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Chapter 6



When a nation binds itself by treaty, either to permit the entry
of certain goods from one foreign country which it prohibits from
all others, or to exempt the goods of one country from duties to
which it subjects those of all others, the country, or at least
the merchants and manufacturers of the country, whose commerce is
so favoured, must necessarily derive great advantage from the
treaty. Those merchants and manufacturers enjoy a sort of
monopoly in the country which is so indulgent to them. That
country becomes a market, both more extensive and more
advantageous for their goods: more extensive, because the goods
of other nations being either excluded or subjected to heavier
duties, it takes off a greater quantity of theirs; more
advantageous, because the merchants of the favoured country,
enjoying a sort of monopoly there, will often sell their goods
for a better price than if exposed to the free competition of all
other nations.

Such treaties, however, though they may be advantageous to the
merchants and manufacturers of the favoured, are necessarily
disadvantageous to those of the favouring country. A monopoly is
thus granted against them to a foreign nation; and they must
frequently buy the foreign goods they have occasion for, dearer
than if the free competition of other nations was admitted. That
part of its own produce with which such a nation purchases
foreign goods, must consequently be sold cheaper; because, when
two things are exchanged for one another, the cheapness of the
one is a necessary consequence, or rather is the same thing, with
the dearness of the other. The exchangeable value of its annual
produce, therefore. is likely to be diminished by every such
treaty. This diminution, however, can scarce amount to any
positive loss, but only to a lessening of the gain which it might
otherwise make. Though it sells its goods cheaper than it
otherwise might do, it will not probably sell them for less than
they cost; nor, as in the case of bounties, for a price which
will not replace the capital employed in bringing them to market,
together with the ordinary profits of stock. The trade could not
go on long if it did. Even the favouring country, therefore, may
still gain by the trade, though less than if there was a free

Some treaties of commerce, however, have been supposed
advantageous, upon principles very different from these; and a
commercial country has sometimes granted a monopoly of this kind,
against itself, to certain goods of a foreign nation, because it
expected, that in the whole commerce between them, it would
annually sell more than it would buy, and that a balance in gold
and silver would be annually returned to it. It is upon this
principle that the treaty of commerce between England and
Portugal, concluded in 1703 by Mr Methuen, has been so much
commended. The following is a literal translation of that treaty,
which consists of three articles only.


His sacred royal majesty of Portugal promises, both in his own
name and that of his successors, to admit for ever hereafter,
into Portugal, the woollen cloths, and the rest of the woollen
manufactures of the British, as was accustomed, till they were
prohibited by the law ; nevertheless upon this condition :


That is to say, that her sacred royal majesty of Great Britain
shall, in her own name, and that of her successors, be obliged,
for ever hereafter, to admit the wines of the growth of Portugal
into Britain; so that at no time, whether there shall be peace or
war between the kingdoms of Britain and France, any thing more
shall be demanded for these wines by the name of custom or duty,
or by whatsoever other title, directly or indirectly, whether
they shall be imported into Great Britain in pipes or hogsheads,
or other casks, than what shall be demanded for the like quantity
or measure of French wine, deducting or abating a third part of
the custom or duty. But if, at any time, this deduction or
abatement of customs, which is to be made as aforesaid, shall in
any manner be attempted and prejudiced, it shall be just and
lawful for his sacred royal majesty of Portugal, again to
prohibit the woollen cloths, and the rest of the British woollen


The most excellent lords the plenipotentiaries promise and take
upon themselves, that their above named masters shall ratify this
treaty; and within the space of two months the ratification shall
be exchanged.

By this treaty, the crown of Portugal becomes bound to admit the
English woollens upon the same footing as before the prohibition;
that is, not to raise the duties which had been paid before that
time. But it does not become bound to admit them upon any better
terms than those of any other nation, of France or Holland, for
example. The crown of Great Britain, on the contrary, becomes
bound to admit the wines of Portugal, upon paying only two-thirds
of the duty which is paid for those of France, the wines most
likely to come into competition with them. So far this treaty,
therefore, is evidently advantageous to Portugal, and
disadvantageous to Great Britain.

It has been celebrated, however, as a masterpiece of the
commercial policy of England. Portugal receives annually from the
Brazils a greater quantity of gold than can be employed in its
domestic commerce, whether in the shape of coin or of plate. The
surplus is too valuable to be allowed to lie idle and locked up
in coffers; and as it can find no advantageous market at home, it
must, notwithstanding; any prohibition, be sent abroad, and
exchanged for something for which there is a more advantageous
market at home. A large share of it comes annually to England, in
return either for English goods, or for those of other European
nations that receive their returns through England. Mr Barretti
was informed, that the weekly packet-boat from Lisbon brings, one
week with another, more than 50,000 in gold to England. The sum
had probably been exaggerated. It would amount to more than
2,600,000 a. year, which is more than the Brazils are supposed
to afford.

