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.
[Illustration: Chart XIII.]
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,
_cæteris 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.
[Illustration: Chart XIV.]
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.
A merchant in the United States, A, has exported American commodities,
consigning them to his correspondent, B, in England. Another merchant in
England, C, has exported English commodities, suppose of equivalent value,
to a merchant, D, in the United States. It is evidently unnecessary that B
in England should send money to A in the United States, and that D in the
United States should send an equal sum of money to C in England. The one
debt may be applied to the payment of the other, and the double cost and
risk of carriage be thus saved. A draws a bill on B for the amount which B
owes to him: D, having an equal amount to pay in England, buys this bill
from A, and sends it to C, who, at the expiration of the number of days
which the bill has to run, presents it to B for payment. Thus the debt due
from England to the United States, and the debt due from the United States
to England, are both paid without sending an ounce of gold or silver from
one country to the other.(274)
[Illustration.]
This implies (if we exclude for the present any other international
payments than those occurring in the course of commerce) that the exports
and imports exactly pay for one another, or, in other words, that the
equation of international demand is established. When such is the fact,
the international transactions are liquidated without the passage of any
money from one country to the other. But, if there is a greater sum due
from the United States to England than is due from England to the United
States, or _vice versa_, the debts can not be simply written off against
one another. After the one has been applied, as far as it will go, toward
covering the other, the balance must be transmitted in the precious
metals. In point of fact, the merchant who has the amount to pay will even
then pay for it by a bill. When a person has a remittance to make to a
foreign country, he does not himself search for some one who has money to
receive from that country, and ask him for a bill of exchange. In this, as
in other branches of business, there is a class of middle-men or brokers,
who bring buyers and sellers together, or stand between them, buying bills
from those who have money to receive, and selling bills to those who have
money to pay. When a customer comes to a broker for a bill on Paris or
Amsterdam, the broker sells to him perhaps the bill he may himself have
bought that morning from a merchant, perhaps a bill on his own
correspondent in the foreign city; and, to enable his correspondent to
pay, when due, all the bills he has granted, he remits to him all those
which he has bought and has not resold. In this manner these brokers take
upon themselves the whole settlement of the pecuniary transactions between
distant places, being remunerated by a small commission or percentage on
the amount of each bill which they either sell or buy. Now, if the brokers
find that they are asked for bills, on the one part, to a greater amount
than bills are offered to them on the other, they do not on this account
refuse to give them; but since, in that case, they have no means of
enabling the correspondents on whom their bills are drawn to pay them when
due, except by transmitting part of the amount in gold or silver, they
require from those to whom they sell bills an additional price, sufficient
to cover the freight and insurance of the gold and silver, with a profit
sufficient to compensate them for their trouble and for the temporary
occupation of a portion of their capital. This premium (as it is called)
the buyers are willing to pay, because they must otherwise go to the
expense of remitting the precious metals themselves, and it is done
cheaper by those who make doing it a part of their especial business. But,
though only some of those who have a debt to pay would have actually to
remit money, all will be obliged, by each other’s competition, to pay the
premium; and the brokers are for the same reason obliged to pay it to
those whose bills they buy. The reverse of all this happens, if, on the
comparison of exports and imports, the country, instead of having a
balance to pay, has a balance to receive. The brokers find more bills
offered to them than are sufficient to cover those which they are required
to grant. Bills on foreign countries consequently fall to a discount; and
the competition among the brokers, which is exceedingly active, prevents
them from retaining this discount as a profit for themselves, and obliges
them to give the benefit of it to those who buy the bills for purposes of
remittance.
When the United States had the same number of dollars to pay to England
which England had to pay to her, one set of merchants in the United States
would want bills, and another set would have bills to dispose of, for the
very same number of dollars; and consequently a bill on England for $1,000
would sell for exactly $1,000, or, in the phraseology of merchants, the
exchange would be at par. As England also, on this supposition, would have
an equal number of dollars to pay and to receive, bills on the United
States would be at par in England, whenever bills on England were at par
in the United States.
If, however, the United States had a larger sum to pay to England than to
receive from her, there would be persons requiring bills on England for a
greater number of dollars than there were bills drawn by persons to whom
money was due. A bill on England for $1,000 would then sell for more than
$1,000, and bills would be said to be at a premium. The premium, however,
could not exceed the cost and risk of making the remittance in gold,
together with a trifling profit; because, if it did, the debtor would send
the gold itself, in preference to buying the bill.
If, on the contrary, the United States had more money to receive from
England than to pay, there would be bills offered for a greater number of
dollars than were wanted for remittance, and the price of bills would fall
below par: a bill for $1,000 might be bought for somewhat less than
$1,000, and bills would be said to be at a discount.
