Happy birthday, Adela! (Also, my blog is 13 years old today, 3 July!) As I mentioned at the end of my previous Adam Smith post (see here), Smith devotes Addition #11 (pp. 13-22) of his 1784 pamphlet to the herring bounty. Here, he begins by making the best possible case for such bounties (my emphasis):

“Something like a bounty upon production … has been granted upon some particular occasions. The tonnage bounties given to the white-herring and whale fisheries may, perhaps, be considered as somewhat of this nature. They tend directly, it may be supposed, to render the goods cheaper in the home market than they otherwise would be.” (Smith 1784, p. 13)

Smith, however, lays his cards on the table. He concludes that such fishery bounties are a waste of money:

“In other respects their effects, it must be acknowledged, are the same as those of bounties upon exportation. By means of them a part of the capital of the country is employed in bringing goods to market, of which the price does not repay the cost together with the ordinary profits of stock.” (Id. at pp. 13-14)

The Scottish customs commissioner then tries to defend this subsidy on national security grounds (again, my emphasis):

“But though the tonnage bounties of those fisheries do not contribute to the opulence of the nation, it may perhaps be thought that they contribute to its defence by augmenting the number of its sailors and shipping. This, it may be alleged, may sometimes be done by means of such bounties at a much smaller expense than by keeping up a great standing navy, if I may use such an expression, in the same way as a standing army.” (Id. at p. 14)

Adam Smith, however, is not persuaded by this argument either. In fact, he concludes that the politicians who voted in favor of this subsidy policy have been fooled:

“Notwithstanding these favourable allegations, however, the following considerations dispose me to believe that, in granting at least one of these bounties, the legislature has been very grossly imposed upon.” (Id.)

In the remainder of Addition #11, Smith gives us four specific reasons why the herring bounty is counterproductive. First off, Smith claims “the herring buss bounty seems too large.” (Id.) Why too large? Because herring must be cured with salt, and the government delivered salt to the herring fish-curers without charging them the standard salt tax: “The salt with which these herrings are cured is sometimes Scotch and sometimes foreign salt, both which are delivered free of all excise duty to the fish-curers.” (Id. at pp. 14-15) As an aside, did Smith obtain this information about the provision of duty-free salt in his role as Commissioner of Scottish Customs and Salt Duties?

But in addition to waiving the salt tax, the government also paid fishermen a cash bonus (or “bounty”) for every barrel of herring they exported: “Upon every barrel of herrings exported there is, besides, a bounty of 2s. 8d. [i.e. two shillings and eightpence], and more than two-thirds of the buss caught herrings are exported.” (Id. at 15)

Next, Smith combines the lost tax revenue from the tax-free salt along with the cash export bounty and concludes that the government spent, in some cases, over one pound (£) to subsidize a single barrel of herrings!

“Put all these things together and you will find that, during these eleven years, every barrel of buss caught herrings, cured with Scotch salt when exported, has cost government 17s. 11 3/4 d. [80 pence]; and when entered for home consumption 14s. 3 3/4 d. [71.5 pence]; and that every barrel cured with foreign salt, when exported, has cost government 1l. 7s. 5 3/4 d. [£1.37]; and when entered for home consumption 1l. 3s. 9 3/4 d. [£1.19].” (Id.)

After making these careful but tedious calculations, Smith concludes that a barrel of herring sold for an average of about 21 shillings (one guinea): “The price of a barrel of good merchantable herrings runs from seventeen and eighteen to four and five and twenty shillings, about a guinea at an average.” (Id.) In other words, the total cost of the herring bounty was nearly equal to the actual market value of the fish! (See the figures in the indented passage quoted above.)

Before proceeding to his other three anti-subsidy arguments, Adam Smith dons his accountant’s cap, so to speak, and cross-checks his startling conclusion with the actual data. Here, Smith presents the relevant data in two tables. The first table (p. 16) shows the number of barrels of herrings caught as well as the bounties paid from the winter fishing season of 1771 to the winter fishing season of 1782, while the second table (p. 18) shows the number of bushels of foreign salt and Scots salt delivered duty-free to the herring fisheries during this same period of time (5 April 1771 to 5 April 1782). Nota bene: I will proceed to Smith’s three remaining anti-subsidy arguments in my next post.