not necessarily a losing
trade. In its own nature it is just as advantageous as any other, though,
perhaps, somewhat more liable to be abused. The employment of a brewer,
and even that of a retailer of fermented liquors, are as necessary
divisions of labour as any other. It will generally be more advantageous
for a workman to buy of the brewer the quantity he has occasion for, than
to brew it himself; and if he is a poor workman, it will generally be more
advantageous for him to buy it by little and little of the retailer, than
a large quantity of the brewer. He may no doubt buy too much of either, as
he may of any other dealers in his neighbourhood; of the butcher, if he is
a glutton; or of the draper, if he affects to be a beau among his
companions. It is advantageous to the great body of workmen,
notwithstanding, that all these trades should be free, though this freedom
may be abused in all of them, and is more likely to be so, perhaps, in
some than in others. Though individuals, besides, may sometimes ruin their
fortunes by an excessive consumption of fermented liquors, there seems to
be no risk that a nation should do so. Though in every country there are
many people who spend upon such liquors more than they can afford, there
are always many more who spend less. It deserves to be remarked, too, that
if we consult experience, the cheapness of wine seems to be a cause, not
of drunkenness, but of sobriety. The inhabitants of the wine countries are
in general the soberest people of Europe; witness the Spaniards, the
Italians, and the inhabitants of the southern provinces of France. People
are seldom guilty of excess in what is their daily fare. Nobody affects
the character of liberality and good fellowship, by being profuse of a
liquor which is as cheap as small beer. On the contrary, in the countries
which, either from excessive heat or cold, produce no grapes, and where
wine consequently is dear and a rarity, drunkenness is a common vice, as
among the northern nations, and all those who live between the tropics,
the negroes, for example on the coast of Guinea. When a French regiment
comes from some of the northern provinces of France, where wine is
somewhat dear, to be quartered in the southern, where it is very cheap,
the soldiers, I have frequently heard it observed, are at first debauched
by the cheapness and novelty of good wine; but after a few months
residence, the greater part of them become as sober as the rest of the
inhabitants. Were the duties upon foreign wines, and the excises upon
malt, beer, and ale, to be taken away all at once, it might, in the same
manner, occasion in Great Britain a pretty general and temporary
drunkenness among the middling and inferior ranks of people, which would
probably be soon followed by a permanent and almost universal sobriety. At
present, drunkenness is by no means the vice of people of fashion, or of
those who can easily afford the most expensive liquors. A gentleman drunk
with ale has scarce ever been seen among us. The restraints upon the wine
trade in Great Britain, besides, do not so much seem calculated to hinder
the people from going, if I may say so, to the alehouse, as from going
where they can buy the best and cheapest liquor. They favour the wine
trade of Portugal, and discourage that of France. The Portuguese, it is
said, indeed, are better customers for our manufactures than the French,
and should therefore be encouraged in preference to them. As they give us
their custom, it is pretended we should give them ours. The sneaking arts
of underling tradesmen are thus erected into political maxims for the
conduct of a great empire; for it is the most underling tradesmen only who
make it a rule to employ chiefly their own customers. A great trader
purchases his goods always where they are cheapest and best, without
regard to any little interest of this kind.
By such maxims as these, however, nations have been taught that their
interest consisted in beggaring all their neighbours. Each nation has been
made to look with an invidious eye upon the prosperity of all the nations
with which it trades, and to consider their gain as its own loss.
Commerce, which ought naturally to be, among nations as among individuals,
a bond of union and friendship, has become the most fertile source of
discord and animosity. The capricious ambition of kings and ministers has
not, during the present and the preceding century, been more fatal to the
repose of Europe, than the impertinent jealousy of merchants and
manufacturers. The violence and injustice of the rulers of mankind is an
ancient evil, for which, I am afraid, the nature of human affairs can
scarce admit of a remedy: but the mean rapacity, the monopolizing spirit,
of merchants and manufacturers, who neither are, nor ought to be, the
rulers of mankind, though it cannot, perhaps, be corrected, may very
easily be prevented from disturbing the tranquillity of anybody but
themselves.
That it was the spirit of monopoly which originally both invented and
propagated this doctrine, cannot be doubted and they who first taught it,
were by no means such fools as they who believed it. In every country it
always is, and must be, the interest of the great body of the people, to
buy whatever they want of those who sell it cheapest. The proposition is
so very manifest, that it seems ridiculous to take any pains to prove it;
nor could it ever have been called in question, had not the interested
sophistry of merchants and manufacturers confounded the common sense of
mankind. Their interest is, in this respect, directly opposite to that of
the great body of the people. As it is the interest of the freemen of a
corporation to hinder the rest of the inhabitants from employing any
workmen but themselves; so it is the interest of the merchants and
manufacturers of every country to secure to themselves the monopoly of the
home market. Hence, in Great Britain, and in most other European
countries, the extraordinary duties upon almost all goods imported by
alien merchants. Hence the high duties and prohibitions upon all those
foreign manufactures which can come into competition with our own. Hence,
too, the extraordinary restraints upon the importation of almost all sorts
of goods from those countries with which the balance of trade is supposed
to be disadvantageous; that is, from those against whom national animosity
happens ta be most violently inflamed.
The wealth of neighbouring nations, however, though dangerous in war and
politics, is certainly advantageous in trade. In a state of hostility, it
may enable our enemies to maintain fleets and armies superior to our own;
but in a state of peace and commerce it must likewise enable them to
exchange with us to a greater value, and to afford a better market, either
for the immediate produce of our own industry, or for whatever is
purchased with that produce. As a rich man is likely to be a better
customer to the industrious people in his neighbourhood, than a poor, so
is likewise a rich nation. A rich man, indeed, who is himself a
manufacturer, is a very dangerous neighbour to all those who deal in the
same way. All the rest of the neighbourhood, however, by far the greatest
number, profit by the good market which his expense affords them. They
even profit by his underselling the poorer workmen who deal in the same
way with him. The manufacturers of a rich nation, in the same manner, may
no doubt be very dangerous rivals to those of their neighbours. This very
competition, however, is advantageous to the great body of the people, who
profit greatly, besides, by the good market which the great expense of
such a nation affords them in every other way. Private people, who want to
make a fortune, never think of retiring to the remote and poor provinces
of the country, but resort either to the capital, or to some of the great
commercial towns. They know, that where little wealth circulates, there is
little to be got; but that where a great deal is in motion, some share of
it may fall to them. The same maxim which would in this manner direct the
common sense of one, or ten, or twenty individuals, should regulate the
judgment of one, or ten, or twenty millions, and should make a whole
nation regard the riches of its neighbours, as a probable cause and
occasion for itself to acquire riches. A nation that would enrich itself
by foreign trade, is certainly most likely to do so, when its neighbours
are all rich, industrious and commercial nations. A great nation,
surrounded on all sides by wandering savages and poor barbarians, might,
no doubt, acquire riches by the cultivation of its own lands, and by its
own interior commerce, but not by foreign trade. It seems to have been in
this manner that the ancient Egyptians and the modern Chinese acquired
their great wealth. The ancient Egyptians, it is said, neglected foreign
commerce, and the modern Chinese, it is known, hold it in the utmost
contempt, and scarce deign to afford it the decent protection of the laws.
The modern maxims of foreign commerce, by aiming at the impoverishment of
all our neighbours, so far as they are capable of producing their intended
effect, tend to render that very commerce insignificant and contemptible.
It is in consequence of these maxims, that the commerce between France and
England has, in both countries, been subjected to so many discouragements
and restraints. If those two countries, however, were to consider their
real interest, without either mercantile jealousy or national animosity,
the commerce of France might be more advantageous to Great Britain than
that of any other country, and, for the same reason, that of Great Britain
to France. France is the nearest neighbour to Great Britain. In the trade
between the southern coast of England and the northern and north-western
coast of France, the returns might be expected, in the same manner as in
the inland trade, four, five, or six times in the year. The capital,
therefore, employed in this trade could, in each of the two countries,
keep in motion four, five, or six times the quantity of industry, and
afford employment and subsistence to four, five, or six times the number
of people, which all equal capital could do in the greater part of the
other branches of foreign trade. Between the parts of France and Great
Britain most remote from one another, the returns might be expected, at
least, once in the year; and even this trade would so far be at least
equally advantageous, as the greater part of the other branches of our
foreign European trade. It would be, at least, three times more
advantageous than the boasted trade with our North American colonies, in
which the returns were seldom made in less than three years, frequently
not in less than four or five years. France, besides, is supposed to
contain 24,000,000 of inhabitants. Our North American colonies were never
supposed to contain more than 3,000,000; and France is a much richer
country than North America; though, on account of the more unequal
distribution of riches, there is much more poverty and beggary in the one
country than in the other. France, therefore, could afford a market at
least eight times more extensive, and, on account of the superior
frequency of the returns, four-and-twenty times more advantageous than
that which our North American colonies ever afforded. The trade of Great
Britain would be just as advantageous to France, and, in proportion to the
wealth, population, and proximity of the respective countries, would have
the same superiority over that which France carries on with her own
colonies. Such is the very great difference between that trade which the
wisdom of both nations has thought proper to discourage, and that which it
has favoured the most.
