Money measures and transfers value.: (1.) Hence best served by the precious metals, on account of their peculiar qualities. (2.) Depends for its value, in the long run, on the cost of production at the worst mine worked (Class III); but practically on demand and supply (Class I). And (if no credit exists) its value changes exactly with the supply, which is expressed by V = 1/(Q x R) (3.) Under two legal standards, obeys Gresham's law—e.g., experience of Japan and the United States. (4.) Substitutes for money, called credit (which is not capital, but calls out inactive capital).

Of these substitutes for money, (1) Use of credit depends not on quality of coin and notes, and (2) Various kinds of credit.

Of those various kinds of credit, there are (1) Book credits, (2) Bills of exchange, (3) Promissory notes, and (4) checks processed via clearing-house.

Of the promissory notes, they are of either (1) Individuals, (2) Banks (Coin Banks or Land Banks, etc.), or (3) Governments.

Of Government notes, there are (1) Convertible or (2) Inconvertible.



Chapter XI. Of Excess Of Supply.



1. The theory of a general Over-Supply of Commodities stated.

After the elementary exposition of the theory of money contained in the last few chapters, we shall return to a question in the general theory of Value which could not be satisfactorily discussed until the nature and operations of Money were in some measure understood, because the errors against which we have to contend mainly originate in a misunderstanding of those operations.

Because the phenomenon of over-supply and consequent inconvenience or loss to the producer or dealer may exist in the case of any one commodity whatever, many persons, including some distinguished political economists,(255) have thought that it may exist with regard to all commodities; that there may be a general over-production of wealth; a supply of commodities in the aggregate surpassing the demand; and a consequent depressed condition of all classes of producers.

The doctrine appears to me to involve so much inconsistency in its very conception that I feel considerable difficulty in giving any statement of it which shall be at once clear and satisfactory to its supporters. They agree in maintaining that there may be, and sometimes is, an excess of productions in general beyond the demand for them; that when this happens, purchasers can not be found at prices which will repay the cost of production with a profit; that there ensues a general depression of prices or values (they are seldom accurate in discriminating between the two), so that producers, the more they produce, find themselves the poorer instead of richer; and Dr. Chalmers accordingly inculcates on capitalists the practice of a moral restraint in reference to the pursuit of gain, while Sismondi deprecates machinery and the various inventions which increase productive power. They both maintain that accumulation of capital may proceed too fast, not merely for the moral but for the material interest of those who produce and accumulate; and they enjoin the rich to guard against this evil by an ample unproductive consumption.



2. The supply of commodities in general can not exceed the power of Purchase.

When these writers speak of the supply of commodities as outrunning the demand, it is not clear which of the two elements of demand they have in view—the desire to possess, or the means of purchase; whether their meaning is that there are, in such cases, more consumable products in existence than the public desires to consume, or merely more than it is able to pay for. In this uncertainty, it is necessary to examine both suppositions.

It will be here noticed that Mr. Mill uses demand in the sense for which we contended it should be used (Book III, Chap. I, 3), and not as "quantity demanded." The present discussion of over-production should also be connected by the student with the former reference to it, Book I, Chap. IV, 2.

First, let us suppose that the quantity of commodities produced is not greater than the community would be glad to consume; is it, in that case, possible that there should be a deficiency of demand for all commodities for want of the means of payment? Those who think so can not have considered what it is which constitutes the means of payment for commodities. It is simply commodities. Each person's means of paying for the productions of other people consists of those which he himself possesses. All sellers are inevitably and ex vi termini buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power.

Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange. It is probable, indeed, that there would now be a superfluity of certain things. Although the community would willingly double its aggregate consumption, it may already have as much as it desires of some commodities, and it may prefer to do more than double its consumption of others, or to exercise its increased purchasing power on some new thing. If so, the supply will adapt itself accordingly, and the values of things will continue to conform to their cost of production. At any rate, it is a sheer absurdity that all things should fall in value, and that all producers should, in consequence, be insufficiently remunerated. If values remain the same, what becomes of prices is immaterial, since the remuneration of producers does not depend on how much money, but on how much of consumable articles, they obtain for their goods. Besides, money is a commodity; and, if all commodities are supposed to be doubled in quantity, we must suppose money to be doubled too, and then prices would no more fall than values would.



3. There can never be a lack of Demand arising from lack of Desire to Consume.

A general over-supply, or excess of all commodities above the demand, so far as demand consists in means of payment, is thus shown to be an impossibility. But it may, perhaps, be supposed that it is not the ability to purchase, but the desire to possess, that falls short, and that the general produce of industry may be greater than the community desires to consume—the part, at least, of the community which has an equivalent to give.

This is much the most plausible form of the doctrine, and does not, like that which we first examined, involve a contradiction. There may easily be a greater quantity of any particular commodity than is desired by those who have the ability to purchase, and it is abstractedly conceivable that this might be the case with all commodities. The error is in not perceiving that, though all who have an equivalent to give might be fully provided with every consumable article which they desire, the fact that they go on adding to the production proves that this is not actually the case. Assume the most favorable hypothesis for the purpose, that of a limited community, every member of which possesses as much of necessaries and of all known luxuries as he desires, and, since it is not conceivable that persons whose wants were completely satisfied would labor and economize to obtain what they did not desire, suppose that a foreigner arrives and produces an additional quantity of something of which there was already enough. Here, it will be said, is over-production. True, I reply; over-production of that particular article. The community wanted no more of that, but it wanted something. The old inhabitants, indeed, wanted nothing; but did not the foreigner himself want something? When he produced the superfluous article, was he laboring without a motive? He has produced—but the wrong thing instead of the right. He wanted, perhaps, food, and has produced watches, with which everybody was sufficiently supplied. The new-comer brought with him into the country a demand for commodities equal to all that he could produce by his industry, and it was his business to see that the supply he brought should be suitable to that demand. If he could not produce something capable of exciting a new want or desire in the community, for the satisfaction of which some one would grow more food and give it to him in exchange, he had the alternative of growing food for himself, either on fresh land, if there was any unoccupied, or as a tenant, or partner, or servant of some former occupier, willing to be partially relieved from labor. He has produced a thing not wanted, instead of what was wanted, and he himself, perhaps, is not the kind of producer who is wanted—but there is no over-production; production is not excessive, but merely ill-assorted. We saw before that whoever brings additional commodities to the market brings an additional power of purchase; we now see that he brings also an additional desire to consume, since if he had not that desire he would not have troubled himself to produce. Neither of the elements of demand, therefore, can be wanting when there is an additional supply, though it is perfectly possible that the demand may be for one thing, and the supply may, unfortunately, consist of another.

It is not sufficiently borne in mind, also, that the whole progress of civilization results in a differentiation of new wants and desires. To take but a single instance, with the growth of the artistic sense the articles of common use change their entire form; and the advances in the arts disclose new commodities which satisfy the world's desires, and for these new satisfactions people are willing to work and produce in order to attain them. With education also comes a wider horizon and a more refined perception of taste, which creates wants for new things for which the mind before had no desires. A little reflection, therefore, must inevitably lead us to see that no person, no community, ever had, or probably ever will have, all its wants satisfied. So far as we know man, it does not seem possible that there will ever be a falling off in demand, because of a satiety of all material satisfactions.



4. Origin and Explanation of the notion of general Over-Supply.

I have already described the state of the markets for commodities which accompanies what is termed a commercial crisis. At such times there is really an excess of all commodities above the money demand: in other words, there is an under-supply of money. From the sudden annihilation of a great mass of credit, every one dislikes to part with ready money, and many are anxious to procure it at any sacrifice. Almost everybody, therefore, is a seller, and there are scarcely any buyers: so that there may really be, though only while the crisis lasts, an extreme depression of general prices, from what may be indiscriminately called a glut of commodities or a dearth of money. But it is a great error to suppose, with Sismondi, that a commercial crisis is the effect of a general excess of production. It is simply the consequence of an excess of speculative purchases. It is not a gradual advent of low prices, but a sudden recoil from prices extravagantly high: its immediate cause is a contraction of credit, and the remedy is, not a diminution of supply, but the restoration of confidence. It is also evident that this temporary derangement of markets is an evil only because it is temporary. The fall being solely of money prices, if prices did not rise again no dealer would lose, since the smaller price would be worth as much to him as the larger price was before. In no matter does this phenomenon answer to the description which these celebrated economists have given of the evil of over-production. That permanent decline in the circumstances of producers, for want of markets, which those writers contemplate, is a conception to which the nature of a commercial crisis gives no support.

