Chapter IV.—On the Balance of Trade, or the causes which Occasion the Transmission of the precious Metals from one Country to another

CHAPTER IV.

OF THE BALANCE OF TRADE, OR OF THE CAUSES WHICH OCCASION THE TRANSMISSION OF THE PRECIOUS METALS FROM ONE COUNTRY TO ANOTHER.

IN a preceding chapter, it was stated that the precious metals are distributed by the operations of commerce throughout the trading world, in such a way as to establish what is called a general level of currencies. I shall now proceed to show the mode by which this distribution is accomplished, which is according to the laws of what is termed the balance of trade.

It must be manifest to every observant mind, that even under the most perfect level which the currencies of all commercial nations can attain, that is, under such a state of things as may be imagined where no motive of profit could lead to the importation or exportation of the precious metals, except as relates to the annual production of the mines, the prices of other commodities will not be in all countries the same. Were this the case there could be no commerce, for the only object of commerce is to transport commodities from countries where they can be purchased for a comparatively small quantity of gold and silver; that is, at a comparatively low price; to other countries where they can be sold for a greater quantity of gold and silver; that is, at a higher price.* Any one can perceive that iron would not be imported into the United States from England unless it could be sold here at a higher price than it cost at the place of production, and that cotton would not be exported from the United States to Europe unless it could be sold there at a higher price than it could be purchased for here. The prices of different articles, it is self-evident, in every country, are regulated by causes peculiar to themselves, such as the soil, climate, wages of labor, degree of skill required, extent of population, capital, and taxation; and this it is which sets in motion the whole machinery of commerce. Even in the case of barter with savage nations, although gold and silver be absent, yet the trader has reference in his calculations to the metallic standard, in order to enable him to determine how much he can afford to give of what he has to dispose of, in exchange for the commodities which he is to receive in payment.

The foreign commerce of a nation is usually of two kinds. The first is that wherein the export and import trade are carried on by the same individual, in the same vessel, and in the prosecution of the same voyage. Such is the trade of the United States with most parts of the West Indies, South America, Africa, some parts of India, and some other countries. The imports from those regions consist of the articles purchased with the proceeds of the outward cargoes, and this trade is strictly an exchange of equal values, and although it may exhibit what is called a balance of trade on one side or the other, yet it calls for no payment. The same is true of the whale and other fisheries, wherein although the amount imported may far exceed in value the amount exported, yet no balance of trade is left to be paid, the difference being made up by the value of the labor expended by the crew, of the freight earned by the ship, and by the profits of the enterprise.

The second trade is that wherein the exports and imports are made by different classes of merchants, without any previous consultation or agreement with one another. Such is our trade with Great Britain and most of the other maritime nations of Europe. The exporters of cotton, rice, tobacco, flour, and the other commodities which form the bulk of our exports to Europe, are very rarely the same individuals who import the dry goods, hardware, and the infinite variety of other manufactures and productions which constitute the bulk of our imports from Europe. The former ship their cargoes to foreign countries, without any knowledge of the quantity or value of the commodities which the importing merchants intend to order from abroad, and the latter send their orders abroad for goods without any knowledge of the amount for which the exported cargoes will be sold. The former class, that is, the exporters, get paid for their cargoes by drawing bills of exchange upon the proceeds in the hands of their foreign correspondents; and the latter class, or the importers, pay for their goods by purchasing and remitting these same bills.

Under a course of operations carried on by so many independent traders, it would indeed be miraculous if the exports and imports should be so exactly equal as to leave no balance one way or the other. In truth, experience shows that the exports will sometimes exceed the imports, and that sometimes the imports will exceed the exports, leaving a balance of trade in the former case in favor of the country, and in the latter case against it.

Let us now suppose, that in a given country where the currency is at its proper level, where no gold or silver flows out or flows in, and where consequently exchange would be at par, an excess of imports should take place. What would be the first effect? The answer must be, a demand for more bills of exchange than are for sale in the market, the effect of which is a rise in the rate of exchange above par, which obviously holds out an inducement for the exportation of commodities for which a sufficient inducement did not previously exist. A rise in the exchange of one or two per cent, may sometimes determine shipments, which without such rise would not have been thought of; not that so small a profit would of itself induce shipments, but because one or two per cent, added to the profit which might have been made without such addition, would elevate the gain to the height of the average mercantile rate of profit requisite to warrant a shipment. A profit in advance is a powerful stimulus to exportation, especially where two thirds or three fourths of the capital employed in the purchase of the exported commodities can be immediately replaced by the sale of a bill of exchange. The additional demand, therefore for bills, to assist towards paying the balance is met, we will suppose, at once by additional exports, it sometimes even happening that the remitting merchant, to save, as it is called, the premium on bills, becomes himself an exporter.