When the United States has more to pay than to receive, England has more
to receive than to pay, and _vice versa_. When, therefore, in the United
States, bills on England bear a premium, then, in England, bills on the
United States are at a discount; and, when bills on England are at a
discount in the United States, bills on the United States are at a premium
in England. If they are at par in either country, they are so, as we have
already seen, in both.(275)
Thus do matters stand between countries, or places which have the same
currency. So much of barbarism, however, still remains in the transactions
of the most civilized nations, that almost all independent countries
choose to assert their nationality by having, to their own inconvenience
and that of their neighbors, a peculiar currency of their own. To our
present purpose this makes no other difference than that, instead of
speaking of _equal_ sums of money, we have to speak of _equivalent_ sums.
By equivalent sums, when both currencies are composed of the same metal,
are meant sums which contain exactly the same quantity of the metal, in
weight and fineness.
The quantity of gold in the English pound is equivalent to
$4.8666+ of our gold coins. If the bills offered are about equal
to those wanted, a claim to a pound in England will sell for
$4.86. If many are wanted, and but few to be had, their price will
go up, of course; but it can not go more than a small fraction
beyond $4.90, since about 3-¼ cents is sufficient to cover the
brokerage, insurance, and freight per pound sterling in a shipment
of gold to London. Therefore, in order to get money to a creditor
in London, no one will pay more for a pound in the form of a bill
than he will be obliged to pay for sending it across in the form
of bullion. Bills of exchange, then, can not rise in price beyond
the point ($4.90 +) since, rather than pay a higher sum for a
bill, gold will be sent. This point is called the “shipping-point”
of gold. When the exchanges are at $4.90, it will be found that
gold is going abroad. On the other hand, when the supply of bills
is greater than the demand, their price will fall. A man having a
bill on London to sell—i.e., a claim to a pound in London—will not
sell it at a price here lower than $4.86, by more than the expense
of bringing the gold itself across. Since this expense is about
3-¼ cents, bills can not fall below about $4.83. When exchange is
at that price, it will be found that gold is coming to the United
States from England. This price is the “shipping-point” for
imports of gold. This, of course, applies to sight-bills only.
Formerly, we computed exchange on a scale of percentages, the real
par being about 109. This was given up after the war.
When bills on foreign countries are at a premium, it is customary to say
that the exchanges are against the country, or unfavorable to it. In order
to understand these phrases, we must take notice of what “the exchange,”
in the language of merchants, really means. It means the power which the
money of the country has of purchasing the money of other countries.
Supposing $4.86 to be the exact par of exchange, then when it requires
more than $1,000 to buy a bill of ￡205, $1,000 of American money are worth
less than their real equivalent of English money: and this is called an
exchange unfavorable to the United States. The only persons in the United
States, however, to whom it is really unfavorable are those who have money
to pay in England, for they come into the bill market as buyers, and have
to pay a premium; but to those who have money to receive in England the
same state of things is favorable; for they come as sellers and receive
the premium. The premium, however, indicates that a balance is due by the
United States, which must be eventually liquidated in the precious metals;
and since, according to the old theory, the benefit of a trade consisted
in bringing money into the country, this prejudice introduced the practice
of calling the exchange favorable when it indicated a balance to receive,
and unfavorable when it indicated one to pay; and the phrases in turn
tended to maintain the prejudice.
§ 2. Distinction between Variations in the Exchanges which are
self-adjusting and those which can only be rectified through Prices.
It might be supposed at first sight that when the exchange is unfavorable,
or, in other words, when bills are at a premium, the premium must always
amount to a full equivalent for the cost of transmitting money. But a
small excess of imports above exports, or any other small amount of debt
to be paid to foreign countries, does not usually affect the exchanges to
the full extent of the cost and risk of transporting bullion. The length
of credit allowed generally permits, on the part of some of the debtors, a
postponement of payment, and in the mean time the balance may turn the
other way, and restore the equality of debts and credits without any
actual transmission of the metals. And this is the more likely to happen,
as there is a self-adjusting power in the variations of the exchange
itself. Bills are at a premium because a greater money value has been
imported than exported. But the premium is itself an extra profit to those
who export. Besides the price they obtain for their goods, they draw for
the amount and gain the premium. It is, on the other hand, a diminution of
profit to those who import. Besides the price of the goods, they have to
pay a premium for remittance. So that what is called an unfavorable
exchange is an encouragement to export, and a discouragement to import.
And if the balance due is of small amount, and is the consequence of some
merely casual disturbance in the ordinary course of trade, it is soon
liquidated in commodities, and the account adjusted by means of bills,
without the transmission of any bullion. Not so, however, when the excess
of imports above exports, which has made the exchange unfavorable, arises
from a permanent cause. In that case, what disturbed the equilibrium must
have been the state of prices, and it can only be restored by acting on
prices. It is impossible that prices should be such as to invite to an
excess of imports, and yet that the exports should be kept permanently up
to the imports by the extra profit on exportation derived from the premium on bills; for, if the exports were kept up to the imports, bills would not be at a premium, and the extra profit would not exist. It is through the prices of commodities that the correction must be administered. |
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