The other phenomenon from which the notion of a general excess of wealth and superfluity of accumulation seems to derive countenance is one of a more permanent nature, namely, the fall of profits and interest which naturally takes place with the progress of population and production. The cause of this decline of profit is the increased cost of maintaining labor, which results from an increase of population and of the demand for food, outstripping the advance of agricultural improvement. This important feature in the economical progress of nations will receive full consideration and discussion in the succeeding book.(256) It is obviously a totally different thing from a want of market for commodities, though often confounded with it in the complaints of the producing and trading classes. The true interpretation of the modern or present state of industrial economy is, that there is hardly any amount of business which may not be done, if people will be content to do it on small profits; and this all active and intelligent persons in business perfectly well know: but even those who comply with the necessities of their time grumble at what they comply with, and wish that there were less capital,(257) or, as they express it, less competition, in order that there might be greater profits. Low profits, however, are a different thing from deficiency of demand, and the production and accumulation which merely reduce profits can not be called excess of supply or of production. What the phenomenon really is, and its effects and necessary limits, will be seen when we treat of that express subject.



Chapter XII. Of Some Peculiar Cases Of Value.



1. Values of commodities which have a joint cost of production.

The general laws of value, in all the more important cases of the interchange of commodities in the same country, have now been investigated. We examined, first, the case of monopoly, in which the value is determined by either a natural or an artificial limitation of quantity, that is, by demand and supply: secondly, the case of free competition, when the article can be produced in indefinite quantity at the same cost; in which case the permanent value is determined by the cost of production, and only the fluctuations by supply and demand: thirdly, a mixed case, that of the articles which can be produced in indefinite quantity, but not at the same cost; in which case the permanent value is determined by the greatest cost which it is necessary to incur in order to obtain the required supply: and, lastly, we have found that money itself is a commodity of the third class; that its value, in a state of freedom, is governed by the same laws as the values of other commodities of its class; and that prices, therefore, follow the same laws as values.

From this it appears that demand and supply govern the fluctuations of values and prices in all cases, and the permanent values and prices of all things of which the supply is determined by any agency other than that of free competition: but that, under the regime of competition, things are, on the average, exchanged for each other at such values, and sold at such prices, as afford equal expectation of advantage to all classes of producers; which can only be when things exchange for one another in the ratio of their cost of production.

Here, again, is a distinct recognition of the true meaning of cost of production, and its ruling influence within a competing group, which has been seen in its full significance by Mr. Cairnes.

It sometimes happens [however] that two different commodities have what may be termed a joint cost of production. They are both products of the same operation, or set of operations, and the outlay is incurred for the sake of both together, not part for one and part for the other. The same outlay would have to be incurred for either of the two, if the other were not wanted or used at all. There are not a few instances of commodities thus associated in their production. For example, coke and coal-gas are both produced from the same material, and by the same operation. In a more partial sense, mutton and wool are an example; beef, hides, and tallow; calves and dairy produce; chickens and eggs. Cost of production can have nothing to do with deciding the value of the associated commodities relatively to each other. It only decides their joint value. Cost of production does not determine their prices, but the sum of their prices. A principle is wanting to apportion the expenses of production between the two.

Since cost of production here fails us, we must revert to a law of value anterior to cost of production, and more fundamental, the law of demand and supply. The law is, that the demand for a commodity varies with its value, and that the value adjusts itself so that the demand shall be equal to the supply. This supplies the principle of repartition which we are in quest of.

Suppose that a certain quantity of gas is produced and sold at a certain price, and that the residuum of coke is offered at a price which, together with that of the gas, repays the expenses with the ordinary rate of profit. Suppose, too, that, at the price put upon the gas and coke respectively, the whole of the gas finds an easy market, without either surplus or deficiency, but that purchasers can not be found for all the coke corresponding to it. The coke will be offered at a lower price in order to force a market. But this lower price, together with the price of the gas, will not be remunerating; the manufacture, as a whole, will not pay its expenses with the ordinary profit, and will not, on these terms, continue to be carried on. The gas, therefore, must be sold at a higher price, to make up for the deficiency on the coke. The demand consequently contracting, the production will be somewhat reduced; and prices will become stationary when, by the joint effect of the rise of gas and the fall of coke, so much less of the first is sold, and so much more of the second, that there is now a market for all the coke which results from the existing extent of the gas-manufacture.

Or suppose the reverse case; that more coke is wanted at the present prices than can be supplied by the operations required by the existing demand for gas. Coke, being now in deficiency, will rise in price. The whole operation will yield more than the usual rate of profit, and additional capital will be attracted to the manufacture. The unsatisfied demand for coke will be supplied; but this can not be done without increasing the supply of gas too; and, as the existing demand was fully supplied already, an increased quantity can only find a market by lowering the price. Equilibrium will be attained when the demand for each article fits so well with the demand for the other, that the quantity required of each is exactly as much as is generated in producing the quantity required of the other.

When, therefore, two or more commodities have a joint cost of production, their natural values relatively to each other are those which will create a demand for each, in the ratio of the quantities in which they are sent forth by the productive process.



2. Values of the different kinds of agricultural produce.

Another case of value which merits attention is that of the different kinds of agricultural produce. The case would present nothing peculiar, if different agricultural products were either grown indiscriminately and with equal advantage on the same soils, or wholly on different soils. The difficulty arises from two things: first, that most soils are fitter for one kind of produce than another, without being absolutely unfit for any; and, secondly, the rotation of crops.

For simplicity, we will confine our supposition to two kinds of agricultural produce; for instance, wheat and oats. If all soils were equally adapted for wheat and for oats, both would be grown indiscriminately on all soils, and their relative cost of production, being the same everywhere, would govern their relative value. If the same labor which grows three quarters of wheat on any given soil would always grow on that soil five quarters of oats, the three and the five quarters would be of the same value. The fact is, that both wheat and oats can be grown on almost any soil which is capable of producing either.

It is evident that each grain will be cultivated in preference on the soils which are better adapted for it than for the other; and, if the demand is supplied from these alone, the values of the two grains will have no reference to one another. But when the demand for both is such as to require that each should be grown not only on the soils peculiarly fitted for it, but on the medium soils which, without being specifically adapted to either, are about equally suited for both, the cost of production on those medium soils will determine the relative value of the two grains; while the rent of the soils specifically adapted to each will be regulated by their productive power, considered with reference to that one [grain] alone to which they are peculiarly applicable. Thus far the question presents no difficulty, to any one to whom the general principles of value are familiar.



This may be easily shown by a diagram, in which A represents the grade of land best adapted for oats; B, C, D, respectively, lands of diminishing productiveness for oats, until E is reached, which is, perhaps, equally good for oats or wheat; a, b, c, d, and E likewise represent the wheat-lands, the best beginning with a. The rent of A, or B, is determined by a comparison with whatever grade of land planted in oats is cultivated at the least return, as E, for example. So, if all the wheat-lands are cultivated, land a, or b, is compared with E, but in regard to the capacity of E to produce wheat.

It may happen, however, that the demand for one of the two, as for example wheat, may so outstrip the demand for the other, as not only to occupy the soils specially suited for wheat, but to engross entirely those equally suitable to both, and even encroach upon those which are better adapted to oats. To create an inducement for this unequal apportionment of the cultivation, wheat must be relatively dearer, and oats cheaper, than according to the cost of their production on the medium land. Their relative value must be in proportion to the cost on that quality of land, whatever it may be, on which the comparative demand for the two grains requires that both of them should be grown. If, from the state of the demand, the two cultivations meet on land more favorable to one than to the other, that one will be cheaper and the other dearer, in relation to each other and to things in general, than if the proportional demand were as we at first supposed.

