Guanzi replied，“Please set up a system of divide and rule，and establish small states beside the central government of the Son of Heaven．The Son of Heaven should stay at the centre of the world and supervise a territory of about one thousand square li．The size of territories of big feudatories should be three hundred square li and that of the ordinary ones should be one hundred square li．Fiefs of viscounts and barons along the coast should be seventy square li．If this is the case，these feudatories and fiefs can be controlled like a chest controlling the arms or arms controlling fingers．Thus，all other states are relatively small and weak，so they are not able to contend with the Son of Heaven．The Son of Heaven can adjust the demand and supply and regulate prices of things to reasonable levels，so that the inferiors will not cause any problems to disturb the throne．Moreover，salt is produced endlessly in the sea. Metals and timber are produced constantly in mountains．Plants grow when the right season comes. Utensils will break finally and salt produced by steaming will be consumed day by day．After they are used up，they can be produced again，and then these processes will go round and round just like the perpetuation of Heaven and Earth．That is the so-called setting up the system of divide and rule．”

King Wu once asked Gui Du，“If presents to the Son of Heaven are not significant enough，one cannot endear himself to him．If the wishes of officials around the throne cannot be fulfilled，the sovereign will not be loved and supported by them．So，if 1 want to stop levying taxes upon the common people door by door and meet all demands of the officials around me，do you think there is any way to do that?’’Gui Du replied，“Regarding the geographical conditions of our country，we have adjacent states on all four sides．People of remote areas pass through our state to pay taxes，travelers and merchants do business via our state，and goods are transited from our state as well．Hence，they will come to consume our grain，use our money and pay in terms of gold．So，please drive up the prices of important things and use the income gained to regulate the prices of other things and let them come down if necessary．Thus，things will circulate smoothly，advantages will be taken easily and the economic policies of the nation will be successful．So，make sure that there will be no mistake in the economic policies taken by the government．0therwise，(if the economic policies are not suitable or reasonable) how can the common people be well administered?”King Wu asked．“What shall I do then?”

Gui Du said，“Gold is produced along the right banks of both the Ru River and the Han River．Pearls are produced in Wei Guang of Chi Ye and jade is produced at Mount Pang of Yu Shi．These places are all seven thousand eight hundred li from the capital of the Zhou Dynasty．The provenances of these treasures are very far away，so it is very difficult to transport them．Hence，sovereigns of ancient times used to make good use of them according to their value and regarded jade and pearls as first-rate currency，gold as second-rate currency and  money as third-rate  currency．Hence，sovereigns in ancient times were clever at regulating the price of gold to take control over the prices of jade，pearls，the currency and as a result，enough wealth had been created for people all over the world．”

Duke Huan said，“Once Heng told me：‘One farmer must have at least one plough，one big hoe，one sickle，one small hoe，one mallet and one reaphook and then he can start the farm work．0ne cart-maker must have at least one axe，one saw，one anvil，one drill，one chisel，one special chisel and one rind and then he can start to make cart．0ne woman worker must have at least one pair of scissors，one awl，one needle and one special long needle and then she can start to do needlework．Therefore，you can order people to cut trees of mountain forests and mine iron ore buried in mountains．Thus，the state will have enough money to spend without levying any tax upon the people．’”

Guanzi replied，“No，you should not do that．If you send slaves to excavate the mines and chop down the trees，they will escape and go out of control．If you send the common people there to perform these tasks，they will become hostile to you．And if other states invade our border，the soldiers will not fight them because of their ingrained grudge towards the government．Thus，the state will fail before the advantages provided by the mines turn into reality．Hence，a sovereign who is good at governing his state would rather allot them to the common people，and then regulate the prices of these products and calculate the amount of profits the common people gained to make sure that they take seven tenths and the state takes three tenths of the sum of profits．Prices of commodities should also be regulated according to the degree of seriousness of various issues．If this is the case，the common people will work assiduously and can be manipulated very effectively．”

