1766 2026
This is an AI modernization of Reflections on the Formation and Distribution of Wealth into contemporary English. The original is available from Wikisource. Also available as an epub.
Anne-Robert-Jacques Turgot (1727–1781) trained for the priesthood, left it for government, and spent thirteen years as royal administrator of the Limousin, one of the poorest provinces of France, where he built roads, fought a famine and tried to make taxes fairer. In 1774 Louis XVI made him controller-general of finances. He abolished forced road labor and freed the grain trade, made enemies at court, and was dismissed after less than two years. Many historians have wondered whether his reforms could have headed off the Revolution.
He wrote these Reflections in 1766 for two young Chinese men, known in France as Ko and Yang, who had been educated by the Jesuits in Paris and were about to go home. Turgot wanted to send them off with questions about China's economy, and he wrote a short account of how an economy works so the questions would make sense. It appeared in 1769 and 1770 in a French journal edited by his friend Pierre-Samuel du Pont de Nemours, who altered parts of it; Turgot complained.
In one hundred short numbered sections, Turgot begins with a thought experiment, a country where every family has just enough land to feed itself, and shows why it could never last. From there he builds up trade, the division of labor, money, capital, wages, profit and interest. It is one of the first attempts to explain a whole economy in a single chain of reasoning, and it came ten years before Adam Smith's Wealth of Nations, which covers much of the same ground.
Two things will seem strange. Turgot was close to the Physiocrats, the French school that held that only land produces a true surplus, which they called the "net product." So he divides society into a productive class of farmers, a "sterile" or paid class of artisans and merchants, and landowners who live on the surplus. Few economists hold that view now, but his account of capital and interest has worn much better. He also writes, as a matter of history, about slavery and the slave trade, which he condemns.
This edition is translated from the French text in Eugène Daire's 1844 edition of Turgot's works, from Wikisource. Each numbered section keeps the summary printed at its head. The notes by Daire and Du Pont, and Du Pont's essay comparing Turgot with Smith, are left out.
Reflections on the Formation and Distribution of Wealth
Trade would be impossible if land were divided equally, with each person holding only what he needs to feed himself.
Suppose the land of a country were divided among all its inhabitants so that each person had exactly enough to feed himself and nothing more. It is plain that, since everyone would be equal, no one would be willing to work for anyone else. No one would have the means to pay for another person's labor either. Each would own only as much land as it takes to grow his own food, so he would eat everything he harvested and have nothing left over to trade for other people's work.
This supposition has never held and could not last. Differences in soil and the variety of human needs lead people to trade one product of the land for another.
This situation can never have existed, because land was cultivated before it was divided. Cultivation itself was the only reason for dividing it up and for the law that guarantees each person his property. Now the first people to farm probably farmed as much ground as their strength allowed, and so more than they needed to feed themselves.
Even if such a state of affairs had existed, it could not have lasted. Each person would get only his food from his field. With nothing to pay for anyone else's labor, he could meet his other needs, such as housing and clothing, only by his own work. That would be nearly impossible, because no piece of land produces everything, not by a long way.
A man whose land suited only grain, and grew neither cotton nor hemp, would have no cloth to wear. Another would have land good for cotton that grew no grain. One would lack firewood while another lacked grain to eat. Experience would soon teach each person which kind of crop his land suited best, and he would limit himself to growing that. Then he could get the things he lacked by trading with his neighbors. They, having reached the same conclusion on their own side, would have grown the crop best suited to their fields and given up growing all the others.
The products of the land need long and difficult preparation before they can serve human needs.
Most of what the land produces to meet our various needs cannot be used as nature hands it over. It has to go through a series of changes and be prepared by skill. Wheat must be turned into flour and bread. Hides must be tanned or dressed. Wool and cotton must be spun. Silk must be drawn from the cocoons. Hemp and flax must be soaked and stripped, then woven into different fabrics, and then those fabrics must be cut and sewn into clothes, shoes, and so on. Suppose the same man who makes his land grow all these things, and who uses them for his own needs, had to carry out all these intermediate steps himself. He would surely do it very badly. Most of these preparations call for care, close attention, and long experience, and that experience comes only from working steadily and on large quantities of material. Take the tanning of hides as an example. What farmer could follow all the details this job requires, when it lasts several months and sometimes several years? Even if he could, could he do it for a single hide? What a waste of time, of space, and of materials that could have been used at the same moment, or one after another, to tan a great many hides! And say he did manage to tan one hide all by himself. He needs only one pair of shoes. What would he do with the rest? Will he kill an ox to get one pair of shoes? Will he cut down a tree to make himself one pair of clogs? The same can be said of every other need a person has. If he were reduced to his own field and his own labor, he would spend a great deal of time and trouble to end up very poorly supplied in every respect, and he would farm his land very badly too.
The need for preparation leads to the trading of products for labor.
The same motive that set up the trading of one product for another among farmers on different kinds of land must therefore also have led to trading products for labor. This trade took place between the farmers and another part of society, who preferred the work of preparing and processing the land's products to the work of growing them.
Everyone gained from this arrangement, because each person, by devoting himself to a single kind of work, did much better at it. The farmer drew from his field the greatest quantity of produce possible. By trading his surplus, he supplied all his other needs far more easily than he could have done by his own labor. The shoemaker, by making shoes for the farmer, took for himself a share of the farmer's harvest. Every worker labored to meet the needs of workers in all the other trades, and they in turn all labored for him.
The farmer, who produces, ranks above the artisan, who only prepares. The farmer is what sets the circulation of labor in motion, because he is the one who makes the land yield the wages of all the artisans.
We should note, however, that the farmer supplies everyone with the most important and largest item of their consumption. I mean their food, and in addition the raw material for almost every craft. This gives him the advantage of greater independence. In the division of labor among the members of society, his work keeps the same first place that the work of feeding himself held among the many jobs he had to do for his needs when he lived alone. This is not a first place of honor or dignity. It is a first place of physical necessity. Strictly speaking, the farmer can do without the labor of other workers, but no worker can work unless the farmer keeps him alive. This circulation, in which the exchange of things people need makes them dependent on one another and forms the bond of society, gets its first push from the farmer's labor. Whatever his work makes the land produce beyond his own needs is the only fund out of which every other member of society is paid wages for their labor. These others use the price they get in that exchange to buy the farmer's produce in turn, and so they give him back exactly what they received from him. This is an essential difference between the two kinds of work. We need to press the point until its truth is clear, before we go on to the countless consequences that flow from it.
The worker's wages are held down to bare subsistence by competition among workers. He earns only his living.
The plain worker, who has only his hands and his skill, has nothing except what he can manage to sell his labor for. He sells it at a higher or lower price, but that price does not depend on him alone. It comes out of the bargain he strikes with the person who pays for his work. That person pays as little as he can. Since he can choose among many workers, he prefers the one who works for the least. So workers are forced to undercut each other's prices. In every kind of labor it must happen, and it does in fact happen, that the worker's wages are limited to what he needs to provide his subsistence.
The farmer is the only one whose labor produces more than the wages of labor. He is therefore the sole source of all wealth.
The farmer's position is very different. The land pays him the price of his labor directly, independent of any other man and of any agreement. Nature does not haggle with him to make him settle for the bare minimum. What she gives is not matched to his needs, nor to some agreed valuation of the price of his days. It is the physical result of the soil's fertility and of how well chosen, much more than how hard, were the methods he used to make it fruitful. Once the farmer's labor yields more than he needs, he can use this surplus, which nature grants him as a pure gift on top of the wages for his pains, to buy the labor of the other members of society. When they sell him their labor, they earn only their living. But the farmer gathers, besides his own subsistence, an independent and available wealth that he did not buy and that he sells. He is therefore the only source of the wealth whose circulation sets all the labor of society in motion, because his is the only labor that produces more than the wages of labor.
The first division of society into two classes: one productive, the class of cultivators, the other paid, the class of artisans.
So the whole of society is divided, by a necessity grounded in the nature of things, into two classes. Both work, but in different ways. One, by its labor, produces or rather draws from the land a wealth that keeps renewing itself and that supplies the whole society with food and with the raw material for every need. The other is busy giving the materials that have been produced the preparation and shape that make them fit for people to use. It sells its labor to the first class and receives its food in exchange. The first can be called the productive class, and the second the paid class, meaning the class that lives on wages.
In the earliest times the landowner cannot have been distinguished from the cultivator.
So far we have not yet distinguished the farmer from the owner of the land, and in the beginning they really were not distinct. The land stopped being common to all, and private property in land was established, through the labor of those who first plowed fields and fenced them in to secure the harvest. Until societies had become firmly established, and public force, or law made stronger than private force, could guarantee to each person the peaceful possession of his property against any outside invasion, a field could be kept only the way it had been acquired, by going on cultivating it. It would not have been safe to have another man plow your field. Having done all the work, he would not easily understand why the whole harvest was not his. Besides, in that early time any hard-working man who could find as much land as he wanted could not be tempted to plow for someone else. Every owner had to cultivate his own field or give it up entirely.
As society advances, every piece of land gets a master.
The earth filled with people, and more and more of it was cleared. In time the best lands were all taken. For the latecomers, only barren ground was left, which the first settlers had rejected. But in the end every piece of land found its master. Those who could not get any property at first had no recourse but to trade the labor of their hands, in the jobs of the paid class, for the surplus produce of the landowner who farmed his own land.
Landowners begin to be able to hand the work of cultivation over to hired cultivators.
However, the land gave its master who worked it not only his food, and not only the means of trading for his other needs, but also a considerable surplus. So he could use that surplus to pay men to cultivate his land. For men who live on wages, it was as good to earn them at this trade as at any other. Ownership thus had to be separated from the work of cultivation, and soon it was.
Inequality in the division of property, and the causes that make it unavoidable.
The first owners, as we have already said, took at the outset as much ground as their strength let them cultivate with their families. A man who was stronger, harder-working, or more anxious about the future took more than a man of the opposite character. A man with a larger family, having more hands, extended his holdings further. That was already a first inequality.
Not all land is equally fertile. Two men with the same amount of ground and the same labor can get very different yields from it. That is a second source of inequality.
As property passes from fathers to children, it is split into smaller or larger shares depending on how large the families are. As generations follow one another, sometimes inheritances are divided even further and sometimes they are joined together again when a family line dies out. That is a third source of inequality.
The contrast between some people's intelligence, energy, and above all thrift, and other people's laziness, idleness, and waste, was a fourth source of inequality, and the most powerful of all.