Our merchants were, some years ago, out of humour with the crown
of Portugal. Some privileges which had been granted them, not by
treaty, but by the free grace of that crown, at the solicitation,
indeed, it is probable, and in return for much greater favours,
defence and protection from the crown of Great Britain, had been
either infringed or revoked. The people, therefore, usually most
interested in celebrating the Portugal trade, were then rather
disposed to represent it as less advantageous than it had
commonly been imagined. The far greater part, almost the whole,
they pretended, of this annual importation of gold, was not on
account of Great Britain, but of other European nations; the
fruits and wines of Portugal annually imported into Great Britain
nearly compensating the value of the British goods sent thither.

Let us suppose, however, that the whole was on account of Great
Britain, and that it amounted to a still greater sum than Mr
Barretti seems to imagine ; this trade would not, upon that
account, be more advantageous than any other, in which, for the
same value sent out, we received an equal value of consumable
goods in return.

It is but a very small part of this importation which, it can be
supposed, is employed as an annual addition, either to the plate
or to the coin of the kingdom. The rest must all be sent abroad,
and exchanged for consumable goods of some kind or other. But if
those consumable goods were purchased directly with the produce
of English industry, it would be more for the advantage of
England, than first to purchase with that produce the gold of
Portugal, and afterwards to purchase with that gold those
consumable goods. A direct foreign trade of consumption is always
more advantageous than a round-about one; and to bring the same
value of foreign goods to the home market requires a much smaller
capital in the one way than in the ether. If a smaller share of
its industry, therefore, had been enmloyed in producing goods fit
for the Portugal market, and a greater in producing those lit for
the other markets, where those consumable goods for which there
is a demand in Great Britain are to be had, it would have been
more for the advantage of England. To procure both the gold which
it wants for its own use, and the consumable goods, would, in
this way, employ a much smaller capital than at present. There
would be a spare capital, therefore, to be employed for other
purposes, in exciting an additional quantity of industry, and in
raising a greater annual produce.

Though Britain were entirely excluded from the Portugal trade, it
could find very little difficulty in procuring all the annual
supplies of gold which it wants, either for the purposes of
plate, or of coin, or of foreign trade. Gold, like every other
commodity, is always somewhere or another to be got for its value
by those who have that value to give for it. The annual surplus
of gold in Portugal, besides, would still be sent abroad, and
though not carried away by Great Britain, would be carried away
by some other nation, which would be glad to sell it again for
its price, in the same manner as Great Britain does at present.
In buying gold of Portugal, indeed, we buy it at the first hand ;
whereas, in buying it of any other nation, except Spain, we
should buy it at the second, and might pay somewhat dearer. This
difference, however, would surely be too insignificant to deserve
the public attention.

Almost all our gold, it is said, comes from Portugal. With other
nations, the balance of trade is either against as, or not much
in our favour. But we should remember, that the more gold we
import from one country, the less we must necessarily import from
all others. The effectual demand for gold, like that for every
other commodity, is in every country limited to a certain
quantity. If nine-tenths of this quantity are imported from one
country, there remains a tenth only to be imported from all
others. The more gold, besides, that is annually imported from
some particular countries, over and above what is requisite for
plate and for coin, the more must necessarily be exported to some
others: and the more that most insignificant object of modern
policy, the balance of trade, appears to be in our favour with
some particular countries, the more it must necessarily appear to
be against us with many others.

It was upon this silly notion, however, that England could not
subsist without the Portugal trade, that, towards the end of the
late war, France and Spain, without pretending either offence or
provocation, required the king of Portugal to exclude all British
ships from his ports, and, for the security of this exclusion, to
receive into them French or Spanish garrisons. Had the king of
Portugal submitted to those ignominious terms which his
brother-in-law the king of Spain proposed to him, Britain would
have been freed from a much greater inconveniency than the loss
of the Portugal trade, the burden of supporting a very weak ally,
so unprovided of every thing for his own defence, that the whole
power of England, had it been directed to that single purpose,
could scarce, perhaps, have defended him for another campaign.
The loss of the Portugal trade would, no doubt, have occasioned a
considerable embarrassment to the merchants at that time engaged
in it, who might not, perhaps, have found out, for a year or two,
any other equally advantageous method of employing their
capitals; and in this would probably have consisted all the
inconveniency which England could have suffered from this notable
piece of commercial policy.

