The Wealth of Nations

Book 3, Chapter 4

How the Commerce of Towns Contributed to the Improvement of the Country

Download Preston's Free Checklist

Download Preston's free checklist. His checklist was developed after spending countless hours studying billionaires like, Warren Buffett, Carl Icahn, and Ray Dalio. With his checklist, you can find safe picks that protect and grow your principal. Additionally, Preston reads a lot of books and writes an executive summary for each book he reads. If you download his checklist, you will be added to his monthly e-mail list where he sends his book summaries. There are never any advertisements...ever. Here's an example of one of Preston's executive summaries, based on the book written by Billionaire Charlies Koch.

Chapter 4 Summary

The growth and increasing wealth of commercial and manufacturing towns contributed to the improvement and cultivation of the countries to which they belonged in three different ways:

  • Firstly, by providing a large market for the country's crude produce, they encouraged its further cultivation and improvement.

  • Secondly, the wealth acquired by the city inhabitants was frequently used to purchase land. Merchants, keen to become country gentlemen, were more likely to improve the land they purchased. Such merchants saw a return on their investment and were not afraid to invest capital in improving their land, as they realized it would increase its value.

  • Thirdly, commerce and manufacturing gradually introduced order and good government amongst a country's inhabitants, in contrast to their previous existence, which involved ongoing wars with their neighbors and servile dependency upon their superiors. This is viewed as being the most important change brought about by towns’ growth. Merchants, however, were unaware of the revolution their industry was gradually bringing about, acting merely in their own interests in pursuit of making money wherever they could. Throughout most of Europe, commerce and manufacturing in cities led to improvements in the countryside.

  • Growth rates in European countries, whose wealth depends on commerce, is slow compared to that in the North American colonies, whose wealth depends on agriculture. In terms of population growth, population doubles in Europe only every five hundred years or so, whereas in North America it doubles every twenty years.

    The law of primogeniture in Europe prevents the division of great estates, thus hindering the multiplication of small landlords. The same regulations keep so much land out of the market that land which is sold is at a monopoly price. The result is that very little capital is invested in cultivation and improvement of land.

    In North America, on the contrary, fifty to sixty pounds will generally buy enough stock to begin a plantation. The purchase and improvement of uncultivated land there is the most profitable investment for both small and large amounts of capital, and the fastest road to wealth. Such land is very cheap in North America, going for prices way below the value of the natural produce—which is not the case in Europe, or indeed in any country where the land is all privately owned.

    If estates were divided equally among all of the children upon the death of a proprietor with a numerous family, the estate would generally be sold, with the result that so much land would come to market that it could no longer sell at a monopoly price. As such, a small amount of capital invested in purchasing land would be as attractive an investment opportunity as any.

    The people occupying land were dependent on both the great landlord and his servants. The rent paid by both tenants renting under the feudal system and tenants at will was nowhere near equivalent to the subsistence the land provided them. A crown, half a crown, a sheep or a lamb was a common means of rent some years ago in the Highlands of Scotland for lands which maintained a family. This is still the case in some places today. In a country where the surplus produce of a large estate must be consumed upon the estate itself, it is often more convenient for the landlord if part of it is consumed at a distance from his house, provided those consuming it are dependent upon him. He is thereby saved from the embarrassment of either too large a company or too large a family. A tenant at will who has sufficient land to maintain his family for little more than a quit-rent is as dependent upon the landlord as any servant. Such a landlord provides food for his servants at his own home, and feeds his tenants at their houses. Their subsistence is therefore derived from his bounty, and depends upon his goodwill.

    Wealth resided in the great landlords, and with it, power over their tenants and servants. They became both judges and leaders for those living on their estates. They maintained order and enforced laws within their respective estates by mobilizing the inhabitants against injustices committed by an individual. No other person, including the king, had sufficient authority to do this; in these ancient times, the king was little more than the greatest landlord of his dominions, and was respected by the great landlords mainly in terms of ensuring mutual defense against common enemies. For the king to have enforced payment of a small debt within the lands of a great landlord, in which all the inhabitants were armed and stood by one another, would have been akin to him ending a civil war. The king therefore left the administration of justice throughout most of the country to those capable of administering it, and left the command of the militia to those whom that militia would obey.