Duke Huan asked，“Would you please tell me something about keeping financial balance by taking the conditions of the fields into serious consideration?”Guanzi replied，“For states located on fertile lands along big rivers，one zhong of grain can be produced by each mu of field．And for places with a lot of rocks．states located there are normally mountainous．Nevertheless，the level of affluence of states located along riversides normally cannot match that of the mountainous states。because the latter are often well prepared in advance．” Duke Huan asked．“What did you mean?” Guanzi replied，“For states located on fertile lands along big rivers，one zhong of grain can be produced by each mu of field．So，these states are rich in grain but they often do not take suitable measures to administer it and as a result，they cannot eventually maintain the grain they produced．But those mountainous states are very careful to farm and cultivate vegetables and all kinds of melons．That is the so-called getting prepared in advance．”

Duke Huan asked，“Are these all the measures a state should take for keeping financial balance according to the conditions of the land?” Guanzi replied，“No，these are not all measures a state should take．0nce there was a state called Di，those fields there were so fertile that one mu could produce one zhong of grain，so the price of ten zhong was only one zi (zi is an ancient Chinese measure of weight) of gold．The state of Cheng used to be a mountainous state，so that the price of five fu of grain was one zi of gold．Nevertheless，the state of Di could not manage to establish an army and the state of Cheng was successful in establishing their army because the price of ten zhong of grain of Di only amounted to that of five fu in Cheng．Some states are short of expenses even though their grain output can be ten times higher compared with the average．But some states have surplus money even though their grain output is one half of the average，because the latter know how to regulate prices according to the degree of seriousness of various issues．If a state has enough store of grain that can last for ten years，but the common people do not have enough food to eat，they will all long for getting salaries from the sovereign by their undertaking．If the sovereign has a lot of money saved from monopolizing iron and salt，but the common people do not have enough money to spend，they will all seek the chance to serve the sovereign by their undertaking．So，‘Zu Ji’is a kind of tax that should be collected by the state and ‘Zheng Ji’ is a kind of tax that is demanded by force．Sovereigns who are going to be toppled will abandon their legal entitlements and demand things by force，so that inferior people are hostile towards their superiors and orders issued by these sovereigns will not be carried out．The common people are angry when some of their belongings are dispossessed, and they are happy when they are conferred with something. That is natural according to the nature of human being．Sovereigns in ancient times knew it，so，when they were going to render things to the common people，they would do that openly．On the other hand，when they were going to deprive them of something，they would do it secretly and unknowingly．Hence，the lives of the common people are dependent upon grain produced by all kinds of crops，and gold and money are the media of circulation．Sovereigns in ancient times were good at manipulating the price and supply of grain by taking firm control over their currencies，so that the strength of the common people could be well used by them．”

    Guanzi said，“When a proper rain moistens the soil as deep as five chi，the throne will be humiliated，and when a state is full of grain，it will be ruined．These two mishaps are caused while there are a lot of people holding huge amounts of grain．Hence，trees being able to stand frost and dew will not be affected by the weather．And self-sufficient families will not be obedient to the sovereign．So，deprive the common people of their possessions and then render things to them．Drive up the prices of things and then make them come down．Irritate people and then make them happy，thus，the whole world can be kept under control．”

    Duke Huan asked，“If I undergird farming and economies on the expenses of the government，do you think the state can be safeguarded this way?”Guanzi replied．“That can help somewhat but cannot be counted on exclusively for maintaining the state．Once the state of the Jis used to undergird farming and economize on expenses．The grain output of their state was especially good，however，they could not administer it reasonably and as a result，it drained to other states all over the world．In this case，measures taken by the Jis to undergird farming and economize on expenses could only make their people lose all their grain because it cannot be effectively and reasonably administered at all. Moreover，the Jis were held captive by other states of the world．Thus，their state was ruined and they themselves did not have any shelter．Hence，this measure can be taken to improve the situation to some extent，but it cannot safeguard the throne．So，for a sovereign being clever at governing his state，he will drive up the prices of things of his own state when they are sold too cheap all over the world．He will attach importance to things being overlooked by other states of the world，and he will also regulate the distribution of goods to make the supply fall short of the demand when things are oversupplied all over the world．Thus，sovereigns of all other states will submit to his authority．”