As in the diagram just mentioned, if the demand for wheat forces its cultivation downward not only on to land E, suited to either indifferently, but, still farther on, to lands still less adapted for wheat (although good land for oats), wheat may be pushed down one stem of the V and up the other to D, or even to C. Then the value of wheat will be regulated by the cost of production on C, and the rent will be determined by a comparison between the productiveness of a, b, etc. (running downward through E), with C. The price of wheat will be high relatively to oats, which are now cultivated only on lands, A, B, better suited to growing oats, and whose cost of production on C is much less than on D or E.

Here, then, we obtain a fresh illustration, in a somewhat different manner, of the operation of demand, not as an occasional disturber of value, but as a permanent regulator of it, conjoined with, or supplementary to, cost of production.



Chapter XIII. Of International Trade.



1. Cost of Production not a regulator of international values. Extension of the word "international."

Some things it is physically impossible to produce, except in particular circumstances of heat, soil, water, or atmosphere. But there are many things which, though they could be produced at home without difficulty, and in any quantity, are yet imported from a distance. The explanation which would be popularly given of this would be, that it is cheaper to import than to produce them: and this is the true reason. But this reason itself requires that a reason be given for it. Of two things produced in the same place, if one is cheaper than the other, the reason is that it can be produced with less labor and capital, or, in a word, at less cost. Is this also the reason as between things produced in different places? Are things never imported but from places where they can be produced with less labor (or less of the other element of cost, time) than in the place to which they are brought? Does the law, that permanent value is proportioned to cost of production, hold good between commodities produced in distant places, as it does between those produced in adjacent places?

We shall find that it does not. A thing may sometimes be sold cheapest, by being produced in some other place than that at which it can be produced with the smallest amount of labor and abstinence.

This could not happen between adjacent places. If the north bank of the Thames possessed an advantage over the south bank in the production of shoes, no shoes would be produced on the south side; the shoemakers would remove themselves and their capitals to the north bank, or would have established themselves there originally; for, being competitors in the same market with those on the north side, they could not compensate themselves for their disadvantage at the expense of the consumer; the amount of it would fall entirely on their profits; and they would not long content themselves with a smaller profit, when, by simply crossing a river, they could increase it. But between distant places, and especially between different countries, profits may continue different; because persons do not usually remove themselves or their capitals to a distant place without a very strong motive. If capital removed to remote parts of the world as readily, and for as small an inducement, as it moves to another quarter of the same town—if people would transport their manufactories to America or China whenever they could save a small percentage in their expenses by it—profits would be alike (or equivalent) all over the world, and all things would be produced in the places where the same labor and capital would produce them in greatest quantity and of best quality. A tendency may, even now, be observed toward such a state of things: capital is becoming more and more cosmopolitan; there is so much greater similarity of manners and institutions than formerly, and so much less alienation of feeling, among the more civilized countries, that both population and capital now move from one of those countries to another on much less temptation than heretofore. But there are still extraordinary differences, both of wages and of profits, between different parts of the world.

Between all distant places, therefore, in some degree, but especially between different countries (whether under the same supreme government or not), there may exist great inequalities in the return to labor and capital, without causing them to move from one place to the other in such quantity as to level those inequalities. The capital belonging to a country will, to a great extent, remain in the country, even if there be no mode of employing it in which it would not be more productive elsewhere. Yet even a country thus circumstanced might, and probably would, carry on trade with other countries. It would export articles of some sort, even to places which could make them with less labor than itself; because those countries, supposing them to have an advantage over it in all productions, would have a greater advantage in some things than in others, and would find it their interest to import the articles in which their advantage was smallest, that they might employ more of their labor and capital on those in which it was greatest.

It might seem that a special theory of value is required for international trade, as compared with domestic trade, for the particular reason that in the former there exists no free movement of labor and capital from one trading country to another. But we shall see that no new theory is necessary. As before pointed out,(258) commodities exchange for each other at their relative costs wherever there is that free competition which insures perfect facility of movement for labor and capital. It has been usually assumed that capital and labor move freely as between different parts of the same country, but not between different countries. This, however, is not consistent with the facts. We saw that there were non-competing industrial groups within the same nation. Mr. Mill here, in a pointed way, suggests this, when he speaks of "distant places." The addition, therefore, made to Mr. Mill's exposition by Mr. Cairnes(259) is, that the word "international" (in default of a better term) should be applied to those conditions either within a country, or between two countries, which, because of the actual immobility of labor and capital from one occupation to another, furnishes a substantial interference with industrial competition. The obstacles to the free movement of labor and capital which produce the conditions called "international" are: 1. "Geographical distance; 2. Difference in political institutions; 3. Difference in language, religion, and social customs—in a word, in forms of civilization." These differences exist between Maine and Montana; or even between two adjoining States, Ohio and Kentucky, one a free and the other an old slave State. Labor and capital have not in the past moved freely even across Mason and Dixon's line. There is, therefore, no treatment of international trade and values separate from the laws of value already laid down concerning non-competing groups, since there is also no free competition between all the industrial groups within a country.



2. Interchange of commodities between distance places determined by differences not in their absolute, but in the comparative, costs of production.

As I have said elsewhere(260) after Ricardo (the thinker who has done most toward clearing up this subject),(261) "it is not a difference in the absolute cost of production which determines the interchange, but a difference in the comparative cost. It may be to our advantage to procure iron from Sweden in exchange for cottons, even although the mines of England as well as her manufactories should be more productive than those of Sweden; for if we have an advantage of one half in cottons, and only an advantage of a quarter in iron, and could sell our cottons to Sweden at the price which Sweden must pay for them if she produced them herself, we should obtain our iron with an advantage [over Sweden] of one half, as well as our cottons. We may often, by trading with foreigners, obtain their commodities at a smaller expense of labor and capital than they cost to the foreigners themselves. The bargain is still advantageous to the foreigner, because the commodity which he receives in exchange, though it has cost us less, would have cost him more."

This may be illustrated as follows:

Articles England. Sweden. interchanged. Cotton. 10 days' labor 15 days' labor produces x yds. produces x yds. Iron. 12 days' labor 15 days' labor produces y cwts. produces y cwts.

Here England has the advantage over Sweden in both cotton and iron, since she can produce x yards of cotton in ten days' labor to fifteen days in Sweden, and y cwts. of iron in twelve days' labor to fifteen days in Sweden. The ship which takes x yards of cotton to Sweden, and there exchanges it, as may be done, for y cwts. of iron, brings back to England that which cost Sweden fifteen days' labor, while the cotton with which the iron was bought cost England only ten days' labor. So that England also got her iron at an advantage over Sweden of one half of ten days' labor; and yet England had an absolute advantage over Sweden in iron of a less amount (i.e., of one fourth of twelve days' labor). It is to be distinctly understood that by difference in comparative cost we mean a difference in the comparative cost of producing two or more articles in the same country, and not the difference of cost of the same article in the different trading countries. In this example, for instance, it is the difference in the comparative costs in England of both cotton and iron (not the different costs of cotton in England and Sweden) which gives the reason for the existence of the foreign trade.

To illustrate the cases in which interchange of commodities will not, and those in which it will, take place between two countries, the supposition may be made that the United States has an advantage over England in the production both of iron and of corn. It may first be supposed that the advantage is of equal amount in both commodities; the iron and the corn, each of which required 100 days' labor in the United States, requiring each 150 days' labor in England. It would follow that the iron of 150 days' labor in England, if sent to the United States, would be equal to the iron of 100 days' labor in the United States; if exchanged for corn, therefore, it would exchange for the corn of only 100 days' labor. But the corn of 100 days' labor in the United States was supposed to be the same quantity with that of 150 days' labor in England. With 150 days' labor in iron, therefore, England would only get as much corn in the United States as she could raise with 150 days' labor at home; and she would, in importing it, have the cost of carriage besides. In these circumstances no exchange would take place. In this case the comparative costs of the two articles in England and in the United States were supposed to be the same, though the absolute costs were different; on which supposition we see that there would be no labor saved to either country by confining its industry to one of the two productions and importing the other.