The great annual importation of gold and silver is neither for
the purpose of plate nor of coin, but of foreign trade. A
round-about foreign trade of consumption can be carried on more
advantageously by means of these metals than of almost any other
goods. As they are the universal instruments of commerce, they
are more readily received in return for all commodities than any
other goods ; and, on account of their small bulk and great
value, it costs less to transport them backward and forward from
one place to another than almost any other sort of merchandize,
and they lose less of their value by being so transported. Of all
the commodities, therefore, which are bought in one foreign
country, for no other purpose but to be sold or exchanged again
for some other goods in another, there are none so convenient as
gold and silver. In facilitating all the different round-about
foreign trades of consumption which are carried on in Great
Britain, consists the principal advantage of the Portugal trade;
and though it is not a capital advantage, it is, no doubt, a
considerable one.

That any annual addition which, it can reasonably be supposed, is
made either to the plate or to the coin of the kingdom, could
require but a very small annual importation of gold and silver,
seems evident enough; and though we had no direct trade with
Portugal, this small quantity could always, somewhere or another,
be very easily got.

Though the goldsmiths trade be very considerable in Great
Britain, the far greater part of the new plate which they
annually sell, is made from other old plate melted down ; so that
the addition annually made to the whole plate of the kingdom
cannot be very great, and could require but a very small annual

It is the same case with the coin. Nobody imagines, I beileve,
that even the greater part of the annual coinage, amounting, for
ten years together, before the late reformation of the gold coin,
to upwards of 800,000 a-year in gold, was an annual addition to
the money before current in the kingdom. In a country where the
expense of the coinage is defrayed by the government, the value
of the coin, even when it contains its full standard weight of
gold and silver, can never be much greater than that of an equal
quantity of those metals uncoined, because it requires only the
trouble of going to the mint, and the delay, perhaps, of a few
weeks, to procure for any quantity of uncoined gold and silver an
equal quantity of those metals in coin; but in every country the
greater part of the current coin is almost always more or less
worn, or otherwise degenerated from its standard. In Great
Britain it was, before the late reformation, a good deal so, the
gold being more than two per cent., and the silver more than
eight per cent. below its standard weight. But if forty-four
guineas and a-half, containing their full standard weight, a
pound weight of gold, could purchase very little more than a
pound weight of uncoined gold; forty-four guineas and a-half,
wanting a part of their weight, could not purchase a pound
weight, and something was to be added, in order to make up the
deficiency. The current price of gold bullion at market,
therefore, instead of being the same with the mint price, or
46:14:6, was then about 47:14s., and sometimes about 48. When
the greater part of the coin, however, was in this degenerate
condition, forty four guineas and a-half, fresh from the mint,
would purchase no more goods in the market than any other
ordinary guineas; because, when they came into the coffers of the
merchant, being confounded with other money, they could not
afterwards be distinguished without more trouble than the
difference was worth. Like other guineas, they were worth no more
than 46:14:6. If thrown into the melting pot, however, they
produced, without any sensible loss, a pound weight of standard
gold, which could be sold at any time for between 47:14s. and
48, either in gold or silver, as fit for all the purposes of
coin as that which had been melted down. There was an evident
profit, therefore, in melting down new-coined money; and it was
done so instantaneously, that no precaution of government could
prevent it. The operations of the mint were, upon this account,
somewhat like the web of Penelope; the work that was done in the
day was undone in the night. The mint was employed, not so much
in making daily additions to the coin, as in replacing the very
best part of it, which was daily melted down.

Were the private people who carry their gold and silver to the
mint to pay themselves for the coinage, it would add to the value
of those metals, in the same manner as the fashion does to that
of plate. Coined gold and silver would be more valuable than
uncoined. The seignorage, if it was not exorbitant, would add to
the bullion the whole value of the duty; because, the government
having everywhere the exclusive privilege of coining, no coin can
come to market cheaper than they think proper to afford it. If
the duty was exorbitant, indeed, that is, if it was very much
above the real value of the labour and expense requisite for
coinage, false coiners, both at home and abroad, might be
encouraged, by the great difference between the value of bullion
and that of coin, to pour in so great a quantity of counterfeit
money as might reduce the value of the government money. In
France, however, though the seignorage is eight per cent., no
sensible inconveniency of this kind is found to arise from it.
The dangers to which a false coiner is everywhere exposed, if he
lives in the country of which he counterfeits the coin, and to
which his agents or correspondents are exposed, if he lives in a
foreign country, are by far too great to be incurred for the sake
of a profit of six or seven per cent.

