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Chapter 1



When the stock which a man possesses is no more than sufficient to maintain
him for a few days or a few weeks, he seldom thinks of deriving any revenue
from it. He consumes it as sparingly as he can, and endeavours, by his
labour, to acquire something which may supply its place before it be
consumed altogether. His revenue is, in this case, derived from his labour
only. This is the state of the greater part of the labouring poor in all

But when he possesses stock sufficient to maintain him for months or years,
he naturally endeavours to derive a revenue from the greater part of it,
reserving only so much for his immediate consumption as may maintain him
till this revenue begins to come in. His whole stock, therefore, is
distinguished into two parts. That part which he expects is to afford him
this revenue is called his capital. The other is that which supplies his
immediate consumption, and which consists either, first, in that portion of
his whole stock which was originally reserved for this purpose; or,
secondly, in his revenue, from whatever source derived, as it gradually
comes in ; or, thirdly, in such things as had been purchased by either of
these in former years, and which are not yet entirely consumed, such as a
stock of clothes, household furniture, and the like. In one or other, or all
of these three articles, consists the stock which men commonly reserve for
their own immediate consumption.

There are two different ways in which a capital may be employed so as to
yield a revenue or profit to its employer.

First, it maybe employed in raising, manufacturing, or purchasing goods, and
selling them again with a profit. The capital employed in this manner yields
no revenue or profit to its employer, while it either remains in his
possession, or continues in the same shape. The goods of the merchant yield
him no revenue or profit till he sells them for money, and the money yields
him as little till it is again exchanged for goods. His capital is
continually going from him in one shape, and returning to him in another ;
and it is only by means of such circulation, or successive changes, that it
can yield him any profit. Such capitals, therefore, may very properly be
called circulating capitals.

Secondly, it may be employed in the improvement of land, in the purchase of
useful machines and instruments of trade, or in such like things as yield a
revenue or profit without changing masters, or circulating any further. Such
capitals, therefore, may very properly be called fixed capitals.

Different occupations require very different proportions between the fixed
and circulating capitals employed in them.

The capital of a merchant, for example, is altogether a circulating capital.
He has occasion for no machines or instruments of trade, unless his shop or
warehouse be considered as such.

Some part of the capital of every master artificer or manufacturer must be
fixed in the instruments of his trade. This part, however, is very small in
some, and very great in others, A master tailor requires no other
instruments of trade but a parcel of needles. Those of the master shoemaker
are a little, though but a very little, more expensive. Those of the weaver
rise a good deal above those of the shoemaker. The far greater part of the
capital of all such master artificers, however, is circulated either in the
wages of their workmen, or in the price of their materials, and repaid, with
a profit, by the price of the work.

In other works a much greater fixed capital is required. In a great
iron-work, for example, the furnace for melting the ore, the forge, the
slit-mill, are instruments of trade which cannot be erected without a very
great expense. In coal works, and mines of every kind, the machinery
necessary, both for drawing out the water, and for other purposes, is
frequently still more expensive.

That part of the capital of the farmer which is employed in the instruments
of agriculture is a fixed, that which is employed in the wages and
maintenance of his labouring servants is a circulating capital. He makes a
profit of the one by keeping it in his own possession, and of the other by
parting with it. The price or value of his labouring cattle is a fixed
capital, in the same manner as that of the instruments of husbandry; their
maintenance is a circulating capital, in the same manner as that of the
labouring servants. The farmer makes his profit by keeping the labouring
cattle, and by parting with their maintenance. Both the price and the
maintenance of the cattle which are bought in and fattened, not for labour,
but for sale, are a circulating capital. The farmer makes his profit by
parting with them. A flock of sheep or a herd of cattle, that, in a breeding
country, is brought in neither for labour nor for sale, but in order to make
a profit by their wool, by their milk, and by their increase, is a fixed
capital. The profit is made by keeping them. Their maintenance is a
circulating capital. The profit is made by parting with it; and it comes
back with both its own profit and the profit upon the whole price of the
cattle, in the price of the wool, the milk, and the increase. The whole
value of the seed, too, is properly a fixed capital. Though it goes
backwards and forwards between the ground and the granary, it never changes
masters, and therefore does not properly circulate. The farmer makes his
profit, not by its sale, but by its increase.

The general stock of any country or society is the same with that of all its
inhabitants or members ; and, therefore, naturally divides itself into the
same three portions, each of which has a distinct function or office.