It is otherwise when the comparative and not merely the absolute costs of the two articles are different in the two countries. If, while the iron produced with 100 days' labor in the United States was produced with 150 days' labor in England, the corn which was produced in the United States with 100 days' labor could not be produced in England with less than 200 days' labor, an adequate motive to exchange would immediately arise. With a quantity of iron which England produced with 150 days' labor, she would be able to purchase as much corn in the United States as was there produced with 100 days' labor; but the quantity which was there produced with 100 days' labor would be as great as the quantity produced in England with 200 days' labor. By importing corn, therefore, from the United States, and paying for it with iron, England would obtain for 150 days' labor what would otherwise cost her 200, being a saving of 50 days' labor on each repetition of the transaction; and not merely a saving to England, but a saving absolutely; for it is not obtained at the expense of the United States, who, with corn that cost her 100 days' labor, has purchased iron which, if produced at home, would have cost her the same. The United States, therefore, on this supposition, loses nothing; but also she derives no advantage from the trade, the imported iron costing her as much as if it were made at home. To enable the United States to gain anything by the interchange, something must be abated from the gain of England: the corn produced in the United States by 100 days' labor must be able to purchase from England more iron than the United States could produce by that amount of labor; more, therefore, than England could produce by 150 days' labor, England thus obtaining the corn which would have cost her 200 days at a cost exceeding 150, though short of 200. England, therefore, no longer gains the whole of the labor which is saved to the two jointly by trading with one another.(262)

The case in which both England and the United States would gain from the trade may be thus briefly shown:

Articles United States. England. interchanged. Corn. 100 days' labor 200 days' labor produces x bus. produces x bus. Iron. 125 days' labor 150 days' labor produces y tons. produces y tons.

The ship which carries x bushels of corn from the United States to England can there exchange it for at least y tons of iron (costing England 150 days' labor, since x bushels in England would cost 200 days' labor), and bring it home, gaining for the United States the difference between the 100 days' labor in corn, paid for the y tons of iron, and the 125 days which the iron would have cost here if produced at home. In this case the United States has an advantage over England in both corn and iron, but still an international trade will spring up, because the United States will derive a gain owing to the less cost of corn as compared with the cost of iron. Our comparative advantage is in corn. England, also, by sending to the United States y tons of iron, gets in return for it x bushels of corn. To produce the corn herself would have cost her 200 days' labor, but she bought that corn by only 150 days' labor spent on iron. England's comparative advantage is in iron. Then both countries will gain.

Mr. Bowen(263) gives an instance of international trade where one country has the advantage in both of the commodities entering into the exchange: "The inhabitants of Barbadoes, favored by their tropical climate and fertile soil, can raise provisions cheaper than we can in the United States. And yet Barbadoes buys nearly all her provisions from this country. Why is this so? Because, though Barbadoes has the advantage over us in the ability to raise provisions cheaply, she has a still greater advantage over us in her power to produce sugar and molasses. If she has an advantage of one fourth in raising provisions, she has an advantage of one half in regard to products exclusively tropical; and it is better for her to employ all her labor and capital in that branch of production in which her advantage is greatest. She can thus, by trading with us, obtain our breadstuffs and meat at a smaller expense of labor and capital than they cost ourselves. If, for instance, a barrel of flour costs ten days' labor in the United States and only eight days' labor in Barbadoes, the people of Barbadoes can still profitably buy the flour from this country, if they can pay for it with sugar which cost them only six days' labor; and the people of this country can profitably sell them the flour, or buy from them the sugar, provided the sugar, if raised in the United States, would cost eleven days' labor.... The United States receive sugar, which would have cost them eleven days' labor, by paying for it with flour which costs them but ten days. Barbadoes receives flour, which would have cost her eight days' labor, by paying for it with sugar which costs her but six days. If Barbadoes produced both commodities with greater facility, but greater in precisely the same degree, there would be no motive for interchange."

It may be said, however, that in practice no business-man considers the question of "comparative cost" in making shipments of goods abroad; that all he thinks of is whether the price here, for example, is less than it is in London. And yet the very fact that the prices are less here implies that gold is of high value relatively to the given commodity; while in London, if money is to be sent back in payment, and if prices are high there, that implies that gold is there of less comparative value than commodities, and consequently that gold is the cheapest article to send to the United States. The doctrine, then, is as true of gold, or the precious metals, as it is of other commodities.(264) It may be stated in the following language of Mr. Cairnes: "The proximate condition determining international exchange is the state of comparative prices in the exchanging countries as regards the commodities which form the subject of the trade. But comparative prices within the limits of each country are determined by two distinct principles—within the range of effective industrial competition, by cost of production; outside that range, by reciprocal demand."(265)



3. The direct benefits of commerce consist in increased Efficiency of the productive powers of the World.

From this exposition we perceive in what consists the benefit of international exchange, or, in other words, foreign commerce. Setting aside its enabling countries to obtain commodities which they could not themselves produce at all, its advantage consists in a more efficient employment of the productive forces of the world. If two countries which traded together attempted, as far as was physically possible, to produce for themselves what they now import from one another, the labor and capital of the two countries would not be so productive, the two together would not obtain from their industry so great a quantity of commodities, as when each employs itself in producing, both for itself and for the other, the things in which its labor is relatively most efficient. The addition thus made to the produce of the two combined constitutes the advantage of the trade. It is possible that one of the two countries may be altogether inferior to the other in productive capacities, and that its labor and capital could be employed to greatest advantage by being removed bodily to the other. The labor and capital which have been sunk in rendering Holland habitable would have produced a much greater return if transported to America or Ireland. The produce of the whole world would be greater, or the labor less, than it is, if everything were produced where there is the greatest absolute facility for its production. But nations do not, at least in modern times, emigrate en masse; and, while the labor and capital of a country remain in the country, they are most beneficially employed in producing, for foreign markets as well as for its own, the things in which it lies under the least disadvantage, if there be none in which it possesses an advantage.

The fundamental ground on which all trade, or all exchange of commodities, rests, is division of labor, or separation of employments. Beyond the ordinary gain from division of labor, arising from increased dexterity, there exist gains arising from the development of "the special capacities or resources possessed by particular individuals or localities." International exchanges call out chiefly the special advantages offered by particular localities for the prosecution of particular industries.

"The only case, indeed, in which personal aptitudes go for much in the commerce of nations is where the nations concerned occupy different grades in the scale of civilization.... The most striking example which the world has ever seen of a foreign trade determined by the peculiar personal qualities of those engaged in ministering to it is that which was furnished by the Southern States of the American Union previous to the abolition of slavery. The effect of that institution was to give a very distinct industrial character to the laboring population of those States which unfitted them for all but a very limited number of occupations, but gave them a certain special fitness for these. Almost the entire industry of the country was consequently turned to the production of two or three crude commodities, in raising which the industry of slaves was found to be effective; and these were used, through an exchange with foreign countries, as the means of supplying the inhabitants with all other requisites.... In the main, however, it would seem that this cause [personal aptitudes] does not go for very much in international commerce."(266)

In brief, then, international trade is but an extension of the principle of division of labor; and the gains to increased productiveness, arising from the latter, are exactly the same as those from the former.



4. —Not in a Vent for exports, nor in the gains of Merchants.

According to the doctrine now stated, the only direct advantage of foreign commerce consists in the imports. A country obtains things which it either could not have produced at all, or which it must have produced at a greater expense of capital and labor than the cost of the things which it exports to pay for them. It thus obtains a more ample supply of the commodities it wants, for the same labor and capital; or the same supply, for less labor and capital, leaving the surplus disposable to produce other things. The vulgar theory disregards this benefit and deems the advantage of commerce to reside in the exports: as if not what a country obtains, but what it parts with, by its foreign trade, was supposed to constitute the gain to it. An extended market for its produce—an abundant consumption for its goods—a vent for its surplus—are the phrases by which it has been customary to designate the uses and recommendations of commerce with foreign countries. This notion is intelligible, when we consider that the authors and leaders of opinion on mercantile questions have always hitherto been the selling class. It is in truth a surviving relic of the Mercantile Theory, according to which, money being the only wealth, selling, or, in other words, exchanging goods for money, was (to countries without mines of their own) the only way of growing rich—and importation of goods, that is to say, parting with money, was so much subtracted from the benefit.

