Adam Smith, considered by many to be the Father of Modern Economics, was born in Kirkcaldy, Scotland, on June 16, 1723. His father, also Adam Smith, was a senior solicitor and judge advocate; his mother, Margaret Douglas, was the daughter of a well-landed gentleman. Smith entered the University of Glasgow when he was fourteen years old and studied under Francis Hutcheson. In 1740, as a graduate scholar, he pursued his postgraduate studies at Oxford. He gradually became dissatisfied with the style of education at Oxford and left in 1746. Two years later, he was giving rhetoric lectures at the University of Edinburgh. He was assisted in securing the position by Lord Kames and the Philosophical Society of Edinburgh. In 1750, Smith met David Hume. Until his death, Hume and Smith would regularly converse on such topics as history, politics, philosophy, economics, and religion. In 1752, Smith became a professor at the University of Glasgow where he taught logic and became a member of the Philosophical Society of Edinburgh. Before the year was out, he was asked to become the head of Moral Philosophy. In 1759, Smith published The Theory of Moral Sentiments and three years later, the University of Glasgow conferred upon him the degree of Doctor of Laws (LL.D.).
In 1763, his life began to move in another direction. David Hume, four years earlier, had sent presentation copies of Theory of Moral Sentiments to notable politicians including his friend Charles Townshend. Townshend was so impressed with Smith’s work that he travelled to Glasgow to meet him. He asked Smith to consider being tutor and chaperone to his stepson, Henry Scott, the young Duke of Buccleugh, on the young man’s Grand Tour of the continent his graduation from Eton. In October 1763, with Henry Scott in his final term at Eton, Townshend contacted Smith and asked him for his decision. Smith accepted the offer and with permission from the university, took up his new position in January 1764.
At the time, a wealthy young man from the gentry class finished his education by going on a tour of the continent; it was an educational rite of passage. The tour had two purposes: first, to expose him to the cultural legacy of both classical antiquity and the Renaissance, and second, to experience the aristocratic societies on the continent. For the first year and a half Scott and Smith toured the south of France, then spent two months in Geneva and finally ten months in Paris. The tutelage was cut short in 1766 when Henry Scott’s brother died. Shortly after returning to London, Smith’s services were required by Lord Shelburne, the Secretary-of-State for the Southern Department and the American Colonies, and Charles Townshend, now the Chancellor of the Exchequer. Shelburne sought advice on the Roman Colonial Model of Government; Townshend needed annotation of a document that he had prepared on the concept of a “Sinking Fund.” In time, the document would evolve into the Revenue (or Townshend) Acts of 1767. Smith headed back to Scotland, but instead of returning to the University of Glasgow, he returned to his home in Kirkcaldy and began work on what would become his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith spent most of the next six years working on the text.
In 1773 he returned to London where he hoped to finish the text and express his gratitude to the Royal Society for his recent election. During his time in London, he visited Shelburne frequently. The first edition of Wealth of Nations was published on March 9, 1776. Smith sent a copy to Shelburne. It was clear by the time of its publication that Smith was preoccupied with the American colonies. He had devoted Chapter VII of Book IV, entitled “Of Colonies” and Chapter III of Book V, “Of Public Debts,” or nearly thirty percent of Volume II, to the present conflict between Britain and America. Among the many arguments that Smith presented in his work, there were three that directly impacted the colonists.
First, he believed the colonies should be taxed.
It is not contrary to justice that . . . America should contribute towards the discharge of the publick debt of Great Britain. That debt was contracted in support of government . . . to which several of the colonies of America owe their present charters, and consequently their present constitution, and to which all the colonies of America owe the liberty, security, and property, which they ever since enjoyed. That publick debt has been contracted in the defence, not of Great Britain alone, but of all the different provinces of the empire.
Second, he believed the colonies should be granted representation in Parliament. Taxes imposed on the colonies
could scarce, perhaps, be done, consistently with the principles of the British constitution, without admitting into the British Parliament, or if you will into the states-general of the British Empire, a fair and equal representation of all those different provinces, that of each province bearing the same proportion of the produce of its taxes, as the representation of Great Britain might bear to the produce of the taxes levied upon Great Britain”
Third, he believed that there should be free trade within the empire.
The extension of the custom-house laws of Great Britain [to America] . . . would be in the highest degree advantageous to both. All the invidious restraints, [that is,] the distinctions between the enumerated and non-enumerated commodities of America would be entirely at and end . . . The trade between all the different parts of British empire, would in consequence, be as free as the coasting trade of Great Britain at present. The British empire would thus afford within itself an immense internal market for every part of the produce of all its different provinces.