The first is that portion which is reserved for immediate consumption, and
of which the characteristic is, that it affords no revenue or profit. It
consists in the stock of food, clothes, household furniture, etc. which have
been purchased by their proper consumers, but which are not yet entirely
consumed. The whole stock of mere dwelling-houses, too, subsisting at anyone
time in the country, make a part of this first portion. The stock that is
laid out in a house, if it is to be the dwelling-house of the proprietor,
ceases from that moment to serve in the function of a capital, or to afford
any revenue to its owner. A dwelling-house, as such, contributes nothing to
the revenue of its inhabitant ; and though it is, no doubt, extremely useful
to him, it is as his clothes and household furniture are useful to him,
which, however, make a part of his expense, and not of his revenue. If it is
to be let to a tenant for rent, as the house itself can produce nothing, the
tenant must always pay the rent out of some other revenue, which he derives,
either from labour, or stock, or land. Though a house, therefore, may yield
a revenue to its proprietor, and thereby serve in the function of a capital
to him, it cannot yield any to the public, nor serve in the function of a
capital to it, and the revenue of the whole body of the people can never be
in the smallest degree increased by it. Clothes and household furniture, in
the same manner, sometimes yield a revenue, and thereby serve in the
function of a capital to particular persons. In countries where masquerades
are common, it is a trade to let out masquerade dresses for a night.
Upholsterers frequently let furniture by the month or by the year.
Undertakers let the furniture of funerals by the day and by the week. Many
people let furnished houses, and get a rent, not only for the use of the
house, but for that of the furniture. The revenue, however, which is derived
from such things, must always be ultimately drawn from some other source of
revenue. Of all parts of the stock, either of an individual or of a society,
reserved for immediate consumption, what is laid out in houses is most
slowly consumed. A stock of clothes may last several years; a stock of
furniture half a century or a century; but a stock of houses, well built and
properly taken care of, may last many centuries. Though the period of their
total consumption, however, is more distant, they are still as really a
stock reserved for immediate consumption as either clothes or household

The second of the three portions into which the general stock of the society
divides itself, is the fixed capital ; of which the characteristic is, that
it affords a revenue or profit without circulating or changing masters. It
consists chiefly of the four following articles.

First, of all useful machines and instruments of trade, which facilitate and
abridge labour.

Secondly, of all those profitable buildings which are the means of procuring
a revenue, not only to the proprietor who lets them for a rent, but to the
person who possesses them, and pays that rent for them; such as shops,
warehouses, work-houses, farm-houses, with all their necessary buildings,
stables, granaries, etc. These are very different from mere dwelling-houses.
They are a sort of instruments of trade, and may be considered in the same

Thirdly, of the improvements of land, of what has been profitably laid out
in clearing, draining, inclosing, manuring, and reducing it into the
condition most proper for tillage and culture. An improved farm may very
justly be regarded in the same light as those useful machines which
facilitate and abridge labour, and by means of which an equal circulating
capital can afford a much greater revenue to its employer. An improved farm
is equally advantageous and more durable than any of those machines,
frequently requiring no other repairs than the most profitable application
of the farmer's capital employed in cultivating it.

Fourthly, of the acquired and useful abilities of all the inhabitants and
members of the society. The acquisition of such talents, by the maintenance
of the acquirer during his education, study, or apprenticeship, always costs
a real expense, which is a capital fixed and realized, as it were, in his
person. Those talents, as they make a part of his fortune, so do they
likewise that of the society to which he belongs. The improved dexterity of
a workman may be considered in the same light as a machine or instrument of
trade which facilitates and abridges labour, and which, though it costs a
certain expense, repays that expense with a profit.

The third and last of the three portions into which the general stock of the
society naturally divides itself, is the circulating capital, of which the
characteristic is, that it affords a revenue only by circulating or changing
masters. It is composed likewise of four parts.

First, of the money, by means of which all the other three are circulated
and distributed to their proper consumers.

Secondly, of the stock of provisions which are in the possession of the
butcher, the grazier, the farmer, the corn-merchant, the brewer, etc. and
from the sale of which they expect to derive a profit.

Thirdly, of the materials, whether altogether rude, or more or less
manufactured, of clothes, furniture, and building which are not yet made up
into any of those three shapes, but which remain in the hands of the
growers, the manufacturers, the mercers, and drapers, the timber-merchants,
the carpenters and joiners, the brick-makers, etc.

Fourthly, and lastly, of the work which is made up and completed, but which
is still in the hands of the merchant and manufacturer, and not yet disposed
of or distributed to the proper consumers; such as the finished work which
we frequently find ready made in the shops of the smith, the cabinet-maker,
the goldsmith, the jeweller, the china-merchant, etc. The circulating
capital consists, in this manner, of the provisions, materials, and finished
work of all kinds that are in the hands of their respective dealers, and of
the money that is necessary for circulating and distributing them to those
who are finally to use or to consume them.

Of these four parts, three - provisions, materials, and finished work, are
either annually or in a longer or shorter period, regularly withdrawn from
it, and placed either in the fixed capital, or in the stock reserved for
immediate consumption.