    These territorial jurisdictions did not, however, originate from the feudal system. Not only the highest jurisdictions, both civil and criminal, but the power of levying troops, of coinage, and even that of making bylaws for the government of their own people were all the absolute right of the great landlords several centuries before feudal law was first introduced in Europe. The authority and jurisdiction of the Saxon lords in Britain appear to have been just as strong before the Conquest as that of any of the Norman lords after it—yet the feudal system is believed to have become common law in Britain only after the Conquest. There is also substantial evidence that the lords in France held absolute ownership of estates long before the feudal law was introduced in that country. This authority and jurisdiction came from ownership of an estate. There is historical proof of this even later than the times of the French and English monarchies. Only thirty years ago, Mr. Cameron of Lochiel from Lochaber in Scotland, a landholder by feudal tenure under the Duke of Argyll, was neither a noble nor a tenant in chief, yet exercised the highest criminal jurisdictions over his own people, despite having no legal right to do so. He is said to have done so fairly, though without any of the formalities of justice. Probably the state of that part of the country at that time made it necessary for him to assume this authority in order to maintain public peace. In 1745, Mr. Cameron, whose rent never exceeded £500 a year, mobilized 800 of his own people into rebellion with him.

    The introduction of the feudal system may be viewed as an attempt to moderate the authority of the great allodial lords. It established subordination, from the king down to the smallest landlord. Under this system, the rent and management of a landlord’s land was controlled by his immediate superior, and that of the great landlords was controlled by the king, who was charged with the maintenance and education of the pupil, and who, from his authority as guardian, had the right to arrange marriage, provided it was not deemed unsuitable to the pupil’s rank. This system strengthened the authority of the king and weakened that of the great landlords; however, it did not result in order and good government amongst country dwellers. Government authority remained weak at the top and strong amongst the lower ranks, and the feudal system did not enable the king to prevent violence amongst the great lords. They continued to fight amongst each other at will almost continually, as well as against the king, and the countryside remained a place of violence, rapine and disorder.

    But it was not the violence that reigned under the feudal system that brought about the growth and progression of society; it was foreign trade and industry, which gradually provided the great landlords with something for which they could exchange the whole surplus produce of their lands and which they could consume themselves, without sharing it either with tenants or servants. Self-interest above the interests of others seems to have been the vile maxim of the masters of mankind, throughout the ages. The wealthy would sooner spend their money on themselves than invest it in renting land to others. They would happily purchase a pair of diamond buckles or some other frivolous and useless item for an amount that would have maintained 1000 men for a year. The thinking behind this was that the frivolous purchase was all their own, whereas by renting their land out, they would have been sharing with 1000 other people. This wealth eroded over time, however, as the great landowners could not maintain this extravagant lifestyle.

    In a country where there is no foreign trade or major manufacturing businesses, a man earning £10,000 a year cannot employ his revenue in any other way than maintaining perhaps 1000 families, all of whom work for him. In the present state of Europe, a man earning £10,000 a year can spend his whole revenue—and generally does so—without directly maintaining as few as twenty people or employing just ten of even the most menial servants. Indirectly, however, he is probably maintaining as many or even more people than he could have done if renting out his land to these people because, although the quantity of precious items he purchases with his revenue is very small, the number of workmen employed in manufacturing them is great. The high price of the frivolous item reflects the wages of their labor and the profits of all their immediate employers. By paying this steep price, he is indirectly paying all these wages and profits, and thus indirectly contributing to the maintenance of all the workmen and their employers. In terms of their annual maintenance, however, he is contributing a very small portion. Though he contributes toward their maintenance, they are all more or less independent of him since they can generally all be maintained without him.

    When great landlords spend their rents in maintaining their tenants and servants, each maintains his own tenants and servants. But when these landlords spend their rents maintaining tradesmen and skilled workers, they may in fact, as a whole, be maintaining as many or more people than before, on account of the waste incurred when providing hospitality. Each landlord individually, however, contributes only a very small share to the maintenance of each individual of this greater number. Each tradesman or skilled worker derives his subsistence from the employment not of one but of a hundred or a thousand different customers. Though in some measure obliged to them all, therefore, he is not absolutely dependent upon any individual one of them.

    As a result, the great landlords’ personal expenses gradually increased and the number of servants they hired decreased, until they could no longer hire any at all. They also started to find themselves having to dismiss their tenants. Farms were enlarged and the number of tenants reduced to just the necessary amount needed to cultivate the land. By reducing these unnecessary mouths and by exploiting the farm to its full potential, the landlord obtained a greater surplus and hence profit, which he was able to spend on himself, purchasing from merchants and manufacturers, in the same way he done in the past. The landowner would often then be tempted to increase the rent for his land, usually above what it was actually worth. His tenants would agree to this, on the condition that they could rent the land for a specified number of years, thus guaranteeing them the income required to recover whatever they invested in the further improvement of the land. The landlords, keen to maintain their extravagant lifestyles, agreed to this—hence the origin of the long-term lease.

    A tenant at will who pays the full value of the land is not totally dependent upon the landlord. The financial benefits they receive from one another are mutual and equal, and the tenant is risking neither life nor fortune by working for the landlord. If, on the other hand, he has a long-term lease, he is totally independent; his landlord cannot expect any service of him beyond what is expressly stipulated in the lease or imposed upon him by the country’s laws.

