FOREIGN COMMERCE.
It is claimed by many writers that international trade is carried on
upon a gold basis, and that it is necessary, therefore, if a country
is to maintain and increase such trade, that it should have its money
based upon gold, since its "balance of trade" must be paid in gold.
The idea of foreign trade involved in such statements is a relic of the
old "mercantile theory" that the great object of any country was to
export as much as possible of its products and receive in return the
largest possible amount of gold and silver,--to get gold, in fact, at
any hazard. This theory was buried, a century ago, under the weight of
Adam Smith's arguments, and every economist since then has helped to
bury it deeper; but its ghost still stalks and appears now and again in
the form of such statements as the above, and in the common expressions
"the balance of trade is against the country," or "the balance of trade
is in favour of the country," meaning that gold is being exported or
imported, and implying that the one is an injury or the other a benefit
to the country.
From a mercantile point of view, there is some justification for these
expressions, and for the satisfaction felt at a condition of things
requiring the import of gold. As before stated, the value of gold
is inversely as general prices in gold-standard countries, and the
import of gold means a lowering of its value and a general rise of
prices,--which, of course, is what merchants like to have happen; and
the export of gold means a fall in prices,--which they dread.
Under a monetary system which maintained prices constant, on the
average, the export or import of gold would be of no more importance
than the export or import of corn or silk.
From an economic standpoint the term _balance of trade_ is a misnomer,
and is misleading. Equally misleading and erroneous is the idea that
gold or silver is in any way necessary to foreign commerce, or that in
consequence of a money being based on one of these metals such trade
will be in any way enhanced.
International trade is an exchange of commodities; not, to be sure,
a direct barter, but an indirect one. One country exports those
commodities which it can produce the cheapest, in exchange for those
of other countries that are either not produced at all in the first
country, or can be produced only at a greater cost than by import. The
immediate force impelling to the export and import of commodities is,
in all cases, a difference in their values in the two countries. This
is no less true of gold than of other commodities, for gold will never
move from one country to another except it be of lower value in the
exporting than in the importing country, no matter how much the one may
be owing the other. The expressions "balance of trade in favour of,"
or "against a country," means only that gold is at that time of higher
value in one than in another country, by an amount above the cost of
shipment, and is being exported or imported because there is a profit
in so doing; but this furnishes no criterion whatever of the prosperity
of a country. It frequently happens that gold moves for a considerable
time from one country to another because of large production of gold
in the exporting country. That cannot be considered a bad condition
of business or unfortunate for the exporting country, unless the
commodities received in exchange are useless, or are wasted. At other
times it frequently happens that a country is importing gold, giving
in exchange not only other commodities, but promises to pay back the
value received, in the shape of bonds and stocks--running in debt, in
fact. This may be a good or a bad thing for the country, as for an
individual, according as the value received is profitably used or not.
It certainly is no sure indication of real prosperity.
The operations of foreign trade create a great number of claims and
obligations on the part of citizens of one country against, as well
as in favour of, the citizens of all others. These claims consist of
drafts, bills of exchange, letters of credit, etc., and are expressed
in every kind of money that exists, whether based on gold or silver,
or simply inconvertible paper. Through the medium of foreign exchange
banks these claims are offset against each other and cancelled.
Between two countries having the same monetary standard there exists
what is called the par of exchange; that is, the ratio between the
weights of gold or silver in their respective units. The actual rate
of exchange--that is, the price which will be paid in one money for
claims expressed in another--seldom conforms to this nominal par. The
bills of exchange, etc., representing claims of the exporters of one
country against the importers of another may be regarded as a sort of
commodity, and subject to the law of supply and demand. If one country,
A., has more claims against another, B., than B. has against A., then
the demand will be stronger for those which are fewer, and the price
will rise, and _vice versa_.
The prices of exchange cannot vary from the par of exchange between
gold-standard countries much more than the cost of shipment of gold;
for if they do, it will become profitable to export or import gold,
and this will create new claims balancing the others. The variation
of exchange rates within these limits is quite sufficient, however,
to cause the _actual_ exchange rate, and not the nominal one, to be
reckoned on by those engaged in foreign trade.
There exists, and always has existed, an _actual_ exchange rate between
the money units of all countries, or between the claims expressed
therein, no matter what the money was based on; although there cannot
be a par of exchange except between moneys based on the same metal.
These actual rates are continually varying, even between countries
like England and Australia, which not only use the same standard, but
a common unit, and there is, therefore, no difference in the practical
working of exchange between countries having the same standard and
those having different ones.