The notion that money alone is wealth has been long defunct, but it has left many of its progeny behind it. Adam Smith's theory of the benefit of foreign trade was, that it afforded an outlet for the surplus produce of a country, and enabled a portion of the capital of the country to replace itself with a profit. The expression, surplus produce, seems to imply that a country is under some kind of necessity of producing the corn or cloth which it exports; so that the portion which it does not itself consume, if not wanted and consumed elsewhere, would either be produced in sheer waste, or, if it were not produced, the corresponding portion of capital would remain idle, and the mass of productions in the country would be diminished by so much. Either of these suppositions would be entirely erroneous. The country produces an exportable article in excess of its own wants from no inherent necessity, but as the cheapest mode of supplying itself with other things. If prevented from exporting this surplus, it would cease to produce it, and would no longer import anything, being unable to give an equivalent; but the labor and capital which had been employed in producing with a view to exportation would find employment in producing those desirable objects which were previously brought from abroad; or, if some of them could not be produced, in producing substitutes for them. These articles would, of course, be produced at a greater cost than that of the things with which they had previously been purchased from foreign countries. But the value and price of the articles would rise in proportion; and the capital would just as much be replaced, with the ordinary profit, from the returns, as it was when employed in producing for the foreign market. The only losers (after the temporary inconvenience of the change) would be the consumers of the heretofore imported articles, who would be obliged either to do without them, consuming in lieu of them something which they did not like as well, or to pay a higher price for them than before.

If it be said that the capital now employed in foreign trade could not find employment in supplying the home market, I might reply that this is the fallacy of general over-production, discussed in a former chapter; but the thing is in this particular case too evident to require an appeal to any general theory. We not only see that the capital of the merchant would find employment, but we see what employment. There would be employment created, equal to that which would be taken away. Exportation ceasing, importation to an equal value would cease also, and all that part of the income of the country which had been expended in imported commodities would be ready to expend itself on the same things produced at home, or on others instead of them. Commerce is virtually a mode of cheapening production; and in all such cases the consumer is the person ultimately benefited; the dealer, in the end, is sure to get his profit, whether the buyer obtains much or little for his money.

E converso, if for any reason, such as a removal of duties, capital should be withdrawn from the production of articles consumed at home, and imported commodities should entirely take their place, the very importation of the foreign commodities would imply that an increased corresponding production was going on in this country with which to pay for the imported goods. The capital thus thrown out of employment in an industry in which we had no comparative advantage (when competition became free) would necessarily be employed in the industries in which we had an advantage, and would supply—and the transferred capital would be the only means of supplying—the commodities which would be sent abroad to pay for those, which by the supposition are now imported, but were formerly produced at home. The result is a greater productiveness of industry, and so a greater sum from which both labor and capital may be rewarded. Whenever capital, unrestrained by artificial support, leaves one employment as unprofitable, it means that that employment is naturally, and in itself, less productive than the usual run of other industries in the country, and so less profitable to both labor and capital than the majority of other occupations.



5. Indirect benefits of Commerce, Economical and Moral; still greater than the Direct.

Such, then, is the direct economical advantage of foreign trade. But there are, besides, indirect effects, which must be counted as benefits of a high order. (1) One is, the tendency of every extension of the market to improve the processes of production. A country which produces for a larger market than its own can introduce a more extended division of labor, can make greater use of machinery, and is more likely to make inventions and improvements in the processes of production. Whatever causes a greater quantity of anything to be produced in the same place tends to the general increase of the productive powers of the world.(267) There is (2) another consideration, principally applicable to an early stage of industrial advancement. The opening of a foreign trade, by making them acquainted with new objects, or tempting them by the easier acquisition of things which they had not previously thought attainable, sometimes works a sort of industrial revolution in a country whose resources were previously undeveloped for want of energy and ambition in the people; inducing those who were satisfied with scanty comforts and little work to work harder for the gratification of their new tastes, and even to save, and accumulate capital, for the still more complete satisfaction of those tastes at a future time.

But (3) the economical advantages of commerce are surpassed in importance by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, in the present low state of human improvement, of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. Commerce is now, what war once was, the principal source of this contact. Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress. Finally, (4) commerce first taught nations to see with goodwill the wealth and prosperity of one another. Before, the patriot, unless sufficiently advanced in culture to feel the world his country, wished all countries weak, poor, and ill-governed but his own: he now sees in their wealth and progress a direct source of wealth and progress to his own country. It is commerce which is rapidly rendering war obsolete, by strengthening and multiplying the personal interests which are in natural opposition to it. And it may be said without exaggeration that the great extent and rapid increase of international trade, in being the principal guarantee of the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race.



Chapter XIV. Of International Values.



1. The values of imported commodities depend on the Terms of international interchange.

The values of commodities produced at the same place, or in places sufficiently adjacent for capital to move freely between them—let us say, for simplicity, of commodities produced in the same country—depend (temporary fluctuations apart) upon their cost of production. But the value of a commodity brought from a distant place, especially from a foreign country, does not depend on its cost of production in the place from whence it comes. On what, then, does it depend? The value of a thing in any place depends on the cost of its acquisition in that place; which, in the case of an imported article, means the cost of production of the thing which is exported to pay for it.

If, then, the United States imports wine from Spain, giving for every pipe of wine a bale of cloth, the exchange value of a pipe of wine in the United States will not depend upon what the production of the wine may have cost in Spain, but upon what the production of the cloth has cost in the United States. Though the wine may have cost in Spain the equivalent of only ten days' labor, yet, if the cloth costs in the United States twenty days' labor, the wine, when brought to the United States, will exchange for the produce of twenty days' American labor, plus the cost of carriage, including the usual profit on the importer's capital during the time it is locked up and withheld from other employment.(268)

The value, then, in any country, of a foreign commodity, depends on the quantity of home produce which must be given to the foreign country in exchange for it. In other words, the values of foreign commodities depend on the terms of international exchange. What, then, do these depend upon? What is it which, in the case supposed, causes a pipe of wine from Spain to be exchanged with the United States for exactly that quantity of cloth? We have seen that it is not their cost of production. If the cloth and the wine were both made in Spain, they would exchange at their cost of production in Spain; if they were both made in the United States, they would [possibly] exchange at their cost of production in the United States: but all the cloth being made in the United States, and all the wine in Spain, they are in circumstances to which we have already determined that the law of cost of production is not applicable. We must accordingly, as we have done before in a similar embarrassment, fall back upon an antecedent law, that of supply and demand; and in this we shall again find the solution of our difficulty.



2. The values of foreign commodities depend, not upon Cost of Production, but upon Reciprocal Demand and Supply.

It has been previously explained that the conditions called. "international" are those, either within a nation, or those existing between two separate nations, which are such as to prevent the free movement of labor and capital from one group of industries to another, or from one locality to another distant one. Even if woolen cloth could be made cheaper in England than in the United States, we know that neither capital nor labor would easily leave the United States for England, although it might go from Rhode Island to Massachusetts under similar inducements. If shoes can be made with less advantage in Providence than in Lynn, the shoe industry will come to Lynn; but it does not follow that the English shoe industry would come to Lynn, even if the advantages of the latter were greater than those in England. If there be no obstacle to the free movement of labor and capital between places or occupations, and if some place or occupation can produce at a less cost than another place or occupation, then there will be a migration of the instruments of production. Since there is no free movement of labor and capital between one country and another, then two countries stand in the same relation as that of two "non-competing groups" within the same country, as before explained. When this fact is once fully grasped, the subject of international values becomes very simple. It does not differ from the question of those domestic values for which we found(269) that the dependence on cost of production would not hold, but that their values were governed by reciprocal demand and supply.