But the very same circumstances which would have rendered an open and free
commerce between the two countries so advantageous to both, have
occasioned the principal obstructions to that commerce. Being neighbours,
they are necessarily enemies, and the wealth and power of each becomes,
upon that account, more formidable to the other; and what would increase
the advantage of national friendship, serves only to inflame the violence
of national animosity. They are both rich and industrious nations; and the
merchants and manufacturers of each dread the competition of the skill and
activity of those of the other. Mercantile jealousy is excited, and both
inflames, and is itself inflamed, by the violence of national animosity,
and the traders of both countries have announced, with all the passionate
confidence of interested falsehood, the certain ruin of each, in
consequence of that unfavourable balance of trade, which, they pretend,
would be the infallible effect of an unrestrained commerce with the other.
There is no commercial country in Europe, of which the approaching ruin
has not frequently been foretold by the pretended doctors of this system,
from all unfavourably balance of trade. After all the anxiety, however,
which they have excited about this, after all the vain attempts of almost
all trading nations to turn that balance in their own favour, and against
their neighbours, it does not appear that any one nation in Europe has
been, in any respect, impoverished by this cause. Every town and country,
on the contrary, in proportion as they have opened their ports to all
nations, instead of being ruined by this free trade, as the principles of
the commercial system would lead us to expect, have been enriched by it.
Though there are in Europe indeed, a few towns which, in same respects,
deserve the name of free ports, there is no country which does so.
Holland, perhaps, approaches the nearest to this character of any, though
still very remote from it; and Holland, it is acknowledged, not only
derives its whole wealth, but a great part of its necessary subsistence,
from foreign trade.
There is another balance, indeed, which has already been explained, very
different from the balance of trade, and which, according as it happens to
be either favourable or unfavourable, necessarily occasions the prosperity
or decay of every nation. This is the balance of the annual produce and
consumption. If the exchangeable value of the annual produce, it has
already been observed, exceeds that of the annual consumption, the capital
of the society must annually increase in proportion to this excess. The
society in this case lives within its revenue; and what is annually saved
out of its revenue, is naturally added to its capital, and employed so as
to increase still further the annual produce. If the exchangeable value of
the annual produce, on the contrary, fall short of the annual consumption,
the capital of the society must annually decay in proportion to this
deficiency. The expense of the society, in this case, exceeds its revenue,
and necessarily encroaches upon its capital. Its capital, therefore, must
necessarily decay, and, together with it, the exchangeable value of the
annual produce of its industry.
This balance of produce and consumption is entirely different from what is
called the balance of trade. It might take place in a nation which had no
foreign trade, but which was entirely separated from all the world. It may
take place in the whole globe of the earth, of which the wealth,
population, and improvement, may be either gradually increasing or
gradually decaying.
The balance of produce and consumption may be constantly in favour of a
nation, though what is called the balance of trade be generally against
it. A nation may import to a greater value than it exports for half a
century, perhaps, together; the gold and silver which comes into it during
all this time, may be all immediately sent out of it; its circulating coin
may gradually decay, different sorts of paper money being substituted in
its place, and even the debts, too, which it contracts in the principal
nations with whom it deals, may be gradually increasing; and yet its real
wealth, the exchangeable value of the annual produce of its lands and
labour, may, during the same period, have been increasing in a much
greater proportion. The state of our North American colonies, and of the
trade which they carried on with Great Britain, before the commencement of
the present disturbances, {This paragraph was written in the year 1775.}
may serve as a proof that this is by no means an impossible supposition.
Extracted Entities
--- ENTITY: balance of trade doctrine ---
Balance of Trade Doctrine
Definition
The mercantilist theory that a nation's economic prosperity depends on exporting more goods and services than it imports, thereby accumulating gold and silver through a favourable balance of trade. This doctrine assumes that international trade is a zero-sum game where one nation's gain is another's loss.
Source Chapter
Book IV, Chapter 3
Context
Smith's central target of critique in this chapter, which he argues is based on "national prejudice and animosity" rather than sound economic reasoning. He demonstrates how the doctrine leads to irrational trade restrictions and mutual impoverishment between nations.
Economic Domain
General Theory
--- ENTITY: extraordinary restraints on importation ---
Extraordinary Restraints on Importation
Definition
Government-imposed restrictions on the import of goods from specific countries, including prohibitions, higher duties, and warehousing requirements, designed to protect domestic industries and maintain a favourable balance of trade. These restraints are applied selectively based on political and commercial considerations rather than economic efficiency.
Source Chapter
Book IV, Chapter 3
Context
The primary subject of Smith's critique, exemplified by British restrictions on French goods while allowing imports from other countries. Smith argues these restraints are "unreasonable" even according to the principles of the commercial system that justifies them.
Economic Domain
Regulation
--- ENTITY: computed exchange rate ---
Computed Exchange Rate
Definition
The theoretical exchange rate between two currencies calculated based on the official mint standards of each country, assuming coins contain their full legal weight of precious metal. This differs from the real exchange rate, which reflects the actual market value of debased or worn currency.
Source Chapter
Book IV, Chapter 3
Context
Part of Smith's analysis of why exchange rates can be misleading indicators of trade balances. He explains that computed exchange rates based on mint standards often diverge significantly from real exchange rates reflecting the actual condition of circulating currency.
Economic Domain
Exchange
--- ENTITY: real exchange rate ---
Real Exchange Rate
Definition
The actual market-determined exchange rate between two currencies, reflecting the true value of the circulating money in each country, which may differ from the official mint standard due to wear, clipping, or debasement of coins. This rate determines the true cost of international transactions.
Source Chapter
Book IV, Chapter 3
Context
Smith uses this concept to demonstrate that apparent trade imbalances suggested by computed exchange rates may be misleading, as the real exchange rate often tells a different story about the actual flow of value between nations.
Economic Domain
Exchange
--- ENTITY: agio of bank money ---
Agio of Bank Money
Definition
The premium or discount at which bank money (representing deposits of precious metal at banks like Amsterdam) trades relative to current currency in circulation. This premium reflects the superior quality and reliability of bank money compared to debased or worn circulating currency.
Source Chapter
Book IV, Chapter 3
Context
Smith explains how the agio varies based on the relative quality of bank money versus current currency, and how banks like Amsterdam's manipulate the agio to prevent stock-jobbing while maintaining currency stability.
Economic Domain
Exchange
--- ENTITY: bank money ---
Bank Money
Definition
A form of money represented by credit in the books of a bank, backed by actual deposits of precious metal, which maintains a stable value equal to the mint standard. Bank money is superior to current currency because it is not subject to wear, clipping, or debasement.
Source Chapter
Book IV, Chapter 3
Context
Smith describes the Bank of Amsterdam as the archetype, explaining how bank money provides security, transferability, and a reliable medium for international trade, while also generating revenue for the city through various fees and the interest on deposits.
Economic Domain
Exchange
--- ENTITY: warehouse rent for bullion deposits ---
Warehouse Rent for Bullion Deposits
Definition
The fee charged by banks for storing precious metal deposits, typically higher for gold than silver due to greater security risks and the difficulty of assaying gold's fineness. This fee represents the cost of maintaining the bank's bullion reserves that back its money-issuing operations.
Source Chapter
Book IV, Chapter 3
Context
Smith explains why warehouse rent is higher for gold deposits, citing the greater difficulty in ascertaining gold's fineness and the higher risk of fraud, while also noting that this fee contributes to the bank's revenue stream.
Economic Domain
Exchange
--- ENTITY: round-about foreign trade of consumption ---
Round-about Foreign Trade of Consumption
Definition
A trade pattern where a country imports goods by first exporting its own products to a third country, receiving payment in precious metals, then using those metals to purchase the desired imports. This contrasts with direct trade where imports are paid for with domestic exports.
Source Chapter
Book IV, Chapter 3
Context
Smith argues that round-about trade is less advantageous than direct trade, using the example of England potentially importing French goods through tobacco and East India goods rather than through direct English manufactures.
Economic Domain
Exchange
--- ENTITY: direct foreign trade of consumption ---
Direct Foreign Trade of Consumption
Definition
A trade pattern where a country directly exchanges its own products for the products it desires from another country, without intermediate transactions through third parties or the use of precious metals as intermediaries.
Source Chapter
Book IV, Chapter 3
Context
Smith presents this as the most advantageous form of trade, arguing that England would benefit more from directly exchanging its hardware and cloth for French wines than through round-about routes involving tobacco or precious metals.