    Duke Huan said，“I am going to dig two huge ponds without costing the life of one person or supervising the laborers with a halberd in the hand．Do you think there is a way to fulfill this goal?”Guanzi replied．“Build up twelve water gates along the Wen River，the Si River and the Zhu River，thus，three times more water can be accumulated in these rivers．Then issue an order to let people sow wheat during the ninth month and harvest it on the day of the forthcoming Summer Solstice．In this case，the harvest can be finished before the rain season comes and it will be beneficial for farming．”Duke Huan said，“Very good．” He then ordered people to sow wheat during the ninth month and harvest it on the day of the Summer Solstice．The amount of grain produced should match the volume of these two ponds put together．So，that was a case where a sovereign was clever at governing his state，took opportunities provided by Heaven and favorable geographical conditions provided by the Earth to construct huge ponds．

Guanzi went to the palace to set forth his proposal to Duke Huan，and he said，“The sum of rentals collected by the state this year is forty-two thousand jin of gold，please use this money to reward our officers and soldiers beforehand within one morning．”Duke Huan said，“Very well．” Then an order was issued to display banners and war drums on the fields of Tai Zhou for all officers and soldiers to convene there．Duke Huan then went on to the platform and stood there．Ning Qi，Bao Shuya，Xi Peng，Yi Ya and Bin Xuwu stood side by side in front of the platform．Guanzi held the drumstick，clasped the hands to bow to the officers and soldiers and then，said，“Whoever can break the enemy front will be reworded with one hundred jin of gold．” He asked three times，but no one responded．And then，carrying a sword in the hand，one of them went up to him and asked，“How many soldiers does the army you mentioned have?” Guanzi said．“An army of one thousand soldiers．”“I am able to destroy an army of one thousand soldiers．” And then he was rewarded with one hundred jin of gold．

Guanzi said further，“At the time when two opposite armies are confronting closely and bows have been drawn back for firing，whoever is able to capture the captain of the enemy troops will be rewarded with one hundred jin of gold．”(One  person) asked，“How many soldiers should he command then?”Guanzi said，“0ne thousand soldiers．” “I can do that，”said the soldier，and he was rewarded with one hundred jin of gold．

Guanzi continued，“Whoever can follow the orders given by the commander’s banner to decapitate the general of the enemy troops and bring back his severed head will be rewarded with one thousand jin of gold．” Altogether ten people said that they could do it and they were all rewarded with one thousand jin of gold．Among the rest of the soldiers，who said that they could kill enemies abroad were all rewarded with ten jin of gold．After rewards were conferred that morning，forty-two thousand jin of gold was gone．

Duke Huan looked melancholy and groaned，“How can I understand you?”Guanzi replied，“Please do not worry about it，His Majesty．Please let them become famous and honorable openly，let their parents be proud of them because of their accomplishments and let their wives and children benefit from their talents and virtues．Thus，all soldiers will try their best to gain fame and repay obligations to the sovereign and as a result，they will not retreat on the battleground．If we dispatch our troops to attack our enemies，destroy their army and annex their territories，the benefits we gained will be much more significant than forty-two thousand jin of gold．”All the other five persons said，“Fine．”

Duke Huan said，“Very good．” He then warned the powerful generals of the state and said，“Any time when leaders of one hundred troops are paying a visit to you，you should treat them courteously just like the way you behave yourself at court．Any time when 1eaders of one thousand troops are paying a visit to you，you should bow to them while seeing them off，and you should also go down two stairs to say good-bye to them．For those above-mentioned leaders，if their parents are still alive，make sure to present their parents four dan of wine and four pots of meat．For those whose parents are dead，make sure to present their wives and children three dan of wine and three pots of meat．”  After these measures had been taken for half a year，fathers were educating their sons，older brothers were edifying their younger brothers，and wives were persuading their husbands as follows，“Look，you have been treated well and generously by the state．If you do not fight to the death at the front，won’t you feel embarrassed to come back home again?”