In April Smith headed back to Kirkcaldy. Over the next four months, he and Hume exchanged numerous letters. Hume had recently finished a short autobiography entitled My Own Life. On August 22, Smith asked him if he could “add a few lines to your account of your own life;” on the 23rd, Hume, with the assistance of his caretaker, wrote back, “You have entire liberty to make what Additions you please to the account of my Life.” Sadly, on August 25, David Hume died. On November 19, Smith sent a letter to Hume’s publisher, William Strahan; it was a stirring eulogy in honor of his friend. Two months later, the autobiography and letter were published together for the first time.
By January 1777, Smith was back in London. He wanted to be in town for the printing of the second edition of Wealth of Nations and had been asked by Lord North, the Prime Minister and Chancellor of the Exchequer (he had succeeded Charles Townshend), to serve as an advisor to Sir Grey Cooper, the Secretary to the Treasury, who put together the nation’s budget. Smith’s connection with Lord North probably came about through Alexander Wedderburn, a former student and now friend as well as the Solicitor-General in North’s administration. Smith had been in communication with Wedderburn during the previous summer. Due to the war, the government of England was falling deeper in debt and needed additional sources of revenue. Smith’s ideas considerably influenced Cooper’s thinking on the matter. He recommended the imposition of two new taxes in the 1777 budget, one on manservants and another on property sold at auction. The former was projected to bring in 105,000 pounds and the latter, 37,000 pounds. These became part of North’s budget speech that was delivered in the House of Commons in August. The following year Cooper recommended two more taxes, one on inhabited house duty and another on malt. The former was projected to bring in 264,000 pounds and the latter, 310,000 pounds.
On October 23, Archibald Menzies, the Commissioner of Customs in Scotland, died. In November, at the recommendation of William Strahan, Alexander Wedderburn, the Duke of Buccleugh, Sir Grey Cooper and Henry Dundas, the Lord Advocate of Scotland, Lord North agreed to appoint Smith to be the new Commissioner of Customs.
On December 2, news reached London of Burgoyne’s defeat at Saratoga. The loss of 6,000 men immediately changed the military calculus of the war. England needed to consider a different approach with regard to her American colonies. North wrote in a letter to King George, “The consequences of this most fatal event may be very important and serious and will certainly require some material change of system. No time shall be lost, and no person who can give good information left unconsulted in the present moment.”
The reality of the moment was not lost on Smith. In February 1778, he wrote a memorandum to Wedderburn that condensed his thoughts on England’s future options. It was entitled “Smith’s Thoughts on the State of the Contest with America.” The memorandum read:
There seems to be four, and but four, possible ways in which the present unhappy War with our Colonies may be conceived to end.
First, it may be conceived to end in the complete submission of America; all the different colonies, not only acknowledging, as formerly, the supremacy of . . . the mother country; but contributing their proper proportion towards defraying the expence of the general Government and defence of the Empire.
Secondly, it may be conceived to end in the complete emancipation of America; not a single acre of land, from the entrance into Hudson’s Straits to the mouth of the Mississippi, acknowledging the supremacy of Great Britain.
Thirdly, it may be conceived to end in the restoration, or something near to the restoration, of the old system; the colonies acknowledging the supremacy of the mother country, allowing the Crown to appoint the Governors, the Lieutenant-Governors . . . and submitting to certain regulations of trade; but contributing little or nothing towards defraying the expence of the general Government and defence of the empire.
Fourthly, and lastly, it may be conceived to end in the submission of a part, but of a part only, of America; Great Britain, after a long, expensive and ruinous war, being obliged to acknowledge the independency of the rest.
The probability of some of these events is very small; and it may not, perhaps, be worthwhile to say anything about them. For the sake of order and distinctness, however, I shall say a few words concerning the advantages and disadvantages which might be expected from each.
If the complete submission of America was brought about altogether by Conquest, a military government would naturally be established there; and the continuance of that submission would be supposed to depend altogether upon the continuance of the force which had originally established it. But a military government is what, of all others, the Americans hate and dread the most. While they are able to keep the field they never will submit to it; and if, in spite of their utmost resistance, it should be established, they will, for more than a century to come, be at all times ready to take arms in order to overturn it . . .
Whatever could be extorted from them . . . would be spent in maintaining that military force which would be requisite to command their obedience. By our dominion over a country, which submitted so unwillingly to our authority, we could gain scarce anything but the disgrace of being supposed to oppress a people whom we have long talked of . . . as our brethren and even as our children . . .
A plan of this kind would be agreeable to the present humour of Great Britain where, if you except a few angry speeches in Parliament, it would meet with scarce any opposition.
If the complete submission of America was brought about altogether by treaty, the most perfect equality would probably be established between the mother country and her colonies; both parts of the empire enjoying the same freedom of trade and sharing in their proper proportion both in the burden of taxation and in the benefit of representation.
