Commercial World.
§ 1. The substitution of money for barter makes no difference in exports
and imports, nor in the Law of international Values.
Having now examined the mechanism by which the commercial transactions
between nations are actually conducted, we have next to inquire whether
this mode of conducting them makes any difference in the conclusions
respecting international values, which we previously arrived at on the
hypothesis of barter.
The nearest analogy would lead us to presume the negative. We did not find
that the intervention of money and its substitutes made any difference in
the law of value as applied to adjacent places. Things which would have
been equal in value if the mode of exchange had been by barter are worth
equal sums of money. The introduction of money is a mere addition of one
more commodity, of which the value is regulated by the same laws as that
of all other commodities. We shall not be surprised, therefore, if we find
that international values also are determined by the same causes under a
money and bill system as they would be under a system of barter, and that
money has little to do in the matter, except to furnish a convenient mode
of comparing values.
All interchange is, in substance and effect, barter; whoever sells
commodities for money, and with that money buys other goods, really buys
those goods with his own commodities. And so of nations: their trade is a
mere exchange of exports for imports; and, whether money is employed or
not, things are only in their permanent state when the exports and imports
exactly pay for each other. When this is the case, equal sums of money are
due from each country to the other, the debts are settled by bills, and
there is no balance to be paid in the precious metals. The trade is in a
state like that which is called in mechanics a condition of stable
equilibrium.
But the process by which things are brought back to this state when they
happen to deviate from it is, at least outwardly, not the same in a barter
system and in a money system. Under the first, the country which wants
more imports than its exports will pay for must offer its exports at a
cheaper rate, as the sole means of creating a demand for them sufficient
to re-establish the equilibrium. When money is used, the country seems to
do a thing totally different. She takes the additional imports at the same
price as before, and, as she exports no equivalent, the balance of
payments turns against her; the exchange becomes unfavorable, and the
difference has to be paid in money. This is, in appearance, a very
distinct operation from the former. Let us see if it differs in its
essence, or only in its mechanism.
Let the country which has the balance to pay be the United States,(276)
and the country which receives it, England. By this transmission of the
precious metals, the quantity of the currency is diminished in the United
States, and increased in England. This I am at liberty to assume. We are
now supposing that there is an excess of imports over exports, arising
from the fact that the equation of international demand is not yet
established: that there is at the ordinary prices a permanent demand in
the United States for more English goods than the American goods required
in England at the ordinary prices will pay for. When this is the case, if
a change were not made in the prices, there would be a perpetually renewed
balance to be paid in money. The imports require to be permanently
diminished, or the exports to be increased, which can only be accomplished
through prices; and hence, even if the balances are at first paid from
hoards, or by the exportation of bullion, they will reach the circulation
at last, for, until they do, nothing can stop the drain.
When, therefore, the state of prices is such that the equation of
international demand can not establish itself, the country requiring more
imports than can be paid for by the exports, it is a sign that the country
has more of the precious metals, or their substitutes, in circulation,
than can permanently circulate, and must necessarily part with some of
them before the balance can be restored. The currency is accordingly
contracted: prices fall, and, among the rest, the prices of exportable
articles; for which, accordingly, there arises, in foreign countries, a
greater demand: while imported commodities have possibly risen in price,
from the influx of money into foreign countries, and at all events have
not participated in the general fall. But, until the increased cheapness
of American goods induces foreign countries to take a greater pecuniary
value, or until the increased dearness (positive or comparative) of
foreign goods makes the United States take a less pecuniary value, the
exports of the United States will be no nearer to paying for the imports
than before, and the stream of the precious metals which had begun to flow
out of the United States will still flow on. This efflux will continue
until the fall of prices in the United States brings within reach of the
foreign market some commodity which the United States did not previously
send thither; or, until the reduced price of the things which she did send
has forced a demand abroad for a sufficient quantity to pay for the
imports, aided perhaps by a reduction of the American demand for foreign
goods, through their enhanced price, either positive or comparative.
