Of The Profits Of Stock

The rise and fall in the profits of stock depend upon the same causes

with the rise and fall in the wages of labour, the increasing or

declining state of the wealth of the society; but those causes affect

the one and the other very differently.

The increase of stock, which raises wages, tends to lower profit. When

the stocks of many rich merchants are turned into the same trade, their

mutual competition n
turally tends to lower its profit; and when there

is a like increase of stock in all the different trades carried on in

the same society, the same competition must produce the same effect in

them all.

It is not easy, it has already been observed, to ascertain what are the

average wages of labour, even in a particular place, and at a particular

time. We can, even in this case, seldom determine more than what are the

most usual wages. But even this can seldom be done with regard to the

profits of stock. Profit is so very fluctuating, that the person who

carries on a particular trade, cannot always tell you himself what is

the average of his annual profit. It is affected, not only by every

variation of price in the commodities which he deals in, but by the

good or bad fortune both of his rivals and of his customers, and by a

thousand other accidents, to which goods, when carried either by sea

or by land, or even when stored in a warehouse, are liable. It varies,

therefore, not only from year to year, but from day to day, and almost

from hour to hour. To ascertain what is the average profit of all

the different trades carried on in a great kingdom, must be much more

difficult; and to judge of what it may have been formerly, or in remote

periods of time, with any degree of precision, must be altogether


But though it may be impossible to determine, with any degree of

precision, what are or were the average profits of stock, either in the

present or in ancient times, some notion may be formed of them from the

interest of money. It may be laid down as a maxim, that wherever a great

deal can be made by the use of money, a great deal will commonly be

given for the use of it; and that, wherever little can be made by it,

less will commonly he given for it. Accordingly, therefore, as the usual

market rate of interest varies in any country, we may be assured that

the ordinary profits of stock must vary with it, must sink as it sinks,

and rise as it rises. The progress of interest, therefore, may lead us

to form some notion of the progress of profit.

By the 37th of Henry VIII. all interest above ten per cent. was declared

unlawful. More, it seems, had sometimes been taken before that. In

the reign of Edward VI. religious zeal prohibited all interest. This

prohibition, however, like all others of the same kind, is said to have

produced no effect, and probably rather increased than diminished the

evil of usury. The statute of Henry VIII. was revived by the 13th of

Elizabeth, cap. 8. and ten per cent. continued to be the legal rate of

interest till the 21st of James I. when it was restricted to eight per

cent. It was reduced to six per cent. soon after the Restoration, and by

the 12th of Queen Anne, to five per cent. All these different statutory

regulations seem to have been made with great propriety. They seem to

have followed, and not to have gone before, the market rate of interest,

or the rate at which people of good credit usually borrowed. Since the

time of Queen Anne, five per cent. seems to have been rather above than

below the market rate. Before the late war, the government borrowed at

three per cent.; and people of good credit in the capital, and in many

other parts of the kingdom, at three and a-half, four, and four and

a-half per cent.

Since the time of Henry VIII. the wealth and revenue of the country have

been continually advancing, and in the course of their progress, their

pace seems rather to have been gradually accelerated than retarded. They

seem not only to have been going on, but to have been going on faster

and faster. The wages of labour have been continually increasing during

the same period, and, in the greater part of the different branches of

trade and manufactures, the profits of stock have been diminishing.