Economic Domain
Exchange
--- ENTITY: smuggling as principal import method ---
Smuggling as Principal Import Method
Definition
The illegal importation of goods across borders to avoid tariffs, prohibitions, or other trade restrictions, which becomes the dominant method of trade when legal commerce is severely restricted by government policies.
Source Chapter
Book IV, Chapter 3
Context
Smith observes that mutual trade restrictions between Britain and France have driven legitimate commerce underground, making smugglers the primary importers of each other's goods, thus defeating the intended purpose of the restrictions.
Economic Domain
Exchange
--- ENTITY: commercial system principles ---
Commercial System Principles
Definition
The mercantilist framework of economic thought that prioritizes the accumulation of precious metals through trade surpluses, government intervention in commerce, and the use of tariffs, bounties, and monopolies to direct economic activity toward national enrichment.
Source Chapter
Book IV, Chapter 3
Context
Smith critiques this system throughout the chapter, showing how its principles lead to unreasonable trade restrictions and mutual hostility between nations, while failing to achieve their stated objectives of national wealth accumulation.
Economic Domain
General Theory
--- ENTITY: national prejudice and animosity in trade ---
National Prejudice and Animosity in Trade
Definition
The emotional and political factors that influence trade policy, where merchants and manufacturers promote restrictions against foreign competitors based on nationalistic sentiments rather than economic reasoning, leading to mutually harmful trade wars.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as a primary driver of unreasonable trade restrictions, arguing that merchants exploit national prejudices to secure monopolies and that governments foolishly adopt these policies based on animosity rather than economic self-interest.
Economic Domain
Regulation
--- ENTITY: free ports ---
Free Ports
Definition
Designated port cities where goods can be imported and exported with minimal or no customs duties, allowing for unrestricted international trade within those specific locations while maintaining restrictions elsewhere in the country.
Source Chapter
Book IV, Chapter 3
Context
Smith notes that while some European towns function as free ports, no entire country adopts this approach, despite evidence that free trade enriches rather than ruins trading communities.
Economic Domain
Exchange
--- ENTITY: balance of produce and consumption ---
Balance of Produce and Consumption
Definition
The relationship between a nation's annual production of goods and services and its annual consumption of those goods and services, which determines whether national capital is increasing (when production exceeds consumption) or decreasing (when consumption exceeds production).
Source Chapter
Book IV, Chapter 3
Context
Smith distinguishes this from the balance of trade, arguing that a nation can have a favourable balance of production and consumption while simultaneously running trade deficits for extended periods, as capital accumulation continues despite negative trade balances.
Economic Domain
General Theory
--- ENTITY: annual produce of land and labour ---
Annual Produce of Land and Labour
Definition
The total value of goods and services produced by a nation's economy in a given year through the combined efforts of agricultural and manufacturing activities, representing the fundamental source of national wealth and the basis for determining economic prosperity.
Source Chapter
Book IV, Chapter 3
Context
Smith uses this concept to argue that true national wealth is measured by productive output rather than by the accumulation of precious metals, and that trade restrictions that reduce productive efficiency ultimately diminish this annual produce.
Economic Domain
Production
--- ENTITY: annual consumption of goods ---
Annual Consumption of Goods
Definition
The total value of goods and services consumed by a nation's population in a given year, including both necessities and luxuries, which when compared to annual production determines whether national capital is being accumulated or depleted.
Source Chapter
Book IV, Chapter 3
Context
Smith argues that the relationship between annual consumption and annual production is a more accurate indicator of national economic health than the balance of trade, as it directly measures whether a society is living within its means.
Economic Domain
Consumption
--- ENTITY: capital decay through excessive consumption ---
Capital Decay Through Excessive Consumption
Definition
The process by which a nation's productive resources are diminished when annual consumption exceeds annual production, forcing society to consume its capital stock to maintain current living standards, leading to long-term economic decline.
Source Chapter
Book IV, Chapter 3
Context
Smith warns that when expenses exceed revenue, capital must necessarily decay, and this principle applies to nations as well as individuals, making sustainable consumption levels essential for long-term prosperity.
Economic Domain
Accumulation
--- ENTITY: capital accumulation through frugality ---
Capital Accumulation Through Frugality
Definition
The process by which national wealth grows when annual production exceeds annual consumption, allowing the surplus to be saved and invested in productive capital, thereby increasing the nation's capacity for future production and wealth creation.
Source Chapter
Book IV, Chapter 3
Context
Smith presents this as the natural mechanism of economic growth, arguing that societies that live within their means and invest surpluses in productive capital will experience sustainable economic development.
Economic Domain
Accumulation
--- ENTITY: mercantile jealousy ---
Mercantile Jealousy
Definition
The competitive hostility and fear among merchants and manufacturers of different nations toward each other's commercial success, leading them to advocate for trade restrictions and monopolies that protect their own interests at the expense of overall economic efficiency.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as a key obstacle to beneficial international trade, explaining how merchants exploit nationalistic sentiments to secure protective measures that ultimately harm both domestic consumers and the broader economy.
Economic Domain
Regulation
--- ENTITY: underling tradesmen maxims ---
Underling Tradesmen Maxims
Definition
The narrow commercial principles adopted by small-scale merchants and manufacturers who prioritize securing exclusive customer relationships and protecting local markets over seeking the most efficient sources of supply and the best markets for their goods.
Source Chapter
Book IV, Chapter 3
Context
Smith criticizes these principles when applied to national economic policy, arguing that great traders seek the best value regardless of source, while underling tradesmen wrongly believe national prosperity depends on exclusive trading relationships.
Economic Domain
Exchange
--- ENTITY: mutual gain reciprocity ---
Mutual Gain Reciprocity
Definition
The principle that international trade between nations, when conducted freely and without artificial restraints, benefits all parties involved through the mutual exchange of goods and services according to comparative advantage, rather than operating as a zero-sum competition.
Source Chapter
Book IV, Chapter 3
Context
Smith presents this as the fundamental truth that mercantilist policies ignore, demonstrating how both trading nations gain from exchange even when one appears to have a favourable balance of trade.
Economic Domain
Exchange
--- ENTITY: commercial discord source ---
Commercial Discord Source
Definition
The artificial conflicts and animosities created between nations through mercantilist trade policies that frame international commerce as competitive warfare rather than cooperative exchange, leading to restrictions, retaliations, and mutual economic harm.
Source Chapter
Book IV, Chapter 3
Context
Smith argues that commerce should naturally be "a bond of union and friendship" between nations, but mercantilist policies have transformed it into "the most fertile source of discord and animosity."
Economic Domain
Regulation
--- ENTITY: national enrichment through neighbour's wealth ---
National Enrichment Through Neighbour's Wealth
Definition
The principle that a nation's economic prosperity is enhanced rather than threatened by the wealth and development of its trading partners, as rich and industrious neighbours provide larger markets, better goods, and more opportunities for mutually beneficial exchange.
Source Chapter
Book IV, Chapter 3
Context
Smith argues against the mercantilist fear of neighbourly prosperity, explaining that wealthy trading partners are better customers and that commercial success should be seen as an opportunity for mutual gain rather than competitive threat.
Economic Domain
Exchange
--- ENTITY: commercial maxims inversion ---
Commercial Maxims Inversion
Definition
The perverse economic principles that teach nations to view their neighbours' prosperity as a threat rather than an opportunity, leading to policies designed to beggar other nations rather than to maximize mutual benefit through free and open trade.
Source Chapter
Book IV, Chapter 3
Context
Smith criticizes how mercantile theory has inverted natural economic reasoning, causing nations to adopt policies that harm themselves while attempting to harm others, rather than pursuing the mutual prosperity that free trade would naturally produce.
Economic Domain
General Theory
--- ENTITY: domestic market monopoly ---
Domestic Market Monopoly
Definition
The exclusive control over a nation's internal market achieved by domestic merchants and manufacturers through government-imposed trade restrictions, tariffs, and prohibitions that prevent foreign competition and allow domestic producers to charge higher prices.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as the primary interest served by mercantilist policies, explaining how merchants and manufacturers use national prejudice to secure monopolies that benefit them at the expense of consumers and overall economic efficiency.
Economic Domain
Regulation
--- ENTITY: alien merchant duties ---
Alien Merchant Duties
Definition
The special tariffs and restrictions imposed on foreign merchants operating within a country's borders, designed to protect domestic merchants from foreign competition by making it more expensive or difficult for alien merchants to conduct business.
Source Chapter
Book IV, Chapter 3
Context
Smith cites these duties as examples of how mercantile interests secure protection through government policy, arguing that such restrictions harm consumers while benefiting a small group of domestic merchants.
Economic Domain
Regulation
--- ENTITY: foreign manufacture prohibitions ---
Foreign Manufacture Prohibitions
Definition
Government bans on the importation of manufactured goods from other countries that could compete with domestic production, designed to protect domestic industries from foreign competition regardless of whether foreign goods might be cheaper or of better quality.