Duke Huan sent out troops to attack the state of Lai．The battle was to be fought at Bi Shi Li of the state of Ju．However，the troops of Lai retreated even before they saw the banners，heard the war-drums or knew how many troops were dispatched from the state of Qi．So，their army was destroyed，their territory was annexed and their generals were held captive．Hence，the achievements of annihilating their army，annexing their territory and capturing their sovereign before lands were conferred and money was rewarded，were all due to rewarding the soldiers beforehand．

    Duke Huan said，“During the combat in Qu Fang，many people had borrowed money to support the state to prepare the pay and provisions of the army．And I am going to pay the bills for them，what do you think I shall do then?’’Guanzi replied，“Please issue an order to ask each of the wealthy merchants with no 1ess than one hundred bonds to contribute one horse to the state．For those who do not have horse，they can buy it from the state．Thus，the price of horses will go up one hundred times．And as a result，even before the horses owned by the state leave the stalls，the amount you borrowed for the war in Qu Fang will be ready．”

Duke Huan asked Guanzi，“From the offspring of Chon Di，Jiang Di，Ding and Hui，officials who have rendered outstanding services to the nation，I do not collect anything from them all the year round．Thus I cannot get one sheng or one dou of grain from them，so that one share of the income of the state is excluded．For those sterile fields such as the swamplands，brine pans，salinas and concavo-convex mountainous lands，they are almost useless and I cannot get one sheng or one dou of grain，so that one share of income of the state is excluded．There are crops growing on the plains located no more than fifteen li from the border because some people have cultivated these fields，grown crops and built up villages there out of their own force of will．I cannot get one sheng or one dou of grain from them either．As a result，I cannot manage to control two fifths of the grain produced in the state．Thus，I only have the inflated reputation of a sovereign with ten thousand chariots。but our national strength cannot match that of a state of one thousand chariots at all．If I am going to put myself on a par with the Son of Heaven and compete with sovereigns of other state for power，do you think I can realize it?”Guanzi replied．“You can only resort to orders and policies to obtain some income．’’Duke Huan asked，“What shall I do then?”

Guanzi replied， “Please issue an order to send people to the border areas to reclaim wastelands and grow crops there．But make it clear that people who have ten zhong of grain stored at home will be exempted，people who have one hundred zhong of grain stored at home will be exempted and people who have one thousand zhong of grain stored at home will be exempted too．Thus，no more than one hundredth of the population will be sent there．However，the situation of the store of grain among the common people will be crystal-clear to you．Then based on the situation of the store of grain of the state，you can issue an order as follows：‘our state is short of money and cannot afford all kinds of expenditure now．Please allow me to buy grain at the normal price from you．You should sell your store of grain according to the amount you reported and make sure that there will be no discrepancy．’Then you will decide how much you will pay them according to the value of the currency and pay the bills of the state．Thus，you will take firm control over the total sum of the store of grain of the state．As a result，you will be invincible all across the nine sub-continents of the world and no other state will dare to invade our border．”

The Duke asked。“If the army is demobilized and all soldiers are sent back for farming，do you think that the grain stored by the state will be of any use?” Guanzi said，“In case there is a war launched by other states of the world，our store of grain will be enough to support provisions for the army．When there is no threat of war caused by other states，you can grant grain to the poor people and thus，all swampy lands，brine pans，salinas and concavo-convex mountainous lands will be reclaimed．That is the so-called obtaining income for the state by issuing right orders and taking suitable measures．”