The careless and improvident owner farms badly. In good years he spends his whole surplus on frivolous things. At the first mishap he finds himself reduced to asking his wiser neighbor for help and living on borrowed money. If further mishaps, or his own continued carelessness, leave him unable to repay, and he has to borrow again, he will in the end have no recourse but to give up part or even all of his land to his creditor, who takes it as the equivalent of the debt. Or he can transfer it to someone else in exchange for other valuables, with which he will pay off his creditor.
Inequality continued. The cultivator is set apart from the owner.
Now we have land in trade, bought and sold. The share of the wasteful or unlucky owner goes to enlarge the share of the luckier or wiser one. With possessions varying endlessly in this unequal way, it is impossible that many owners would not have more than they can cultivate. Besides, it is quite natural for a man to want to enjoy his wealth in peace, and instead of spending all his time on hard labor, to prefer to give part of his surplus to people who work for him.
The division of the product between the cultivator and the landowner. Net product, or revenue.
Under this arrangement, the product of the land is divided into two parts. One part covers the farmer's food and his profits. These are the reward for his labor and the condition on which he takes on the work of cultivating the owner's field. What remains is that independent, available part which the land gives, as a pure gift, to whoever cultivates it, over and above his advances (the money laid out ahead of the harvest, for seed, tools, animals, and upkeep) and the wages for his pains. This is the owner's share, or his revenue, and with it he can live without working and take it wherever he wishes.
A new division of society into three classes: cultivators, artisans, and landowners, that is, the productive class, the paid class, and the free class.
Now society is divided into three classes. The first is the class of farmers, which we can go on calling the productive class. The second is the class of artisans and others who are paid from the products of the land, the paid class. The third is the class of landowners. It alone is not tied to any particular job by the need to earn its food, so it can be used for the general needs of society, such as war and the administration of justice. It can do this either by personal service or by paying over part of its revenue, with which the state or society hires men to fill those roles. For this reason the best name for it is the free class, meaning the class that is at society's disposal (the disposable class).
The likeness between the two working classes, the ones that are not free.
The classes of cultivators and artisans resemble each other in many ways, especially in that their members have no revenue and all live on wages paid out of the products of the land. Both also have this in common: they earn only the price of their labor and of their advances, and that price is roughly the same in both classes. The owner bargains with those who work the land to give them the smallest possible share of the produce, just as he argues with his shoemaker to buy his shoes as cheaply as he can. In a word, the cultivator and the artisan both have only the payment for their labor.
The essential difference between the two working classes.
But there is this difference between the two kinds of work. The cultivator produces his own wages, and in addition the revenue that pays the wages of the whole class of artisans and other paid people. The artisans, by contrast, simply receive their wages, that is, their share of what the land produces in exchange for their labor, and they produce no revenue. The landowner has nothing except through the cultivator's labor. He receives from the cultivator his own food and the means to pay for the work of the other paid people. He needs the cultivator by a necessity of the physical order, by which the land produces nothing without labor. But the cultivator needs the owner only by virtue of agreements and laws. These laws had to guarantee to the first cultivators and their heirs the ownership of the ground they had occupied, even when they stopped cultivating it. This was the price for the advances laid out on the land itself, by which they made that ground fit to farm, and which have, so to speak, become part of the soil. But these laws could guarantee to the idle man only the part of the harvest that the land gives beyond the payment due the cultivators. The owner is forced to leave that payment to them, or lose everything.
So the cultivator, limited as he is to payment for his labor, still keeps that natural and physical first place. It makes him the prime mover of the whole machine of society. It makes depend on his labor alone his own food, the wealth of the landowner, and the wages of all other work.
The artisan, on the other hand, receives his wages either from the landowner or from the cultivator, and gives them, in exchange for his labor, only the equivalent of those wages, nothing more.
So although the cultivator and the artisan each earn only the payment for their labor, the cultivator brings into being, beyond that payment, the landowner's revenue, while the artisan brings into being no revenue, either for himself or for anyone else.
This difference justifies calling one class productive and the other sterile.
We can therefore divide the two classes that are not free into the productive class, which is the cultivators, and the sterile class, which includes all the other paid members of society.
How landowners can get revenue from their land.
Landowners who do not work their lands themselves can go about having them cultivated in different ways, or make different arrangements with the people who cultivate them.
First way: cultivation by hired men.
First, they can pay men by the day or by the year to plow their fields and keep the whole harvest for themselves. This assumes that the owner puts up the advance of both the seed and the workers' wages until after the harvest.
But this first way has the drawback of demanding a great deal of work and steady attention from the owner. Only he can direct the workers in their tasks, watch how they spend their time, and make sure they are honest enough not to divert any of the produce.
It is true that he can also hire a more capable man whose honesty he knows, who as manager or foreman directs the workers and keeps the account of the produce. But the owner will always be open to being cheated.
Besides, this method is extremely expensive, unless a large population and a lack of jobs in other trades force workers to accept very low wages.
Second way: cultivation by slaves.
In the times close to the origin of societies, it was almost impossible to find men willing to work another man's land. Not all the land was yet taken, and people who want to work prefer to clear new land and farm it on their own account. So it is not at the origin of societies that owners can stop being cultivators. As we showed above (Sections 11 and following), that happens only when the progress of society and of agriculture has brought the paid class into being and made it clearly distinct.
But in the first times of ignorance and ferocity, there were many occasions for quarrels among men who were poorly armed, fearful, in need, and without any secure supply of food. They were therefore very prone to fear and mutual hatred. For it is a matter of experience that people almost never fight except out of weakness and anxiety, from the fear, well founded or not, of some deprivation or misfortune that they regard as certain and would rather face the chance of battle than accept. For a long time the defeated were massacred without pity, as some savage peoples in America still do.
The introduction of agriculture softened manners somewhat, without fully reforming them. It made the depravity less cruel but more widespread, and so more truly dangerous to humanity in general. The stronger came to think that instead of killing the weaker, it would be profitable to take them as their own property and make them work the land as slaves.
Once this abominable custom was established, wars became even more frequent. Before then they had come about only by accident. From then on they were undertaken precisely in order to take slaves, whom the victors forced to work for them or sold to others. This was the chief object of the wars that the ancient peoples waged on one another. And this plunder and this trade still reign in all their horror on the coast of Guinea, where Europeans encourage them by going there to buy Black people to work the colonies of America.
The portion that nature secures to cultivators, even slaves, from the product of their labor.
Slaves have no justice they can usefully claim from people who could not have reduced them to slavery without violating every law of order and morality and every right of humanity.
Still, the physical law of nature secures for them a share in the products they bring forth, for the master has to feed them if he is to profit from their labor. But this kind of wage is limited to the barest necessity, to their subsistence.
How unprofitable and costly cultivation by slaves is, for the master and for humanity.
Slaves have no motive to carry out the work they are forced to do with the intelligence and care that could make it succeed. As a result, this work yields very little.
Greedy masters know no other way to make up for this shortfall in production, which is the necessary result of farming by slaves, than to force them to still harder, more unbroken, and more violent labor. This excessive labor kills many of them. To keep the number needed for farming up to strength, trade has to supply a very great quantity every year, and the masters are obliged to buy replacements. So they pay no wages to their slaves, but they pay a considerable capital to acquire these poor workers. And since it is always war that supplies the original stock of this trade, it is plain that it can go on only through an enormous destruction of human life, and only so long as people are divided into very small nations that tear at one another without end, each village making war on the next. Let England, France, and Spain wage the fiercest war against each other. Only the borders of each state will be hurt, and at only a few points. All the rest of the country will be quiet, and the few prisoners that could be taken on either side would be a very weak resource for the farming of each of the three nations.
Cultivation by slaves cannot continue in large societies.
When people gather into large societies, the supply of new slaves is no longer plentiful enough to meet the use that farming makes of them. Although the labor of men is supplemented by the labor of livestock, a time comes when the land can no longer be worked by slaves. The practice survives only for service inside the household, and in the long run it dies out, because as nations become more civilized they make agreements among themselves to exchange prisoners of war. These agreements are made all the more easily because each individual has a strong interest in keeping the danger of falling into slavery away from himself.
Serfdom, bondage to the soil, follows slavery proper.
The descendants of the first slaves, at first attached to the cultivation of the land, themselves change their condition. Peace between nations no longer leaves the slave trade able to supply a very large consumption of slaves, so masters are obliged to treat the ones they have with more care.
Those born in the household are used to their condition from childhood and are less outraged by it, and the masters have less need to use harshness to keep them in line. Little by little, the soil they cultivate becomes their homeland. They have no language but their masters'. They become part of the nation. Familiarity grows, and after it, trust and humane treatment on the masters' side.
Vassalage follows serfdom, and the slave becomes an owner. Third way: giving up the land in return for a fixed payment.
Managing an estate worked by slaves takes wearisome care and a burdensome residence on the spot. The master secures a freer, easier, and safer enjoyment of his property by giving the slaves a stake in the cultivation. He hands each of them a certain extent of land, on condition that they return to him a portion of the fruits. Some made this bargain for a limited time and left their serfs only a precarious possession that could be revoked. Others gave up the land permanently, reserving an annual rent, payable in produce or in money, and demanding certain duties from the holders. Those who received land on these terms became owners and free men, under the name of tenants or vassals. The former owners, under the name of lords, kept only the right to demand payment of the rent and the other agreed duties. This is how things went in most of Europe.
Fourth way: sharecropping.
These lands, freed on condition of the rent, can change owners again, and be divided and reunited through inheritance and sale. A vassal in his turn may have more land than he can cultivate himself. Most often the rent the land owes is not high enough to prevent a good cultivator from still getting, beyond his advances, his costs, and his own food, a surplus of produce that forms a revenue. So the vassal-owner too must want to enjoy this revenue without effort and to have his land cultivated by others. On the other side, most lords give up only the parts of their holdings that are farthest from them, and keep those they can have cultivated at less cost. Since farming by slaves was no longer workable, the first and simplest means that offered itself for getting free men to cultivate land that did not belong to them was to give them a share of the fruits. This encouraged them to cultivate better than workers paid a fixed wage would. The most common division was to make two equal parts, one belonging to the tenant and the other to the owner. That is where the name métayer (from the Latin medietarius), or half-fruit tenant, comes from. Under arrangements of this kind, found in most of France, the owner makes all the advances of the cultivation. That is, at his own expense he supplies the plow animals, the plows and other farm tools, the seed, and the food of the tenant and his family, from the moment the tenant enters the farm until the first harvest.