Source Chapter
Book IV, Chapter 3
Context
Smith criticizes these prohibitions as economically irrational, arguing that consumers should be free to purchase the best and cheapest goods available, regardless of their country of origin.
Economic Domain
Regulation
--- ENTITY: disadvantageous balance trade restraints ---
Disadvantageous Balance Trade Restraints
Definition
The trade restrictions imposed on countries with which a nation supposedly has an unfavourable balance of trade, including higher tariffs, quotas, and prohibitions designed to reduce imports from those specific countries and protect domestic industries.
Source Chapter
Book IV, Chapter 3
Context
Smith argues these restraints are based on false economic reasoning, demonstrating that trade with countries where the balance appears unfavourable can still be beneficial if their goods are cheaper or better than alternatives.
Economic Domain
Regulation
--- ENTITY: commercial country ruin predictions ---
Commercial Country Ruin Predictions
Definition
The frequent forecasts of economic collapse made by proponents of mercantile theory regarding countries that engage in free trade or run trade deficits, predictions that Smith argues have consistently proven false as open trading nations have grown wealthy rather than impoverished.
Source Chapter
Book IV, Chapter 3
Context
Smith points out that despite constant warnings about ruin from unfavourable trade balances, no European country has been impoverished by this cause, while those that have opened their ports have been enriched.
Economic Domain
General Theory
--- ENTITY: trade as union and friendship ---
Trade as Union and Friendship
Definition
The natural role of commerce as a cooperative activity that should foster peaceful relations and mutual benefit between nations through the voluntary exchange of goods and services, rather than serving as a source of conflict and competition.
Source Chapter
Book IV, Chapter 3
Context
Smith laments how mercantile policies have perverted the natural character of trade, transforming what should be a bond of international friendship into a source of discord and animosity between nations.
Economic Domain
Exchange
--- ENTITY: national animosity in commerce ---
National Animosity in Commerce
Definition
The hostile attitudes and policies between nations that frame international trade as economic warfare rather than mutual benefit, leading to retaliatory restrictions, trade barriers, and the pursuit of policies designed to harm trading partners rather than maximize collective prosperity.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as a primary driver of unreasonable trade restrictions, explaining how merchants exploit nationalistic sentiments to secure protection while governments foolishly adopt policies based on animosity rather than economic self-interest.
Economic Domain
Regulation
--- ENTITY: commercial system enrichment mechanism ---
Commercial System Enrichment Mechanism
Definition
The mercantilist theory that national wealth is increased through the accumulation of precious metals via trade surpluses, achieved through government intervention, tariffs, bounties, and monopolies that direct economic activity toward exporting more than importing.
Source Chapter
Book IV, Chapter 3
Context
Smith critiques this entire mechanism throughout the chapter, demonstrating how it leads to irrational policies that harm rather than benefit the nations that adopt them, while failing to achieve their stated objectives of national enrichment.
Economic Domain
General Theory
--- ENTITY: private interest monopoly spirit ---
Private Interest Monopoly Spirit
Definition
The tendency of individual merchants and manufacturers to pursue policies that create and maintain monopolies for their own benefit, using government power to restrict competition and secure exclusive privileges at the expense of consumers and overall economic efficiency.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as the original source of mercantilist doctrine, explaining how private commercial interests invented and propagated these theories to secure protection and monopolies through government intervention.
Economic Domain
Regulation
--- ENTITY: public good versus private interest ---
Public Good Versus Private Interest
Definition
The fundamental conflict between policies that serve the broader public interest through economic efficiency and consumer welfare, and policies that serve the narrow interests of specific commercial groups through protection, monopoly, and restriction of competition.
Source Chapter
Book IV, Chapter 3
Context
Smith argues throughout the chapter that mercantilist policies consistently favor private commercial interests over public good, with merchants and manufacturers using national prejudice to secure privileges that harm consumers and reduce overall economic prosperity.
Economic Domain
General Theory
--- ENTITY: national economic identity ---
National Economic Identity
Definition
The conception of a nation's economic character and purpose, shaped by its trading relationships, industrial capabilities, and commercial policies, which influences how it views its economic interests and its relationships with other nations.
Source Chapter
Book IV, Chapter 3
Context
Smith discusses how national economic identity is constructed through commercial relationships and policies, arguing that nations should view wealthy neighbours as opportunities rather than threats to their economic identity and prosperity.
Economic Domain
General Theory
--- ENTITY: sovereign economic policy authority ---
Sovereign Economic Policy Authority
Definition
The governmental power to regulate commerce through tariffs, prohibitions, bounties, and other interventions, which Smith argues should be exercised with restraint and guided by principles of economic efficiency rather than private commercial interests.
Source Chapter
Book IV, Chapter 3
Context
Smith critiques how sovereigns have improperly delegated economic policy to commercial interests, resulting in restrictions and monopolies that serve private gain rather than public good, and argues for policies based on sound economic reasoning.
Economic Domain
Regulation
--- ENTITY: commercial society formation ---
Commercial Society Formation
Definition
The development of social and economic structures characterized by specialized labor, market exchange, and commercial relationships that replace earlier forms of economic organization based on self-sufficiency, feudal obligations, or simple barter.
Source Chapter
Book IV, Chapter 3
Context
Smith discusses how commercial society creates new forms of economic interdependence and requires different principles of governance than earlier social forms, particularly in managing international trade relationships.
Economic Domain
General Theory
--- ENTITY: market price mechanism regulation ---
Market Price Mechanism Regulation
Definition
The natural process by which market prices adjust to balance supply and demand through the independent actions of buyers and sellers, which Smith argues is disrupted by government interventions designed to manipulate prices for particular interests.
Source Chapter
Book IV, Chapter 3
Context
Smith demonstrates how mercantilist policies interfere with natural price mechanisms, leading to inefficiencies and reduced economic welfare, while arguing that free markets naturally regulate prices more effectively than government intervention.
Economic Domain
Exchange
--- ENTITY: economic system effectiveness evaluation ---
Economic System Effectiveness Evaluation
Definition
The assessment of different economic arrangements based on their ability to promote national prosperity, consumer welfare, and efficient resource allocation, which Smith applies to critique mercantilist policies and advocate for free trade principles.
Source Chapter
Book IV, Chapter 3
Context
Smith evaluates the commercial system against criteria of economic efficiency and public benefit, demonstrating how mercantilist policies fail to achieve their stated objectives while causing significant economic harm.
Economic Domain
General Theory
--- ENTITY: economic development sequencing ---
Economic Development Sequencing
Definition
The order and pattern in which different economic activities and capabilities develop within a nation, which Smith argues is distorted by mercantilist policies that attempt to force development in artificial directions rather than allowing natural economic progression.
Source Chapter
Book IV, Chapter 3
Context
Smith discusses how natural economic development follows patterns based on comparative advantage and market opportunities, while mercantilist policies attempt to impose artificial sequences that often prove counterproductive.
Economic Domain
General Theory
--- ENTITY: commercial order and government introduction ---
Commercial Order and Government Introduction
Definition
The establishment of governmental structures and policies designed to regulate and promote commercial activity, which Smith argues has often been captured by private interests to serve monopolistic rather than public purposes.
Source Chapter
Book IV, Chapter 3
Context
Smith examines how commercial interests have shaped governmental policies to create artificial advantages for themselves through restrictions and monopolies, rather than allowing natural market forces to determine economic outcomes.
Economic Domain
Regulation
--- ENTITY: economic system transformation ---
Economic System Transformation
Definition
The fundamental change in economic organization and principles from mercantilist systems based on government intervention and precious metal accumulation to systems based on free trade, market mechanisms, and productive efficiency.
Source Chapter
Book IV, Chapter 3
Context
Smith's entire analysis in this chapter represents a call for transformation from the prevailing commercial system to one based on natural liberty and free market principles, arguing that such transformation would benefit all nations involved in international trade.
Economic Domain
General Theory
VSM Mappings
--- MAPPING: balance-of-trade-doctrine-to-S5-policy-identity ---
Balance of Trade Doctrine -> S5 Policy / Identity
Economic Entity Reference
--- ENTITY: balance of trade doctrine ---
Balance of Trade Doctrine
Definition
The mercantilist theory that a nation's economic prosperity depends on exporting more goods and services than it imports, thereby accumulating gold and silver through a favourable balance of trade. This doctrine assumes that international trade is a zero-sum game where one nation's gain is another's loss.
Source Chapter
Book IV, Chapter 3
Context
Smith's central target of critique in this chapter, which he argues is based on "national prejudice and animosity" rather than sound economic reasoning. He demonstrates how the doctrine leads to irrational trade restrictions and mutual impoverishment between nations.