The seignorage in France raises the value of the coin higher than
in proportion to the quantity of pure gold which it contains.
Thus, by the edict of January 1726, the mint price of fine gold
of twenty-four carats was fixed at seven hundred and forty livres
nine sous and one denier one-eleventh the mark of eight Paris
ounces. {See Dictionnaire des Monnoies, tom. ii. article
Seigneurage, p. 439, par 81. Abbot de Bazinghen,
Conseiller-Commissaire en la Cour des Monnoies Paris.} The gold
coin of France, making an allowance for the remedy of the mint,
contains twenty-one carats and three-fourths of fine gold, and
two carats one-fourth of alloy. The mark of standard gold,
therefore, is worth no more than about six hundred and
seventy-one livres ten deniers. But in France this mark of
standard gold is coined into thirty louis d'ors of twenty-four
livres each, or into seven hundred and twenty livres. The coin.
age, therefore, increases the value of a mark of standard gold
bullion, by the difference between six hundred and seventy-one
livres ten deniers and seven hundred and twenty livres, or by
forty-eight livres nineteen sous and two deniers.

A seignorage will, in many cases, take away altogether, and will
in all cases diminish, the profit of melting down the new coin.
This profit always arises from the difference between the
quantity of bullion which the common currency ought to contain
and that which it actually does contain. If this difference is
less than the seignorage, there will be loss instead of profit.
If it is equal to the seignorage, there will be neither profit
nor loss. If it is greater than the seignorage, there will,
indeed, be some profit, but less than if there was no seignorage.
If, before the late reformation of the gold coin, for example,
there had been a seignorage of five per cent. upon the coinage,
there would have been a loss of three per cent. upon the melting
down of the gold coin. If the seignorage had been two per cent.,
there would have been neither profit nor loss. If the seignorage
had been one per cent., there would have been a profit but of one
per cent. only, instead of two per cent. Wherever money is
received by tale, therefore, and not by weight, a seignorage is
the most effectual preventive of the melting down of the coin,
and, for the same reason, of its exportaticn. It is the best and
heaviest pieces that are commonly either melted down or exported,
because it is upon such that the largest profits are made.

The law for the encouragement of the coinage, by rendering it
duty-free, was first enacted during the reign of Charles II. for
a limited time, and afterwards continued, by different
prolongations, till 1769, when it was rendered perpetual. The
bank of England, in order to replenish their coffers with money,
are frequently obliged to carry bullion to the mint ; and it was
more for their interest, they probably imagined, that the coinage
should be at the expense of the government than at their own. It
was probably out of complaisance to this great company, that the
government agreed to render this law perpetual. Should the custom
of weighing gold, however, come to be disused, as it is very
likely to be on account of its inconveniency ; should the gold
coin of England come to be received by tale, as it was before the
late recoinage this great company may, perhaps, find that they
have, upon this, as upon some other occasions, mistaken their own
interest not a little.

Before the late recoinage, when the gold currency of England was
two per cent. below its standard weight, as there was no
seignorage, it was two per cent. below the value of that quantity
of standard gold bullion which it ought to have contained. When
this great company, therefore, bought gold bullion in order to
have it coined, they were obliged to pay for it two per cent.
more than it was worth after the coinage. But if there had been a
seignorage of two per cent. upon the coinage, the common gold
currency, though two per cent. below its standard weight, would,
notwithstanding, have been equal in value to the quantity of
standard gold which it ought to have contained ; the value of the
fashion compensating in this case the diminution of the weight.
They would, indeed, have had the seignorage to pay, which being
two per cent., their loss upon the whole transaction would have
been two per cent., exactly the same, but no greater than it
actually was.

If the seignorage had been five per cent. and the gold currency
only two per cent. below its standard weight, the bank would, in
this case, have gained three per cent. upon the price of the
bullion ; but as they would have had a seignorage of five per
cent. to pay upon the coinage, their loss upon the whole
transaction would, in the same manner, have been exactly two per

If the seignorage had been only one per cent., and the gold
currency two per cent. below its standard weight, the bank would,
in this case, have lost only one per cent. upon the price of the
bullion; but as they would likewise have had a seignorage of one
per cent. to pay, their loss upon the whole transaction would
have been exactly two per cent., in the same manner as in all
other cases.

