The principle of regulation was applied much more thoroughly to our externaL than to our internal trade.The former was entirely carried on by great chartered companies,whether they were on a joint-stock footing,Like the East India Company,or were 'regulated'like the Turkey Company,in which every man traded on his own capital.Here,again,Adam Smith carried too far his revolt against the restrictive system,which Led him to denounce corporate trading as vicious in principle.'The directors of such companies,'he says,'being the managers rather of other people's money than of their own,it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own....Negligence and profusion must always prevail,more or less,in the management of the affairs of such a company.'This is an instance of pure a Priori reasoning,but Smith's main argument is derived from the history of Joint-Stock Companies.He sought to show that,as a matter of fact,unless they had had a monopoly,they had failed;that is,he proceeded inductively,and wound up with an empirical law:'it seems contrary to all experience that a Joint-Stock Company should be able to carry on successfully any branch of foreign trade,when private adventurers can come into any sort of open and fair competition with them.'But he was too honest not to admit exceptions to his rule,as in the instance of banking,which he explained by the fact that it could be reduced to routine.
Smith's empirical law is,as we all now know,far from being universally true,though it was a reasonable induction enough at the time when it was made.Since then a large number of Joint-Stock Companies have succeeded,as for instance in the iron trade.Nor is it difficult to see the reason of this change.The habit of combination is stronger than it was,and we have discovered how to interest paid servants by giving them a share in the results of the enterprises they direct.Experience has shown also that a big company can buy the best brains.In the recent depression of trade the ironworks of Dowlais,which are managed on the Joint-stock system,alone remained successful amid many surrounding failures,and that because they had the ablest man in the district as manager.
In Adam Smith's time,however,the existence of Joint-Stock Companies was due not to any notion of their economical superiority,but to the tendency to place restrictions upon individual enterprise,based upon that belief in the antagonism of public and private interests which was characteristic of the time.The same idea of opposition obtained equally in international relations.The prosperity of one country was thought to be incompatible with that of another.If one profited by trade,it seemed to do so at the expense of its neighbours.
This theory was the foundation of the mercantile system.It had its origin in the spirit of Nationalism -the idea of self-sustained and complete national life -which came in with the Renaissance and the Reformation.
But how came this Nationalism to he connected with a belief in the special importance of gold and silver,which is generally regarded as the essence of the mercantile system?The object of that system was national greatness,but national greatness depends on national riches generally,not on one particular kind of riches only,such as coin.The explanation must be sought in the fact that,owing to the simultaneous development of trade and the money system,gold and silver became peculiarly essential to the machinery of commerce.With the growth of standing armies,moreover,State finance acquired a new importance,and the object of State finance was to secure a ready supply of the precious metals.Thus the theory sprang up that gold and silver were the most solid and durable parts of the moveable wealth of a nation,and that,as they had more value in use than any other commodities,every state should do all in its power to acquire a great store of them.At first the Government tried to attain this object by accumulating a hoard;but this policy soon proved too wasteful and difficult.It then turned its attention to increasing the quantity of bullion in the hands of the people,for it came to see that if there was plenty of bullion in the country it could always draw upon it in case of need.The export of gold and silver was accordingly forbidden;but if hoarding had proved impracticable,this new method of securing the desired end was soon found to be useless,as the prohibition could be easily evaded.In the last resort,therefore,it was sought to insure a continuous influx of the precious metals through the ordinary channels of trade.If we bought less than we sold,it was argued,the balance of trade must be paid in coin.To accomplish this end every encouragement was given to the importation of raw materials and the necessaries of life,but the purchase of foreign manufactures was,for the most part,prohibited,and individuals were entreated not to buy imported luxuries.The result was retaliation abroad,and a deadlock in the commercial machine.
