value of gold in two countries, I understand him to mean its value estimated in corn and labour.

But we have seen that, estimated in corn, gold may be of very different value in two countries. I have endeavoured to show that it will be low in rich countries and high in poor countries; Adam Smith is of a different opinion: he thinks that the value of gold, estimated in corn, is highest in rich countries. But without further examining which of these opinions is correct, either of them is sufficient to show that gold will not necessarily be lower in those countries which are in possession of the mines, though this is a proposition maintained by Adam Smith. Suppose England to be possessed of the mines, and Adam Smith's opinion, that gold is of the greatest value in rich countries, to be correct: although gold would naturally flow from England to all other countries in exchange for their goods, it would not follow that gold was necessarily lower in England, as compared with corn and labour, than in those countries. In another place, however, Adam Smith speaks of the precious metals being necessarily lower in Spain and Portugal than in other parts of Europe, because those countries happen to be almost the exclusive possessors of the mines which produce them. "Poland, where the feudal system still continues to take place, is at this day as beggarly a country as it was before the discovery of America. The money price of corn, however, has risen; THE REAL VALUE OF THE PRECIOUS METALS HAS FALLEN in Poland in the same manner as in other parts of Europe. Their quantity, therefore, must have increased there as in other places, and nearly in the same proportion to the annual produce of the land and labour. This increase of the quantity of those metals, however, has not, it seems, increased that annual produce; has neither improved the manufactures and agriculture of the country, nor mended the circumstances of its inhabitants. Spain and Portugal, the countries which possess the mines, are, after Poland, perhaps the two most beggarly countries in Europe. The value of the precious metals, however, must be lower in Spain and Portugal than in any other parts of Europe, loaded not only with a freight and insurance, but with the expense of smuggling, their exportation being either prohibited or subjected to a duty. In proportion to the annual produce of the land and labour, therefore, their quantity must be greater in those countries than in any other part of Europe: those countries, however, are poorer than the greater part of Europe. Though the feudal system has been abolished in Spain and Portugal, it has not been succeeded by a much better."

Dr Smith's argument appears to me to be this: Gold, when estimated in corn, is cheaper in Spain than in other countries, and the proof of this is not that corn is given by other countries to Spain for gold, but that cloth, sugar, hardware, are by those countries given in exchange for that metal.

CHAPTER XXIX.

TAXES PAID BY THE PRODUCER.

MONS. SAY greatly magnifies the inconveniences which result if a tax on a manufactured commodity is levied at an early, rather than at a late, period of its manufacture. The manufacturers, he observes, through whose hands the commodity may successively pass, must employ greater funds in consequence of having to advance the tax, which is often attended with considerable difficulty to a manufacturer of very limited capital and credit. To this observation no objection can be made.

Another inconvenience on which he dwells is, that in consequence of the advance of the tax, the profits on the advance also must be charged to the consumer, and that this additional tax is one from which the treasury derives no advantage.

In this latter objection I cannot agree with M. Say. The State, we will suppose, wants to raise immediately 1000l., and levies it on a manufacturer, who will not for a twelvemonth be able to charge it to the consumer on his finished commodity. In consequence of such delay, he is obliged to charge for his commodity an additional price, not only of 1000l., the amount of the tax, but probably of 1,1007., 1007. being for interest on the 1000l. advanced. But in return for this additional 1007. paid by the consumer, he has a real benefit, inasmuch as his payment of the tax which Government required immediately, and which he must finally pay, has been postponed for a year; an opportunity, therefore, has been afforded to him of lending to the manufacturer who had occasion for it the 10007, at 10 per cent., or at any other rate of interest which might be agreed upon. Eleven hundred pounds, payable at the end of one year, when money is at 10 per cent. interest, is of no more value than 1000l. to be paid immediately. If Government delayed receiving the tax for one year, till the manufacture of the commodity was completed, it would perhaps be obliged to issue an Exchequer bill bearing interest, and it would pay as much for interest as the consumer would save in price, excepting, indeed, that portion of the price which the manufacturer might be enabled, in consequence of the tax, to add to his own real gains. If for the interest of the Exchequer bill Government would pay 5 per cent., a tax of 50l. is saved by not issuing it. If the manufacturer borrowed the addi

tional capital at 5 per cent., and charged the consumer 10 per cent., he also will have gained 5 per cent. on his advance, over and above his usual profits, so that the manufacturer and Government together gain or save precisely the sum which the consumer pays.