The principal security of every government arises always from the support of those whose dignity, authority and interest, depend upon its being supported . . . The leading men of America, being either members of the general legislature of the empire, or electors of those members, would have the same interest to support the general government of the empire which the Members of the British legislature and their electors have at present to support the particular government of Great Britain . . .
That the complete submission of America, however, should be brought about by treaty only, seems not very probable at present. In their present elevation of spirits, the ulcerated minds of the Americans are not likely to consent to any union, even upon terms the most advantageous to themselves. One or two campaigns, however, more successful than those we have hitherto made against them, might bring them perhaps to think more soberly upon the subject of their dispute with the mother country . . . however, the plan of a constitutional union with our colonies and of an American representation seems not to be agreeable to any considerable party of men in Great Britain. The plan which, if it could be executed, would certainly tend most to the prosperity, to the splendour, and to the duration of the empire, if you except here and there a solitary philosopher like myself, seems scarce to have a single advocate. After the unavoidable difficulty, however, of reconciling the discordant views both of societies and of individuals
The complete emancipation of America from all dependency upon Great Britain would at once deliver this country from the great ordinary expence of the military establishment necessary for maintaining her authority in the colonies, and of the naval establishment necessary for defending her monopoly of their trade. It would at once deliver her likewise from the still greater extraordinary expence of defending them in time of war. . . If, with the complete emancipation of America, we should restore Canada to France and the two Floridas to Spain; we should render our colonies the natural enemies of those two monarchies and consequently the natural allies of Great Britain. Those splendid, but unprofitable acquisitions of the late war, left our colonies no other enemies to quarrel with but their mother country. By restoring those acquisitions to their antient masters, we should certainly revive old enemies and old enemies . . . yet the similarity of language and manners would in most cases dispose the Americans to prefer our alliance to that of any other nation. Their antient affection for the people of this country might revive, if they were once assured that we meant to claim no dominion over them; and if in the peace which we made with them, we insisted upon nothing, but the personal safety, and the restoration to their estates and possessions, of those few unfortunate individuals who have made some feeble, but ineffectual efforts to support our authority among them. By a federal union with America we should certainly incur much less expence, and might, at the same time, gain as real advantages, as any we have hitherto derived from all the nominal dominion we have ever exercised over them.
But tho’ this termination of the war might be really advantageous, it would not, in the eyes of Europe appear honourable to Great Britain; and when her empire was so much curtailed, her power and dignity would be supposed to be proportionably diminished. What is of still greater importance, it could scarce fail to discredit the Government in the eyes of our own people, who would probably impute to mal-administration what might, perhaps, be no more than the unavoidable effect of the natural and necessary course of things.
The restoration, or something near to the restoration, of the old system would sufficiently preserve, both in the eyes of foreign nations and of our own people, the credit and honour of the government. Our own people seem to desire this event so ardently, that what might be the effect of mere weakness and inability, would by them be imputed to wisdom, tho’ too late wisdom, and moderation. But this event would not preserve the honour of the British Government in the eyes of the Americans. After so complete a victory, as even this event would amount to; after having, not only left their own strength, but made us to feel it, they would be ten times more ungovernable than ever; factious, mutinous and discontented subjects in time of peace; at all times, upon the slightest disobligation, disposed to rebel . . . This event, however, does not at present seem very probable. The Americans, I imagine, would be less unwilling to consent to such a union with Great Britain than to the restoration, or anything like the restoration, of the old system . . .
The Americans . . . when they compare the mildness of their old government with the violence of that which they have established in its stead, cannot fail both to remember the one with regret and to view the other with detestation. That these will be their sentiments when the war is over and when their new government, if ever that should happen, is firmly established among them, I have no doubt. But while the war they will impute, and with appearance of reason too, the greater part of the oppressions which they suffer to the necessity of the times. Those oppressions will serve to animate them, not so much against their own leaders, as against the government of the Mother country to which they will impute the causes of the necessity.
An apparent restoration of the old system, so contrived as to lead necessarily, but insensibly to the total dismemberment of America, might, perhaps, satisfy the people of Great Britain . . . It might, at the same time, gradually bring about an event which, in the present distressful situation of our affairs, is, perhaps, of all those which are likely to happen, the most advantageous to the state. But the policy, the secrecy, the prudence necessary for conducting a scheme of this kind, are such as, I apprehend, a British Government, from the nature and essence of our constitution, is altogether incapable of.
The submission or conquest of a part, but of a part only, of America, seems of all the four possible terminations of this unhappy war, by far the most probable; and unfortunately it is the termination which is likely to prove most destructive to Great Britain. The defence of that part, from the attacks of the other colonies, would require a much greater military force than all the taxes which could be raised upon it could maintain. The neighborhood of that part would keep alive the jealousy and animosity of all the other provinces, and would necessarily throw them into an alliance of the enemies of Great Britain.