It generally requires a greater stock to carry on any sort of trade in a

great town than in a country village. The great stocks employed in every

branch of trade, and the number of rich competitors, generally reduce

the rate of profit in the former below what it is in the latter. But the

wages of labour are generally higher in a great town than in a country

village. In a thriving town, the people who have great stocks to employ,

frequently cannot get the number of workmen they want, and therefore bid

against one another, in order to get as many as they can, which raises

the wages of labour, and lowers the profits of stock. In the remote

parts of the country, there is frequently not stock sufficient to employ

all the people, who therefore bid against one another, in order to get

employment, which lowers the wages of labour, and raises the profits of


In Scotland, though the legal rate of interest is the same as in

England, the market rate is rather higher. People of the best credit

there seldom borrow under five per cent. Even private bankers in

Edinburgh give four per cent. upon their promissory-notes, of which

payment, either in whole or in part may be demanded at pleasure. Private

bankers in London give no interest for the money which is deposited with

them. There are few trades which cannot be carried on with a smaller

stock in Scotland than in England. The common rate of profit, therefore,

must be somewhat greater. The wages of labour, it has already been

observed, are lower in Scotland than in England. The country, too, is

not only much poorer, but the steps by which it advances to a better

condition, for it is evidently advancing, seem to be much slower and

more tardy. The legal rate of interest in France has not during the

course of the present century, been always regulated by the market rate

{See Denisart, Article Taux des Interests, tom. iii, p.13}. In 1720,

interest was reduced from the twentieth to the fiftieth penny, or from

five to two per cent. In 1724, it was raised to the thirtieth penny,

or to three and a third per cent. In 1725, it was again raised to the

twentieth penny, or to five per cent. In 1766, during the administration

of Mr Laverdy, it was reduced to the twenty-fifth penny, or to four per

cent. The Abbé Terray raised it afterwards to the old rate of five

per cent. The supposed purpose of many of those violent reductions of

interest was to prepare the way for reducing that of the public debts;

a purpose which has sometimes been executed. France is, perhaps, in the

present times, not so rich a country as England; and though the legal

rate of interest has in France frequently been lower than in England,

the market rate has generally been higher; for there, as in other

countries, they have several very safe and easy methods of evading the

law. The profits of trade, I have been assured by British merchants who

had traded in both countries, are higher in France than in England;

and it is no doubt upon this account, that many British subjects chuse

rather to employ their capitals in a country where trade is in disgrace,

than in one where it is highly respected. The wages of labour are lower

in France than in England. When you go from Scotland to England, the

difference which you may remark between the dress and countenance of

the common people in the one country and in the other, sufficiently

indicates the difference in their condition. The contrast is still

greater when you return from France. France, though no doubt a richer

country than Scotland, seems not to be going forward so fast. It is

a common and even a popular opinion in the country, that it is going

backwards; an opinion which I apprehend, is ill-founded, even with

regard to France, but which nobody can possibly entertain with regard

to Scotland, who sees the country now, and who saw it twenty or thirty

years ago.

The province of Holland, on the other hand, in proportion to the extent

of its territory and the number of its people, is a richer country than

England. The government there borrow at two per cent. and private people

of good credit at three. The wages of labour are said to be higher in

Holland than in England, and the Dutch, it is well known, trade upon

lower profits than any people in Europe. The trade of Holland, it has

been pretended by some people, is decaying, and it may perhaps be true

that some particular branches of it are so; but these symptoms seem

to indicate sufficiently that there is no general decay. When profit

diminishes, merchants are very apt to complain that trade decays, though

the diminution of profit is the natural effect of its prosperity, or of

a greater stock being employed in it than before. During the late war,

the Dutch gained the whole carrying trade of France, of which they still

retain a very large share. The great property which they possess both in

French and English funds, about forty millions, it is said in the latter

(in which, I suspect, however, there is a considerable exaggeration ),

the great sums which they lend to private people, in countries where the

rate of interest is higher than in their own, are circumstances which

no doubt demonstrate the redundancy of their stock, or that it has

increased beyond what they can employ with tolerable profit in the

proper business of their own country; but they do not demonstrate that

that business has decreased. As the capital of a private man, though

acquired by a particular trade, may increase beyond what he can employ

in it, and yet that trade continue to increase too, so may likewise the

capital of a great nation.

In our North American and West Indian colonies, not only the wages

of labour, but the interest of money, and consequently the profits of

stock, are higher than in England. In the different colonies, both the

legal and the market rate of interest run from six to eight percent.

