Literature Study GuidesThe Wealth Of NationsVolume 2 Book 4 Chapter 6 Summary

The Wealth of Nations | Study Guide

Adam Smith

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The Wealth of Nations | Volume 2, Book 4, Chapter 6 : Of Treaties of Commerce | Summary



The next mercantilist practice on Smith's chopping block is the treaty of commerce, meaning any treaty designed to establish favorable terms of trade between two nations. As a case study for the chapter, Smith reprints a 1703 treaty that allowed Portuguese wine to be imported into Great Britain at a lower tariff than the French competition, on the condition that British woolen goods would be admitted into Portugal. The treaty, Smith notes, is "evidently advantageous to Portugal, and disadvantageous to Great Britain," yet it "has been celebrated ... as a masterpiece of the commercial policy of England."

Why, Smith asks, are people so convinced the treaty is a good idea? It comes down, as usual, to mercantilism and the balance of trade. Portugal is rich in gold thanks to its Brazilian mines, and the mercantilists believe any measure resulting in the importation of Portuguese gold is a win for England. Smith declares that this is a "silly notion" since gold can be purchased on the open market just like any other commodity.

The chapter closes with a brief digression on British monetary policy. Smith contends the British government is squandering its resources by allowing its citizens to have their gold and silver coined for free. In other countries, such as France, a fee—called seignorage—is charged to convert metals into official coin. This, Smith says, serves at least two beneficial purposes: it supplies an additional revenue source for the French government, and it prevents people from melting the best (i.e., the least worn-down) coins back down into bullion, thus wasting the mint's labor.


Smith, to be clear, is not against all treaties of commerce. He merely picks as his illustration a treaty he finds particularly objectionable. For one thing, the treaty is predicated on a history of Great Britain providing military aid to Portugal, an arrangement that never would have arisen had Portugal not been rich in gold. The treaty thus reads as yet another favor extorted by Portugal in exchange for access to its precious metal supply. Secondly, the treaty is lopsided: Portugal must merely allow British goods into the country, whereas Great Britain has to grant Portugal a special discount on the importation of its wine. What seems to bother Smith most of all is the characterization of this treaty as a "masterpiece," a remark that can only be justified if the gain of Portuguese gold is weighted unreasonably high.

A treaty that simply secured free and equal trade between two nations would, in contrast, likely meet with Smith's approval. Such a treaty may be what he has in mind in the subsequent chapter, where he advocates the establishment of a commercial relationship with the American colonies. Before a treaty can be formed with the colonies, however, they will need to become a sovereign state. In Book 4, and again in Book 5, Smith expresses his hope that Great Britain will grant American independence in a voluntarily and friendly manner, rather than waiting for it to be seized as a prize of war.

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