Economic Domain
General Theory
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
The balance of trade doctrine functions as a fundamental policy framework that defines national economic identity and purpose. It represents the philosophical foundation for how a nation views its economic relationships with other nations, serving as the supreme policy principle that shapes all other economic decisions. Like S5, it provides closure by establishing the overarching economic ethos that balances internal regulation (S3) with external engagement (S4).
Mapping Strength
Strong
--- MAPPING: extraordinary-restraints-on-importation-to-S3-control-operational-management ---
Extraordinary Restraints on Importation -> S3 Control / Operational Management
Economic Entity Reference
--- ENTITY: extraordinary restraints on importation ---
Extraordinary Restraints on Importation
Definition
Government-imposed restrictions on the import of goods from specific countries, including prohibitions, higher duties, and warehousing requirements, designed to protect domestic industries and maintain a favourable balance of trade. These restraints are applied selectively based on political and commercial considerations rather than economic efficiency.
Source Chapter
Book IV, Chapter 3
Context
The primary subject of Smith's critique, exemplified by British restrictions on French goods while allowing imports from other countries. Smith argues these restraints are "unreasonable" even according to the principles of the commercial system that justifies them.
Economic Domain
Regulation
VSM Concept Reference
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
Mapping Rationale
Extraordinary restraints on importation represent direct governmental control over internal economic operations, establishing rules and restrictions that govern how System 1 (individual merchants and producers) can engage in trade. This functions as S3's regulatory mechanism, setting the parameters within which operational units must function. The restraints allocate resources (market access) and establish responsibilities (compliance with trade restrictions), performing the same internal optimisation role that S3 plays in managing operational efficiency.
Mapping Strength
Strong
--- MAPPING: computed-exchange-rate-to-S4-intelligence-adaptation ---
Computed Exchange Rate -> S4 Intelligence / Adaptation
Definition
The theoretical exchange rate between two currencies calculated based on the official mint standards of each country, assuming coins contain their full legal weight of precious metal. This differs from the real exchange rate, which reflects the actual market value of debased or worn currency.
Source Chapter
Book IV, Chapter 3
Context
Part of Smith's analysis of why exchange rates can be misleading indicators of trade balances. He explains that computed exchange rates based on mint standards often diverge significantly from real exchange rates reflecting the actual condition of circulating currency.
Economic Domain
Exchange
VSM Concept Reference
System 4 (S4) — Intelligence / Adaptation
The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.
In economic terms: Foreign intelligence about trade opportunities, market research, new technology adoption, colonial exploration and trade route development, understanding of foreign economic systems.
Key properties: Environmental scanning, future orientation, strategic planning, modelling, research and development.
Mapping Rationale
The computed exchange rate serves as an analytical tool for understanding the external economic environment, providing information about international monetary relationships that informs strategic economic decisions. Like S4's intelligence function, it represents an attempt to model and understand external conditions (currency relationships between nations) to guide adaptation strategies. Smith uses this concept to demonstrate how theoretical models of external conditions can diverge from reality, highlighting the importance of accurate environmental intelligence.
Mapping Strength
Moderate
--- MAPPING: real-exchange-rate-to-S4-intelligence-adaptation ---
Real Exchange Rate -> S4 Intelligence / Adaptation
Definition
The actual market-determined exchange rate between two currencies, reflecting the true value of the circulating money in each country, which may differ from the official mint standard due to wear, clipping, or debasement of coins. This rate determines the true cost of international transactions.
Source Chapter
Book IV, Chapter 3
Context
Smith uses this concept to demonstrate that apparent trade imbalances suggested by computed exchange rates may be misleading, as the real exchange rate often tells a different story about the actual flow of value between nations.
Economic Domain
Exchange
VSM Concept Reference
System 4 (S4) — Intelligence / Adaptation
The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.
In economic terms: Foreign intelligence about trade opportunities, market research, new technology adoption, colonial exploration and trade route development, understanding of foreign economic systems.
Key properties: Environmental scanning, future orientation, strategic planning, modelling, research and development.
Mapping Rationale
The real exchange rate provides accurate intelligence about actual market conditions in the external economic environment, serving the same function as S4's environmental scanning. Smith uses it to correct misleading theoretical models, demonstrating how accurate real-world intelligence is essential for proper economic adaptation. This represents the kind of ground-truth information that S4 must gather to inform strategic responses to environmental conditions.
Mapping Strength
Strong
--- MAPPING: agio-of-bank-money-to-S2-coordination ---
Agio of Bank Money -> S2 Coordination
Definition
The premium or discount at which bank money (representing deposits of precious metal at banks like Amsterdam) trades relative to current currency in circulation. This premium reflects the superior quality and reliability of bank money compared to debased or worn circulating currency.
Source Chapter
Book IV, Chapter 3
Context
Smith explains how the agio varies based on the relative quality of bank money versus current currency, and how banks like Amsterdam's manipulate the agio to prevent stock-jobbing while maintaining currency stability.
Economic Domain
Exchange
VSM Concept Reference
System 2 (S2) — Coordination
The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.
In economic terms: Market price mechanisms, trade customs, standard weights and measures, commercial law, banking clearinghouses, trade guilds.
Key properties: Anti-oscillatory, dampening, scheduling, conflict resolution, standardisation.
Mapping Rationale
The agio functions as a coordination mechanism that standardises value across different forms of currency, allowing merchants to coordinate their transactions despite the existence of multiple currency types with varying quality. By providing a premium that reflects the superior reliability of bank money, the agio dampens the oscillations that would occur from currency debasement and resolves conflicts between different currency standards. This coordination function mirrors S2's role in standardising communication between operational units.
Mapping Strength
Strong
--- MAPPING: bank-money-to-S2-coordination ---
Bank Money -> S2 Coordination
Definition
A form of money represented by credit in the books of a bank, backed by actual deposits of precious metal, which maintains a stable value equal to the mint standard. Bank money is superior to current currency because it is not subject to wear, clipping, or debasement.
Source Chapter
Book IV, Chapter 3
Context
Smith describes the Bank of Amsterdam as the archetype, explaining how bank money provides security, transferability, and a reliable medium for international trade, while also generating revenue for the city through various fees and the interest on deposits.
Economic Domain
Exchange
VSM Concept Reference
System 2 (S2) — Coordination
The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.
In economic terms: Market price mechanisms, trade customs, standard weights and measures, commercial law, banking clearinghouses, trade guilds.
Key properties: Anti-oscillatory, dampening, scheduling, conflict resolution, standardisation.
Mapping Rationale
Bank money serves as a coordination mechanism that standardises value across international transactions, providing a stable medium through which merchants can coordinate their commercial activities. By maintaining a fixed value equal to the mint standard and being immune to the wear and debasement that affects circulating currency, bank money resolves the conflicts and uncertainties that arise from currency quality differences. This standardisation function is precisely what S2 provides between operational units.
Mapping Strength
Strong
--- MAPPING: warehouse-rent-for-bullion-deposits-to-S3-control-operational-management ---
Warehouse Rent for Bullion Deposits -> S3 Control / Operational Management
Definition
The fee charged by banks for storing precious metal deposits, typically higher for gold than silver due to greater security risks and the difficulty of assaying gold's fineness. This fee represents the cost of maintaining the bank's bullion reserves that back its money-issuing operations.
Source Chapter
Book IV, Chapter 3
Context
Smith explains why warehouse rent is higher for gold deposits, citing the greater difficulty in ascertaining gold's fineness and the higher risk of fraud, while also noting that this fee contributes to the bank's revenue stream.
Economic Domain
Exchange
VSM Concept Reference
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
Mapping Rationale
Warehouse rent represents a regulatory mechanism that allocates resources (storage space and security) and establishes responsibilities (payment for services) within the banking system. By charging different rates for different metals based on security requirements, the bank exercises control over resource allocation similar to how S3 manages internal resources. The fee structure also serves as a performance management tool, incentivising efficient use of storage facilities while generating revenue for the bank's operations.
Mapping Strength
Moderate
--- MAPPING: round-about-foreign-trade-of-consumption-to-S1-operations ---
Round-about Foreign Trade of Consumption -> S1 Operations
Definition
A trade pattern where a country imports goods by first exporting its own products to a third country, receiving payment in precious metals, then using those metals to purchase the desired imports. This contrasts with direct trade where imports are paid for with domestic exports.
Source Chapter
Book IV, Chapter 3
Context
Smith argues that round-about trade is less advantageous than direct trade, using the example of England potentially importing French goods through tobacco and East India goods rather than through direct English manufactures.
Economic Domain
Exchange
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Round-about foreign trade represents a specific operational pattern of commercial activity that directly produces the value of imported goods for domestic consumption. As a method of conducting trade operations, it exemplifies the autonomous commercial activities that S1 encompasses. Smith's critique of its efficiency relative to direct trade reflects the kind of operational performance management that S3 would exercise over S1 units, making this an operational rather than strategic or regulatory function.