Fifth way: farming or leasing of land.
Some intelligent and wealthy cultivators knew how far active and well-directed farming, on which neither labor nor expense would be spared, could raise the fertility of the land. They rightly judged that they would earn more if the owner agreed to leave them, for a certain number of years, the whole of the harvests, on condition that they pay him a fixed revenue each year and make all the advances of the cultivation. That way they made sure that the increase in produce brought about by their spending and their labor would belong to them entirely. The owner, for his part, gained from this an enjoyment of his revenue that was more peaceful, since he was freed from the trouble of making advances and counting produce. It was more even, since he received the same price for his farm every year. And it was more certain, since he never ran the risk of losing his advances, and the livestock and other goods with which the farmers had stocked his farm became a pledge assuring him of payment. Besides, since the lease was only for a small number of years, if his farmer had offered too low a price for the land, he could raise it when the lease ended.
This last method is the most advantageous of all, but it assumes a country that is already rich.
This method of leasing out land is the most advantageous of all to owners and cultivators alike. It takes hold wherever there are wealthy cultivators able to make the advances of cultivation. And since wealthy cultivators can give the land far more plowing and manure, the result is a prodigious increase in production and in the revenue from landed estates.
In Picardy, Normandy, the area around Paris, and most of the provinces of northern France, the lands are cultivated by farmers who lease them. In the southern provinces they are cultivated by sharecroppers. And so the northern provinces of France are incomparably richer and better cultivated than those of the south.
A recap of the different ways of putting land to work.
I have just counted five different ways that landowners can put their land to work through other people's hands, without doing the farming themselves. The first is to hire workers at a fixed wage. The second is to use slaves. The third is to hand the land over in return for a rent. The fourth is to give the cultivator a set share of the crop, most commonly half, while the landowner pays for the advances the farming requires. The fifth is to lease the land to tenant farmers, who pay for all the advances of farming themselves and promise the landowner a steady, unchanging income for an agreed number of years.
Of these five ways, the first is too expensive and is very rarely used. The second can only exist in countries that are still ignorant and barbarous. The third is less a way of putting one's property to work than a giving up of the property in exchange for a claim on the land. The old landowner is no longer, strictly speaking, anything more than a creditor of the new one.
The last two methods of cultivation are the ones most widely used: sharecropping in the poorer countries, and tenant farming in the richest.
Capitals in general, and the income from money.
There is another way to be rich without working and without owning land, which I have not yet discussed. I need to explain where it comes from and how it fits with the rest of the system by which wealth is distributed in society, the rough outline of which I have just sketched. This way consists of living off one's capital, or rather off the interest one earns by lending it out. The use of gold and silver helps this along a great deal, because it makes small savings easy.
The use of gold and silver in trade.
Silver and gold are merchandise like any other, and less precious than many others, since they serve none of the real needs of life. To explain how these two metals became the stand-in for every kind of wealth, how they affect the course of trade, and how they enter into the making of fortunes, I have to go back a little way and retrace our steps.
The birth of trade. The principle by which traded things are valued.
Mutual need introduced the exchange of what one had for what one lacked. People exchanged one kind of produce for another, and produce for labor. For these exchanges, the two parties had to agree on the quality and quantity of each thing exchanged. In such a bargain, it is natural for each to want to receive as much as possible and give as little as possible. Both are equally masters of what they have to hand over, so each must weigh how attached he is to the produce he is offering against how much he wants the produce he hopes to get, and set the quantities exchanged accordingly. If they cannot agree, they will have to move toward each other, each giving way a little, offering more and settling for less. Suppose that one man needs grain and the other needs wine, and they agree to trade one bushel of grain for six pints of wine. Clearly, for each of them, a bushel of grain and six pints of wine are seen as exactly equivalent, and in this particular exchange the price of a bushel of grain is six pints of wine, and the price of six pints of wine is a bushel of grain. But in another exchange between other people, the price will be different, depending on whether one of them needs the other's produce more or less urgently. One bushel of grain might be traded for eight pints of wine, while another bushel goes for only four. Now, obviously, none of these three prices can be called the true price of a bushel of grain any more than the others, because for each pair the wine received was the equivalent of the grain given. In short, as long as we look at each exchange as a separate, individual case, the value of each thing exchanged has no measure other than the needs or desires and the means of the two parties, weighed against each other, and it is fixed only by the agreement of their wills.
How the going value is established in the exchange of merchandise.
But it happens that several different people have wine to offer to the man who has grain. If one of them was willing to give only four pints for a bushel, the owner of the grain will not hand over his grain once he learns that someone else will give him six pints, or eight, for the same bushel. If the first man wants grain, he will have to raise his price to match the one who offers more. The wine sellers, for their part, benefit from the competition among the grain sellers. Each person decides to part with his produce only after comparing the different offers he gets for the produce he needs, and he gives preference to the strongest offer. The value of grain and wine is no longer haggled over by two individuals alone, according to their own needs and means. It is fixed by the balance between the needs and means of all the grain sellers taken together and those of all the wine sellers taken together. For a man who would gladly give eight pints of wine for a bushel of grain will give only four once he learns that a grain owner is willing to give two bushels of grain for eight pints. The middle price between the various offers and the various demands will become the going price, which all buyers and sellers will follow in their exchanges. And it will be true to say that six pints of wine are, for everyone, the equivalent of a bushel of grain, if that is the middle price, until a decrease in supply on one side or in demand on the other causes this valuation to change.
Trade gives each piece of merchandise a going value in terms of every other piece of merchandise. It follows that every piece of merchandise is the equivalent of a certain quantity of any other, and can be regarded as a pledge that stands in for it.
Grain is not exchanged only for wine, but for everything else that grain owners might need: wood, leather, wool, cotton, and so on. The same is true of wine and of every other kind of produce. If a bushel of grain is the equivalent of six pints of wine, and a sheep is the equivalent of three bushels of grain, then that sheep is the equivalent of eighteen pints of wine. A man who has grain and needs wine could quite safely trade his grain for a sheep, in order to trade that sheep later for the wine he needs.
Any piece of merchandise can serve as a common scale or measure for comparing the value of all the others.
It follows that in a country where trade is lively, where there is a lot of production and a lot of consumption, and where there are many offers and demands for every sort of produce, each kind of thing will have a going price in terms of every other kind. That is, a certain quantity of one will equal a certain quantity of each of the others. So the same amount of grain that is worth eighteen pints of wine will also be worth a sheep, a piece of tanned leather, a certain quantity of iron, and all these things will have equal value in trade.
To express and make known the value of one particular thing, it is obviously enough to state the quantity of some other familiar produce that is regarded as its equivalent. So to make known what a piece of leather of a certain size is worth, one can just as well say that it is worth three bushels of grain or eighteen pints of wine. In the same way, one can express the value of a certain quantity of wine by the number of sheep or bushels of grain that it is worth in trade.
We can see from this that all the kinds of produce that can be traded measure one another, so to speak, and that each can serve as a common measure, a scale of comparison to which the values of all the others are referred. And in the same way, each piece of merchandise becomes, in the hands of whoever owns it, a means of getting all the others, a kind of universal pledge.
Not every piece of merchandise offers an equally convenient scale of values. In practice, people have preferred those whose quality does not vary much, so that their value depends mainly on number or quantity.
But although all merchandise has, at bottom, this property of standing in for all the others, of serving as a common measure to express their value and as a universal pledge for getting them all by exchange, not all of it can be used for these two purposes with the same ease.
The more a piece of merchandise varies in value according to its quality, the harder it is to use as a scale for stating the value of other merchandise.
For example, if eighteen pints of Anjou wine are the equivalent of a sheep, eighteen pints of Cape wine may be the equivalent of eighteen sheep. So a man who says, to make known what a sheep is worth, that it is worth eighteen pints of wine is speaking ambiguously, and gives no precise idea unless he adds a great many explanations, which would be very inconvenient.
So people had to choose, by preference, for their scale of comparison, kinds of produce that were in more common use and therefore better known in value. These were more alike from one to the next, and so their value depended more on number or quantity than on quality.
Where value does not correspond exactly to number or quantity, people make up for it with an average valuation, which becomes a kind of imaginary money.
In a country where there is only one breed of sheep, it is easy to take the value of a fleece, or of a sheep, as the common measure of values. People will say that a cask of wine or a piece of cloth is worth a certain number of fleeces or sheep. It is true that sheep are not all equal. But when sheep are being sold, care is taken to allow for this inequality, for example by counting two lambs as one sheep. When any other merchandise is being valued, the unit is the common value of a sheep of middle age and middle strength.
In this way, stating values in sheep becomes a language of convention. In the habits of trade, the words "one sheep" no longer mean anything but a certain value. In the minds of those who hear the words, this value carries the idea not merely of a sheep but of a certain quantity of each of the most common kinds of produce that are regarded as its equivalent. And the expression will end up applying so thoroughly to a fictional, abstract value rather than to a real sheep that, if some disease happens to kill off the sheep, and it takes twice as much grain or wine as before to get one, people will say that a sheep is worth two sheep, rather than change the expression they are used to for every other value.
Examples of these average valuations that become an imaginary expression of values.
In the trade of every nation we find several examples of these fictional valuations in merchandise, which are, so to speak, only a language of convention for expressing value.
So the roast-meat sellers and fishmongers of Paris, who supply great households, usually make their contracts by the "piece." A fat pullet counts as one piece, a chicken as half a piece, more or less depending on the season, and so on. In the trade in enslaved Africans sold to the American colonies, a cargo is sold at so much per head, counted as a "piece of India." Women and children are given a rating, so that, for example, three children, or a woman and a child, count as one head. The rating is raised or lowered according to the strength or other qualities of the enslaved person, so that a particular man may be counted as two heads.
The Mandingo people, who trade in gold dust with the Arab merchants, refer all goods to an imaginary scale whose units are called "macutes." They tell the merchants they are giving them so many macutes in gold. They also value in macutes the merchandise they receive, and they haggle with the merchants over that valuation.
In the same way, people in Holland reckon in bank florins, which are only an imaginary money and which in trade are valued sometimes higher and sometimes lower than the coin called the florin.
Every piece of merchandise is a pledge standing in for all the things traded, but it is more or less convenient in use according to how easy it is to carry and to keep without damage.
The variation in the quality of merchandise, and in its price according to that quality, makes some goods more or less suited than others to serve as a common measure. It also makes them more or less unfit to stand in for any other merchandise of equal value.
Yet with respect to this second property, there is a very great difference between the different kinds of merchandise.