Now, this is the very process which took place on our original supposition
of barter. Not only, therefore, does the trade between nations tend to the
same equilibrium between exports and imports, whether money is employed or
not, but the means by which this equilibrium is established are
essentially the same. The country whose exports are not sufficient to pay
for her imports offers them on cheaper terms, until she succeeds in
forcing the necessary demand: in other words, the equation of
international demand, under a money system as well as under a barter
system, is the law of international trade. Every country exports and
imports the very same things, and in the very same quantity, under the one
system as under the other. In a barter system, the trade gravitates to the
point at which the sum of the imports exactly exchanges for the sum of the
exports: in a money system, it gravitates to the point at which the sum of
the imports and the sum of the exports exchange for the same quantity of
money. And, since things which are equal to the same thing are equal to
one another, the exports and imports which are equal in money price would,
if money were not used, precisely exchange for one another.(277)
§ 2. The preceding Theorem further illustrated.
Let us proceed to [examine] to what extent the benefit of an improvement
in the production of an exportable article is participated in by the
countries importing it.
The improvement may either consist in the cheapening of some article which
was already a staple production of the country, or in the establishment of
some new branch of industry, or of some process rendering an article
exportable which had not till then been exported at all. It will be
convenient to begin with the case of a new export, as being somewhat the
simpler of the two.
The first effect is that the article falls in price, and a demand arises
for it abroad. This new exportation disturbs the balance, turns the
exchanges, money flows into the country (which we shall suppose to be the
United States), and continues to flow until prices rise. This higher range
of prices will somewhat check the demand in foreign countries for the new
article of export; and will diminish the demand which existed abroad for
the other things which the United States was in the habit of exporting.
The exports will thus be diminished; while at the same time the American
public, having more money, will have a greater power of purchasing foreign
commodities. If they make use of this increased power of purchase, there
will be an increase of imports; and by this, and the check to exportation,
the equilibrium of imports and exports will be restored. The result to
foreign countries will be, that they have to pay dearer than before for
their other imports, and obtain the new commodity cheaper than before, but
not so much cheaper as the United States herself does. I say this, being
well aware that the article would be actually at the very same price (cost
of carriage excepted) in the United States and in other countries. The
cheapness, however, of the article is not measured solely by the
money-price, but by that price compared with the money-incomes of the
consumers. The price is the same to the American and to the foreign
consumers; but the former pay that price from money-incomes which have
been increased by the new distribution of the precious metals; while the
latter have had their money-incomes probably diminished by the same cause.
The trade, therefore, has not imparted to the foreign consumer the whole,
but only a portion, of the benefit which the American consumer has derived
from the improvement; while the United States has also benefited in the
prices of foreign commodities. Thus, then, any industrial improvement
which leads to the opening of a new branch of export trade benefits a
country not only by the cheapness of the article in which the improvement
has taken place, but by a general cheapening of all imported products.
Let us now change the hypothesis, and suppose that the improvement,
instead of creating a new export from the United States, cheapens an
existing one. Let the commodity in which there is an improvement be
[cotton] cloth. The first effect of the improvement is that its price
falls, and there is an increased demand for it in the foreign market. But
this demand is of uncertain amount. Suppose the foreign consumers to
increase their purchases in the exact ratio of the cheapness, or, in other
words, to lay out in cloth the same sum of money as before; the same
aggregate payment as before will be due from foreign countries to the
United States; the equilibrium of exports and imports will remain
undisturbed, and foreigners will obtain the full advantage of the
increased cheapness of cloth. But if the foreign demand for cloth is of
such a character as to increase in a greater ratio than the cheapness, a
larger sum than formerly will be due to the United States for cloth, and
when paid will raise American prices, the price of cloth included; this
rise, however, will affect only the foreign purchaser, American incomes
being raised in a corresponding proportion; and the foreign consumer will
thus derive a less advantage than the United States from the improvement.