Mapping Strength
Strong
--- MAPPING: direct-foreign-trade-of-consumption-to-S1-operations ---
Direct Foreign Trade of Consumption -> S1 Operations
Definition
A trade pattern where a country directly exchanges its own products for the products it desires from another country, without intermediate transactions through third parties or the use of precious metals as intermediaries.
Source Chapter
Book IV, Chapter 3
Context
Smith presents this as the most advantageous form of trade, arguing that England would benefit more from directly exchanging its hardware and cloth for French wines than through round-about routes involving tobacco or precious metals.
Economic Domain
Exchange
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Direct foreign trade represents the fundamental operational activity of international commerce, where merchants directly exchange goods to create value through trade. This operational pattern exemplifies the autonomous commercial activities that S1 encompasses, with merchants engaging directly with foreign markets to produce the value of imported goods. The efficiency advantages Smith identifies reflect operational performance characteristics that would be managed by S3 oversight of S1 activities.
Mapping Strength
Strong
--- MAPPING: smuggling-as-principal-import-method-to-S4-intelligence-adaptation ---
Smuggling as Principal Import Method -> S4 Intelligence / Adaptation
Definition
The illegal importation of goods across borders to avoid tariffs, prohibitions, or other trade restrictions, which becomes the dominant method of trade when legal commerce is severely restricted by government policies.
Source Chapter
Book IV, Chapter 3
Context
Smith observes that mutual trade restrictions between Britain and France have driven legitimate commerce underground, making smugglers the primary importers of each other's goods, thus defeating the intended purpose of the restrictions.
Economic Domain
Exchange
VSM Concept Reference
System 4 (S4) — Intelligence / Adaptation
The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.
In economic terms: Foreign intelligence about trade opportunities, market research, new technology adoption, colonial exploration and trade route development, understanding of foreign economic systems.
Key properties: Environmental scanning, future orientation, strategic planning, modelling, research and development.
Mapping Rationale
Smuggling as a dominant import method represents an adaptive response to the external regulatory environment, demonstrating how commercial actors must develop intelligence about and adapt to governmental restrictions. The emergence of smuggling networks shows how System 1 operations adapt to environmental constraints when legal channels are blocked. This adaptive intelligence about circumventing restrictions mirrors S4's function of scanning the environment and developing strategic responses to external conditions.
Mapping Strength
Moderate
--- MAPPING: commercial-system-principles-to-S5-policy-identity ---
Commercial System Principles -> S5 Policy / Identity
Definition
The mercantilist framework of economic thought that prioritizes the accumulation of precious metals through trade surpluses, government intervention in commerce, and the use of tariffs, bounties, and monopolies to direct economic activity toward national enrichment.
Source Chapter
Book IV, Chapter 3
Context
Smith critiques this system throughout the chapter, showing how its principles lead to unreasonable trade restrictions and mutual hostility between nations, while failing to achieve their stated objectives of national wealth accumulation.
Economic Domain
General Theory
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
The commercial system principles function as the fundamental policy framework that defines national economic identity and purpose, establishing the overarching ethos that guides all economic decisions. Like S5, these principles provide closure by establishing the supreme policy framework that balances internal regulation with external engagement. Smith's critique demonstrates how this policy identity shapes the entire economic system's approach to international trade and national prosperity.
Mapping Strength
Strong
--- MAPPING: national-prejudice-and-animosity-in-trade-to-S5-policy-identity ---
National Prejudice and Animosity in Trade -> S5 Policy / Identity
Definition
The emotional and political factors that influence trade policy, where merchants and manufacturers promote restrictions against foreign competitors based on nationalistic sentiments rather than economic reasoning, leading to mutually harmful trade wars.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as a primary driver of unreasonable trade restrictions, arguing that merchants exploit national prejudices to secure monopolies and that governments foolishly adopt these policies based on animosity rather than economic self-interest.
Economic Domain
Regulation
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
National prejudice and animosity function as the ideological foundation that shapes economic policy identity, establishing the values and purposes that guide trade decisions. Like S5, these sentiments provide closure by defining the national economic ethos that balances internal interests with external relationships. Smith's critique shows how this policy identity, when based on animosity rather than rational self-interest, distorts the entire economic system's approach to international commerce.
Mapping Strength
Strong
--- MAPPING: free-ports-to-S2-coordination ---
Free Ports -> S2 Coordination
Definition
Designated port cities where goods can be imported and exported with minimal or no customs duties, allowing for unrestricted international trade within those specific locations while maintaining restrictions elsewhere in the country.
Source Chapter
Book IV, Chapter 3
Context
Smith notes that while some European towns function as free ports, no entire country adopts this approach, despite evidence that free trade enriches rather than ruins trading communities.
Economic Domain
Exchange
VSM Concept Reference
System 2 (S2) — Coordination
The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.
In economic terms: Market price mechanisms, trade customs, standard weights and measures, commercial law, banking clearinghouses, trade guilds.
Key properties: Anti-oscillatory, dampening, scheduling, conflict resolution, standardisation.
Mapping Rationale
Free ports function as coordination mechanisms that standardise trade conditions within specific locations, allowing merchants to coordinate their commercial activities without the oscillations and conflicts caused by varying tariff structures. By creating zones of free trade, they resolve the conflicts between different regulatory regimes and provide a standardised environment for commercial coordination. This standardisation and conflict resolution function mirrors S2's role in coordinating between operational units.
Mapping Strength
Strong
--- MAPPING: balance-of-produce-and-consumption-to-S1-operations ---
Balance of Produce and Consumption -> S1 Operations
Definition
The relationship between a nation's annual production of goods and services and its annual consumption of those goods and services, which determines whether national capital is increasing (when production exceeds consumption) or decreasing (when consumption exceeds production).
Source Chapter
Book IV, Chapter 3
Context
Smith distinguishes this from the balance of trade, arguing that a nation can have a favourable balance of production and consumption while simultaneously running trade deficits for extended periods, as capital accumulation continues despite negative trade balances.
Economic Domain
General Theory
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
The balance of produce and consumption represents the fundamental operational output of the economic system, measuring the direct value created through productive activities. This operational metric reflects the core purpose of System 1 units in producing value through their activities. Smith's emphasis on this measure over trade balances highlights the primacy of operational production over financial flows, consistent with S1's focus on direct value creation.
Mapping Strength
Strong
--- MAPPING: annual-produce-of-land-and-labour-to-S1-operations ---
Annual Produce of Land and Labour -> S1 Operations
Definition
The total value of goods and services produced by a nation's economy in a given year through the combined efforts of agricultural and manufacturing activities, representing the fundamental source of national wealth and the basis for determining economic prosperity.
Source Chapter
Book IV, Chapter 3
Context
Smith uses this concept to argue that true national wealth is measured by productive output rather than by the accumulation of precious metals, and that trade restrictions that reduce productive efficiency ultimately diminish this annual produce.
Economic Domain
Production
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
The annual produce of land and labour represents the core operational output of the economic system, directly measuring the value created through productive activities. This operational metric reflects the fundamental purpose of System 1 units in producing value through their autonomous activities. Smith's focus on productive output as the measure of national wealth emphasizes the primacy of operational value creation over financial metrics.
Mapping Strength
Strong
--- MAPPING: annual-consumption-of-goods-to-S1-operations ---
Annual Consumption of Goods -> S1 Operations
Definition
The total value of goods and services consumed by a nation's population in a given year, including both necessities and luxuries, which when compared to annual production determines whether national capital is being accumulated or depleted.
Source Chapter
Book IV, Chapter 3
Context
Smith argues that the relationship between annual consumption and annual production is a more accurate indicator of national economic health than the balance of trade, as it directly measures whether a society is living within its means.
Economic Domain
Consumption
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Annual consumption represents the operational outcome of economic activity, measuring the direct value extracted from production through consumption. This operational metric reflects the end purpose of System 1 activities in creating value that is then consumed. Smith's emphasis on the consumption-production relationship as an indicator of economic health highlights the importance of operational balance, consistent with S1's focus on the direct flow of value creation and consumption.
Mapping Strength
Strong
--- MAPPING: capital-decay-through-excessive-consumption-to-S1-operations ---
Capital Decay Through Excessive Consumption -> S1 Operations
Definition
The process by which a nation's productive resources are diminished when annual consumption exceeds annual production, forcing society to consume its capital stock to maintain current living standards, leading to long-term economic decline.
Source Chapter
Book IV, Chapter 3
Context
Smith warns that when expenses exceed revenue, capital must necessarily decay, and this principle applies to nations as well as individuals, making sustainable consumption levels essential for long-term prosperity.
Economic Domain
Accumulation
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Capital decay through excessive consumption represents the operational consequence of imbalanced economic activity, where the direct output of production operations is insufficient to sustain consumption levels. This operational imbalance reflects the kind of performance issues that S3 would monitor in System 1 units. Smith's warning about sustainable consumption levels highlights the importance of maintaining operational viability through balanced value flows.