Clearly, for example, a man who has a bolt of linen at home is much more certain of being able to get, whenever he likes, a given quantity of grain of equal value than another man who has a cask of wine, since wine is subject to countless accidents that can in an instant make it lose all its price.
Every piece of merchandise has the two essential properties of money, measuring and representing every value; and in this sense every piece of merchandise is money.
These two properties, serving as the common measure of all values and being a pledge that stands in for any merchandise of equal value, contain everything that makes up the essence and usefulness of what we call money. It follows from the details I have just gone into that all merchandise is, in some respects, money, and shares in these two essential properties more or less, according to its particular nature. All of it is more or less suited to serve as a common measure, depending on how widely it is used, how much alike its pieces are in quality, and how easily it divides into parts of equal value. All of it is more or less suited to be a universal pledge in exchanges, depending on how little it is liable to shrink or spoil in quantity or quality.
Conversely, all money is essentially merchandise.
The only thing that can be taken as a common measure of values is something that has value, something that is accepted in trade in exchange for other values. And the only thing that can be a universal pledge standing in for a value is another, equal value. A money of pure convention is therefore an impossible thing.
Different materials have served, or could have served, as everyday money.
Several nations have adopted, in their speech and their trade, various materials of greater or lesser value as the common measure of values. Even today there are some barbarous peoples who use a kind of small seashell called cowries, which are also made into bracelets and necklaces to adorn their women. I remember seeing, at school, apricot pits swapped and traded among the boys as a kind of money, which they used to play different games. I have already spoken of reckoning value by the head of cattle. We find traces of it in the laws of the ancient Germanic nations that destroyed the Roman Empire. The earliest Romans, or at least the Latins, their ancestors, had also used it. It is claimed that the first coins struck in copper stood for the value of a sheep and bore the image of that animal, and that this is where the word pecunia comes from, from pecus. This guess is very likely.
Metals, and above all gold and silver, are better suited to this than any other substance, and why.
We have now come to the introduction of the precious metals into trade. All the metals, as they were discovered, were admitted into exchanges because of their real usefulness. Their shine made them sought after as ornaments, and their flexibility and toughness made them suitable for making vessels more durable and lighter than clay ones. But these substances could not enter trade without almost immediately becoming the universal money. A piece of any metal whatever has exactly the same qualities as another piece of the same metal, provided it is equally pure. Now, since various chemical processes make it easy to separate a metal from the other metals it might be mixed with, metals can always be brought to whatever degree of purity, or, as we say, whatever fineness, one wants. Then the value of the metal can differ only by its weight. If we express the value of each piece of merchandise by the weight of metal given in exchange for it, we get the clearest, most convenient and most precise way of expressing all values, and it is then impossible that in practice people should not prefer it to any other. Metals are no less suited to become the universal pledge of all the values that they can measure. Because they can be divided in every way imaginable, there is nothing in trade whose value, small or large, cannot be paid exactly by a certain quantity of metal. Besides this advantage of lending themselves to every kind of division, they have the advantage of being unalterable, and the rare ones, like silver and gold, have a very great value in a very small weight and volume.
These two metals are therefore, of all merchandise, the easiest to check for quality, to divide by quantity, to keep forever without damage, and to carry anywhere at the least cost. Anyone who has a surplus of some produce, and who has no immediate need of another kind, will therefore hurry to exchange it for silver, with which he is more sure than with anything else of getting whatever produce he wants when the need arises.
By the nature of things, gold and silver are established as money, and as universal money, independent of any agreement or law.
So gold and silver are established as money, and as universal money, without any arbitrary agreement among men, without any law stepping in, but by the nature of things. They are not, as many people have imagined, mere signs of value. They have a value themselves. If they can be the measure and pledge of other values, they share that property with every other object that has value in trade.
They differ from other things only in that, being at once more divisible, more unalterable and easier to carry than other merchandise, they are more convenient to use for measuring and representing values.
The other metals are used for these purposes only as a second choice.
All metals could be used as money.
But the very common ones have too little value in too great a volume to be used in the everyday exchanges of trade. Copper, silver and gold are the only ones in regular use.
And except for a few peoples whom neither mines nor trade had yet been able to supply with enough gold and silver, copper has never been used except for exchanges of the smallest values.
The use of gold and silver as money has raised their value as materials.
It cannot be that the eagerness with which everyone has tried to exchange his surplus produce for gold or silver, rather than for any other merchandise, has failed to raise greatly the value of these two metals in trade. That only made them more convenient to use as a pledge and common measure.
Changes in the value of gold and silver compared with other objects of trade, and with each other.
This value can change, and does in fact change continuously, so that the same quantity of metal that used to answer to a certain quantity of some produce stops answering to it, and it takes more or less silver to stand for the same produce. When it takes more, we say the produce is dearer, and when it takes less, we say it is cheaper. But we could just as well say that silver is cheaper in the first case and dearer in the second.
Silver and gold do not only change in price compared with all kinds of produce. They also change in price against each other, according to how plentiful each one is. It is well known that today in Europe people give fourteen to fifteen ounces of silver for an ounce of gold, and that in earlier times they gave only ten to eleven ounces of silver for an ounce of gold.
Even today in China, people give only about twelve ounces of silver to get an ounce of gold. So there is a very great profit in carrying silver to China, trading it for gold, and bringing the gold back to Europe. Clearly, in the long run this trade must make gold more common in Europe and scarcer in China, and the value of the two metals must in the end return everywhere to the same proportion.
A thousand different causes combine, at every moment, to fix the value of goods compared with one another or with silver, and to make it vary without end. The same causes fix and vary the value of silver, compared either with the value of each kind of produce in particular or with the sum of all the other values now in trade. It would not be possible to untangle these different causes and work out their effects without going into very lengthy and difficult details, and I will refrain from entering into that discussion.
The use of payment in silver gave rise to the distinction between seller and buyer.
As people grew used to the habit of valuing everything in silver, of exchanging all their surplus for silver, and of exchanging silver only for the things that were useful or pleasing to them at the moment, they got into the way of looking at the exchanges of trade in a new light. They picked out two persons in them, the seller and the buyer. The seller was the one who gave the produce for silver, and the buyer was the one who gave the silver to get the produce.
The use of silver greatly helped to separate the different kinds of work among the different members of society.
The more silver took the place of everything else, the more each person could devote himself only to the kind of farming or craft he had chosen, and be freed of all worry about meeting his other needs. He had only to think of getting as much silver as he could by selling his crops or his labor, quite sure that with this silver he would have everything else. This is how the use of silver hastened the progress of society enormously.
On setting aside the yearly products, accumulated to form capitals.
As soon as there were people whose ownership of land assured them a yearly income more than enough to meet all their needs, there had to be some among them, either anxious about the future or simply prudent, who set aside a part of what they harvested each year, either to cover possible accidents or to increase their comfort. When the produce they gathered was hard to keep, they had to look for a way to trade it for things of a more lasting kind, things that would not lose their value with time, or that could be put to work in a way that would bring profits which would more than make up for the wear and tear.
Movable wealth. Hoards of silver.
This kind of possession, resulting from the accumulation of yearly products that were not consumed, is known as movable wealth. Furniture, silverware, stored merchandise, the tools of each trade, and livestock all belong to this kind of wealth. It is plain that people had worked hard to gather as much of this wealth as they could before they knew silver. But it is no less clear that once silver was known, once it was established that it was the most unalterable of all objects of trade and the easiest to keep without trouble, it had to be sought out above all by anyone who wanted to save. It was not only landowners who put aside their surplus in this way. The profits of industry are not, like the revenues of land, a gift of nature. The industrious man gets from his labor only the price paid by the person who pays his wages. That person saves as much as he can on those wages, and competition forces the industrious man to be content with less than he would like. Yet it is certain that this competition has never been numerous enough, or lively enough, in every kind of work to keep a man who was more skillful, more active, and above all more thrifty than the others in his personal spending from earning, in every age, a little more than he needs to support himself and his family, and from setting this surplus aside to make himself a small nest egg.
Movable wealth is an indispensable prerequisite for all profitable labor.
It is even necessary that, in every trade, the workers, or the entrepreneurs who employ them, have a certain stock of movable wealth gathered in advance. Here we are again obliged to retrace our steps and recall several things that were only mentioned in passing at first, when we spoke of the division of the different professions and of the different ways landowners can put their land to work. We could not then have explained them properly without breaking the thread of our ideas.
The need for advances in farming.
All kinds of work, in farming, in industry and in trade, require advances. Even if people plowed the earth with their bare hands, they would have to sow before they reaped, and they would have to live until after the harvest. The more farming is perfected and enlivened, the larger the advances. You need livestock, farm tools, buildings to house the livestock and store the harvests. You must pay, and support until the harvest, a number of people in proportion to the size of the operation. Only through large advances do you get rich products, and only then does the land yield a large income. In any trade at all, the worker must already have his tools, and a sufficient quantity of the materials he works on. He must support himself while waiting for his goods to sell.
The first advances, supplied by land still uncultivated.
The land is always the first and only source of all wealth. It is the land that, through cultivation, produces all income, and it is also the land that gave the first stock of advances that came before any cultivation. The first cultivator took the seeds he sowed from plants that the earth had produced by itself. While waiting for the harvest, he lived on hunting, fishing and wild fruit. His tools were branches torn from trees in the forests and shaped with sharp stones ground against other stones. He caught the animals wandering in the woods himself, by running them down or driving them into his traps. He tamed them and made them gentle. He used them first for food, and then to help him in his work. This first stock grew little by little. Livestock in particular were, of all movable wealth, the most sought after in those early times, and the easiest to build up. They die, but they breed, so their wealth is in a way imperishable. It grows by reproduction alone, and livestock also give a yearly product, in milk products, or in wool, hides and other materials which, together with wood taken from the forests, were the first raw stock of the products of industry.
Livestock, a movable wealth that came even before the farming of land.
At a time when there was still a great deal of uncultivated land that belonged to no one, one could have livestock without owning land. It is even likely that almost everywhere people began to gather herds and live on their yield before they turned to the harder work of farming.
It seems that the nations that farmed the land earliest were those that found in their own country kinds of animals more easily tamed. These nations were thus led from the wandering, restless life of peoples who live by hunting and fishing to the calmer life of herding peoples.
Herding keeps people in one place longer. It gives more leisure and more chances to study the differences between soils, and to watch how nature goes about producing the plants that feed the livestock. Perhaps this is the reason why the Asian nations were the first to farm the land, and why the peoples of America stayed so long in a state of savagery.