High wages of labour and high profits of stock, however, are things,

perhaps, which scarce ever go together, except in the peculiar

circumstances of new colonies. A new colony must always, for some time,

be more understocked in proportion to the extent of its territory, and

more underpeopled in proportion to the extent of its stock, than the

greater part of other countries. They have more land than they have

stock to cultivate. What they have, therefore, is applied to the

cultivation only of what is most fertile and most favourably situated,

the land near the sea-shore, and along the banks of navigable rivers.

Such land, too, is frequently purchased at a price below the value even

of its natural produce. Stock employed in the purchase and improvement

of such lands, must yield a very large profit, and, consequently, afford

to pay a very large interest. Its rapid accumulation in so profitable

an employment enables the planter to increase the number of his hands

faster than he can find them in a new settlement. Those whom he can

find, therefore, are very liberally rewarded. As the colony increases,

the profits of stock gradually diminish. When the most fertile and best

situated lands have been all occupied, less profit can be made by the

cultivation of what is inferior both in soil and situation, and less

interest can be afforded for the stock which is so employed. In the

greater part of our colonies, accordingly, both the legal and the market

rate of interest have been considerably reduced during the course of the

present century. As riches, improvement, and population, have increased,

interest has declined. The wages of labour do not sink with the profits

of stock. The demand for labour increases with the increase of stock,

whatever be its profits; and after these are diminished, stock may not

only continue to increase, but to increase much faster than before. It

is with industrious nations, who are advancing in the acquisition of

riches, as with industrious individuals. A great stock, though with

small profits, generally increases faster than a small stock with great

profits. Money, says the proverb, makes money. When you have got a

little, it is often easy to get more. The great difficulty is to get

that little. The connection between the increase of stock and that of

industry, or of the demand for useful labour, has partly been explained

already, but will be explained more fully hereafter, in treating of the

accumulation of stock.

The acquisition of new territory, or of new branches of trade, may

sometimes raise the profits of stock, and with them the interest of

money, even in a country which is fast advancing in the acquisition of

riches. The stock of the country, not being sufficient for the whole

accession of business which such acquisitions present to the different

people among whom it is divided, is applied to those particular branches

only which afford the greatest profit. Part of what had before been

employed in other trades, is necessarily withdrawn from them, and turned

into some of the new and more profitable ones. In all those old trades,

therefore, the competition comes to be Jess than before. The market

comes to be less fully supplied with many different sorts of goods.

Their price necessarily rises more or less, and yields a greater profit

to those who deal in them, who can, therefore, afford to borrow at a

higher interest. For some time after the conclusion of the late war,

not only private people of the best credit, but some of the greatest

companies in London, commonly borrowed at five per cent. who, before

that, had not been used to pay more than four, and four and a half

per cent. The great accession both of territory and trade by our

acquisitions in North America and the West Indies, will sufficiently

account for this, without supposing any diminution in the capital stock

of the society. So great an accession of new business to be carried on

by the old stock, must necessarily have diminished the quantity employed

in a great number of particular branches, in which the competition

being less, the profits must have been greater. I shall hereafter have

occasion to mention the reasons which dispose me to believe that the

capital stock of Great Britain was not diminished, even by the enormous

expense of the late war.

The diminution of the capital stock of the society, or of the funds

destined for the maintenance of industry, however, as it lowers the

wages of labour, so it raises the profits of stock, and consequently the

interest of money. By the wages of labour being lowered, the owners of

what stock remains in the society can bring their goods at less expense

to market than before; and less stock being employed in supplying the

market than before, they can sell them dearer. Their goods cost them

less, and they get more for them. Their profits, therefore, being

augmented at both ends, can well afford a large interest. The great

fortunes so suddenly and so easily acquired in Bengal and the other

British settlements in the East Indies, may satisfy us, that as the

wages of labour are very low, so the profits of stock are very high in

those ruined countries. The interest of money is proportionably so. In

Bengal, money is frequently lent to the farmers at forty, fifty, and

sixty per cent. and the succeeding crop is mortgaged for the payment.