Mapping Strength
Strong
--- MAPPING: capital-accumulation-through-frugality-to-S1-operations ---
Capital Accumulation Through Frugality -> S1 Operations
Definition
The process by which national wealth grows when annual production exceeds annual consumption, allowing the surplus to be saved and invested in productive capital, thereby increasing the nation's capacity for future production and wealth creation.
Source Chapter
Book IV, Chapter 3
Context
Smith presents this as the natural mechanism of economic growth, arguing that societies that live within their means and invest surpluses in productive capital will experience sustainable economic development.
Economic Domain
Accumulation
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Capital accumulation through frugality represents the operational outcome of efficient economic activity, where the direct output of production operations exceeds consumption needs, creating surplus value for reinvestment. This operational surplus reflects the kind of value creation that S1 units are designed to produce. Smith's emphasis on this natural growth mechanism highlights the importance of operational efficiency in creating sustainable economic development.
Mapping Strength
Strong
--- MAPPING: mercantile-jealousy-to-S5-policy-identity ---
Mercantile Jealousy -> S5 Policy / Identity
Definition
The competitive hostility and fear among merchants and manufacturers of different nations toward each other's commercial success, leading them to advocate for trade restrictions and monopolies that protect their own interests at the expense of overall economic efficiency.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as a key obstacle to beneficial international trade, explaining how merchants exploit nationalistic sentiments to secure protective measures that ultimately harm both domestic consumers and the broader economy.
Economic Domain
Regulation
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
Mercantile jealousy functions as an ideological force that shapes economic policy identity, establishing the values and purposes that guide trade decisions. Like S5, these sentiments provide closure by defining the national economic ethos that balances internal commercial interests with external relationships. Smith's critique shows how this policy identity, when based on competitive jealousy rather than rational self-interest, distorts the entire economic system's approach to international commerce.
Mapping Strength
Strong
--- MAPPING: underling-tradesmen-maxims-to-S1-operations ---
Underling Tradesmen Maxims -> S1 Operations
Definition
The narrow commercial principles adopted by small-scale merchants and manufacturers who prioritize securing exclusive customer relationships and protecting local markets over seeking the most efficient sources of supply and the best markets for their goods.
Source Chapter
Book IV, Chapter 3
Context
Smith criticizes these principles when applied to national economic policy, arguing that great traders seek the best value regardless of source, while underling tradesmen wrongly believe national prosperity depends on exclusive trading relationships.
Economic Domain
Exchange
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Underling tradesmen maxims represent the operational principles guiding individual commercial actors, reflecting the autonomous decision-making of System 1 units. These maxims shape how merchants conduct their direct commercial operations, determining their engagement with suppliers and customers. Smith's critique of their narrowness highlights the tension between individual operational autonomy and the broader system's need for efficient value flows.
Mapping Strength
Strong
--- MAPPING: mutual-gain-reciprocity-to-S1-operations ---
Mutual Gain Reciprocity -> S1 Operations
Definition
The principle that international trade between nations, when conducted freely and without artificial restraints, benefits all parties involved through the mutual exchange of goods and services according to comparative advantage, rather than operating as a zero-sum competition.
Source Chapter
Book IV, Chapter 3
Context
Smith presents this as the fundamental truth that mercantilist policies ignore, demonstrating how both trading nations gain from exchange even when one appears to have a favourable balance of trade.
Economic Domain
Exchange
VSM Concept Reference
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
Mapping Rationale
Mutual gain reciprocity represents the fundamental operational principle of international commerce, where individual merchants and producers engage in direct value exchange that benefits all parties. This operational principle guides the autonomous commercial activities of System 1 units, determining how they engage with foreign markets to create value through trade. Smith's emphasis on mutual benefit highlights the importance of operational efficiency and value creation over competitive advantage.
Mapping Strength
Strong
--- MAPPING: commercial-discord-source-to-S5-policy-identity ---
Commercial Discord Source -> S5 Policy / Identity
Definition
The artificial conflicts and animosities created between nations through mercantilist trade policies that frame international commerce as competitive warfare rather than cooperative exchange, leading to restrictions, retaliations, and mutual economic harm.
Source Chapter
Book IV, Chapter 3
Context
Smith argues that commerce should naturally be "a bond of union and friendship" between nations, but mercantilist policies have transformed it into "the most fertile source of discord and animosity."
Economic Domain
Regulation
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
Commercial discord as a source of policy represents the ideological framework that defines national economic identity and purpose, establishing the values that guide international trade relationships. Like S5, this policy framework provides closure by establishing the supreme policy principle that shapes all economic decisions. Smith's lament about commerce's perversion shows how this policy identity, when based on discord rather than cooperation, distorts the entire economic system's approach to international relations.
Mapping Strength
Strong
--- MAPPING: national-enrichment-through-neighbours-wealth-to-S5-policy-identity ---
National Enrichment Through Neighbour's Wealth -> S5 Policy / Identity
Definition
The principle that a nation's economic prosperity is enhanced rather than threatened by the wealth and development of its trading partners, as rich and industrious neighbours provide larger markets, better goods, and more opportunities for mutually beneficial exchange.
Source Chapter
Book IV, Chapter 3
Context
Smith argues against the mercantilist fear of neighbourly prosperity, explaining that wealthy trading partners are better customers and that commercial success should be seen as an opportunity for mutual gain rather than competitive threat.
Economic Domain
Exchange
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
National enrichment through neighbour's wealth represents a policy framework that defines economic identity based on cooperative rather than competitive relationships. Like S5, this principle provides closure by establishing the supreme policy framework that shapes how a nation views its economic relationships. Smith's argument demonstrates how this policy identity, when based on recognizing mutual benefit, can transform the entire economic system's approach to international commerce.
Mapping Strength
Strong
--- MAPPING: commercial-maxims-inversion-to-S5-policy-identity ---
Commercial Maxims Inversion -> S5 Policy / Identity
Definition
The perverse economic principles that teach nations to view their neighbours' prosperity as a threat rather than an opportunity, leading to policies designed to beggar other nations rather than to maximize mutual benefit through free and open trade.
Source Chapter
Book IV, Chapter 3
Context
Smith criticizes how mercantile theory has inverted natural economic reasoning, causing nations to adopt policies that harm themselves while attempting to harm others, rather than pursuing the mutual prosperity that free trade would naturally produce.
Economic Domain
General Theory
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
Commercial maxims inversion represents a fundamental policy framework that defines national economic identity through competitive rather than cooperative principles. Like S5, this framework provides closure by establishing the supreme policy principle that shapes all economic decisions. Smith's critique shows how this inverted policy identity distorts the entire economic system's approach to international relations, transforming natural cooperation into artificial conflict.
Mapping Strength
Strong
--- MAPPING: domestic-market-monopoly-to-S3-control-operational-management ---
Domestic Market Monopoly -> S3 Control / Operational Management
Definition
The exclusive control over a nation's internal market achieved by domestic merchants and manufacturers through government-imposed trade restrictions, tariffs, and prohibitions that prevent foreign competition and allow domestic producers to charge higher prices.
Source Chapter
Book IV, Chapter 3
Context
Smith identifies this as the primary interest served by mercantilist policies, explaining how merchants and manufacturers use national prejudice to secure monopolies that benefit them at the expense of consumers and overall economic efficiency.
Economic Domain
Regulation
VSM Concept Reference
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
Mapping Rationale
Domestic market monopoly represents direct governmental control over internal economic operations, establishing rules that govern how System 1 units can compete within the domestic market. This regulatory mechanism allocates resources (market access) and establishes responsibilities (compliance with restrictions), performing the same internal optimisation role that S3 plays in managing operational efficiency. The monopoly protection serves the private interests that S3 is meant to regulate.
Mapping Strength
Strong
--- MAPPING: alien-merchant-duties-to-S3-control-operational-management ---
Alien Merchant Duties -> S3 Control / Operational Management
Definition
The special tariffs and restrictions imposed on foreign merchants operating within a country's borders, designed to protect domestic merchants from foreign competition by making it more expensive or difficult for alien merchants to conduct business.
Source Chapter
Book IV, Chapter 3
Context
Smith cites these duties as examples of how mercantile interests secure protection through government policy, arguing that such restrictions harm consumers while benefiting a small group of domestic merchants.
Economic Domain
Regulation
VSM Concept Reference
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
Mapping Rationale
Alien merchant duties represent governmental control mechanisms that regulate the internal market environment by establishing rules for foreign commercial actors. This regulatory framework allocates resources (market access) and establishes responsibilities (payment of duties), performing the same internal optimisation role that S3 plays in managing operational efficiency. The duties serve to protect domestic System 1 units from foreign competition, demonstrating how S3 can be captured by particular interests.