Movable wealth has a value that can be exchanged for land itself.
Those who had a great deal of movable wealth could use it not only for farming land but also for the various kinds of industry. The ease of accumulating this wealth, and of putting it to use even apart from land, meant that people could put a value on land itself and compare it with the value of movable wealth.
A man who had a great deal of land but no livestock or tools, or not enough of them, would certainly have made a good bargain by giving up part of his land to a man who would give him, in exchange, livestock and tools to cultivate the rest. This, above all, is how pieces of land themselves entered trade and came to have a value comparable to that of every other kind of produce. Suppose four bushels of grain, the net product of one acre of land, were worth six sheep. The acre that produced them could then have been given up for a certain value, a greater one to be sure, but always easy to determine in the same way as the price of any other merchandise. That is, first by the haggling between the two parties, and then by the going price set by the meeting of those who want to exchange land for livestock and those who want to give livestock to get land. It is by this going price that land is valued when a debtor, pressed by his creditor, is forced to give up his land to him.
How land is valued: by the ratio of its revenue to the sum of movable wealth, or the value it is exchanged for. This ratio is what is called the denier of the price of land.
Suppose a piece of land produces a revenue equal to six sheep, and it can be sold for some value. That value can always be expressed as a number of sheep. Obviously, that number will stand in a definite ratio to six: it will contain six a certain number of times. So the price of an estate is just a certain number of times its revenue: twenty times if the price is a hundred and twenty sheep, thirty times if it is a hundred and eighty. The going price of land is therefore set by the ratio of the value of the estate to the value of its revenue. The number of times the price of the estate contains the revenue is called the denier of the price of land. Land sells at "denier twenty," "denier thirty," "forty," and so on, when the buyer pays twenty, thirty, or forty times its yearly revenue to get it. It is also obvious that this price, this denier, must rise and fall with the number of people who want to sell or buy land, just as the price of every other kind of merchandise varies with the changing ratio of supply to demand.
Every capital in money, every sum of value of any kind, is the equivalent of a piece of land yielding a revenue equal to a fixed fraction of that sum. The first use of capitals: buying an estate in land.
Let us return now to the period after money was introduced. Because money is so easy to pile up, it soon became the most sought-after form of movable wealth. It also gave people a way to keep increasing their store of it, simply by thrift. Suppose someone receives more value each year than he needs to spend, whether from the revenue of his land or from the wages of his labor or skill. He can set that surplus aside and let it accumulate. These accumulated values are what we call a capital. A timid miser hoards money only to quiet his imagination against the fear of going without necessities at some uncertain time in the future, and he keeps his money in one lump. Suppose the dangers he foresaw came true, and poverty forced him to live off his hoard year after year. Or suppose a spendthrift heir squandered it bit by bit. Either way the hoard would soon be used up, and the owner would lose the capital entirely. He can make better use of it than that. An estate in land with a certain revenue is only the equivalent of a sum of value equal to that revenue repeated a certain number of times. It follows that any sum of values whatever is the equivalent of an estate producing a revenue equal to a fixed fraction of that sum. It makes no difference at all whether the sum of values, the capital, consists of a heap of metal or of anything else, since money represents every kind of value, just as every kind of value represents money. So the owner of a capital can, first of all, use it to buy land. But he has other options as well.
Another use of money: as advances for manufacturing and other industrial enterprises.
I have already observed that all labor, whether in farming or in industry, requires advances. And I have shown how the earth supplied the first advances for farming, and even for the first handicrafts that each person can make for his own use. It did so through the fruits and grasses it produces on its own to feed people and livestock, and through the trees from which people made their first tools. For example, the earth supplied the stone, the clay, and the wood from which the first houses were built. Before the trades separated, the same man who worked the land met his other needs with his own labor, and no other advances were needed. But once a large part of society had nothing but its arms to live on, those who lived on wages had to start out with something laid up in advance. They needed it either to get the materials they worked on, or to live on while waiting for their wages to be paid.
More on how capitals are advanced in industrial enterprises, how they come back, and the profit they must yield.
In the earliest times, the person who put people to work supplied the material himself and paid the worker's wages day by day. The farmer or landowner handed the spinner the hemp he had harvested himself and fed her while she worked. Then he passed the thread to the weaver, to whom he gave the agreed wage each day. But such small daily advances are enough only for crude, simple labor. Many trades, even trades that serve the poorest members of society, require the same material to pass through many different hands, and to go through preparations that are both difficult and varied, over a very long time.
I have already mentioned the preparation of the hides that are made into shoes. Anyone who has seen a tanner's yard can feel how completely impossible it is for one poor man, or even several poor men, to do all of this. They would have to stock up on hides, lime, tanbark, tools, and so on. They would have to put up the buildings needed to set up a tannery. And they would have to live for several months until the leather was sold. In this trade and in many others, don't the workers have to learn the craft before they dare touch the material, which they would spoil in their first attempts? That is another advance that cannot be done without. So who will gather the materials for the work, the ingredients, and the tools needed for the preparation? Who will have the vats, the sheds, and buildings of every kind constructed? Who will keep alive, until the leather is sold, the large number of workers, none of whom could prepare even a single hide alone, and whose profit from selling a single hide could not keep even one of them alive? Who will pay for the students and apprentices? Who will provide for their living until they are trained, moving them by stages from easy work suited to their age up to the jobs that demand the most strength and skill?
It will be one of those owners of capitals, of accumulated movable values. He will spend part of it on the advances for construction and for buying materials, and part on the wages of the workers who prepare the leather. He is the one who will wait until the sale of the leather brings back to him not only all his advances but also a profit large enough to make up for what his money would have earned him if he had used it to buy land. On top of that, he must be paid wages for his work, his attention, his risks, and even his skill. For surely, at equal profit, he would have preferred to live without any trouble on the revenue of a piece of land that he could have bought with the same capital. As the capital returns to him through the sale of the goods, he uses it for new purchases, to feed and sustain his workshop through this constant circulation. He lives on his profits. What he can save he sets aside to increase his capital and pour it into his enterprise, enlarging the mass of his advances so as to enlarge his profits further.
The paid industrial class divides into entrepreneurs who own capital and plain workers.
So the whole class that supplies society's many different needs with the immense variety of industrial goods is divided, so to speak, into two orders. The first is the manufacturing entrepreneurs, the master makers. All of them own large capitals, which they put to work by employing people through their advances. The second is made up of plain artisans. They have no property except their arms, they advance only their daily labor, and their only profit is their wages.
Another use of capitals: advances for farming enterprises. More on how capitals are used, how they return, and the profits they must bring in farming enterprises.
I spoke first about the use of capitals in manufacturing enterprises because I wanted to give a clearer example of why large advances are needed, what they do, and how they circulate. But in doing so I turned the natural order upside down a little. The natural order would have had me start with farming enterprises, which also can be undertaken, expanded, and made profitable only through large advances.
There are owners of large capitals who want to put them to work in farming enterprises. They lease land and pay the landowners high rents for it, taking on all the advances that farming requires. Their situation must be the same as that of the factory entrepreneurs. Like them, they must make the first advances of the enterprise. They must supply themselves with cattle, horses, and farm tools, and buy the first seed. Like them, they must keep and feed workers of every kind: carters, reapers, threshers, farmhands. These workers have only their arms, advance only their labor, and earn only their wages. And like them, besides getting back their capitals, that is, all their advances, they must collect three things. First, a profit equal to the revenue they could get with their capital without any labor. Second, the wages and price of their labor, their risks, and their skill. Third, enough to maintain their capital, the fund of their original advances, by replacing each year the wear on the assets used in the enterprise: the livestock that die, the tools that wear out, and so on. All of this must be taken out of the price of the land's products first. What is left over serves the cultivator to pay the landowner for the permission the owner has given him to use his field to set up his enterprise. This is the price of the lease, the landowner's revenue, the net product. For everything the land produces, up to the amount that returns the advances of every kind and the profits of the person who makes them, cannot be counted as revenue. It is only the recovery of the costs of cultivation. If the cultivator did not get these back, he would take good care not to spend his wealth and his effort farming someone else's field.
Competition among capitalists who undertake farming sets the going price of leases, and sets up large-scale farming.
Competition among rich farming entrepreneurs sets the going price of leases. It rests on the fertility of the land and the price at which its products sell, and always on the tenants' calculation of their costs and of the profits they must draw from their advances. They can hand over to the landowner only what is left. But when the competition among them is lively, they do hand over all of that surplus, because the landowner will give his land only to the one who offers him a higher rent.
Where there are no capitalists to undertake farming, land is worked only on a small scale.
Now suppose the opposite. There are no rich men with large capitals to put into farming enterprises. Or the price of the land's products is low, or something else is wrong, and the harvests do not suffice to assure the entrepreneurs, besides the return of their funds, profits at least equal to what they could get from their money by using it in any other way. In that case no tenant farmers can be found who are willing to rent the land.
Landowners are then forced to have their land worked by sharecroppers, who are in no position to make any advances or to farm well.
The landowner then makes modest advances himself, which bring him a very modest revenue. If the land belongs to a poor or careless owner, a widow, or a minor, it lies uncultivated.
This is the true explanation of the difference I have already noted between the provinces where the land is farmed by rich tenants, such as Normandy and the Île de France, and those where it is farmed only by poor sharecroppers, such as the Limousin, the Angoumois, the Bourbonnais, and many others.
The class of cultivators divides into entrepreneurs or tenant farmers, and plain hired hands, servants or day laborers.
It follows that the class of cultivators splits, like that of manufacturers, into two orders of men. One is the entrepreneurs or capitalists who make all the advances. The other is the plain wage-earning workers. We also see that capitals alone create and sustain large farming enterprises. Capitals give land a steady rental value, if I may put it that way. They assure landowners a revenue that is always the same and as large as it can possibly be.
The fourth use of capitals: advances for trading enterprises. Why merchants in the proper sense must stand between the producers of goods and the consumers.
Entrepreneurs, whether in farming or in manufacturing, get back their advances and their profits only by selling the fruits of the land or the goods they make.
It is always the needs and means of the consumer that set the price at the sale. But the consumer does not always need the thing that has been grown or made at the moment of the harvest or the moment the goods are finished.
Meanwhile the entrepreneurs need their funds to come back immediately and regularly, so that they can pour them back into their enterprises. Plowing and sowing have to follow right on the harvest. The workers of a manufacture must be kept busy all the time. New work must be started as the first work is finished, and materials replaced as they are used up. You cannot interrupt the work of a going enterprise without paying for it, and you cannot pick it up again whenever you please.