    Guanzi said，“If the price of one fu of grain is one hundred qian in the state of Teng and the state of Lu，then you can drive up that of our state to one thousand qian．Thus，grain will be drawn to our state from all directions like water pouring into deep valleys．It is not that the harvest of our state is bad and our people are starving，but because we have taken the right policies to regulate the demand and supply of grain，so it will be drawn to us like water pouring down to low-lying areas．”

    Duke Huan said，“I am going to reduce the profits gained by the merchants and facilitate farming．Do you think there is a way to do that?”Guanzi replied。“If the price of grain is high，prices of tens of thousands of other commodities will come down，and if the price of grain is low，prices of tens of thousands of other things will go up．These two factors will never become unanimous．So，if you want to reduce the profits gained by the merchants and facilitate farming，please just drive up the price of every fu of grain to three hundred qian，and then a huge amount of land will be cultivated and the farmers will work assiduously in their fields．” Duke Huan said，“How can I drive up the price of grain?”Guanzi replied，“Please issue an order to ask all high-ranking officials to hoard grain，the ministers and all those with feudatories to store one thousand zhong，all ordinary officials to store five hundred zhong。all second-rate officials to store one hundred zhong，and all wealthy merchants to store fifty zhong each．Thus you can guarantee enough store of grain for the state and facilitate farming in the mean time．”Duke Huan asked，“Fine．”He then issued an order to ask all ministers officials，officials with feudatories and the ordinary officials to hoard grain．As a result，farmers grew all kinds of crops extensively，the price of grain was driven up by three times，the profits of the merchants were reduced，but those of the farmers were increased one hundred times．

Duke Huan asked Guanzi，“Is there a fixed method for balancing demand and supply?”Guanzi replied，“No，there is no fixed method to balance demand and supply．Balancing demand and supply means regulating the prices of things to make them high or low according to the situation of the market．However，the prices of various things should not and cannot be kept fixed at all．”Duke Huan asked，“The amounts of both the demand and the supply of things should not be made fixed at any rate?”Guanzi replied，“No，they should not be made fixed．If they are fixed，the distribution of goods will become stagnant．When the market is stagnant，it will be changeless．When the market is changeless，the prices of things will be steadfast．When the prices of things are steadfast，tens of thousands of things cannot be used effectively．”
Duke Huan asked。“How can I take opportunities from the fluctuation of prices then?”Guanzi replied，“During the year，there are four opportunities provided by the four seasons respectively．So，it is said：At the time when the spring ploughing starts，grant loans to farmers based on the units of shi and wu to let them buy tools such as ploughshares．That is regarded as the opportunity of spring．When summer comes，it is time for raising silkworms，spinning and weaving silk．That is regarded as the opportunity of summer．When autumn comes，all kinds of crops are harvested at that time．That is regarded as the opportunity of autumn．And when the cold weather of the winter-comes, it is time for the females to spin and weave indoors，and that is regarded as the opportunity of winter。Hence，there are four opportunities during the year and they are provided by the four seasons respectively．Now that you know these four opportunities，then you can issue orders to regulate prices of things and make them either go up or come down tens or hundreds of times，so that the prices of items cannot be fixed．So，it is said that there is no fixed method to balance demand and supply．”

Duke Huan said，“Our state lacks materials such as furs，bones，dried veins，horns，bamboo arrows，feathers，ivory，leather and etc．Do you think there is any way to obtain these things?”Guanzi replied．“You can only obtain them by using schemes．”Duke Huan asked，“What shall I do then?”Guanzi replied，“Please issue an order to provide hostels for merchants coming here from other states and make sure that those coming with one cargo cart will be treated with free food．Those coming with three cargo carts will also be provided with fodder for their horses，and those coming with five cargo carts will be served by five waiters in addition．Thus，merchants will be drawn to us from all over the world like water flowing down to low-lying areas．”