THE SO-CALLED "BALANCE OF TRADE."
That it is good for a country to have its exports exceed its imports is a notion that has been widely accepted among us. We have usually been in that position, and the fact has been accepted as proof that we were doing well under a policy of protection. England, on the other hand, has had an excess of imports over exports, and England is free trade; the English excess of imports has been accepted as proof of the mistaken nature of a free-trade policy.
The idea that it is a good thing to have the imports less than the exports, to have the balance of trade "in your favor," as the phrase goes, is a relic of that "Mercantile Theory" overturned by Adam Smith. That theory was briefly, that wealth consists in the precious metals, and that for a country to remain wealthy, it is necessary to keep bullion from going out of the country. It followed from this principle that everything should be done to discourage imports, for it was thought that imports must, of course, be paid for by bullion. Modern political science teaches that wealth does not consist in gold and silver, but that these are commodities, like any other commodities, except that they happen to possess a special fitness to be a medium of exchange. It discards the old notion that imports are paid for by specie, and asserts that they are paid for by commodities. It teaches that it is not a bad thing to have the imports exceed the exports, that this excess is not "unfavorable," and that in fact there is no such thing as "a balance of trade." The old "Mercantile Theory," with its corollaries, has indeed long been abandoned, but many people still consider it matter to congratulate ourselves upon that our exports exceed our imports.
It is Bastiat who has given the most lively account of this subject. He complains in an amusing manner that the doctrine of the "balance of trade" should exhibit such practical vitality, when it is admitted that it has so long been theoretically dead. He observes that the protectionists are perfectly willing to leave him the victory in books, provided always that their idea is paramount in practice. He finds but one man, Lestiboudois, who has the courage of his convictions, and who says that, because France imports 200,000,000 francs' worth of goods a year more than she exports, she is that much in debt to foreign countries. Others are not so candid; they accept the free-trade principle, but their conclusion is protection. Bastiat is not content with obtaining the theoretical victory, but wishes to meet his opponent in the domain of business. He undertakes to prove from the books of his friend, Mr. T. of Havre, that the idea of a "balance of trade" is wrong in practice, and to this end gives sketches of two of this gentleman's enterprises.
In one of these transactions Mr. T. despatches from Havre a vessel freighted for the United States with French merchandise valued at 200,000 francs. It was at this figure that Mr. T. entered his export in the Havre custom-house. The cargo on its arrival in New Orleans had paid ten per cent expenses, and was charged thirty per cent duties. Its value was accordingly 280,000 francs. It was sold at 20 per cent profit on its original value; this, being 40,000 francs, brought the value of the cargo to 320,000 francs. This sum the assignee converted into cotton; the cotton had to pay expense of transportation, insurance, commission, etc., of 10 per cent. The return cargo, therefore, on arriving at Havre was worth 352,000 francs. This cargo Mr. T. sold at a profit of 20 per cent and made 70,000 francs. The cotton was thus sold for 432,000 francs. Bastiat offers to send the protectionist author an extract from Mr. T.'s books in which he sets down as gained two sums: one of 40,000 francs, the other of 70,000 francs. Bastiat adds that Mr. T. is perfectly convinced that he made this money. Mr. Lestiboudois, however, would have found at the custom-house that France had an export of 200,000 francs and imported 352,000 francs, and would have concluded that she had squandered on foreign nations 152,000 francs.
About the same time Mr. T. despatched another vessel, freighted also with a cargo worth 200,000 francs. But this vessel went down and never reached New Orleans at all. Mr. Lestiboudois would find at the custom-house that 200,000 francs' worth of goods had been exported, and that there was no importation to balance this entry. France has therefore in this transaction a clear profit of 200,000 francs.
So much for his friend T. Mr. T.'s case, Bastiat continues, is exactly that of the French nation. If France imports more than she exports, she does not lose the excess any more than Mr. T. did. Bastiat invites his opponents to carry his theory to its farthest limits. Let it be supposed that France only imports and does not export at all; in other words, gets everything for nothing: he still defies them to prove that France would be the poorer.