Thus far it is manifest that the balance of trade occasions no exportation of the precious metals, and that consequently the general level of currencies is not disturbed. But it may happen that the increased demand for exportable commodities arising from the augmented premium on exchange, may raise their price to an extent equal to the rise in the price of bills, and thus put an end to their exportation, by taking away the additional profit. A new expedient is then resorted to by capitalists to take advantage of the premium on exchange, which is to obtain a credit abroad upon which they may draw bills, under the calculation that at some future, not very distant period, they will be able to replace the funds at a lower rate of exchange, and thereby realise a profit by the operation. The transmission, too, of public securities, bank, railroad, and canal stocks, and the extension of credits by the consent of the foreign creditors upon allowing interest for the extended term, are all well known levers in the mechanism of trade, (to say nothing of bankruptcy), by which the tendency of an unfavorable balance of trade to cause an exportation of the precious metals is frequently neutralised. But it may happen, however, that all these measures combined will not keep down the price of bills of exchange to the rate which will render them more advantageous to remit than gold or silver. That an exportation of the precious metals will then commence is quite apparent, but compared with the whole balance that may be due, it will be exceedingly trivial, as I will proceed, to show.

We will suppose ten millions of dollars to be the circulating medium of the supposed debtor country, and that that is the amount which is requisite to circulate her commodities and to maintain her currency at an equivalency with the currencies of other countries. No sooner does this quantity become diminished by the exportation of any part of it, than a scarcity of money begins to be felt. A scarcity of money invariably occasions a fall in the prices of commodities, as every body knows, and that fall operates as an incentive to exportation, inasmuch as domestic products, which were before too high to export, will now afford a profit. A fall in the price of cotton of one cent a pound has sometimes occasioned the exportation of immense quantities in a short period; and it is very clear that there is a price at which almost any article might be exported to advantage, and that a gradual diminution of the currency, if continued long enough, will eventually establish that price. It is idle to say that possibly the debtor country may not have on hand a sufficiency of products to discharge the debt, and that therefore she must be drained of her precious metals to the last dollar. This can never be. If her wealth or her powers of production had not been commensurate to her demand for foreign commodities, she could not have had sufficient credit to run deeply into debt. At all events, she would have on hand a large portion of the foreign commodities in the purchase of which the debt was incurred, and a scarcity of money might even bring down prices so low as to render the exportation of foreign commodities a profitable trade. It might even be an object to send back to the place of production the very commodities, the importation of which created the unfavorable balance.* It is quite probale that a very small reduction of the amount of coin would produce such a fall in the prices of commodities as would lead to their exportation to an extent adequate to keep down the price of bills so as to prevent any further exportation of the precious metals; but if this should not be the case, and if the scarcity of money should continue to increase, those who had remittances to make would either become bankrupt and make no remittances at all, or become so embarrassed as to default in their punctuality, either of which events would diminish the demand for funds abroad, and stop pro tanto the exportation of gold and silver.† And here it may be remarked by the way, that a real scarcity of money is always accompanied by an artificial scarcity which aggravates the effects of the former. If, for instance, a million of dollars in coin be exported, so as to produce an outcry about scarcity of money, timid people and speculators will withhold another million from circulation; the former because they are afraid to lend it, and the latter because they expect to profit by forcing down the prices of property and commodities to a still lower point, the effect of which would be to diminish the demand for the exportation of coin by reducing the prices of commodities.

But independent of the tendency of the causes above enumerated, to restrain the exportation of specie, another operation simultaneously takes place, which adds to their efficiency. This is, the cessation of fresh imports, owing to the fall in prices of foreign commodities, occasioned by the existing scarcity of money. This cessation, even though it be but for a short period, affords time for the exportation of the products of the country which had not previously been brought into market; and although the tendency of an unfavorable balance of trade is unquestionably to drive the precious metals from a debtor country; yet in point of fact it does not effect it, for the reasons above stated, beyond a very limited extent. But were this, however, not the case, an outward stream would soon be met by an inward one. The low prices of domestic products would soon invite the attention of foreigners, who, to obtain them, would bring into the country, not foreign commodities, which from their low price could only be sold at a loss, but the precious metals.* Whilst gold and silver would be flowing out of the country in some directions it would be flowing into it from others, and sooner or later the equilibrium would be restored, and the double current arrested.