As the profits which can afford such an interest must eat up almost the

whole rent of the landlord, so such enormous usury must in its turn

eat up the greater part of those profits. Before the fall of the Roman

republic, a usury of the same kind seems to have been common in the

provinces, under the ruinous administration of their proconsuls. The

virtuous Brutus lent money in Cyprus at eight-and-forty per cent. as we

learn from the letters of Cicero.

In a country which had acquired that full complement of riches which the

nature of its soil and climate, and its situation with respect to other

countries, allowed it to acquire, which could, therefore, advance no

further, and which was not going backwards, both the wages of labour

and the profits of stock would probably be very low. In a country fully

peopled in proportion to what either its territory could maintain, or

its stock employ, the competition for employment would necessarily be so

great as to reduce the wages of labour to what was barely sufficient

to keep up the number of labourers, and the country being already

fully peopled, that number could never be augmented. In a country fully

stocked in proportion to all the business it had to transact, as great

a quantity of stock would be employed in every particular branch as the

nature and extent of the trade would admit. The competition, therefore,

would everywhere be as great, and, consequently, the ordinary profit as

low as possible.

But, perhaps, no country has ever yet arrived at this degree of

opulence. China seems to have been long stationary, and had, probably,

long ago acquired that full complement of riches which is consistent

with the nature of its laws and institutions. But this complement may be

much inferior to what, with other laws and institutions, the nature

of its soil, climate, and situation, might admit of. A country which

neglects or despises foreign commerce, and which admits the vessel of

foreign nations into one or two of its ports only, cannot transact the

same quantity of business which it might do with different laws and

institutions. In a country, too, where, though the rich, or the owners

of large capitals, enjoy a good deal of security, the poor, or the

owners of small capitals, enjoy scarce any, but are liable, under the

pretence of justice, to be pillaged and plundered at any time by the

inferior mandarins, the quantity of stock employed in all the different

branches of business transacted within it, can never be equal to what

the nature and extent of that business might admit. In every different

branch, the oppression of the poor must establish the monopoly of the

rich, who, by engrossing the whole trade to themselves, will be able to

make very large profits. Twelve per cent. accordingly, is said to be

the common interest of money in China, and the ordinary profits of stock

must be sufficient to afford this large interest.

A defect in the law may sometimes raise the rate of interest

considerably above what the condition of the country, as to wealth or

poverty, would require. When the law does not enforce the performance

of contracts, it puts all borrowers nearly upon the same footing with

bankrupts, or people of doubtful credit, in better regulated countries.

The uncertainty of recovering his money makes the lender exact the same

usurious interest which is usually required from bankrupts. Among the

barbarous nations who overran the western provinces of the Roman empire,

the performance of contracts was left for many ages to the faith of

the contracting parties. The courts of justice of their kings seldom

intermeddled in it. The high rate of interest which took place in those

ancient times, may, perhaps, be partly accounted for from this cause.

When the law prohibits interest altogether, it does not prevent it. Many

people must borrow, and nobody will lend without such a consideration

for the use of their money as is suitable, not only to what can be made

by the use of it, but to the difficulty and danger of evading the law.

The high rate of interest among all Mahometan nations is accounted for

by M. Montesquieu, not from their poverty, but partly from this, and

partly from the difficulty of recovering the money.

The lowest ordinary rate of profit must always be something more than

what is sufficient to compensate the occasional losses to which every

employment of stock is exposed. It is this surplus only which is neat

or clear profit. What is called gross profit, comprehends frequently

not only this surplus, but what is retained for compensating such

extraordinary losses. The interest which the borrower can afford to pay

is in proportion to the clear profit only. The lowest ordinary rate of

interest must, in the same manner, be something more than sufficient to

compensate the occasional losses to which lending, even with tolerable

prudence, is exposed. Were it not, mere charity or friendship could be

the only motives for lending.

