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Book 4, Chapter 6
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
“Part First. Of the Motives for establishing new Colonies.” Ancient Greek city-states established independent, self-governing colonies once their populations grew too large to support at home. Rome gave its poor citizens land in the provinces it conquered, although these colonies remained under tight Roman control. In contrast to Greece and Rome, Europe’s modern colonies in the Americas are not necessary, and their usefulness wasn’t clear at first. After all, Columbus came to the Americas by accident, then convinced himself he had found India and started trying to persuade the Spanish crown of his discovery’s importance. Since the New World’s plants and animals were no better than the Old World’s, Columbus focused on its minerals instead.
The sixth, final, and most complex way that mercantilist countries try to expand their wealth is through colonialism. Both the Greek and Roman examples show how colonies can support a surplus population by giving them the land and resources they need to survive—often at the expense of their new lands’ original inhabitants. In both cases, these population surpluses likely would have led to conflicts over resources at home, so colonies also prevented unrest. But Europe’s colonies were, per Smith, instead somewhere between a historical accident and a crime of opportunity. Europeans didn’t need colonies to support their population and grow their economies, but Columbus used the allure of gold and silver to convince them that they did.
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Accepting Columbus’s ploy, Spain agreed to conquer and enslave the native people, using Christian conversion as an excuse. It initially taxed away 50% of the gold that the conquistadors recovered, but it had to reduce this rate once they could no longer just steal it from native people (and had to enslave them in mining operations instead). Notably, the conquistadors focused singlehandedly on gold, while all but ignoring silver.
Most early chroniclers of European colonialism in the New World were animated by a religious mission, sense of adventure, nationalist zeal, or unquestioned thirst for gold. In contrast to all these aesthetically-focused, self-serving narratives, Smith offers a cut-and-dry economic account of the conquest, which emphasizes its deep folly and needless brutality.
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Searching for mines is one of the riskiest, most expensive, and least profitable businesses in the world, but people are greedy and overconfident enough to do it anyway. Some even believe in mythical gold cities, forgetting that gold and silver are valuable because they are scarce, and they are scarce because they are very widely dispersed and very difficult to mine. Indeed, the first Spanish explorers wildly exaggerated the New World’s supply of gold and silver, while later explorers acquired massive gold and silver stores by accident, after conquering Mexico and Peru. But none of Europe’s other nations found any significant gold or silver in their American colonies.
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“Part Second. Causes of the Prosperity of New Colonies.” When they colonize new territories, “civilized” Europeans quickly implement better systems of agriculture and government than the “savage and barbarous” natives. Colonists receive free, plentiful land and get to keep everything they produce, so they are willing to pay relatively high wages for laborers. Thanks to this combination of high wages and cheap land, even poor laborers can afford to buy land, there are strong incentives to have many children, and so the population grows fast.
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Ancient Greek colonies also grew fast, sometimes even surpassing the city-states that formed them, but no Roman colony ever surpassed Rome. Europe’s American colonies are more similar to the Greek colonies (and arguably even superior to them), as they are relatively distant and independent, which has enabled them to grow rapidly.
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Spain has held its colonies longer and controlled them more tightly than any other European nation, which has made them less prosperous, at least relative to their vast size. But they have still grown rapidly in population and technology. Portugal’s colony of Brazil has the Americas’ largest population of Europeans in the Americas, and these colonists even drove out the invading Dutch. After the English defeated the Spanish, Europe’s dominant naval force, other countries began colonizing the Americas too. The Swedes colonized New Jersey, but were conquered by the Dutch from New York, who in turn fell to the English.
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The Danish colonies in the Caribbean (the present-day U.S. Virgin Islands) began growing rapidly as soon as the king took control of them from the Danish West India Company. Similarly, company rule hampered growth in the Dutch colonies: Suriname, a few Caribbean islands, and formerly New York and New Jersey. The French colonies of Canada (which the English conquered in 1759) and Saint-Domingue (present-day Haiti) also grew much faster once company rule ended.
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England’s colonies are by far the most prosperous in America. They have less high-quality land than the Spanish or Portuguese, but better political institutions. Specifically, they ban the hoarding of land by making possession conditional on improving it, distribute property more equally among heirs rather than giving everything to the firstborn, and impose relatively low taxes, while spending frugally. In contrast, Spain, Portugal, and France spend lavishly on their colonial officials, while allowing corrupt church officials to live off charity from the poor and amass land.
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Fourth, the English colonies can trade with England on better terms than other countries’ colonies. When individual companies exclusively control the trade (like in Holland, Denmark, Portugal, and France in the past), they limit supply to increase their profits, which harms the colonial economy. When trade is limited to a single port, as with the Spanish, merchants collude to produce the same effect. But some countries—like England and France—let their merchants trade freely with their colonies. England even lets its American colonies freely export some of the goods they produce best—including grain, timber, cattle, fish, and sugar—to any country, not just Britain. Indeed, if they were limited to the British market, American commodities would have outcompeted local British goods.