It was that very able and convincing writer, Augustus Mongredien, who showed, perhaps more clearly than anyone else, in his treatise on free trade, that where a country imports more than she exports, it is impossible that the excess should be paid in specie. Debts owed by one country to another can be paid to but a limited extent in specie. The French indemnity was paid largely in commodities. So have been paid the great sums of money which England has from time to time lent foreign countries. The French indemnity was paid largely in bills of exchange. The excess of imports over exports must be paid by commodities, for there is no other way in which to pay it. This excess in England is yearly, we will say, £70,000,000. It is out of the question that such a sum can be paid in specie, for there is not the specie to be had. The amount of specie in a country never exceeds to any considerable extent what is necessary for circulation. It is impossible that a country can retain an amount of specie much greater than that. The specie which remains after the demands of circulation have been satisfied lowers interest and raises prices, and attracts merchandise from without; it thus very quickly finds its way abroad. On the other hand, when specie is sent abroad to such an extent as to trench upon the requirements of circulation, this raises interest and lowers prices; the specie is thus quickly recalled. The action of the Bank of England familiarly illustrates this law. When it is wanted to attract gold, the rate of interest is raised and the gold quickly appears; when there is too much gold, the interest falls and the gold quickly disappears. It takes only a small sum, say £4,000,000, to produce this effect. How then is it possible that a yearly excess of £70,000,000 could be paid in specie? The payment of such balances for two years would take out of the country not only all the coin, but all the gold cups and silver pencil-cases and earrings it contains. It is computed that all the circulation, taken together with the articles of ornament and utility in Great Britain, the plate, watches, and trinkets, barely comes to £140,000,000. And yet at the end of a long period, in which there has been a steady yearly excess of imports over exports, the country still has plenty of money.
If this excess is not paid for in specie, neither is it obtained on credit. Merchants nowadays do not give and take the long credits that were formerly the custom. There are certain imports, indeed, that are paid for before the goods come to hand. A cargo of wheat from California, for instance, takes from four to five months to reach England. But it is paid for by drafts on England at 60 days sight, which, sent forward by rail and steam, mature a month or more before the arrival of the wheat in England. It is probable, indeed, that the whole excess is paid for before it is received. The excess is certainly not a debt owed by England; it is rather the payment of a debt owed to England. It is sent in payment of interest and dividends on English money invested abroad.
Mongredien shows that so far from its being an indication of debt when the imports of a country exceed the exports, it is an indication of wealth. Such a condition is a matter for congratulation. But many people still cling to the early notion. While all are agreed that foreign commerce is a good thing, and while the world is unanimous in thinking that it is well to have the exports as large as possible, many people still cherish a dislike to large imports. It is forgotten that you must have imports to pay for the exports, and that, if you limit the imports, you of necessity limit the exports. The exports must be paid for by importing commodities and not by importing specie. The case has been supposed of a protectionist Paradise, in which goods only were exported and nothing but bullion received in return. Would a country be richer for such a state of things? It would certainly not be richer, for there would be an over supply of bullion, and it would fall in value in comparison with other commodities. The workingman might receive twice his former wages, but he would have to pay twice as much for everything he consumed. Indeed, prices would rise much more rapidly than he could induce his employers, by remonstrances and by strikes, to raise his wages. Bullion would thus become very cheap. It would be worth about half its price in foreign countries. The result would therefore be that those holding it would send it abroad. But it would of course be sold for goods, since the only other thing for which they could exchange it would be bullion. The country would at once cease to receive nothing but bullion. There would be great exports of bullion and great imports of goods. Protected interests would be ruined, and everything would be upside down, until the superfluous bullion would be worked off. Of course a country which imported nothing but bullion and exported nothing but goods would be impossible, since no prohibitory measures can prevent the transfer of specie from the country in which it was worth less to that in which it is worth more. But the hypothesis may serve to show that such a condition of things would be productive, not of good, but of harm.