The inference to be drawn from these facts and theories is, that it
would make no difference in the foreign trade of any country if it
did not possess an ounce of gold or of silver, or whether its money
was based on gold or was inconvertible paper; if the country produces
commodities that other countries want, and wants some that other
countries produce, the commerce will continue.
If the money of either country is fluctuating in value, relative to the
other, to any great extent, it may introduce some uncertainty that
will hamper and inconvenience trade,--though to a less extent than a
variable money would in its own country, as there are means by which
such fluctuations can be guarded against; but unless the changes are
sudden and violent, no inconvenience will be experienced, as the actual
exchange rates are more or less always fluctuating.
In support of these statements, and as showing that they are borne
out by practical experience, the following quotations are given from
Mr. Wells' "Recent Economic Changes," in reference to trade between a
silver and a gold standard country when the relative values of the two
metals were changing quite rapidly. He says, p. 239:--
"Mr. Lord, a director of the Manchester (England) Chamber of Commerce,
testified before the Commission on the Depression of Trade, in 1886,
that 'So far as India was concerned, it is not necessary to run
any risk at all from the uncertainties of exchange.' Mr. Blythell
(representing the Bombay Chamber of Commerce) testified before the same
commission, ... 'There is no difficulty in negotiating any transaction
for shipping goods to India and in securing exchange.'"
Mr. Wells says: "Thus from returns officially presented to the British
Gold and Silver Commission, 1886, it was established that the trade
of Great Britain with India since 1874 had relatively grown faster
than with any foreign country 'except the United States and perhaps
Holland.'" He also says, of Mexican exchange, p. 241: "The fluctuations
in the price of silver since 1873--Mexican exchange having varied in
New York in recent years from 114 to 140--would seem, necessarily, to
have been a disturbing factor of no little importance in the trade
between United States and Mexico; but the official statistics of the
trade between the two countries since 1873 (notoriously undervalued)
fail to show that any serious interruption has occurred."
During this period, Mexico had a silver standard, while the United
States had inconvertible paper for nearly six years of it, and a gold
standard for the remaining period.
Mr. Wells further states:--
"In forming any opinion in respect to this problem, it is important
to steadily keep in mind the fact that international trade is trade
in commodities and not in money; and that the precious metals come
in only for the settlement of balances.... The trade between England
and India is an exchange of service for service. Its character would
not be altered if India should adopt the gold standard to-morrow, or
if she should, like Russia, adopt an irredeemable paper currency,
or, like China, buy and sell by weight instead of tale.... Unless
all the postulates of political economy are false--unless we are
entirely mistaken in supposing that men in their individual capacity,
and hence in their aggregate capacity as nations, are seeking the
most satisfaction with the least labour, we must assume that India,
England, and America produce and sell their goods to one another for
the most they can get in other goods, regardless of the kind of money
that their neighbours use or that they themselves use."
From the time of the Civil War until 1879, this country, though
nominally on a gold and silver basis, was actually using a depreciated
paper money. No serious inconvenience was experienced in our foreign
trade during the greater part of this time; when the currency was most
fluctuating, it doubtless did disturb all business, both foreign and
domestic, but this was due to its great and sudden changes, and may be
regarded as abnormal, and unlikely under a proper system again to occur.
Walter Bagehot, in his work, "A Universal Money," observes:--
"If France and America had the same currencies as England, it would
still happen, as now, that bills on Paris or New York would be at a
discount or a premium. The amount of money wishing to go eastward
across the Atlantic, and the amount wishing to go westward, would then,
as now, settle how much was to be paid in London for bills on New York,
and how much was to be paid in New York for bills on London."
It must be evident that if the people of one country have incurred
debts to the people of another country expressed in foreign monetary
units, nothing but such foreign money will satisfy the claim, and
to procure it the debtors must ship some commodity in exchange
for it. What this commodity will be, will depend on which is the
cheapest--which one the debtor, everything considered, will have to
give the least of in exchange for the necessary foreign money,--it
may be claims against foreign merchants, or bankers, in the shape of
drafts or bills of exchange, or it may be gold, if that is cheaper, or
it may be wheat, or cotton, or any other commodity, but it will always
be that which the debtor can purchase cheapest. If it be gold, it will
be because the debtor can purchase enough gold to exchange for the
required amount of foreign money for less of his own money (including
transportation and other charges) than he can purchase a sufficient
amount of any other commodity, and not because the foreign money is
based on gold. In short, the gold differs in no way from any other
commodity in such transactions; it is exchanged for the foreign money,
which alone can satisfy the debt, precisely as any other commodity.
That both gold and silver may be a convenience at times in
international trade is not denied; but they are not a necessity, and
their convenience for this purpose is in no way enhanced by their
coinage or by their use as a domestic money.