M. Simonde, in his excellent work, De la Richesse Commerciale, following the same line of argument as M. Say, has calculated that a tax of 4000 francs, paid originally by a manufacturer, whose profits were at the moderate rate of 10 per cent., would, if the commodity manufactured only passed through the hands of five different persons, be raised to the consumer to the sum of 6,734 francs. This calculation proceeds on the supposition, that he who first advanced the tax, would receive from the next manufacturer 4,400 francs, and he again from the next, 4,840 francs; so that at each step 10 per cent. on its value would be added to it. This is to suppose that the value of the tax would be accumulating at compound interest; not at the rate of 10 per cent. per annum, but at an absolute rate of 10 per cent. at every step of its progress. This opinion of M. de Simonde would be correct, if five years elapsed between the first advance of the tax, and the sale of the taxed commodity to the consumer; but if one year only elapsed, a remuneration of 400 francs, instead of 2,734, would give a profit at the rate of 10 per cent. per annum, to all who had contributed to the advance of the tax, whether the commodity had passed through the hands of five manufacturers or fifty.

CHAPTER XXX.

ON THE INFLUENCE OF DEMAND AND SUPPLY ON PRICES.

IT is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed, for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished ; but this effect will be only of temporary duration.

Diminish the cost of production of hats, and their price will ultimately fall to their new natural price, although the demand should be doubled, trebled, or quadrupled. Diminish the cost of subsistence of men, by diminishing the natural price of the food and clothing, by which life is sustained, and wages will ultimately fall, notwithstanding that the demand for labourers may very greatly increase.

The opinion that the price of commodities depends solely on the proportion of supply to demand, or demand to supply, has become almost an axiom in political economy, and has been the source of much error in that science. It is this opinion which has made Mr Buchanan maintain that wages are not influenced by a rise or fall in the price of provisions, but solely by the demand and supply of labour; and that a tax on the wages of labour would not raise wages, because it would not alter the proportion of the demand of labourers to the supply.

The demand for a commodity cannot be said to increase, if no additional quantity of it be purchased or consumed; and yet, under such circumstances, its money value may rise. Thus, if the value of money were to fall, the price of every commodity would rise, for each of the competitors would be willing to spend more money than before on its purchase; but though its price rose 10 or 20 per cent., if no more were bought than before, it would not, I apprehend, be admissible to say, that the variation in the price of the commodity was caused by the increased demand for it. Its natural price, its money cost of production, would be really altered by the altered value of money; and without any increase of demand, the price of the commodity would be naturally adjusted to that new value.

ON THE INFLUENCE OF DEMAND AND SUPPLY ON PRICES. 233

"We have seen," says M. Say, "that the cost of production determines the lowest price to which things can fall: the price below which they cannot remain for any length of time, because production would then be either entirely stopped or diminished." Vol. ii. p. 26.

He afterwards says, that the demand for gold having increased in a still greater proportion than the supply, since the discovery of the mines, "its price in goods, instead of falling in the proportion of ten to one, fell only in the proportion of four to one;" that is to say, instead of falling in proportion as its natural price had fallen, fell in proportion as the supply exceeded the demand." The value of every commodity rises always in a direct ratio to the demand, and in an inverse ratio to the supply."

The same opinion is expressed by the Earl of Lauderdale.

"With respect to the variations in value, of which every thing valuable is susceptible, if we could for a moment suppose that any substance possessed intrinsic and fixed value, so as to render an assumed quantity of it constantly, under all circumstances, of an equal value, then the degree of value of all things, ascertained by such a fixed standard, would vary according to the proportion betwixt the quantity of them and the demand for them, and every commodity would, of course, be subject to a variation in its value, from four different circumstances:

1. "It would be subject to an increase of its value, from a diminution of its quantity.

2. "To a diminution of its value, from an augmentation of its quantity.

3. "It might suffer an augmentation in its value, from the circumstance of an increased demand.

4. "Its value might be diminished by a failure of demand.

"As it will, however, clearly appear that no commodity can possess fixed and intrinsic value, so as to qualify it for a measure of the value of other commodities, mankind are induced to select, as a practical measure of value, that which appears the least liable to any of these four sources of variations, which are the sole causes of alteration of value.

"When, in common language, therefore, we express the value of any commodity, it may vary at one period from what it is at another, in consequence of eight different contingencies :—

1. "From the four circumstances above stated, in relation to the commodity of which we mean to express the value.

* If, with the quantity of gold and silver which actually exists, these metals only served for the manufacture of utensils and ornaments, they would be abundant, and would be much cheaper than they are at present: in other words, in exchanging them for any other species of goods, we should be obliged to give proportionally a greater quantity of them. But as a large quantity of these metals is used for money, and as this portion is used for no other purpose, there remains less to be employed in furniture and jewellery; now this scarcity adds to their value.-Say, vol. ii. p. 316. See also note to p. 78.