If, on the contrary, the cheapening of cloth does not extend the foreign
demand for it in a proportional degree, a less sum of debts than before
will be due to the United States for cloth, while there will be the usual
sum of debts due from the United States to foreign countries; the balance
of trade will turn against the United States, money will be exported,
prices (that of cloth included) will fall, and cloth will eventually be
cheapened to the foreign purchaser in a still greater ratio than the
improvement has cheapened it to the United States. These are the very
conclusions which [would be] deduced on the hypothesis of barter.(278)
The result of the preceding discussion can not be better summed up than in
the words of Ricardo.(279) “Gold and silver having been chosen for the
general medium of circulation, they are, by the competition of commerce,
distributed in such proportions among the different countries of the world
as to accommodate themselves to the natural traffic which would take place
if no such metals existed, and the trade between countries were purely a
trade of barter.” Of this principle, so fertile in consequences, previous
to which the theory of foreign trade was an unintelligible chaos, Mr.
Ricardo, though he did not pursue it into its ramifications, was the real
originator.
On the principles of trade which we have before explained, the
same rule will apply to the distribution of money in different
parts of the same country, especially of a large country with
various kinds of production, like the United States. The medium of
exchange will, by the competition of commerce, be distributed in
such proportions among the different parts of the United States,
by natural laws, as to accommodate itself to the number of
transactions which would take place if no such medium existed. For
this reason, we find more money in the so-called great financial
centers, because there are more exchanges of goods there. In
sparsely settled parts of the West there will be less money
precisely because there are fewer transactions than in the older
and more settled districts. So that there could be no worse folly
than the following legislation of Congress to distribute the
national-bank circulation: “That $150,000,000 of the entire amount
of circulating notes authorized to be issued shall be apportioned
to associations in the States, in the District of Columbia, and in
the Territories, _according to representative population_” (act of
March 3, 1865).
§ 3. The precious metals, as money, are of the same Value, and distribute
themselves according to the same Law, with the precious metals as a
Commodity.
It is now necessary to inquire in what manner this law of the distribution
of the precious metals by means of the exchanges affects the exchange
value of money itself; and how it tallies with the law by which we found
that the value of money is regulated when imported as a mere article of
merchandise.
The causes which bring money into or carry it out of a country (1) through
the exchanges, to restore the equilibrium of trade, and which thereby
raise its value in some countries and lower it in others, are the very
same causes on which the local value of money would depend, if it were
never imported except (2) as a merchandise, and never except directly from
the mines. When the value of money in a country is permanently lowered (1)
[as a medium of exchange] by an influx of it through the balance of trade,
the cause, if it is not diminished cost of production, must be one of
those causes which compel a new adjustment, more favorable to the country,
of the equation of international demand—namely, either an increased demand
abroad for her commodities, or a diminished demand on her part for those
of foreign countries. Now, an increased foreign demand for the commodities
of a country, or a diminished demand in the country for imported
commodities, are the very causes which, on the general principles of
trade, enable a country to purchase all imports, and consequently (2) the
precious metals, at a lower value. There is, therefore, no contradiction,
but the most perfect accordance, in the results of the two different modes
[(1) as a medium of exchange; and (2) as merchandise] in which the
precious metals may be obtained. When money [as a medium of exchange]
flows from country to country in consequence of changes in the
international demand for commodities, and by so doing alters its own local
value, it merely realizes, by a more rapid process, the effect which would
otherwise take place more slowly by an alteration in the relative breadth
of the streams by which the precious metals [as merchandise] flow into
different regions of the earth from the mining countries. As, therefore,
we before saw that the use of money as a medium of exchange does not in
the least alter the law on which the values of other things, either in the
same country or internationally, depend, so neither does it alter the law
of the value of the precious metals itself; and there is in the whole
doctrine of international values, as now laid down, a unity and harmony
which are a strong collateral presumption of truth.
§ 4. International payments entering into the “financial account.”
