Key Arguments

• In foreign trade of consumption based on domestic exports, each operation replaces two capitals, but only one is domestic: 'The capital employed in purchasing foreign goods for home consumption, when this purchase is made with the produce of domestic industry, replaces, too, by every such operation, two distinct capitals; but one of them only is employed in supporting domestic industry. The capital which sends British goods to Portugal, and brings back Portuguese goods to Great Britain, replaces, by every such operation, only one British capital. The other is a Portuguese one.'
• Therefore, even if returns were as quick as in home trade, such capital would still give only half as much encouragement to domestic productive labour: 'Though the returns, therefore, of the foreign trade of consumption, should be as quick as those of the home trade, the capital employed in it will give but one half of the encouragement to the industry or productive labour of the country.'
• In reality, returns in foreign trade of consumption are generally much slower: 'But the returns of the foreign trade of consumption are very seldom so quick as those of the home trade. The returns of the foreign trade of consumption seldom come in before the end of the year, and sometimes not till after two or three years.'
• Roundabout foreign trade of consumption, where foreign goods are purchased with other foreign goods that were themselves bought with domestic produce, lengthens the chain and delays final returns even more: 'The effects, therefore, of a capital employed in such a round-about foreign trade of consumption, are, in every respect, the same as those of one employed in the most direct trade of the same kind, except that the final returns are likely to be still more distant, as they must depend upon the returns of two or three distinct foreign trades.'
• Smith illustrates multi‑stage roundabout trade with examples involving Riga hemp and flax purchased with Virginia tobacco, and tobacco purchased with Jamaican sugar and rum, showing that the same capital must wait for the returns of two or three distinct foreign trades before being re-employed in British manufactures.
• He notes that dividing this chain among multiple merchants may speed each merchant’s personal returns, but not the overall speed at which the whole capital supports British industry: 'Whether the whole capital employed in such a round about trade belong to one merchant or to three, can make no difference with regard to the country, though it may with regard to the particular merchants.'
• He concludes that such roundabout foreign trade of consumption generally gives less encouragement to domestic productive labour than an equal capital in a more direct foreign trade of consumption.
• With respect to gold and silver as intermediaries, he argues that economically this is just another form of foreign trade of consumption, with the same basic effects on productive labour, but it may have one advantage: because of their small bulk and great value, transporting precious metals is relatively cheap and low-risk, so 'An equal quantity of foreign goods, therefore, may frequently be purchased with a smaller quantity of the produce of domestic industry, by the intervention of gold and silver, than by that of any other foreign goods.'
• Hence, using gold and silver may allow a country to supply its demand for foreign goods 'more completely, and at a smaller expense, than in any other' type of equally roundabout foreign trade.

Source Quotes

The capital which sends Scotch manufactures to London, and brings back English corn and manufactures to Edinburgh, necessarily replaces, by every such operation, two British capitals, which had both been employed in the agriculture or manufactures of Great Britain. The capital employed in purchasing foreign goods for home consumption, when this purchase is made with the produce of domestic industry, replaces, too, by every such operation, two distinct capitals; but one of them only is employed in supporting domestic industry. The capital which sends British goods to Portugal, and brings back Portuguese goods to Great Britain, replaces, by every such operation, only one British capital.

The capital employed in purchasing foreign goods for home consumption, when this purchase is made with the produce of domestic industry, replaces, too, by every such operation, two distinct capitals; but one of them only is employed in supporting domestic industry. The capital which sends British goods to Portugal, and brings back Portuguese goods to Great Britain, replaces, by every such operation, only one British capital. The other is a Portuguese one. Though the returns, therefore, of the foreign trade of consumption, should be as quick as those of the home trade, the capital employed in it will give but one half of the encouragement to the industry or productive labour of the country.

The other is a Portuguese one. Though the returns, therefore, of the foreign trade of consumption, should be as quick as those of the home trade, the capital employed in it will give but one half of the encouragement to the industry or productive labour of the country. But the returns of the foreign trade of consumption are very seldom so quick as those of the home trade.

If the capitals are equal, therefore, the one will give four-and-twenty times more encouragement and support to the industry of the country than the other. The foreign goods for home consumption may sometimes be purchased, not with the produce of domestic industry but with some other foreign goods. These last, however, must have been purchased, either immediately with the produce of domestic industry, or with something else that had been purchased with it; for, the case of war and conquest excepted, foreign goods can never be acquired, but in exchange for something that had been produced at home, either immediately, or after two or more different exchanges.

These last, however, must have been purchased, either immediately with the produce of domestic industry, or with something else that had been purchased with it; for, the case of war and conquest excepted, foreign goods can never be acquired, but in exchange for something that had been produced at home, either immediately, or after two or more different exchanges. The effects, therefore, of a capital employed in such a round-about foreign trade of consumption, are, in every respect, the same as those of one employed in the most direct trade of the same kind, except that the final returns are likely to be still more distant, as they must depend upon the returns of two or three distinct foreign trades. If the hemp and flax of Riga are purchased with the tobacco of Virginia, which had been purchased with British manufactures, the merchant must wait for the returns of two distinct foreign trades, before he can employ the same capital in repurchasing a like quantity of British manufactures.