In a country which had acquired its full complement of riches, where, in

every particular branch of business, there was the greatest quantity of

stock that could be employed in it, as the ordinary rate of clear profit

would be very small, so the usual market rate of interest which could

be afforded out of it would be so low as to render it impossible for any

but the very wealthiest people to live upon the interest of their money.

All people of small or middling fortunes would be obliged to superintend

themselves the employment of their own stocks. It would be necessary

that almost every man should be a man of business, or engage in some

sort of trade. The province of Holland seems to be approaching near

to this state. It is there unfashionable not to be a man of business.

Necessity makes it usual for almost every man to be so, and custom

everywhere regulates fashion. As it is ridiculous not to dress, so is

it, in some measure, not to be employed like other people. As a man of

a civil profession seems awkward in a camp or a garrison, and is even

in some danger of being despised there, so does an idle man among men of


The highest ordinary rate of profit may be such as, in the price of the

greater part of commodities, eats up the whole of what should go to the

rent of the land, and leaves only what is sufficient to pay the labour

of preparing and bringing them to market, according to the lowest

rate at which labour can anywhere be paid, the bare subsistence of the

labourer. The workman must always have been fed in some way or other

while he was about the work, but the landlord may not always have been

paid. The profits of the trade which the servants of the East India

Company carry on in Bengal may not, perhaps, be very far from this rate.

The proportion which the usual market rate of interest ought to bear to

the ordinary rate of clear profit, necessarily varies as profit rises or

falls. Double interest is in Great Britain reckoned what the merchants

call a good, moderate, reasonable profit; terms which, I apprehend, mean

no more than a common and usual profit. In a country where the ordinary

rate of clear profit is eight or ten per cent. it may be reasonable that

one half of it should go to interest, wherever business is carried on

with borrowed money. The stock is at the risk of the borrower, who, as

it were, insures it to the lender; and four or five per cent. may, in

the greater part of trades, be both a sufficient profit upon the risk of

this insurance, and a sufficient recompence for the trouble of employing

the stock. But the proportion between interest and clear profit might

not be the same in countries where the ordinary rate of profit was

either a good deal lower, or a good deal higher. If it were a good deal

lower, one half of it, perhaps, could not be afforded for interest; and

more might be afforded if it were a good deal higher.

In countries which are fast advancing to riches, the low rate of profit

may, in the price of many commodities, compensate the high wages of

labour, and enable those countries to sell as cheap as their less

thriving neighbours, among whom the wages of labour may be lower.

In reality, high profits tend much more to raise the price of work than

high wages. If, in the linen manufacture, for example, the wages of the

different working people, the flax-dressers, the spinners, the weavers,

etc. should all of them be advanced twopence a-day, it would be

necessary to heighten the price of a piece of linen only by a number of

twopences equal to the number of people that had been employed about it,

multiplied by the number of days during which they had been so employed.

That part of the price of the commodity which resolved itself into the

wages, would, through all the different stages of the manufacture,

rise only in arithmetical proportion to this rise of wages. But if the

profits of all the different employers of those working people should

be raised five per cent. that part of the price of the commodity which

resolved itself into profit would, through all the different stages of

the manufacture, rise in geometrical proportion to this rise of profit.

The employer of the flax dressers would, in selling his flax, require

an additional five per cent. upon the whole value of the materials and

wages which he advanced to his workmen. The employer of the spinners

would require an additional five per cent. both upon the advanced price

of the flax, and upon the wages of the spinners. And the employer of the

weavers would require alike five per cent. both upon the advanced price

of the linen-yarn, and upon the wages of the weavers. In raising the

price of commodities, the rise of wages operates in the same manner as

simple interest does in the accumulation of debt. The rise of profit

operates like compound interest. Our merchants and master manufacturers

complain much of the bad effects of high wages in raising the price, and

thereby lessening the sale of their goods, both at home and abroad. They

say nothing concerning the bad effects of high profits; they are silent

with regard to the pernicious effects of their own gains; they complain

only of those of other people.