Before closing this discussion, it is fitting to point out in what manner
and degree the preceding conclusions are affected by the existence of
international payments not originating in commerce, and for which no
equivalent in either money or commodities is expected or received—such as
a tribute, or remittances, or interest to foreign creditors, or a
government expenditure abroad.
To begin with the case of barter. The supposed annual remittances being
made in commodities, and being exports for which there is to be no return,
it is no longer requisite that the imports and exports should pay for one
another; on the contrary, there must be an annual excess of exports over
imports, equal to the value of the remittance. If, before the country
became liable to the annual payment, foreign commerce was in its natural
state of equilibrium, it will now be necessary, for the purpose of
effecting the remittances, that foreign countries should be induced to
take a greater quantity of exports than before, which can only be done by
offering those exports on cheaper terms, or, in other words, by paying
dearer for foreign commodities. The international values will so adjust
themselves that, either by greater exports or smaller imports, or both,
the requisite excess on the side of exports will be brought about, and
this excess will become the permanent state. The result is, that a country
which makes regular payments to foreign countries, besides losing what it
pays, loses also something more, by the less advantageous terms on which
it is forced to exchange its productions for foreign commodities.
The same results follow on the supposition of money. Commerce being
supposed to be in a state of equilibrium when the obligatory remittances
begin, the first remittance is necessarily made in money. This lowers
prices in the remitting country, and raises them in the receiving. The
natural effect is, that more commodities are exported than before, and
fewer imported, and that, on the score of commerce alone, a balance of
money will be constantly due from the receiving to the paying country.
When the debt thus annually due to the tributary country becomes equal to
the annual tribute or other regular payment due from it, no further
transmission of money takes place; the equilibrium of exports and imports
will no longer exist, but that of payments will; the exchange will be at
par, the two debts will be set off against one another, and the tribute or
remittance will be virtually paid in goods. The result to the interests of
the two countries will be as already pointed out—the paying country will
give a higher price for all that it buys from the receiving country, while
the latter, besides receiving the tribute, obtains the exportable produce
of the tributary country at a lower price.
It has been seen, as in Chart No. XIII, that, considering the
exports and imports merely as merchandise, there is, in fact, no
actual equilibrium at any given time in accordance with the
equation of International Demand. Another element, the “financial
account” between the United States and foreign countries, must be
considered before we can know all the factors necessary to bring
about the equation. If we had been borrowing largely of England,
Holland, and Germany, we should owe a regular annual sum as
interest, and our exports must, as a rule, be exactly that much
more (under right and normal conditions) than the imports. Or,
take another case, if capital is borrowed in Europe for railways
in the United States, this capital generally comes over in the
form of imports of various kinds; but, if our exports are not
sufficient at once to balance the increased imports, we go in debt
for a time—or, in other words, in order to establish the balance,
we send United States securities abroad instead of actual exports.
This shipment of securities is not seen and recorded as among the
exports; and so we find a period, like that during and after the
war, from 1862 to 1873, of a vast excess of imports. Since 1873
the country has been practically paying the indebtedness incurred
in the former period; and there has been a vast excess of exports
over imports, and an apparent discrepancy in the equilibrium. But
our government bonds and other securities have been coming back to
us, producing a return current to balance the excessive
exports.(280) In brief, the use of securities and various forms of
indebtedness permits the period of actual payment to be deferred,
so that an excess of imports at one time may be offset by an
excess of exports at another, and generally a later, time.
Moreover, the large expenses of people traveling in Europe will
require us to remit abroad in the form of exports more than would
ordinarily balance our imports by the amount spent by the
travelers. The financial operations, therefore, between the United
States and foreign countries, must be well considered in striking
the equation between our exports and imports. As formulated by Mr.
Cairnes,(281) the Equation of International Demand should be
stated more broadly, as follows: “The state of international
demand which results in commercial equilibrium is realized when
the reciprocal demand of trading countries produces such a
relation of exports and imports among them as enables each country
by means of her exports to discharge _all her foreign
liabilities_.” If we were a great lending instead of a great
borrowing country, we should have, as a rule, a permanent excess
of imports.