So the entrepreneur has the greatest interest in getting his funds back very quickly by selling his crops or his goods. On the other side, the consumer has an interest in finding the things he needs when he wants them and where he wants them. It would be very inconvenient for him to have to buy a whole year's supply at harvest time.
Among the things people consume regularly, many require long and costly labor. This labor can be undertaken profitably only on a very large quantity of material. It is so large that the consumption of a small number of people, or of a small district, could not absorb the output of even one manufacture.
Enterprises making this kind of goods are therefore necessarily few, and far apart from one another. So they are also far from the homes of most of the consumers. No one above the depths of poverty avoids consuming several things that are grown or made only in places very distant from his home, and just as distant from each other. A man who could get the things he uses only by buying them directly from the hand of the person who grows or makes them would go without many things, or would spend his life traveling.
Both the producer and the consumer have a stake here. The first wants to find someone to sell to, and the other wants to find someone to buy from, and neither wants to waste precious time waiting for a buyer or hunting for a seller. This double interest must have suggested to some third parties that they step in between the two. That is the business of merchants. They buy goods from the producer to pile them up in stocks and warehouses, where the consumer comes to supply himself.
By this means the entrepreneur, sure of selling and of getting his funds back, can go on without worry or pause to new production, and the consumer finds within reach, at any moment, the things he needs.
The different orders of merchants. What they all have in common: they buy in order to resell, and their trade runs on advances that must come back with a profit in order to be poured into the business again.
From the woman selling herbs at a market stall to the shipowner of Nantes or Cadiz, whose sales and purchases reach to the Indies and America, the merchant's profession, or trade in the proper sense, divides into countless branches and, one might say, degrees. One merchant only stocks one or several kinds of goods, which he sells in his shop to anyone who walks in. Another carries certain goods to the place where they are lacking, and brings back the goods that grow there and are lacking in the place he left. One does his exchanges from one town to the next, and in person. Another works through his correspondents and through the carters he pays, sending goods and having them sent from one province to another, from one kingdom to another, from Europe to Asia and from Asia to Europe. One sells his merchandise in small lots to each of the people who consume it. Another sells only large quantities at a time to other merchants, who resell in retail to the consumers.
But they all have this in common: they buy in order to resell, and their first purchases are an advance that comes back to them only with time. Like the advances of the farming and manufacturing entrepreneurs, it must come back to them. It must come back not only in full within a certain period, to be poured into new purchases, but also with two more things. First, a profit equal to the revenue they could get with their capital without any labor. Second, the wages and price of their labor, their risks, and their skill. If they were not extremely likely to get this return and these profits, which they cannot do without, no merchant would go into trade. If they did not actually get them, none could continue. It is from this point of view that a merchant governs his purchases: he calculates the prices, and the quantity of goods, that he can hope to sell within a certain time. The retailer learns from experience, from the results of small trials made with care, roughly how much of the consumers' needs he is in a position to supply. The wholesale merchant learns from his correspondents how plentiful or scarce goods are, and what they cost, in the different regions where his trade reaches. He steers his ventures accordingly. He sends goods from where they are cheap to where they sell for more, taking care, of course, to count the cost of transport among the advances that must come back to him.
Since trade is necessary, and since no trade can be undertaken without advances in proportion to its size, here is another use of movable wealth. Here is another way for the owner of a mass of values laid aside and accumulated, of a sum of money, in short of a capital, to turn it to his advantage: to provide his living, and to increase his wealth if he can.
The true idea of the circulation of money.
From what has just been said we see how farming, manufacturing of every kind, and every branch of trade all run on a mass of capitals, of accumulated movable wealth. The entrepreneurs first advanced this mass in each of these different kinds of work. It must come back to them each year with a steady profit. The capital must come back to be poured in and advanced again to continue the same enterprises, and the profit must come back to support the entrepreneurs, more or less comfortably. This constant advancing and returning of capitals is what should be called the circulation of money. It is a useful and fruitful circulation. It animates all the labor of society, and keeps movement and life in the body politic. People are quite right to compare it to the circulation of the blood in the animal body. For suppose something goes wrong in the pattern of spending among the different classes of society, and the entrepreneurs stop getting back their advances with the profit they have a right to expect. Then they will obviously be forced to cut back their enterprises. The amount of work will shrink, and so will the consumption of the land's fruits, the production, and the revenue. Poverty will take the place of wealth. And the plain workers, no longer finding employment, will fall into the deepest misery.
All enterprises, above all manufacturing and trade, could only be very limited before gold and silver came into trade.
There is hardly any need to point out that enterprises of every kind, but above all manufacturing and, more still, trade, could only be very limited before gold and silver were brought into trade. It was almost impossible to accumulate large capitals. It was even harder to multiply and divide payments as much as is needed to make exchanges easy and frequent enough for lively trade and a lively circulation. Only the farming of land could hold up a little, because livestock are the main item of the advances it requires. Even so, it is probable that in those days the landowner was the only farming entrepreneur. As for the arts and crafts of every kind, they could only have been in the most extreme languor before money came in. They were limited to the crudest work. Landowners made the advances for it by feeding the workers and supplying the materials, or had it done at home by their own servants.
Capitals are as necessary to every enterprise as labor and skill. So the industrious man readily shares the profits of his enterprise with the capitalist who supplies the funds he needs.
Capitals are the indispensable basis of every enterprise. Money is a chief means of saving small gains, piling up profits, and getting rich. So people who have industry and a zeal for work, but no capitals, or not enough for the enterprises they want to start, have no trouble making up their minds. They are ready to give up a share of the profits they hope to collect, beyond the return of their advances, to the owners of capitals or money who are willing to entrust it to them.
The fifth use of capitals: lending at interest. The nature of a loan.
Owners of money weigh two things against each other. One is the risk their capital may run if the enterprise fails. The other is the advantage of enjoying a certain profit without labor. Guided by this, they demand more or less profit, or interest, on their money, or they agree to lend it for the interest the borrower offers. Here is yet another outlet open to the owner of money. Make no mistake: lending at interest is exactly a kind of trade, in which the lender is a man who sells the use of his money and the borrower is a man who buys it. It is precisely like the owner of a piece of land and his tenant, who sell and buy, respectively, the use of the leased land.
This is just what the Latins expressed so well in the name they gave to the interest on money lent: usura pecuniae, "the use of money." The French word derived from it has become hateful because of the false ideas people have formed about interest on money.
False ideas about lending at interest.
The price of a loan is not at all based, as one might imagine, on the profit the borrower hopes to make with the capital whose use he is buying. This price is fixed, like the price of all merchandise, by the haggling between seller and buyer, by the balance of supply and demand. People borrow with all sorts of aims and for all sorts of reasons.
One man borrows to start an enterprise that will make his fortune. Another borrows to buy land, another to pay a gambling debt, another to make up for the loss of his income, of which some accident has deprived him, another to live on until he can earn something by his labor. But all these reasons that move the borrower are of no concern to the lender. He is occupied with only two things: the interest he will receive and the safety of his capital. He cares no more about what the borrower will do with it than a merchant cares what the buyer will do with the goods he sells him.
The true basis of interest on money.
So a man can lease out his money as rightfully as he can sell it. The owner of money can do either one. This is not only because money is the equivalent of a revenue and a means of getting a revenue. It is not only because the lender loses, for the time of the loan, the revenue he could have gotten. It is not only because he risks his capital. It is not only because the borrower can use it for profitable acquisitions or in enterprises from which he will draw large profits. The owner can rightfully draw interest for a reason that is more general and more decisive. Even if none of those things applied, he would still be entitled to demand interest on the loan for the single reason that the money is his. Since it is his, he is free to keep it. Nothing makes it his duty to lend it. So if he does lend it, he can put on his loan whatever condition he likes. He does the borrower no wrong in this, since the borrower submits to the condition and has no kind of right to the sum lent. The profit one can get with money is undoubtedly one of the most frequent reasons that move a borrower to borrow at interest. It is one source of the ease with which he finds he can pay that interest. But it is not at all what gives the lender the right to demand it. All that is needed is that the money be his, and this right cannot be separated from ownership. A man who buys bread has the motive of feeding himself. But the baker's right to demand a price for it has nothing to do with that use of the bread. It is the same right he would have to sell him stones. It rests solely on this: the bread being his, no one has the right to force him to give it away for nothing.
The rate of interest should be fixed only as the price of all merchandise is, by the course of trade alone.
I have already said that the interest on money lent is set, like that of all other merchandise, by the balance of supply and demand. So when there are many borrowers who need money, the interest on money goes up. When there are many owners of money offering it to lend, the interest goes down. It is therefore a mistake, too, to believe that the interest on money in trade should be fixed by the laws of princes. It is a going price that sets itself, like that of all other merchandise. This price differs somewhat according to how much or how little security the lender has against losing his capital. But at equal security it must rise or fall with plenty and need. And the law should no more fix the rate of interest on money than it should set the price of all the other merchandise that is traded.
In trade, money has two distinct valuations. One expresses the amount of money given to get the different kinds of goods. The other expresses the relation of a sum of money to the interest it earns according to the course of trade.
From this account of how money is sold, or leased for a yearly interest, it appears that there are two ways of valuing money in trade.
In buying and selling, a certain weight of silver stands for a certain quantity of value, or of merchandise of each kind. For example, an ounce of silver is equal to a certain quantity of wheat or to a certain number of days of a man's labor. In lending and in the trade in money, a capital is the equivalent of an annual income equal to a fixed fraction of that capital. And conversely, an annual income stands for a capital equal to that income repeated a certain number of times, depending on whether the interest is at a higher or lower denier.
These two valuations are independent of each other and are governed by entirely different principles.
These two different valuations are less closely related, and depend on each other much less, than one would be tempted to believe at first glance.
Money could be very plentiful in ordinary trade, have very little value there, and answer to a very small quantity of goods, and yet the interest on money could at the same time be very high.
Suppose that with a million ounces of silver circulating in trade, one ounce of silver is given at the market for one measure of wheat. Now suppose that, somehow, a second million ounces of silver arrives in the state, and that this increase is spread through all the purses in the same proportion as the first million, so that a man who had two ounces of silver before now has four. Money, considered as a mass of metal, will certainly fall in price. Or, what comes to the same thing, goods will be paid for at higher prices. To get the measure of wheat that used to cost one ounce of silver, it will take much more silver, perhaps two ounces instead of one.