    With tenants now having become independent and the servants being dismissed, the great landlords no longer had any power to become involved in the country’s legal or peace-related matters. Having sold their birthright—not like Esau, for a mess of pottage at a time of hunger and necessity, but through extravagance, for trinkets and baubles—they became as insignificant as any common burgher or tradesman in a city. Regular governments were established in both the countryside and the cities, and no one had the power to disrupt their operation.

    As an aside, I feel it is relevant to point out here that in commercial countries, there are very few old land-owning families; i.e., that have passed estates from father to son for many successive generations. In countries in which there is little commerce, however, such as Wales or the Highlands of Scotland, there are many such families. Arabian history books are full of genealogies, and the history book written by Tartar Khan, which has been translated into several European languages, contains proof that ancient families are very common among such nations. In countries where a wealthy man’s revenue is spent solely on maintaining as many people as possible, he is unlikely to live beyond his means. But where he can spend his revenue on himself, he tends to have no limitations to his expenditure, which is driven by self-interest. In commercial countries, therefore, riches, in spite of laws implemented with a view to preventing their dissipation, very seldom remain long in the same family. Among simple nations, on the contrary, they frequently do, without the existence of any such laws. Among nations of shepherds such as the Tartars and Arabs, for example, the consumable nature of their property renders all such regulations impossible.

    Consequently, a major revolution in terms of public happiness was brought about by two different classes of people, neither of which had the public’s interests at heart. Great landlords were driven by self-interest and extravagance. Merchants and industrialists, much less frivolous, acted with a view to self-sustenance, striving to make money wherever possible. Neither had the knowledge or foresight of the great revolution which the folly of the one and the industry of the other were gradually bringing about.

    Indeed, throughout the greater part of Europe, trade and industry in cities, rather than being the result of a country’s improvement and growth, have been the driving force behind it.

    This situation, however, being contrary to the natural course of things, is both slow and uncertain. Compare the slow progress of the European countries, whose wealth depends on commerce and manufacturing, with the rapid progress of the North American colonies, whose wealth depends entirely on agriculture. Throughout most of Europe, population doubles only every five hundred years or so; in the North American colonies, it doubles about every twenty years.

    The law of primogeniture in Europe prevents the division of great estates, thereby hindering the multiplication of small landlords. A small landlord, however, who knows every part of his little territory, will take a certain pride in it and will enjoy not only cultivating but embellishing it—with the result that he will be one of the best, most industrious, intelligent and successful landowners. Furthermore, these same regulations keep so much land out of the market that there is always more capital to buy than there is land to sell, so what is sold always sells at a monopoly price. Rent never pays the interest of the purchase fee, nor does it cover repairs and other occasional charges.

    Throughout Europe, investing a small amount of capital in land is an unprofitable investment. A middle-class man may, upon retirement, decide to invest his small amount of capital in land, for the security this provides. A professional man may also secure his savings in the same way. But a young man who, instead of working as a tradesman or in some other profession, invests two or three thousand pounds in the purchase and cultivation of a small piece of land can live very happily and independently—although forgoing the fortune he may have made had he invested otherwise. The latter may well become a farmer, though the small quantity of land, coupled with the high price often means that there will not be a great amount to spare to invest in the land’s cultivation and improvement.

    In North America, on the contrary, fifty to sixty pounds is generally sufficient to begin a plantation. The purchase and improvement of uncultivated land there is the most profitable investment for both small and large amounts of capital, and the fastest road to wealth. This land in North America goes for next to nothing, at prices way below the value of the natural produce—which is not the case in Europe, or indeed in any country where the land is all privately owned. If estates were divided equally among all of the children upon the death of a landlord with a numerous family, the estate would generally be sold, with the result that so much land would come to market that it could no longer sell at a monopoly price. As such, the free rent of the land would come closer to covering the interest of the purchase price, and a small amount of capital invested in purchasing land would be as profitable an investment as any other.

    Next Chapter

    Don't get lost in the Wall Street Fee-Factory

    It's taken us a few years to finally figure out the right mix of tools that get results and save money. If you click on the toolbox, you'll see an article we wrote that lays-out the brokers and research tools we personally use.

    Got Questions?

    The Investor's PODcast

    Get a free autographed copy of the Warren Buffett Accounting Book or Warren Buffett's Three Favorite Books. Simply submit your question to The Investor's PODcast. If your question gets answered on the air, the founders of this site, Preston Pysh and Stig Brodersen, will send you a free signed copy of their book!

    The Warren Buffett Forum

    Ask your question at the Buffett's Books money forum and interact with other smart investors like yourself. You won't find any day traders on this forum! Here's the link to The Warren Buffett Forum.