Smith knew the plan that was most advantageous to the empire was the one that promoted a constitutional union with American representation, but he also knew it was unlikely to be adopted. There were two primary reasons for this: First, most members of Parliament were Landed Gentry and were not of the mindset to do so. “We, on this side of the water, are afraid lest the multitude of American representatives should overturn the balance of the constitution, and increase too much either the influence of the crown on one hand, or the force of democracy on the other.” Second, two men who he believed supported him brushed aside his notion of a constitutional union. They were North and Shelburne. North wanted to restore relations to the status quo of 1763. On February 17, 1779, he introduced two conciliatory bills in the House of Commons. The purpose of the first, entitled “Taxation of Colonies Act 1778,” was
To remove the said uneasiness, and to quiet the minds of his Majesty’s Subjects, who may be disposed to return to their allegiance, and to restore the peace and welfare of all his Majesty’s dominions, it is expedient to declare that the King and Parliament will not impose any duty, tax, or assessment, for the purpose of raising a revenue within any of the said Colonies, Provinces, or Plantations . . . Except only such duties as it may be expedient to impose for the regulation of commerce; the net produce of such duties to be always paid and applied to and for the use of the Colony, Province, or Plantation, in which the same shall be respectively levied.
The purpose of the second, entitled “Royal Instructions to the Peace Commission 1778” was
That persons to be appointed by his Majesty . . . shall have full power, commission, and authority, to treat, consult and agree, with such body or bodies political and corporate, or with such assembly or assemblies of men, or with such person or persons . . . concerning any grievance . . . existing or supposed to exist, in the government of any of the said Colonies, Provinces, or Plantations. That in order to facilitate the good purposes of this Act, it shall and may be lawful for the said Commissioners, from time to time . . . To order or proclaim a cessation of hostilities on the part of his Majesty’s troops in any of the said Colonies . . . To suspend the operation and effect of a certain Act of Parliament . . . To grant a pardon or pardons to any number or description of persons within the said Colonies . . . [and] are hereby authorized and empowered to suspend in such places, and for such times as they shall think fit . . . The operation and effect of all or any of the Acts or Act of Parliament, which have been passed since the 10th day of February, 1763.
Nowhere in the Act or the Instructions were the commissioners granted power to negotiate a constitutional union or independence. There was, however, in the final version of the Instructions an additional concession concerning representation. Unfortunately, it described a “mutual representation:”
By a reciprocal deputation of an agent or agents from the different states, who shall have the privilege of a seat and voice in the Parliament of Great Britain; or, if sent from Britain, to have in that case a seat and voice in the assemblies of the different states to which they may be deputed respectively, in order to attend to the several interests of those whom they are deputed.
Smith believed that the Continental Congress, who had declared the colonies free and independent almost a year and half earlier, would find most of the commissioners’ powers meaningless. Shelburne, on the other hand, wanted the mercantile system to remain in place.
Never adopt any scheme which would go to dissever our colonies from us; for as soon as that event should take place . . . The Sun of Great Britain is set and we shall no longer be a powerful or respectable people . . . Treaties of Commerce [are] the most ridiculous things in the whole world; showing, by a variety of historical precedents, that those which had at the time of making them been deemed the wisest, have always failed, and turned out to no effect . . . Trade laws were quite a different nature, they were solemn compacts, in which the interests of the contracting parties were reciprocal, and founded, on the same basis . . . Such were the connections between all states and their colonies; and such were the obligations of interest and good faith . . . He advised the ministers eternally to . . . Never give up the Navigation Act[s]. 
Adam Smith knew what North and Shelburne failed to grasp—if a constitutional union and representation in Parliament were not strongly considered, it was too late for anything but independence.
“Correspondence No. 76, Charles Townshend to Smith, 25 October 1763,” in Ernest Campbell Mossner and Ian Simpson Ross, eds., The Glasgow Edition of the Works and Correspondence of Adam Smith(Oxford: Clarendon Press, 1987), 95.
Ian Simpson Ross, The Life of Adam Smith (Oxford: Oxford University Press, 1995), 116, 134-36; Smith had also tutored Shelburne’s second son, Thomas Petty Fitzmaurice, at the University of Glasgow from 1759 thru 1761.
“Correspondence No. 159, Alexander Wedderburn to Adam Smith, 6 June 1776,” in The Glasgow Edition of the Works and Correspondence of Adam Smith, 197; “Correspondence No. 163, Adam Smith to Alexander Wedderburn, 14 August 1776,” ibid., 203; “Correspondence No. 185, Alexander Wedderburn to Adam Smith, 30 October 1776,” ibid., 226.
G.H. Guthridge, “Smith’s Thoughts on the State of the Contest with America,” American Historical Review, 38 No. 4 (July, 1933), 714-20; The memorandum was not discovered and attributed to Smith until 1933.