But it will not follow at all that the interest on money falls, provided all this money is brought to market and spent on the everyday expenses of those who hold it, as the first million ounces was, by our supposition. For the interest on money falls only to the extent that there is more money to lend, in proportion to the needs of borrowers, than there was before.
Now, money brought to market is not money to be lent. What is lent is money laid aside, the accumulated capitals. The increase of money at the market, or the fall in its price against goods in ordinary trade, does not inevitably and by any direct link bring down the interest on money. Far from it. It can happen the other way around: the very cause that increases the quantity of money at the market, and raises the price of other goods by lowering the price of money, may be exactly the cause that raises the rent of money, the rate of interest.
For suppose for a moment that all the rich people of a nation, instead of saving from their revenues or their yearly profits, spend the whole of them. And suppose that, not content with spending all their revenue, they spend their capital. Take a man who has a hundred thousand francs in money. Instead of using it profitably or lending it, he burns through it bit by bit in foolish extravagance. Clearly, on one side, more money will go into everyday purchases, to satisfy the needs or whims of each individual, and so money will fall in price. On the other side, there will certainly be much less money to lend, and since many people will ruin themselves, there will also be more borrowers. So the interest on money will rise, at the very time that money becomes more plentiful at the market and falls in price there, and for precisely the same cause.
We will stop being surprised at this apparent oddity if we consider that the money offered at the market, to get wheat or other things, is the money one spends day by day to meet one's needs. The money offered to lend is precisely the money one has cut out of one's daily spending, to lay it aside and build capitals.
When money is priced against goods, what is being valued is silver as a metal. When the rate of interest is set, what is being valued is the use of money for a fixed period of time.
At the market, a measure of grain is balanced against a certain weight of silver. What you buy with the grain is a quantity of silver, and that quantity is what gets valued and compared with other goods. Lending at interest is different. What is being valued is the use of a certain quantity of value for a certain length of time. Now we are no longer comparing a lump of silver to a lump of grain. We are comparing a sum of value with a fixed fraction of itself, and that fraction becomes the price of using the sum for that time. Suppose twenty thousand ounces of silver are worth twenty thousand measures of grain at the market, or only ten thousand. Either way, the use of those twenty thousand ounces for a year is still worth a twentieth of the principal in the lending trade, or a thousand ounces of silver, if interest is at one in twenty.
The price of interest depends directly on how the demand of borrowers compares with the supply of lenders. That comparison depends mainly on how much movable wealth has been piled up by saving from yearly income and yearly produce, to form capitals, whether those capitals exist as money or as any other kind of asset that has value in trade.
The price of silver at the market has to do only with how much of that metal is in use in everyday exchanges. The rate of interest has to do with how much value has been piled up and set aside to form capitals. It makes no difference whether that value is held in metal or in other assets, as long as those assets are easy to turn into money.
The mass of metal that exists in a country falls far short of the total value lent at interest over the course of a year. But every capital held in furniture, merchandise, tools and livestock stands in for that money and represents it. A note signed by a man who owns a hundred thousand francs' worth of well-known assets, promising to pay a hundred thousand francs on a certain date, passes for a hundred thousand francs until that date. Everything the signer owns stands behind the payment, whatever kind of assets he holds, so long as they are worth a hundred thousand francs.
So it is not the amount of money existing as metal that makes interest rise or fall, or that puts more money up for lending in trade. It is only the total of capitals in existence in trade. That means the current total of movable wealth of every kind, saved up bit by bit out of income and profits, to be used to bring its owner new income and new profits. These accumulated savings are what is offered to borrowers. The more of them there are, the lower interest on money will be, unless the number of borrowers grows in proportion.
A thrifty spirit in a nation steadily increases the total of its capitals. Luxury steadily tends to destroy them.
In a nation, the spirit of thrift tends to keep increasing the total of its capitals, to increase the number of lenders, and to reduce the number of borrowers. The habit of luxury does exactly the opposite. From what has already been said about how capitals are used in every enterprise of farming, manufacturing and trade, we can judge whether luxury makes a nation rich or poor.
The fall in interest shows that, on the whole, thrift has won out over luxury in Europe.
Interest on money has fallen steadily in Europe for several centuries. We must conclude from this that the spirit of thrift has been more widespread than luxury. Only rich people indulge in luxury, and among the rich, everyone sensible limits himself to spending his income and is very careful not to dip into his capital. Those who want to get rich are far more numerous in a nation than those who already are. And in the present state of things, when all the land is taken, there is only one way to get rich. You must have, or find some way to get, a yearly income or profit beyond the bare necessities of life. Then each year you must set that surplus aside to build a capital, and with that capital gain a further increase of yearly income or profit, which you can again save and turn into capital. So a great many people have an interest in piling up capitals, and are busy doing it.
A recap of the five different ways of using capitals.
I have counted five different ways of using capitals, or of placing them so that they earn a return.
The first is to buy a piece of land that yields a certain income.
The second is to put your money into farming enterprises by leasing land. Its crops must pay, besides the rent, interest on the advances and the price of the labor of the man who devotes his wealth and his effort to working it.
The third is to place your capital in manufacturing and industrial enterprises.
The fourth is to place it in trade.
And the fifth is to lend it, for interest, to those who need it.
How the different uses of money affect one another.
It is plain that the yearly returns one can draw from capitals placed in these different uses are held in check by one another, and all of them are tied to the current rate of interest on money.
Money put into land ought to earn less.
A man who invests his money by buying land leased to a reliable tenant gets an income that costs him very little trouble to collect, and that he can spend as pleasantly as he likes, giving free rein to all his tastes. He also has the advantage that land, of all possessions, is the one whose ownership is best protected against every kind of accident.
Money lent out ought to earn a little more than the income from land bought with an equal capital.
A man who lends his money at interest enjoys it even more peacefully and freely than a landowner does. But if his debtor cannot pay, he may lose his capital.
So he will not be satisfied with interest equal to the income of the land he could buy with the same capital.
Interest on lent money must therefore be higher than the income from land bought for the same capital. If the lender could find land to buy at an equal income, he would prefer that use of his money.
Money put into farming, manufacturing and trade ought to earn more than interest on money lent.
For a similar reason, money used in manufacturing or trade must earn a larger profit than the income from the same capital in land, or the interest on the same money lent. These uses demand, besides the capital advanced, a great deal of care and labor. If they did not pay well, it would be far better to secure an equal income that you could enjoy without doing anything. So besides interest on his capital, the entrepreneur must draw every year a profit that rewards him for his care, his labor, his talents and his risks. That profit must also give him enough to replace the yearly wearing away of the advances he has to make from the very start, in assets that can spoil and that are exposed to all kinds of accidents.
Still, the returns from these different uses limit one another, and in spite of their inequality they are held in a kind of balance.
So the different uses of capitals bring in very unequal returns. But this inequality does not stop them from influencing one another, and a kind of balance is set up among them. Picture two liquids of unequal weight, joined at the bottom of an inverted siphon, each filling one of its two arms. They would not stand at the same level, but the height of one could not rise without the other rising too in the opposite arm.
Suppose that suddenly a great many landowners wanted to sell. Clearly the price of land would fall, and a smaller sum would buy a larger income. This cannot happen without interest on money rising. People with money would rather buy land than lend at interest no higher than the income of the land they could buy. So if borrowers want money, they will have to pay more for the rent of it. Once interest on money rises, people will prefer to lend rather than put their money to work in farming, manufacturing and trade, which is harder and riskier. Only those enterprises will be started that bring in, besides the wages of labor, a profit well above the rate on money lent. In a word, as soon as the profits from any one use go up or down, capitals flow into it from the other uses, or flow out of it into the others. This necessarily changes, in each of these uses, the ratio of capital to yearly return. In general, money turned into land earns less than money lent, and money lent earns less than money used in laborious enterprises. But the return on money, however it is used, cannot rise or fall without every other use seeing a proportional rise or fall.
The current rate of interest on money is the thermometer of how plentiful or scarce capitals are. It measures how far a nation can extend its farming, manufacturing and trade.
The current interest on money lent can therefore be seen as a kind of thermometer of how plentiful or scarce capitals are in a nation, and of how large the enterprises of every kind are that it can take on. It is plain that the lower interest on money is, the more land is worth. A man with fifty thousand livres of yearly rents is worth only a million if land sells at twenty times its yearly income. He is worth two million if land sells at forty times.
If interest is at five percent, any land waiting to be cleared that will not yield five percent, over and above replacing the advances and rewarding the cultivator's care, will stay wasteland. Any manufacture or trade that will not yield five percent, over and above the wages of the entrepreneur's labor and his risks, will not exist.
Suppose a neighboring nation has interest on money at only two percent. It will not only carry on all the trades from which the five percent nation is shut out. Its manufacturers and merchants, who can be content with a smaller profit, will also set their prices lower in every market. They will draw to themselves nearly all the trade in everything that special circumstances, or the excessive cost of transport, do not keep for the nation where money is worth five percent.
How the rate of interest on money affects every profitable enterprise.
We can think of the price of interest as a kind of level, below which all labor, all farming, all manufacturing and all trade stop. It is like a sea spread over a vast country. The mountain peaks rise above the water and form fertile, cultivated islands. If the sea drains away, then as it sinks the sloping ground appears first, then the plains and valleys, and they cover themselves with every kind of produce. A rise or fall of a single foot of water is enough to flood immense stretches of land or give them back to cultivation. It is the abundance of capitals that gives life to every enterprise, and low interest on money is at once the effect and the sign of that abundance.
The total wealth of a nation is made up of two things. First, the net income of all landed property multiplied by the going rate for the price of land. Second, the sum of all the movable wealth existing in the nation.
Landed property is worth a capital equal to its yearly income multiplied by the current rate at which land sells. So suppose we added up the income of all the land. That is, the net income it yields to the landowners and to everyone who shares in owning it, such as the lord who collects the rent, the priest who collects the tithe, and the sovereign who collects the tax. Suppose, I say, we added up all these sums and multiplied them by the rate at which land sells. We would then have the sum of a nation's wealth in landed property.
To get the total wealth of a nation, we must add its movable wealth, namely: first, the sum of the capitals employed in all enterprises of farming, manufacturing and trade, which must never leave them. Second, all the advances of every kind of enterprise, which must keep coming back to the entrepreneurs so that they can keep being poured back into the enterprise. Third, all the furniture, clothing, jewels and so on, for private use. It would be a gross mistake to confuse the immense mass of this movable wealth with the mass of money in a country. Money is a very small matter by comparison. To be convinced, one need only picture the immense quantity of livestock, tools and seed that make up the advances of agriculture. Picture also the materials, instruments and furnishings of every kind that make up the stock of the manufacturers, and the warehouses of all the merchants and traders. Then one will see that, in the total wealth of a nation, whether in land or in movable goods, actual money is only a very small part. But since all this wealth and money can always be exchanged for one another, all of it represents money, and money represents all of it.