Attention should be drawn to the real nature of the present inquiry. It is not here a question as to what causes international trade between two countries: that has been treated in the preceding chapter, and has been found to be a difference in the comparative cost. The question now is one of exchange value, that is, for how much of other commodities a given commodity will exchange. The reasons for the trade are supposed to exist; but we now want to know what the law is which determines the proportions of the exchange. Why does one article exchange for more or less of another? Not, as we have seen, because one costs more or less to produce than the other.

In the trade between the United States and England in iron and corn, formerly referred to (p. 383), it was seen that a 100 days' labor of corn buys from England iron which would have cost the United States 125 days' labor. England sends 150 days' labor of iron and buys from the United States corn which would have cost her 200 days' labor. But what rule fixes the proportions between 100 and 125 for the United States, and between 150 and 200 for England, at which the exchanges will take place? The trade increases the productiveness of both countries, but in what ratio will the two countries share this gain? The answer is, briefly, in the ratio set by reciprocal demand and supply, that is, the relative strength, as compared with each other, of the demands of the two countries respectively for iron and corn. This, however, may be capable of explanation in a simple form.

A has spades, and B has oats, to dispose of; and each wishes to get the article belonging to the other. Will A give one spade for one bushel of oats, or for two? Will B give two bushels of oats for one spade? That depends upon how strong a desire A has for oats; the intensity of his demand may induce him to give two spades for one bushel. But the exchange also depends upon B. If he has no great need for spades, and A has a strong desire for oats, B will get more spades for oats than otherwise, possibly two spades for one bushel of oats; that is, oats will have a larger exchange value. If, on the other hand, A cares less for oats than B does for spades, then the exchange will result in an increased value of spades relatively to oats. When two commodities exchange against each other, their exchange values will depend entirely upon the relative intensity of the demand on each side for the other commodity. And this simple form of the statement of reciprocal demand and supply is also the law of international values.

If instead of spades and oats we substitute iron and corn, and let the trade be between England and the United States, the quantity of corn required to buy a given quantity of iron will depend upon the relative demands of England for corn and of the United States for iron. Something may cut off England's demand for our breadstuffs, and they will then have a less exchange value relatively to iron (if we keep up our demand), and their prices will fall. But if, on the other hand, England has poor harvests, and consequently a great demand for corn, and if our demand for iron is not excessive at the same time, then our breadstuffs will rise in value. And this was precisely what happened from 1877 to 1879. Now, in the above illustration of corn and iron, how can we know whether or not x bushels of corn (the produce of 100 days' labor in the United States) will exchange for exactly y tons of English iron? That, again, will depend upon the reciprocal demands of the two countries for corn and iron respectively. Moreover, it will have been already observed that the ratio of exchange is not capable of being ascertained exactly, since it varies with changing conditions, namely, the desires of the people of the two countries, together with their means of purchase.

But yet these variations are capable of ascertainment as regards their extreme limits. The reciprocal demand can not carry the exchange value in either country beyond the line set by the cost of production of the article. For instance, an urgent need in England for corn (if the United States has a light demand for English iron) can not carry the ratio of exchange to a point such that England will offer so much more than 150 days' labor in iron for x bushels of American corn that it will go beyond 200 days' labor in iron. It will be seen at once, then, if that were the case, that England would produce the corn herself; and that she would then have no gain whatever from the trade. The ratio of exchange will thus be limited by the reciprocal demand on one side to the cost of production (200 days' labor) of English corn. On the other hand, if the supposition were reversed, and the United States had a great demand for iron, but England had little need for our corn, then we would not offer more than 125 days' labor of corn for y tons of iron, because for that expenditure of labor we could produce the iron ourselves.

In the above examples we have considered the case of a trade in corn and iron only. If corn were to typify all our goods wanted by England, and iron all English goods wanted by the United States, the conclusions would be exactly the same. The ratios of a myriad of things, each governed by its particular reciprocal demand, exchanging against each other, give a general result by which the goods sent out exchange against the goods brought back at such rates as are fixed by the reciprocal demands acting on all the goods. Goods are payments for goods; the ratio of exchange depends on reciprocal demand and supply. If we now add more countries to the example, we simply increase the number of persons (although in different countries) wanting our goods, as set off against our demands for the goods of this greater number of persons. If France, Germany, and England all want our corn, we must have some demand for the goods of France, Germany, and England also; and the same law of reciprocal demand gives the ratio of interchange. That this explanation is consistent with the facts is to be seen when we notice how eagerly the exporters of American staples watch the conditions which increase or diminish the foreign demand for these commodities, looking at them as the causes which directly affect their exchange value, or price.

When cost of carriage is added, it will increase the price of corn to England and of iron to the United States. But, as every one knows, an increase of price affects the demand; and, as the demand on each side is affected, a new ratio of exchange will finally be reached consistent with the strength of desires on each side. Who, therefore, will pay the most of the cost of carriage England or the United States? That will, again, depend on whether England has the greatest relative demand for American goods, as compared with the demand of the United States for English goods.

No absolute rule, therefore, can be laid down for the division of the cost, no more than for the division of the advantage; and it does not follow that, in whatever ratio the one is divided, the other will be divided in the same. It is impossible to say, if the cost of carriage could be annihilated, whether the producing or the importing country would be most benefited. This would depend on the play of international demand.

Cost of carriage has one effect more. But for it, every commodity would (if trade be supposed free) be either regularly imported or regularly exported. A country would make nothing for itself which it did not also make for other countries. But in consequence of cost of carriage there are many things, especially bulky articles, which every, or almost every, country produces within itself. After exporting the things in which it can employ itself most advantageously, and importing those in which it is under the greatest disadvantage, there are many lying between, of which the relative cost of production in that and in other countries differs so little that the cost of carriage would absorb more than the whole saving in cost of production which would be obtained by importing one and exporting another. This is the case with numerous commodities of common consumption, including the coarser qualities of many articles of food and manufacture, of which the finer kinds are the subject of extensive international traffic.



3. —As illustrated by trade in cloth and linen between England and Germany.

Mr. Mill still further illustrates the operation of the law of reciprocal demand by the case of a trade between England and Germany in cloth and linen, as follows:

"Suppose that ten yards of broadcloth cost in England as much labor as fifteen yards of linen, and in Germany as much as twenty." This supposition then being made, it would be the interest of England to import linen from Germany, and of Germany to import cloth from England. "When each country produced both commodities for itself, ten yards of cloth exchanged for fifteen yards of linen in England, and for twenty in Germany. They will now exchange for the same number of yards of linen in both. For what number? If for fifteen yards, England will be just as she was, and Germany will gain all. If for twenty yards, Germany will be as before, and England will derive the whole of the benefit. If for any number intermediate between fifteen and twenty, the advantage will be shared between the two countries. If, for example, ten yards of cloth exchange for eighteen of linen, England will gain an advantage of three yards on every fifteen, Germany will save two out of every twenty. The problem is, what are the causes which determine the proportion in which the cloth of England and the linen of Germany will exchange for each other? Let us suppose, then, that by the effect of what Adam Smith calls the higgling of the market, ten yards of cloth, in both countries, exchange for seventeen yards of linen.

"The demand for a commodity, that is, the quantity of it which can find a purchaser, varies, as we have before remarked, according to the price. In Germany the price of ten yards of cloth is now seventeen yards of linen, or whatever quantity of money is equivalent in Germany to seventeen yards of linen. Now, that being the price, there is some particular number of yards of cloth, which will be in demand, or will find purchasers, at that price. There is some given quantity of cloth, more than which could not be disposed of at that price; less than which, at that price, would not fully satisfy the demand. Let us suppose this quantity to be 1,000 times ten yards.

"Let us now turn our attention to England. There the price of seventeen yards of linen is ten yards of cloth, or whatever quantity of money is equivalent in England to ten yards of cloth. There is some particular number of yards of linen which, at that price, will exactly satisfy the demand, and no more. Let us suppose that this number is 1,000 times seventeen yards.