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But Britain still restricts the market for some goods that are only or mainly produced in America. It offers a bounty for American timber in order to boost its navy, and it imports American iron tax-free, which encourages the creation of wood-fired furnaces. Together, these policies have encouraged massive timber harvesting in America, which has cleared land for agriculture. Britain’s American colonies can also freely trade with the British West Indies.
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But Britain greatly restrains the trade in manufactured goods, even within its American colonies. This protects its own industry but limits the development of colonial ones. This violates people’s “sacred rights” but has little effect because, with so much spare land, it’s still cheaper for the American colonies to focus on agriculture and import manufactured goods.
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Britain uses bounties and drawbacks to encourage imports from its American colonies, while permitting drawbacks for goods originating from other European countries if they’re destined for re-exportation (including to the American colonies). This policy enriches merchants, while depriving the state of revenue. Not only are Britain’s trade policies more liberal than other countries’, but it allows its colonies to govern themselves freely, through representative assemblies. Indeed, there is no hereditary nobility in America. In contrast, Spain, Portugal, and (to a lesser extent) France rule their colonies tyrannically.
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France’s Caribbean sugar colonies are more advanced than England’s because they are allowed to refine sugar onsite and they employ better slave management techniques. This is because French magistrates enforce the law arbitrarily, so interfere with planters to protect enslaved people’s rights, which makes enslaved people work better and harder. The same happened in Rome, where magistrates could emancipate enslaved people whose masters mistreated them.
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In sum, Europe’s policies have not helped its American colonies. These were first established through the “folly and injustice” of murdering native people and stealing their land to search for gold and silver that nobody needed. The religious minorities expelled from Europe later established respectable settlements, governments, and agricultural economies in America. In fact, the adventurers and conquistadors who first established the colonies did so at their own risk, with minimal support from Europe—which was more concerned with preserving its trade monopolies than governing America. The only way Europe contributed to the colonies’ formation was by breeding and educating the superior men who established them.
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“Part Third. Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope.” Europe as a whole has benefited from colonizing America because it can import America’s surplus commodities and export its own commodities to America. Even countries that don’t trade directly with America still benefit, as their commerce with other European countries grows due to those countries’ trade with America. But European countries who establish an exclusive trade with their American colonies benefit less, as these colonies would produce more goods for cheaper if trade were free.
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Still, the particular colonizing countries benefit from their colonies, too. Like all empires, the colonies can provide revenue and soldiers (although, in practice, they actually haven’t). And the exclusive trade helps colonizing countries receive particular commodities that they couldn’t access otherwise (like tobacco and sugar for England). Still, this only gives the mother country a relative advantage over other European countries. Under a system of free trade instead of exclusive trade, such commodities would be even cheaper and more abundant.
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England’s exclusive trade with its colonies led other foreign powers to withdraw their capital from them, which caused more English capital to flow into them. Prices rose, but so did profit margins, so merchants withdrew their capital from other enterprises and forms of foreign trade to invest it in the colonies instead. Indeed, Britain has long been a successful trading nation; rather than greatly expanding that trade, the colonies just reversed its direction, making Britain an importer instead of an exporter. The exclusive trade gives Britain a disadvantage in trading with all other countries, as merchants raise prices to replicate the high profit margins they earn in the colonial trade, and demand for British goods falls in response. While merchants blame these effects on high wages, high profits are the true culprit.
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Direct trade with nearby countries is best because distances are shorter, so goods can circulate back and forth faster, and the same capital can yield profits more frequently. But Britain’s exclusive trade with its colonies has supported a distant, roundabout trade while harming the direct, nearby trade with nearby countries (especially Mediterranean ones). Since the American colonies need more capital than they have, they try to loan themselves that capital by delaying their return shipments of goods to Europe as much as possible, which hurts Britain. Many American goods, like tobacco, are traded to Britain primarily for re-export, which delays the returns on capital even longer. Without the exclusive trade, Britain would have a balanced variety of “small direct foreign trades” rather than one large, slow, indirect, insecure, mostly carrying trade. Britain should gradually dismantle this exclusive trade system.
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The American Revolution has cut Britain off from trade with its colonies, but this hasn’t severely affected it because the colonies already imported everything they would need before cutting off trade, and new political developments in Spain, Russia, Turkey, and Poland have kept up demand for British goods. And Britain’s trade with its colonies has been beneficial overall, even if the exclusive nature of that trade was harmful. Still, it would be far better in a “natural and free state.” The colonies primarily send rude produce to Europe and serve as a market for European manufactured goods. In Spain and Portugal, unlike in Britain, the colonial trade’s monopoly effects outweighed its benefits: their colonies were so rich and fertile that capital fled their manufacturing sectors, which shut down.
