It should, however, be here repeated and emphasized, that Money pieces in whatever form, be it coin or scrip, are themselves of slight practical importance in the ramifications of Trade. Not tangible Money, but the Money terms which measure and express the relative Values of commodities—these play the great part.
In adjustments of Trade outside the pocketmoney class of transactions, Money pieces do not serve to the extent of five per cent. Nearly all those adjustments are effected by means of Money terms in books of account and through the medium of checks and drafts and notes and bills of exchange. These are in effect orders upon banks (one of the forms of Labor) for the transfer of credits recorded in their books of account.
Banking is an improvement upon Money pieces in Trade, very much as Money pieces are an improvement upon crude barter. It lifts the Money-piece customs of Trade to book-keeping levels. If everybody were a bank depositor, and every bank were connected with every other by a perfected clearinghouse system, all necessity for Money pieces, except for “pocket cash,” would vanish. In that event the check and the promissory note and the bill of exchange, operating as orders to the book-keepers of banks and clearinghouses, would effect transfers of debits and credits the world over so that all Trade would be barter systematized—plain barter freed from the obstructions incident to barter in primitive Economic circumstances. Except for the use of “pocket cash,” Money pieces of every kind, whether metal or paper, would be like children’s toys to grown-ups.
4—Balances of Trade
Out of worldwide Trade, which, like Trade in narrower circles is effected by means of Money terms in books of account and through the medium of drafts by creditors upon debtors, a subclassification has evolved in Economics of the business-customs type. This subclassification alludes to a situation in Trade between the people in the aggregate of one country and those of the other countries of the world, in which the balance for that country is at any given time on the credit side. Its exports exceed its imports. This situation is known in the business circles of creditor countries as a “favorable balance of trade.”
The suggestion that such balances are favorable is doubtless true with reference to banking and some other business relationships. Business must be better with banking, apparently at least, when the buying and the selling of drafts on the people of foreign countries is brisk than when it is dull. It must be better, also, with exporters who draw the drafts and sell them. The drawing and the selling of drafts against foreign balances is surely a more profitable occupation when there is an excess of exports to draw against than when the balance of trade is the other way. It must be even more satisfactory in those connections when the excess of exports is continuous.
But as matter of comprehensive Economics, in which not only bankers and exporters but also all the other Wealth-producers of a country are concerned, it cannot be true that a perpetual credit balance of international trade is a favorable balance. In international trading, as in trading between individuals (which, by the way, international trading in the last analysis is), the aggregate of exports and of imports must counter-balance. Otherwise the producers of the exports, considered as a whole, must be engaged in foreign trade at a loss. They give more Value than they get. Surely, trading at a loss is not favorable trading.
Would a farmer prosper if every year he sold a thousand dollars’ worth of his products and got back only eight hundred dollars’ worth of other products? Wouldn’t that depend upon how much credit to him had piled up in account-books as a result? If none, wouldn’t he have exchanged his products at the rate of $10 for $8? How long would a farmer prosper if he considered that kind of balance of trade as favorable?
Precisely so with international trading. The only difference is that in the farmer illustration we have a solitary individual, whereas in international trade we have many individuals grouped in national wholes. In comprehensive Economics that difference is no difference at all.
A credit balance between national communities is simply the difference in Value remaining after all international trading to a given date has been entered in the books of account. If that balance be on the credit side of one of the nations, the creditor individuals of the creditor nation may draw against it. To them it is a favorable balance, in book-keeping terms. But if it is never to be paid off with imports, which seems to be the aspiration of those who applaud so-called “favorable balance of trade” theories, is it not in truth an unfavorable balance?