"As seventeen yards of linen are to ten yards of cloth, so are 1,000 times seventeen yards to 1,000 times ten yards. At the existing exchange value, the linen which England requires will exactly pay for the quantity of cloth which, on the same terms of interchange, Germany requires. The demand on each side is precisely sufficient to carry off the supply on the other. The conditions required by the principle of demand and supply are fulfilled, and the two commodities will continue to be interchanged, as we supposed them to be, in the ratio of seventeen yards of linen for ten yards of cloth.

"But our suppositions might have been different. Suppose that, at the assumed rate of interchange, England had been disposed to consume no greater quantity of linen than 800 times seventeen yards; it is evident that, at the rate supposed, this would not have sufficed to pay for the 1,000 times ten yards of cloth which we have supposed Germany to require at the assumed value. Germany would be able to procure no more than 800 times ten yards at that price. To procure the remaining 200, which she would have no means of doing but by bidding higher for them, she would offer more than seventeen yards of linen in exchange for ten yards of cloth; let us suppose her to offer eighteen. At this price, perhaps, England would be inclined to purchase a greater quantity of linen. She would consume, possibly, at that price, 900 times eighteen yards. On the other hand, cloth having risen in price, the demand of Germany for it would probably have diminished. If, instead of 1,000 times ten yards, she is now contented with 900 times ten yards, these will exactly pay for the 900 times eighteen yards of linen which England is willing to take at the altered price; the demand on each side will again exactly suffice to take off the corresponding supply; and ten yards for eighteen will be the rate at which, in both countries, cloth will exchange for linen.

"The converse of all this would have happened if, instead of 800 times seventeen yards, we had supposed that England, at the rate of ten for seventeen, would have taken 1,200 times seventeen yards of linen. In this case, it is England whose demand is not fully supplied; it is England who, by bidding for more linen, will alter the rate of interchange to her own disadvantage; and ten yards of cloth will fall, in both countries, below the value of seventeen yards of linen. By this fall of cloth, or, what is the same thing, this rise of linen, the demand of Germany for cloth will increase, and the demand of England for linen will diminish, till the rate of interchange has so adjusted itself that the cloth and the linen will exactly pay for one another; and, when once this point is attained, values will remain without further alteration."



4. The conclusion states in the Equation of International Demand.

"It may be considered, therefore, as established, that when two countries trade together in two commodities, the exchange value of these commodities relatively to each other will adjust itself to the inclinations and circumstances of the consumers on both sides, in such manner that the quantities required by each country, of the articles which it imports from its neighbor, shall be exactly sufficient to pay for one another. As the inclinations and circumstances of consumers can not be reduced to any rule, so neither can the proportions in which the two commodities will be interchanged. We know that the limits within which the variation is confined are the ratio between their costs of production in the one country and the ratio between their costs of production in the other. Ten yards of cloth can not exchange for more than twenty yards of linen, nor for less than fifteen. But they may exchange for any intermediate number. The ratios, therefore, in which the advantage of the trade may be divided between the two nations are various. The circumstances on which the proportionate share of each country more remotely depends admit only of a very general indication."

If, therefore, it be asked what country draws to itself the greatest share of the advantage of any trade it carries on, the answer is, the country for whose productions there is in other countries the greatest demand, and a demand the most susceptible of increase from additional cheapness. In so far as the productions of any country possess this property, the country obtains all foreign commodities at less cost. It gets its imports cheaper, the greater the intensity of the demand in foreign countries for its exports. It also gets its imports cheaper, the less the extent and intensity of its own demand for them. The market is cheapest to those whose demand is small. A country which desires few foreign productions, and only a limited quantity of them, while its own commodities are in great request in foreign countries, will obtain its limited imports at extremely small cost, that is, in exchange for the produce of a very small quantity of its labor and capital.

The law which we have now illustrated may be appropriately named the Equation of International Demand. It may be concisely stated as follows: The produce of a country exchanges for the produce of other countries at such values as are required in order that the whole of her exports may exactly pay for the whole of her imports. This law of International Values is but an extension of the more general law of Value, which we called the Equation of Supply and Demand.(270) We have seen that the value of a commodity always so adjusts itself as to bring the demand to the exact level of the supply. But all trade, either between nations or individuals, is an interchange of commodities, in which the things that they respectively have to sell constitute also their means of purchase: the supply brought by the one constitutes his demand for what is brought by the other. So that supply and demand are but another expression for reciprocal demand; and to say that value will adjust itself so as to equalize demand with supply, is, in fact, to say that it will adjust itself so as to equalize the demand on one side with the demand on the other.

The tendency of imports to balance exports may be seen from Chart No. XIII, on the next page, which shows the relation between the exports and imports solely of merchandise, and exclusive of specie, to and from the United States. From 1850 to 1860, after the discoveries of the precious metals in this country, we sent great quantities of gold and silver out of the country, purely as merchandise, so that, if we should include the precious metals among the exports in those years, the total exports would more nearly equal the total imports. The transmission of gold at that time was effected exactly as that of other merchandise; so that to the date of the civil war there was a very evident equilibrium between exports and imports. Then came the war, with the period of extravagance and speculation following, which led to great purchases abroad, and which was closed only by the panic of 1873. Since then more exports than imports were needed to pay for the great purchases of the former period; and the epoch of great exports, from 1875 to 1883, balanced the opposite conditions in the period preceding. It would seem, therefore, that we had reached a normal period about the year 1882.(271) A fuller statement as to the fluctuations of exports and imports about the equilibrium will be given when the introduction of money in international trade is made. The full statement must also include the financial account.



Chart XIII. Value of Merchandise IMPORTED into (dotted line) and EXPORTED from (black line) the United States from 1835 to 1883.



5. The cost to a country of its imports depends not only on the ratio of exchange, but on the efficiency of its labor.

We now pass to another essential part of the theory of the subject. There are two senses in which a country obtains commodities cheaper by foreign trade: in the sense of value and in the sense of cost: (1.) It gets them cheaper in the first sense, by their falling in value relatively to other things; the same quantity of them exchanging, in the country, for a smaller quantity than before of the other produce of the country. To revert to our original figures [of the trade with Germany in cloth and linen]: in England, all consumers of linen obtained, after the trade was opened, seventeen or some greater number of yards for the same quantity of all other things for which they before obtained only fifteen. The degree of cheapness, in this sense of the term, depends on the laws of International Demand, so copiously illustrated in the preceding sections. (2.) But, in the other sense, that of cost, a country gets a commodity cheaper when it obtains a greater quantity of the commodity with the same expenditure of labor and capital. In this sense of the term, cheapness in a great measure depends upon a cause of a different nature: a country gets its imports cheaper, in proportion to the general productiveness of its domestic industry; to the general efficiency of its labor. The labor of one country may be, as a whole, much more efficient than that of another: all or most of the commodities capable of being produced in both may be produced in one at less absolute cost than in the other; which, as we have seen, will not necessarily prevent the two countries from exchanging commodities. The things which the more favored country will import from others are, of course, those in which it is least superior; but, by importing them, it acquires, even in those commodities, the same advantage which it possesses in the articles it gives in exchange for them. What her imports cost to her is a function of two variables: (1) the quantity of her own commodities which she gives for them, and (2) the cost of those commodities. Of these, the last alone depends on the efficiency of her labor; the first depends on the law of international values; that is, on the intensity and extensibility of the foreign demand for her commodities, compared with her demand for foreign commodities.

The great productiveness of any industry in our country has thus two results: (1) it gives a larger total out of which labor and capital at home can receive greater rewards; and (2) the commodities being cheaper in comparison than other commodities not so easily produced, furnish the very articles which are most likely to be sent abroad, in accordance with the doctrine of comparative cost. In the United States, those things in the production of which labor and capital are most efficient, and so earn the largest rewards, are precisely the articles entering most largely into our foreign trade. That is, we get foreign articles cheaper precisely because these exports cost us less in labor and capital. These, of course, since we inhabit a country whose natural resources are not yet fully worked, are largely the products of the extractive industries, as may be seen by the following table of the value of goods entering to the greatest extent into our foreign export trade in 1883:

Raw cotton $247,328,721 Breadstuffs 208,040,850 Provisions and animals 118,177,555 Mineral oils 40,555,492 Wood 26,793,708 Tobacco 22,095,229

These six classes of commodities are arranged in the order in which they enter into our export trade, and are the six which come first and highest in the list.