If those two or three distinct foreign trades should happen to be carried on by two or three distinct merchants, of whom the second buys the goods imported by the first, and the third buys those imported by the second, in order to export them again, each merchant, indeed, will, in this case, receive the returns of his own capital more quickly; but the final returns of the whole capital employed in the trade will be just as slow as ever. Whether the whole capital employed in such a round about trade belong to one merchant or to three, can make no difference with regard to the country, though it may with regard to the particular merchants. Three times a greater capital must in both cases be employed, in order to exchange a certain value of British manufactures for a certain quantity of flax and hemp, than would have been necessary, had the manufactures and the flax and hemp been directly exchanged for one another.

Three times a greater capital must in both cases be employed, in order to exchange a certain value of British manufactures for a certain quantity of flax and hemp, than would have been necessary, had the manufactures and the flax and hemp been directly exchanged for one another. The whole capital employed, therefore, in such a round-about foreign trade of consumption, will generally give less encouragement and support to the productive labour of the country, than an equal capital employed in a more direct trade of the same kind. Whatever be the foreign commodity with which the foreign goods for home consumption are purchased, it can occasion no essential difference, either in the nature of the trade, or in the encouragement and support which it can give to the productive labour of the country from which it is carried on.

If they are purchased with the gold of Brazil, for example, or with the silver of Peru, this gold and silver, like the tobacco of Virginia, must have been purchased with something that either was the produce of the industry of the country, or that had been purchased with something else that was so. So far, therefore, as the productive labour of the country is concerned, the foreign trade of consumption, which is carried on by means of gold and silver, has all the advantages and all the inconveniencies of any other equally round-about foreign trade of consumption; and will replace, just as fast, or just as slow, the capital which is immediately employed in supporting that productive labour. It seems even to have one advantage over any other equally round-about foreign trade.

Their freight is much less, and their insurance not greater; and no goods, besides, are less liable to suffer by the carriage. An equal quantity of foreign goods, therefore, may frequently be purchased with a smaller quantity of the produce of domestic industry, by the intervention of gold and silver, than by that of any other foreign goods. The demand of the country may frequently, in this manner, be supplied more completely, and at a smaller expense, than in any other.

An equal quantity of foreign goods, therefore, may frequently be purchased with a smaller quantity of the produce of domestic industry, by the intervention of gold and silver, than by that of any other foreign goods. The demand of the country may frequently, in this manner, be supplied more completely, and at a smaller expense, than in any other. Whether, by the continual exportation of those metals, a trade of this kind is likely to impoverish the country from which it is carried on in any other way, I shall have occasion to examine at great length hereafter.

Key Concepts

• The capital employed in purchasing foreign goods for home consumption, when this purchase is made with the produce of domestic industry, replaces, too, by every such operation, two distinct capitals; but one of them only is employed in supporting domestic industry.
• The capital which sends British goods to Portugal, and brings back Portuguese goods to Great Britain, replaces, by every such operation, only one British capital. The other is a Portuguese one.
• Though the returns, therefore, of the foreign trade of consumption, should be as quick as those of the home trade, the capital employed in it will give but one half of the encouragement to the industry or productive labour of the country.
• The foreign goods for home consumption may sometimes be purchased, not with the produce of domestic industry but with some other foreign goods.
• The effects, therefore, of a capital employed in such a round-about foreign trade of consumption, are, in every respect, the same as those of one employed in the most direct trade of the same kind, except that the final returns are likely to be still more distant, as they must depend upon the returns of two or three distinct foreign trades.
• Whether the whole capital employed in such a round about trade belong to one merchant or to three, can make no difference with regard to the country, though it may with regard to the particular merchants.
• The whole capital employed, therefore, in such a round-about foreign trade of consumption, will generally give less encouragement and support to the productive labour of the country, than an equal capital employed in a more direct trade of the same kind.
• So far, therefore, as the productive labour of the country is concerned, the foreign trade of consumption, which is carried on by means of gold and silver, has all the advantages and all the inconveniencies of any other equally round-about foreign trade of consumption
• An equal quantity of foreign goods, therefore, may frequently be purchased with a smaller quantity of the produce of domestic industry, by the intervention of gold and silver, than by that of any other foreign goods.
• The demand of the country may frequently, in this manner, be supplied more completely, and at a smaller expense, than in any other.

Context

Extended section of Book II, Chapter V, where Smith contrasts foreign trade of consumption—both direct and roundabout, with and without gold and silver—with the home trade in terms of speed of returns and domestic labour support.