Literature Study GuidesThe Wealth Of NationsVolume 1 Book 4 Chapter 3 Summary

The Wealth of Nations | Study Guide

Adam Smith

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The Wealth of Nations | Volume 1, Book 4, Chapter 3 : Of the Extraordinary Restraints upon the Importation of Goods of almost all Kinds, from those Countries with which the Balance is supposed to be Disadvantageous | Summary

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Summary

Smith now explores the practice of imposing import restraints against specific countries in order to achieve a favorable balance of trade with those countries. Even if such a balance were worth pursuing, he argues, import restraints would not be the way to achieve it. Apart from encouraging smuggling, banning imports from a particular country (say, French wine) might actually increase the overall value of goods imported because it could cause merchants to seek their wine in other countries where it may be more expensive. In addition, many of the goods thus imported might be re-exported and therefore have no net effect on the country's balance of trade. Finally, Smith says, the usual measures of balance of trade—such as the difference in exchange rates between two countries—are so deeply flawed as to be useless. While he is on the topic of foreign exchange, Smith breaks off to discuss the workings of the Bank of Amsterdam, which allows merchants to deposit bullion in exchange for banknotes, thus avoiding the issues of wearing, clipping, and debasement that come with handling coin.

Returning to the problem of import restraints, Smith broadens his argument to make an attack on the whole notion of "balance of trade." No matter who is importing and who is exporting at any given time, both countries benefit from an international trading relationship, although not necessarily equally. Nations, Smith concedes, are willing to harm their own economies in order to prevent a benefit to their neighbors, but this comes from prejudice and distrust, not from any form of sound economic reasoning. Likewise, the "pretended doctors of this system"—i.e., doomsayers and other self-styled experts—seem constantly to be predicting the dangers that will arise from an unfavorable balance of trade. But this "approaching ruin" has somehow never come to pass. It makes little sense, Smith concludes, to obsess over imports and exports when they seem to have little effect on a country's economic health.

Analysis

In general, Smith's arguments against country-specific import duties closely parallel his remarks in the previous chapter. If anything, he finds country-specific trade restrictions even more repugnant than general ones since they appear to be grounded in "national prejudice and animosity," rather than in the hope of economic gain. At the end of this chapter Smith scoffs at the widespread British panic concerning the balance of trade. The way in which he presents this panic has been taken, by some modern critics, as another sign Smith is grappling with a "straw man" version of mercantilism, and not with the theories of a specific rival economist such as Steuart.

The "Digression" regarding the Bank of Amsterdam is not essential to an understanding of Smith's overall economic theory, but it supplements the main work by providing a detailed alternative to the British banking system. A notable advantage of the Amsterdam system—one Smith holds out no hope of replicating in Great Britain—is its encouragement of the long-term storage of bullion and currency in its vaults. With banknotes to circulate, the Bank of Amsterdam largely avoids the problems of maintaining a supply of metallic currency, which is worn down through daily use, and is sometimes deliberately filed down or clipped. Minting new coins, as Smith will point out in Book 4, Chapter 6, is an expensive endeavor, but a system that encourages the use of banknotes cuts down on the frequency—and thus the cost—of doing so.

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