Chapter XV. Of Money Considered As An Imported Commodity.



1. Money imported on two modes; as a Commodity, and as a medium of Exchange.

The degree of progress which we have now made in the theory of foreign trade puts it in our power to supply what was previously deficient in our view of the theory of money; and this, when completed, will in its turn enable us to conclude the subject of foreign trade.

Money, or the material of which it is composed, is, in Great Britain, and in most other countries, a foreign commodity. Its value and distribution must therefore be regulated, not by the law of value which obtains in adjacent places, but by that which is applicable to imported commodities—the law of international values.

In the discussion into which we are now about to enter, I shall use the terms money and the precious metals indiscriminately. This may be done without leading to any error; it having been shown that the value of money, when it consists of the precious metals, or of a paper currency convertible into them on demand, is entirely governed by the value of the metals themselves: from which it never permanently differs, except by the expense of coinage, when this is paid by the individual and not by the state.

Money is brought into a country in two different ways. It is imported (chiefly in the form of bullion) like any other merchandise, as being an advantageous article of commerce. It is also imported in its other character of a medium of exchange, to pay some debt due to the country, either for goods exported or on any other account. The existence of these two distinct modes in which money flows into a country, while other commodities are habitually introduced only in the first of these modes, occasions somewhat more of complexity and obscurity than exists in the case of other commodities, and for this reason only is any special and minute exposition necessary.



2. As a commodity, it obeys the same laws of Value as other imported Commodities.

In so far as the precious metals are imported in the ordinary way of commerce, their value must depend on the same causes, and conform to the same laws, as the value of any other foreign production. It is in this mode chiefly that gold and silver diffuse themselves from the mining countries into all other parts of the commercial world. They are the staple commodities of those countries, or at least are among their great articles of regular export; and are shipped on speculation, in the same manner as other exportable commodities. The quantity, therefore, which a country (say England) will give of its own produce, for a certain quantity of bullion, will depend, if we suppose only two countries and two commodities, upon the demand in England for bullion, compared with the demand in the mining country (which we will call the United States(272)) for what England has to give.

The bullion required by England must exactly pay for the cottons or other English commodities required by the United States. If, however, we substitute for this simplicity the degree of complication which really exists, the equation of international demand must be established not between the bullion wanted in England and the cottons or broadcloth wanted in the United States, but between the whole of the imports of England and the whole of her exports. The demand in foreign countries for English products must be brought into equilibrium with the demand in England for the products of foreign countries; and all foreign commodities, bullion among the rest, must be exchanged against English products in such proportions as will, by the effect they produce on the demand, establish this equilibrium.

There is nothing in the peculiar nature or uses of the precious metals which should make them an exception to the general principles of demand. So far as they are wanted for purposes of luxury or the arts, the demand increases with the cheapness, in the same irregular way as the demand for any other commodity. So far as they are required for money, the demand increases with the cheapness in a perfectly regular way, the quantity needed being always in inverse proportion to the value. This is the only real difference, in respect to demand, between money and other things.

Money, then, if imported solely as a merchandise, will, like other imported commodities, be of lowest value in the countries for whose exports there is the greatest foreign demand, and which have themselves the least demand for foreign commodities. To these two circumstances it is, however, necessary to add two others, which produce their effect through cost of carriage. The cost of obtaining bullion is compounded of two elements; the goods given to purchase it and the expense of transport; of which last, the bullion countries will bear a part (though an uncertain part) in the adjustment of international values. The expense of transport is partly that of carrying the goods to the bullion countries, and partly that of bringing back the bullion; both these items are influenced by the distance from the mines; and the former is also much affected by the bulkiness of the goods. Countries whose exportable produce consists of the finer manufactures obtain bullion, as well as all other foreign articles, caeteris paribus, at less expense than countries which export nothing but bulky raw produce.

To be quite accurate, therefore, we must say: The countries whose exportable productions (1) are most in demand abroad, and (2) contain greatest value in smallest bulk, (3) which are nearest to the mines, and (4) which have least demand for foreign productions, are those in which money will be of lowest value, or, in other words, in which prices will habitually range the highest. If we are speaking not of the value of money, but of its cost (that is, the quantity of the country's labor which must be expended to obtain it), we must add (5) to these four conditions of cheapness a fifth condition, namely, "whose productive industry is the most efficient." This last, however, does not at all affect the value of money, estimated in commodities; it affects the general abundance and facility with which all things, money and commodities together, can be obtained.(273)

The accompanying Chart, No. XIV, on the next page, gives the excess of exports from the United States of gold and silver coin and bullion over imports, and the excess of imports over exports. The movement of the line above the horizontal baseline shows distinctly how largely we have been sending the precious metals abroad from our mines, simply as a regular article of export, like merchandise. From 1850 to 1879 the exports are clearly not in the nature of payments for trade balances; since it indicates a steady movement out of the country (with the exception of the first year of the war, when gold came to this country). The phenomenal increase of specie exports during the war, and until 1879, was due to the fact that we had a depreciated paper currency, which sent the metals out of the country as merchandise. This chart should be studied in connection with Chart No. XIII.



Chart XIV. Chart showing the Excess of Exports and Imports of Gold and Silver Coin and Bullion, from and into the United States, from 1835 to 1883. The line when above the base-line shows the excess of exports; when below, the excess of imports.

From the preceding considerations, it appears that those are greatly in error who contend that the value of money, in countries where it is an imported commodity, must be entirely regulated by its value in the countries which produce it; and can not be raised or lowered in any permanent manner unless some change has taken place in the cost of production at the mines. On the contrary, any circumstance which disturbs the equation of international demand with respect to a particular country not only may, but must, affect the value of money in that country—its value at the mines remaining the same. The opening of a new branch of export trade from England; an increase in the foreign demand for English products, either by the natural course of events or by the abrogation of duties; a check to the demand in England for foreign commodities, by the laying on of import duties in England or of export duties elsewhere; these and all other events of similar tendency would make the imports of England (bullion and other things taken together) no longer an equivalent for the exports; and the countries which take her exports would be obliged to offer their commodities, and bullion among the rest, on cheaper terms, in order to re-establish the equation of demand; and thus England would obtain money cheaper, and would acquire a generally higher range of prices. A country which, from any of the causes mentioned, gets money cheaper, obtains all its other imports cheaper likewise.

It is by no means necessary that the increased demand for English commodities, which enables England to supply herself with bullion at a cheaper rate, should be a demand in the mining countries. England might export nothing whatever to those countries, and yet might be the country which obtained bullion from them on the lowest terms, provided there were a sufficient intensity of demand in other foreign countries for English goods, which would be paid for circuitously, with gold and silver from the mining countries. The whole of its exports are what a country exchanges against the whole of its imports, and not its exports and imports to and from any one country.



Chapter XVI. Of The Foreign Exchanges.



1. Money passes from country to country as a Medium of Exchange, through the Exchanges.

We have thus far considered the precious metals as a commodity, imported like other commodities in the common course of trade, and have examined what are the circumstances which would in that case determine their value. But those metals are also imported in another character, that which belongs to them as a medium of exchange; not as an article of commerce, to be sold for money, but as themselves money, to pay a debt, or effect a transfer of property.

Money is sent from one country to another for various purposes: the most usual purpose, however, is that of payment for goods. To show in what circumstances money actually passes from country to country for this or any of the other purposes mentioned, it is necessary briefly to state the nature of the mechanism by which international trade is carried on, when it takes place not by barter but through the medium of money.

In practice, the exports and imports of a country not only are not exchanged directly against each other, but often do not even pass through the same hands. Each is separately bought and paid for with money. We have seen, however, that, even in the same country, money does not actually pass from hand to hand each time that purchases are made with it, and still less does this happen between different countries. The habitual mode of paying and receiving payment for commodities, between country and country, is by bills of exchange.