Mapping Strength
Strong
--- MAPPING: foreign-manufacture-prohibitions-to-S3-control-operational-management ---
Foreign Manufacture Prohibitions -> S3 Control / Operational Management
Definition
Government bans on the importation of manufactured goods from other countries that could compete with domestic production, designed to protect domestic industries from foreign competition regardless of whether foreign goods might be cheaper or of better quality.
Source Chapter
Book IV, Chapter 3
Context
Smith criticizes these prohibitions as economically irrational, arguing that consumers should be free to purchase the best and cheapest goods available, regardless of their country of origin.
Economic Domain
Regulation
VSM Concept Reference
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
Mapping Rationale
Foreign manufacture prohibitions represent direct governmental control over internal market operations, establishing rules that restrict the options available to System 1 units (merchants and consumers). This regulatory mechanism allocates resources (market access) and establishes responsibilities (compliance with prohibitions), performing the same internal optimisation role that S3 plays in managing operational efficiency. The prohibitions protect domestic producers at the expense of consumers and overall economic efficiency.
Mapping Strength
Strong
--- MAPPING: disadvantageous-balance-trade-restraints-to-S3-control-operational-management ---
Disadvantageous Balance Trade Restraints -> S3 Control / Operational Management
Definition
The trade restrictions imposed on countries with which a nation supposedly has an unfavourable balance of trade, including higher tariffs, quotas, and prohibitions designed to reduce imports from those specific countries and protect domestic industries.
Source Chapter
Book IV, Chapter 3
Context
Smith argues these restraints are based on false economic reasoning, demonstrating that trade with countries where the balance appears unfavourable can still be beneficial if their goods are cheaper or better than alternatives.
Economic Domain
Regulation
VSM Concept Reference
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
Mapping Rationale
Disadvantageous balance trade restraints represent governmental control mechanisms that regulate international commercial relationships based on perceived trade imbalances. This regulatory framework allocates resources (market access to different countries) and establishes responsibilities (compliance with country-specific restrictions), performing the same internal optimisation role that S3 plays in managing operational efficiency. The restraints serve to protect domestic interests based on flawed economic reasoning about trade balances.
Mapping Strength
Strong
--- MAPPING: commercial-country-ruin-predictions-to-S4-intelligence-adaptation ---
Commercial Country Ruin Predictions -> S4 Intelligence / Adaptation
Definition
The frequent forecasts of economic collapse made by proponents of mercantile theory regarding countries that engage in free trade or run trade deficits, predictions that Smith argues have consistently proven false as open trading nations have grown wealthy rather than impoverished.
Source Chapter
Book IV, Chapter 3
Context
Smith points out that despite constant warnings about ruin from unfavourable trade balances, no European country has been impoverished by this cause, while those that have opened their ports have been enriched.
Economic Domain
General Theory
VSM Concept Reference
System 4 (S4) — Intelligence / Adaptation
The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.
In economic terms: Foreign intelligence about trade opportunities, market research, new technology adoption, colonial exploration and trade route development, understanding of foreign economic systems.
Key properties: Environmental scanning, future orientation, strategic planning, modelling, research and development.
Mapping Rationale
Commercial country ruin predictions represent attempts to model future environmental conditions and their impact on national economic viability, serving the same function as S4's strategic planning and future orientation. These predictions attempt to scan the external economic environment and forecast necessary adaptations to maintain viability. Smith's critique demonstrates how inaccurate intelligence about external conditions can lead to poor strategic responses.
Mapping Strength
Moderate
--- MAPPING: trade-as-union-and-friendship-to-S5-policy-identity ---
Trade as Union and Friendship -> S5 Policy / Identity
Definition
The natural role of commerce as a cooperative activity that should foster peaceful relations and mutual benefit between nations through the voluntary exchange of goods and services, rather than serving as a source of conflict and competition.
Source Chapter
Book IV, Chapter 3
Context
Smith laments how mercantile policies have perverted the natural character of trade, transforming what should be a bond of international friendship into a source of discord and animosity.
Economic Domain
Exchange
VSM Concept Reference
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Mapping Rationale
Trade as union and friendship represents a fundamental policy framework that defines national economic identity based on cooperative rather than competitive principles. Like S5, this principle provides closure by establishing the supreme policy framework that shapes how a nation views its economic relationships. Smith's argument demonstrates how this policy identity, when based on recognizing mutual benefit, can transform the entire economic system's approach to international commerce.
Mapping Strength
Strong
--- MAPPING: national-animosity-in-commerce-to-S5-policy-identity ---
National Animosity in Commerce -> S5 Policy / Identity
Definition
The hostile attitudes and policies between nations that frame international trade as economic warfare rather than mutual benefit, leading to retaliatory restrictions, trade barriers, and the pursuit of policies designed to harm trading partners rather than maximize collective prosperity.
Source Chapter
Book IV,
VSM Framework Reference
id: vsm-framework name: vsm_framework artifact_type: content description: Stafford Beer's Viable System Model reference for economic analysis version: 1.0.0
Stafford Beer's Viable System Model (VSM)
The Viable System Model (VSM) is a model of the organisational structure of any autonomous system capable of producing itself. It was created by management cybernetician Stafford Beer in his books Brain of the Firm (1972) and The Heart of Enterprise (1979).
Core Principle: Viability
A viable system is any system organised in such a way as to meet the demands of surviving in a changing environment. One of the prime features of systems that survive is that they are adaptable. The VSM expresses a model for a viable system, which is an abstracted cybernetic description applicable to any organisation that is a going concern.
The Five Systems
System 1 (S1) — Operations
The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
System 2 (S2) — Coordination
The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.
In economic terms: Market price mechanisms, trade customs, standard weights and measures, commercial law, banking clearinghouses, trade guilds.
Key properties: Anti-oscillatory, dampening, scheduling, conflict resolution, standardisation.
System 3 (S3) — Control / Operational Management
The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
System 3* (S3*) — Audit / Monitoring
The audit and monitoring channel that allows System 3 to verify information coming from System 1 through channels other than those provided by System 2. System 3* provides sporadic, direct access to operational reality.
In economic terms: Market inspections, quality checks, auditing of accounts, surprise investigations into trade practices, verification of weights and measures.
Key properties: Sporadic direct investigation, reality checking, bypassing normal reporting channels.
System 4 (S4) — Intelligence / Adaptation
The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.
In economic terms: Foreign intelligence about trade opportunities, market research, new technology adoption, colonial exploration and trade route development, understanding of foreign economic systems.
Key properties: Environmental scanning, future orientation, strategic planning, modelling, research and development.
System 5 (S5) — Policy / Identity
The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Key Concepts
Recursion
Every viable system contains and is contained in a viable system. The same five-system structure recurs at every level of organisation. A workshop is a viable system within a factory, which is a viable system within an industry, which is a viable system within a national economy.
Variety
A measure of the number of possible states of a system. The Law of Requisite Variety (Ashby's Law) states that only variety can absorb variety. A controller must have at least as much variety as the system it controls.
Requisite Variety
The principle that for effective regulation, the variety of the regulator must match the variety of the system being regulated. This is achieved through variety attenuation (reducing the variety coming up from operations) and variety amplification (increasing the variety of management's responses).
Attenuation and Amplification
Variety engineering mechanisms. Attenuation reduces variety (e.g., reporting summaries, statistical aggregation, standardisation). Amplification increases variety (e.g., delegation, empowerment, decentralisation).
Algedonic Signals
Emergency signals that bypass the normal management hierarchy to alert higher systems of critical situations requiring immediate attention. Named from the Greek words for pain (algos) and pleasure (hedone).
In economic terms: Market panics, famine signals, sudden price collapses, trade embargoes, economic crises that demand immediate sovereign intervention.
Autonomy
The degree of freedom granted to operational units (System 1) to self-organise within constraints set by System 3. Beer argued that maximum autonomy consistent with systemic cohesion yields maximum viability.
Viability
The capacity of a system to maintain a separate existence and survive in a changing environment. A viable system continuously adapts while maintaining its identity.
Instructions
- Review the source chapter, extracted entities, and VSM mappings together.
- Produce a single chapter analysis document following the Chapter Analysis Schema v1.0.
- The analysis must include:
- An H1 heading with the chapter analysis title
- A Chapter Summary (50-300 words) of the main economic arguments
- An Entities Extracted section listing all entities with brief descriptions
- A VSM Mappings section listing all mappings with entity, concept, and strength
- A VSM Coverage section assessing which systems (S1-S5, S3*) are represented
- A Gaps & Observations section identifying uncovered systems and patterns
- In the VSM Coverage section, explicitly state which systems are covered and which are not, based on the mappings.
- In Gaps & Observations, note:
- Which VSM systems lack representation from this chapter
- Entities that were difficult to map
- Emerging themes or patterns
- Suggestions for enriching coverage in future analysis
Output Format
Output a single markdown document following the Chapter Analysis Schema v1.0.