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By increasing merchants’ profits, the exclusive trade also reduces wages, discourages land improvement, reduces land rents, and raises interest rates in Europe. In short, it benefits merchants but harms everyone else in society. Further, it encourages people to become merchants and act irresponsibly, rather than doing the honest work that actually makes the economy grow. In this way, merchants’ high profits gradually eat away at society’s capital, impoverishing it, as in Spain and Portugal. In contrast, merchants in places with low profit rates (like Amsterdam) are responsible and honest, but also still wealthier overall, as the volume of their business is much higher.
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Ultimately, shopkeepers contributed nothing to Britain’s efforts to establish colonies, and yet Britain has spent exorbitantly to enrich them by establishing a monopolistic trade system, then paying soldiers and ships to defend it. Britain would be better off if it voluntarily gave up control of the colonies and started trading freely with them. But it will never do this. At present, the colonies don’t yield enough revenue to justify their expense, and the colonial assemblies will neither agree to pay enough nor ever accurately grasp the overall needs of the British Empire as a whole. Alternatively, Parliament could impose higher taxes on the American colonies, which it would not reasonably overtax because it under-taxes other colonies. But it doesn’t have the power to do this: the colonies would simply refuse and revolt. Indeed, that’s exactly what they are doing as Smith writes in 1776.
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If Britain offers the American colonies free trade and representation in Parliament, they might agree to pay their fair share in taxes. Otherwise, the colonies’ new leaders will not surrender, especially because they want to keep the power and status that come with their new roles. In this way, it will resemble the recent revolt in Paris. While Parliament fears that adding American members could alter the balance of power, proportional representation would prevent them from taking over. Instead, it would be in everyone’s best interests to cooperate.
The most important events in human history were the discovery of America and the discovery of the eastern sea route to Asia. In the short term, colonialism has devastated native people around the world, but this is because of the colonizers’ cruelty, not their commercial goals. But over time, it will make the world’s nations equal and mutually interdependent through trade. Colonialism has also spread the mercantile system and turned Europe into the world’s center of manufacturing, so it benefits all the nations of Europe, not just the ones with colonies.
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Yet exclusive trade systems between European countries and their colonies often hurt the mother country’s economy and benefit other European countries even more. Indeed, all of Europe’s American colonies cost more than they yield in revenue. Their dazzling riches lead people to mistakenly put all their capital into it, when it is naturally better to invest capital in activities that are near home and yield fast returns. When too much capital goes into a certain activity, its profit rates fall back to the standard. This is why people naturally distribute their capital in the way that produces the most revenue for society, simply by following their “private interests and passions.”
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The mercantile system disrupts this natural distribution of capital, and this effect is the strongest in Europe’s trade with America and the East Indies. In America, each European nation monopolizes trade with its colonies, and in the East Indies, each European nation assigns monopoly rights over its trade to a particular company. As explained above, the first kind of monopoly, exclusive trade, causes capital to flood into commerce. The second kind, the company-based monopoly, affects rich and poor European countries differently, but it is always undesirable. Poor countries, like Denmark and Sweden, would not be able to conduct international commerce without a company. But these companies are bad investments: such countries ought to invest at home first. In rich countries like Holland, merchants are already seeking ways to invest their abundant capital, but company-based monopolies shut most of them out, repelling investment that would have been desirable.
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Company monopolies are often justified on the grounds that only companies have enough capital to support the East India trade. But this is wrong: in a country wealthy enough for the East India trade, many different merchants will bring their capital together, invest it in different functions, and start trading spontaneously. Portugal has long traded without an exclusive company, for example. Europe’s Asian and African colonies are smaller and less advanced than its American colonies; the Dutch settlements of present-day Cape Town and Jakarta are the largest and most profitable, despite oppressive company rule.
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Indeed, the Dutch East India Company has destroyed most of the spice trees and slaughtered the local population to maintain its monopoly on spices, just as the British East India Company has started destroying Bengal’s agricultural land to grow opium on it for export. These policies are actually against the companies’ self-interest. This is because they function as sovereigns in their colonies, so they should want to expand the population and productivity in order to increase the rents they can charge, their share of the annual produce, and demand for their goods. Yet the companies’ officers are short-sighted merchants, so they choose the lower, temporary revenues of a trade monopoly over the higher, consistent revenues of a sovereign.
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As merchants, these company workers will always trade on the side for their own private profit, in addition to their public work for the company. This is impossible to stop, as they work autonomously, far from home. Worse still, they use this private power to establish other monopolies and restrict production, against the interests of the country (and the company). The British East India Company is particularly corrupt, although the organization’s structure is more at fault than its officers’ character. In general, company monopolies “are nuisances in every respect” and should always be avoided.
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