The sum of capitals lent cannot be counted in that total without counting the same thing twice.
The sum of capitals lent must not be included in the calculation of a nation's wealth. Such capitals can only have been lent to landowners, or to entrepreneurs to put to work in their enterprises, since only these two kinds of people can answer for the capital and pay the interest. Money lent to people with neither land nor skill would be a dead capital, not a capital put to use. Say the owner of an estate worth four hundred thousand francs borrows a hundred thousand. His property is now burdened with an annuity that cuts his income by that much. If he sold the estate, a hundred thousand of the four hundred thousand he received would belong to the lender. So in a count of existing wealth, the lender's capital would be counted twice, along with an equal part of the value of the land. The land is still worth four hundred thousand francs. When the owner borrows a hundred thousand, that does not make five hundred thousand. It only means that, of the four hundred thousand, a hundred thousand belongs to the lender, and only three hundred thousand still belongs to the borrower.
The same double counting would happen if we included in the total of capitals money lent to an entrepreneur to be used for the advances of his enterprise. That loan does not increase the total advances the enterprise needs. It only means that this sum, and the part of the profits that stands for interest on it, belong to the lender. A merchant may put ten thousand francs of his own into his trade and take all the profit. Or he may borrow those ten thousand francs from someone else, pay him interest, and keep the rest of the profit and the wages for his own work. Either way it is only ever ten thousand francs.
But although the capital behind interest on money lent cannot be counted in a nation's wealth without double counting, all the other movable goods must be counted. They may start out as an expense and bring in no profit, yet with time they become a true capital that keeps piling up. Since they can be exchanged for money if need be, they form a kind of reserve fund that can return to trade and make up, whenever wanted, for the loss of other capitals. Such are furniture of every kind, jewels, silverware, paintings, statues, and the ready money locked in the miser's chest. All these things have value, and the sum of all these values can be considerable in rich nations. Considerable or not, it is still true that it must be added to the total price of landed property and to the circulating advances in enterprises of every kind, to give the total wealth of a nation. For the rest, there is no need to say that although we can define perfectly well, as we have just done, what the total wealth of a nation consists of, it is probably impossible to find out how much it comes to. That would take some rule for fixing the proportion between a nation's total trade and the income of its land. That may perhaps be possible, but it has not yet been done in a way that removes all doubt.
In which of the three classes of society should the capitalists, the lenders of money, be placed?
Now let us see how what we have just laid out about the different ways of using capitals fits with what we established earlier about dividing all the members of society into three classes. These are the productive class, or the farmers; the industrious or trading class, which is the paid class; and the free class, or the landowners, whom we also call the disposable class.
The capitalist who lends money belongs, as a person, to the free class.
We have seen that every rich man necessarily owns either a capital in movable wealth or a property equal in value to a capital. Every piece of land is worth a capital. So every landowner is a capitalist, but not every capitalist owns land. The owner of a movable capital has a choice. He can use it to buy land, or he can put it to work in enterprises of the farming class or the manufacturing class. A capitalist who becomes an entrepreneur in farming or manufacturing is no more free than the plain workman of those two classes, neither he nor his profits. Both are tied to keeping their enterprises going. A capitalist who limits himself to lending money lends either to a landowner or to an entrepreneur. If he lends to a landowner, he seems to belong to the class of landowners. He becomes a co-owner of the property. The income of the land is tied up in paying the interest on his claim, and the value of the land is pledged as security for his capital, up to the amount owed. If the lender has lent to an entrepreneur, then it is certain that he himself belongs to the free class. But his capital stays tied up in the advances of the enterprise. It cannot be pulled out without harming the enterprise, unless it is replaced by a capital of equal value.
The interest the money lender receives is free, in the sense of how he may use it.
It is true that the interest he draws from this capital seems to be free, since the entrepreneur and the enterprise can do without it. One might also conclude that in the profits of the two laboring classes, whether in farming or in manufacturing, there is a free portion. That would be the part that matches the interest on the advances, figured at the rate of interest on money lent. And this conclusion seems to undermine what we said, that only the class of landowners had income in the proper sense, a free income, and that all the members of the other two classes had only wages or profits. This deserves some explanation.
Take the thousand écus (three thousand francs) that a man receives each year for having lent sixty thousand francs to a merchant. Look at them in terms of what he can do with them. There is no doubt they are perfectly free, since the enterprise can do without them.
Interest on money is not free in the sense that the state could, without harm, take a share of it for its needs.
But it does not follow that they are free in the sense that the state could take a portion of them without consequences, for public needs. These thousand écus are not a payment that farming or trade hands over for nothing to the man who made the advances. They are the price and the condition of that advance, without which the enterprise could not survive. If this payment is cut, the capitalist will pull out his money and the enterprise will stop. So this payment must be held sacred and enjoy complete immunity, because it is the price of an advance made to the enterprise, without which the enterprise could not survive. To touch it would be to raise the price of advances for every enterprise, and so to shrink the enterprises themselves, that is, farming, manufacturing and trade.
This should make clear what we said before, that the capitalist who has lent to a landowner seemed to belong to the landowning class, but that this appearance was somewhat misleading and needed untangling.
In fact, it is exactly true that the interest on his money is no more free, that is, no more open to being cut, than the interest on money lent to entrepreneurs of farming and trade. This interest is likewise the price of a free agreement, and it cannot be cut without altering or changing the price of the loan. And it matters little to whom the loan was made. If the price of the loan changes and rises for the landowner, it will change and rise for the cultivator, the manufacturer and the merchant. In a word, the capitalist who lends money must be seen as a merchant selling a commodity absolutely necessary to the production of wealth, one that cannot be too cheap. It is as unreasonable to put a tax on his trade as to put a tax on the manure used to fatten the fields. Let us conclude from this that the money lender does belong to the free class as a person, because he has nothing to do. But he does not belong to it in the nature of his wealth, whether the interest on his money is paid by the landowner out of a portion of his income, or by an entrepreneur out of the part of his profits set aside for interest on the advances.
An objection.
No doubt someone will tell me that the capitalist could just as easily have lent his money or spent it on buying land. In either case he draws only an equivalent price for his money, and however he has used it, he should contribute no less to public expenses.
Reply to the objection.
I answer first that it is true that when the capitalist has bought land, its income is for him equal to what he would have drawn from his money by lending it. But there is this essential difference for the state. The price he pays for the land contributes nothing to the income it yields. The land would have yielded just as much income if he had not bought it. That income is, as we have explained, what the land yields beyond the wages of the cultivators, their profits, and the interest on their advances. Interest on a loan is not like that. It is the very condition of the loan, the price of the advance, without which the income or profits that are used to pay it would not exist.
I answer second that if land alone were charged with contributing to public expenses, then once that contribution was settled, the capitalist who bought land would not count, in the interest on his money, the part of the income set aside for that contribution. In the same way, a man who buys land today does not buy the tithe that the priest receives, or even the known tax. He buys the income that remains after the tithe and the tax are deducted.
The only income truly free in a state is the net product of the land.
From what has been said, we see that interest on money lent is taken from the income of land, or from the profit of enterprises in farming, manufacturing or trade.
But we have already shown that these profits themselves are only a share of what the land produces. The produce of the land divides into two portions. One goes to the cultivator's wages, to his profits, and to the return of his advances. The other is the landowner's share, or the income that he can spend as he likes, and out of which he contributes to the general expenses of the state.
We have shown that everything the other classes of society receive is only wages and profits, paid either by the landowner out of his income, or by the agents of the productive class out of the part set aside for their own needs, which they must buy from the manufacturing class. Whether these profits are handed out as workmen's wages, entrepreneurs' profits, or interest on advances, they do not change in nature. They do not add to the amount of income produced by the productive class over and above the price of its labor. The manufacturing class shares in that income only up to the price of its own labor.
So it stands firm that there is no income except the net product of the land, and that every other yearly profit is either paid out of that income or is part of the costs of producing it.
The land has also supplied all the movable wealth, or capitals, that exist, which are formed only from a portion of its produce set aside each year.
Not only does no income exist, or can exist, other than the net product of the land, but the land has also supplied all the capitals that make up the mass of all the advances of farming and trade. Without any cultivation, it offered the first crude and indispensable advances for the first labors. Everything else is the accumulated fruit of the thrift of the centuries since people began to cultivate the earth. This thrift no doubt goes on not only out of the income of landowners but also out of the profits of all the members of the laboring classes. It is even generally true that although landowners have more surplus, they save less. Having more leisure, they have more desires and more passions. They think their fortune is safer, and they think more of enjoying it than of adding to it. Luxury is their lot. The paid workers, and above all the entrepreneurs of the other classes, receive profits in proportion to their advances, their talents and their activity. Though they have no income in the proper sense, they have a surplus beyond their living. Almost all of them are absorbed in their enterprises and busy increasing their fortunes, and their work keeps them away from amusements and costly passions. They save all their surplus to pour it back into their enterprise and enlarge it. Most entrepreneurs of farming borrow little, and nearly all of them work only with their own funds. Entrepreneurs in other lines of work who want to make their fortunes solid also strive to get there. Unless they are very skillful, those who run their enterprises on borrowed funds stand a good chance of failing. But although capitals are formed partly from savings out of the profits of the laboring classes, still these profits always come from the land. All of them are paid either out of the income or out of the costs of producing the income. So it is plain that capitals come from the land just as income does. Or rather, they are nothing but the accumulation of that part of the values produced by the land that the owners of the income, or those who share it, can set aside each year without spending it on their needs.
Money is the direct object of saving and is, so to speak, the raw material of capitals as they are formed. Even so, actual money makes up only a barely noticeable part of the total sum of capitals.
We have seen that money counts for almost nothing in the total sum of capitals in existence. But it counts for a great deal in the forming of capitals. Almost all saving is done in money. Income is paid to landowners in money, and advances and profits come back to entrepreneurs of every kind in money. So it is money that they save, and the yearly growth of capitals takes place in money. But every entrepreneur makes no other use of it than to turn it at once into the various kinds of assets on which his enterprise rests. So this money returns to circulation, and most capitals exist only in assets of various kinds, as we have already explained above.