Previous
Book 4, Chapter 5
Themes
and Colors
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
Commercial treaties that privilege imports from a specific country benefit that country’s wholesalers and manufacturers, but harm those of the importing country by exposing them to greater competition and forcing them to sell their goods more cheaply. But some countries have established such treaties primarily in order to shape the balance of trade and secure more gold and silver. For instance, Britain and Portugal’s 1703 treaty secures Britain’s right to export wool to Portugal under the same terms as any other nation, in exchange for Portugal’s right to export wine to Britain for a lower tax rate than was placed on its main competitor, French wine.
Treaties are the fifth kind of mercantilist policy. They are based on political favoritism, so they clearly violate the basic principles of free trade. While they force domestic producers to compete with foreign ones, they don’t necessarily give those foreign producers an unfair advantage. British people drank Portuguese wine because it was their best option, but if Britain were capable of producing better, cheaper wine than Portugal, Brits would have been drinking it instead. in contrast, free trade puts much more pressure on domestic producers—which Smith considers desirable because it forces those producers to either remain competitive by improving, or else to shift their capital elsewhere. Thus, Smith’s complaint isn't that treaties go too far in opening up trade, but rather that they generally don’t go far enough. (He also thinks Britain should have negotiated better terms in its unfair treaty with Portugal.)
Active
Themes
This policy is obviously better for Portugal than for Britain, but many British people wrongly think it’s advantageous for them because it helps them import more gold from Portugal. This is wrong because most of that gold actually gets re-exported to pay for other foreign goods. Britain could have just bought those goods with its own domestic produce instead of going through the trouble of first selling them for Portuguese gold. This would favor balance of trade with those other countries. When France and Spain invaded Portugal in 1762, they tried to stop its substantial trade with Britain. This actually would have helped Britain by sparing it the expense of defending Portugal, and British merchants who focused on the Portugal trade could have easily found other equally profitable ways to invest their capital.
Mercantilist thinking leads Britain to maintain its lopsided treaty with Portugal. British people think it benefits them by securing them access to gold, but they don't actually need more gold than they already have. For instance, imagine that Britain exports £1,000,000 of wool to Holland, but also buys the same amount in ships from Holland. If it receives payment for the wool in gold, but pays for the ships with the gold it secured from Portugal, this would be exactly the same as if it just exchanged the ships for the wool (and worked out any accounting issues domestically, in the national currency). In this way, Britain gives Portugal favorable treatment—and creates strategic weaknesses for itself—in exchange for liquidity that it simply doesn't need.
Active
Themes
Most imported gold and silver goes to foreign trade. Most new gold coins and gold-plated objects are made by melting down old ones. Due to coin debasing, it was long profitable to melt down freshly-minted coins and sell them as bullion. But if people had to pay seigniorage, like in France, this would stop because money would be worth more than its weight in gold, rather than less.
Active
Themes
Britain stopped charging seigniorage in 1769, in response to complaints from the Bank of England. But these complaints were mistaken, for if the bank paid a percentage in seigniorage to turn its bullion into coins, it would get back the exact same percentage in the form of the coins’ increased value. In this way, nobody really pays the seigniorage, although the government gains some revenue from it. A seigniorage would also protect the Bank of England against future coin debasing, which would cost it dearly because the Bank brings far more bullion to the mint than any other organization (and has to make up the difference when people melt coins down).
Active
Themes
Get the entire The Wealth of Nations LitChart as a printable PDF.
"My students can't get enough of your charts and their results have gone through the roof." -Graham S.