Every fixed capital is both originally derived from, and requires to be
continually supported by, a circulating capital. All useful machines and
instruments of trade are originally derived from a circulating capital,
which furnishes the materials of which they are made, and the maintenance of
the workmen who make them. They require, too, a capital of the same kind to
keep them in constant repair.

No fixed capital can yield any revenue but by means of a circulating capital
The most useful machines and instruments of trade will produce nothing,
without the circulating capital, which affords the materials they are
employed upon, and the maintenance of the workmen who employ them. Land,
however improved, will yield no revenue without a circulating capital, which
maintains the labourers who cultivate and collect its produce.

To maintain and augment the stock which maybe reserved for immediate
consumption, is the sole end and purpose both of the fixed and circulating
capitals. It is this stock which feeds, clothes, and lodges the people.
Their riches or poverty depend upon the abundant or sparing supplies which
those two capitals can afford to the stock reserved for immediate

So great a part of the circulating capital being continually withdrawn from
it, in order to be placed in the other two branches of the general stock of
the society, it must in its turn require continual supplies without which it
would soon cease to exist. These supplies are principally drawn from three
sources; the produce of land, of mines, and of fisheries. These afford
continual supplies of provisions and materials, of which part is afterwards
wrought up into finished work and by which are replaced the provisions,
materials, and finished work, continually withdrawn from the circulating
capital. From mines, too, is drawn what is necessary for maintaining and
augmenting that part of it which consists in money. For though, in the
ordinary course of business, this part is not, like the other three,
necessarily withdrawn from it, in order to be placed in the other two
branches of the general stock of the society, it must, however, like all
other things, be wasted and worn out at last, and sometimes, too, be either
lost or sent abroad, and must, therefore, require continual, though no doubt
much smaller supplies.

Lands, mines, and fisheries, require all both a fixed and circulating
capital to cultivate them; and their produce replaces, with a profit not
only those capitals, but all the others in the society. Thus the farmer
annually replaces to the manufacturer the provisions which he had consumed,
and the materials which he had wrought up the year before; and the
manufacturer replaces to the farmer the finished work which he had wasted
and worn out in the same time. This is the real exchange that is annually
made between those two orders of people, though it seldom happens that the
rude produce of the one, and the manufactured produce of the other, are
directly bartered for one another ; because it seldom happens that the
farmer sells his corn and his cattle, his flax and his wool, to the very
same person of whom he chuses to purchase the clothes, furniture, and
instruments of trade, which he wants. He sells, therefore, his rude produce
for money, with which he can purchase, wherever it is to be had, the
manufactured produce he has occasion for. Land even replaces, in part at
least, the capitals with which fisheries and mines are cultivated. It is the
produce of land which draws the fish from the waters ; and it is the produce
of the surface of the earth which extracts the minerals from its bowels.

The produce of land, mines, and fisheries, when their natural fertility is
equal, is in proportion to the extent and proper application of the capitals
employed about them. When the capitals are equal, and equally well applied,
it is in proportion to their natural fertility.

In all countries where there is a tolerable security, every man of common
understanding will endeavour to employ whatever stock he can command, in
procuring either present enjoyment or future profit. If it is employed in
procuring present enjoyment, it is a stock reserved for immediate
consumption. If it is employed in procuring future profit, it must procure
this profit either by staying with him, or by going from him. In the one
case it is a fixed, in the other it is a circulating capital. A man must be
perfectly crazy, who, where there is a tolerable security, does not employ
all the stock which he commands, whether it be his own, or borrowed of other
people, in some one or other of those three ways.

In those unfortunate countries, indeed, where men are continually afraid of
the violence of their superiors, they frequently bury or conceal a great
part of their stock, in order to have it always at hand to carry with them
to some place of safety, in case of their being threatened with any of those
disasters to which they consider themselves at all times exposed. This is
said to be a common practice in Turkey, in Indostan, and, I believe, in most
other governments of Asia. It seems to have been a common practice among our
ancestors during the violence of the feudal government. Treasure-trove was,
in these times, considered as no contemptible part of the revenue of the
greatest sovereigns in Europe. It consisted in such treasure as was found
concealed in the earth, and to which no particular person could prove any
right. This was regarded, in those times, as so important an object, that it
was always considered as belonging to the sovereign, and neither to the
finder nor to the proprietor of the land, unless the right to it had been
conveyed to the latter by an express clause in his charter. It was put upon
the same footing with gold and silver mines, which, without a special clause
in the charter, were never supposed to be comprehended in the general grant
of the lands, though mines of lead, copper, tin, and coal were, as things of
smaller consequence.

Adam Smith

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