If there was a reasonable seignorage, while at the same time the
coin contained its full standard weight, as it has done very
nearly since the late recoinage, whatever the bank might lose by
the seignorage, they would gain upon the price of the bullion;
and whatever they might gain upon the price of the bullion, they
would lose by the seignorage. They would neither lose nor gain,
therefore, upon the whole transaction, and they would in this, as
in all the foregoing cases, be exactly in the same situation as
if there was no seignorage.

When the tax upon a commodity is so moderate as not to encourage
smuggling, the merchant who deals in it, though he advances, does
not properly pay the tax, as he gets it back in the price of the
commodity. The tax is finally paid by the last purchaser or
consumer. But money is a commodity, with regard to which every
man is a merchant. Nobody buys it but in order to sell it again;
and with regard to it there is, in ordinary cases, no last
purchaser or consumer. When the tax upon coinage, therefore, is
so moderate as not to encourage false coining, though every body
advances the tax, nobody finally pays it; because every body gets
it back in the advanced value of the coin.

A moderate seignorage, therefore, would not, in any case, augment
the expense of the bank, or of any other private persons who
carry their bullion to the mint in order to be coined; and the
want of a moderate seignonage does not in any case diminish it.
Whether there is or is not a seignorage, if the currency contains
its full standard weight, the coinage costs nothing to anybody ;
and if it is short of that weight, the coinage must always cost
the difference between the quantity of bullion which ought to be
contained in it, and that which actually is contained in it.

The government, therefore, when it defrays the expense of
coinage, not only incurs some small expense, but loses some small
revenue which it might get by a proper duty; and neither the
bank, nor any other private persons, are in the smallest degree
benefited by this useless piece of public generosity.

The directors of the bank, however, would probably be unwilling
to agree to the impositon of a seignorage upon the authority of a
speculation which promises them no gain, but only pretends to
insure them from any loss. In the present state of the gold coin,
and as long as it continues to be received by weight, they
certainly would gain nothing by such a change. But if the custom
of weighing the gold coin should ever go into disuse, as it is
very likely to do, and if the gold coin should ever fall into the
same state of degradation in which it was before the late
recoinage, the gain, or more properly the savings, of the bank,
inconsequence of the imposition of a seignorage, would probably
be very considerable. The bank of England is the only company
which sends any considerable quantity of bullion to the mint, and
the burden of the annual coinage falls entirely, or almost
entirely, upon it. If this annual coinage had nothing to do but
to repair the unavoidable losses and necessary wear and tear of
the coin, it could seldom exceed fifty thousand, or at most a
hundred thousand pounds. But when the coin is degraded below its
standard weight, the annual coinage must, besides this, fill up
the large vacuities which exportation and the melting pot are
continually making in the current coin. It was upon this account,
that during the ten or twelve years immediately preceding the
late reformation of the gold coin, the annual coinage amounted,
at an average, to more than 850,000. But if there had been a
seignorage of four or five per cent. upon the gold coin, it would
probably, even in the state in which things then were, have put
an effectual stop to the business both of exportation and of the
melting pot. The bank, instead of losing every year about two and
a half per cent. upon the bullion which was to be coined into
more than eight hundred and fifty thousand pounds, or incurring
an annual loss of more than 21,250 pounds, would not probably
have incurred the tenth part of that loss.

The revenue allotted by parliament for defraying the expense of
the coinage is but fourteen thousand pounds a-year; and the real
expense which it costs the government, or the fees of the
officers of the mint, do not, upon ordinary occasions, I am
assured, exceed the half of that sum. The saving of so very small
a sum, or even the gaining of another, which could not well be
much larger, are objects too inconsiderable, it may be thought,
to deserve the serious attention of government. But the saving of
eighteen or twenty thousand pounds a-year, in case of an event
which is not improbable, which has frequently happened before,
and which is very likely to happen again, is surely an object
which well deserves the serious attention, even of so great a
company as the bank of England.

Some of the foregoing reasonings and observations might, perhaps,
have been more properly placed in those chapters of the first
book which treat of the origin and use of money, and of the
difference between the real and the nominal price of commodities.
But as the law for the encouragement of coinage derives its
origin from those vulgar prejudices which have been introduced by
the mercantile system, I judged it more proper to reserve them
for this chapter. Nothing could be more agreeable to the spirit
of that system than a sort of bounty upon the production of
money, the very thing which, it supposes, constitutes the wealth
of every nation. It is one of its many admirable expedients for
enriching the country.

Adam Smith

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