It may here be remarked, that the accounts current between nations in their commercial dealings, that is, between the individual merchants of one country and those of another, which is the only sense in which we speak of commercial transactions between nations, are not periodically settled like the accounts between individuals of the same country, which are generally settled by the actual payment of the balance. National accounts current are never settled. The balance may be one way to-day and another way to-morrow, and as there is no general pay day, like the first of January, upon which a general balance is struck, facilities are afforded for warding off such a pressure on the bill market as would exist if a periodical punctuality were rigidly enforced.

Having thus given a detail of the operations which would take place under an unfavorable balance of trade, I will say a few words upon those which would occur under a favorable balance. And in doing this, we will take for illustration the same country that we have just been considering, and will suppose that an excess of exports should take place. Of such a state of things, what would be the first effect? The answer must be, a fall in the price of bills of exchange in the market. More money would have to be drawn for than the amount required to pay for the imports, and the competition of the bill drawers might reduce the rate of exchange down to the point at which it would be more profitable for them to import gold and silver from abroad, than to draw bills. Still the quantity that would be thus imported, would be comparatively limited. The very existence of a foreign balance in favor of the country, would be proof of the ability of the nation to consume an additional amount of foreign commodities, and the gain which could be made by the importing merchants of one or two per cent, on the exchange, by buying bills below par,in addition to the usual profits, would invite to more extensive importations. Additional importations would in fact take place, and the supply of these new commodities would be met by a corresponding demand on the part of those whose means of consumption from extraordinary crops or extraordinary profits on their business, had thus become augmented.

But a fall in the price of bills would have a tendency to discourage the exports of domestic products, and this discouragement, in its turn, would have the effect of raising the price of bills by a diminution of the supply in the market, and thereby of removing the motive for the importation of the precious metals. The importation of gold and silver, however, should it commence, would make money plentier than before, and thus raise the prices of commodities, foreign as well as domestic. This rise in price would encourage the importation of foreign commodities, because they could be sold at an increased profit, whilst it would discourage the exportation of domestic products, by which means a part of the specie previously imported would again be exported, in preference to the domestic products, which could only be procurable at an augmented price. It thus appears, that a favorable balance of trade, although it has a tendency to bring the precious metals into a country, yet in point of fact it does not effect it beyond a limited amount, resembling in this particular, the former case of an unfavorable balance; two streams might be flowing, one into the country and one out of it, and sooner or later the equilibrium would be restored, and the level regained.

Thus it would be impossible to retain in any country any more than its true share of the aggregate mass of the gold and silver of the trading world, or to exclude from it any portion of that share. No human contrivance or legislation could possibly effect either, and hence all the efforts which have been made in all parts of the world to alter what the natural laws of commerce have decreed, by prohibiting the exportation of the precious metals under heavy penalties, or by attempting to encourage their importation by protective or prohibitory duties on merchandise, or, by resorting to any other expedient, have proved utterly futile. Money, as has been said, like water, will find its level, and although the former like the latter, may for a period be forced into unnatural channels, the deviation cannot long continue.

And here, I will take occasion to remark, that in forming an estimate of the comparative value of the exports and imports of the United States, the custom house returns, as they appear in their aggregates, are but imperfect guides to determine the balance of trade. The value of the exports given is their value at the time and place of shipment, as furnished by the shippers under oath, in the form of manifests. The value of the imports, is their cost abroad, as ascertained by the invoices, also furnished under oath, subject to such revision by the custom house appraisers as may, in case of suspected fraud in the valuation of goods chargeable with ad valorem duties, be deemed right and just. These foreign invoices embrace the cost of the articles, and what are called the shipping charges, that is, the charges without the payment of which they could not be put on shipboard, but include no frieght, or insurance; and where they are made out in Brazil, Buenos Ayres or other countries, where a depreciated paper currency exists, due allowance is made for the depreciation.

Now, as cargoes shipped abroad from the United States, are burthened with the expenses of freight and insurance, their value at foreign ports must generally be augmented by the amount of these expenses and the profits on the voyage, and consequently the nett proceeds of their sales must always furnish’ a fund adequate to the purchase of foreign commodities to a greater value than their cost at home. On this account it necessarily follows, that where the trade of a country is profitable, its imports will always exceed its exports, and this too, just in the degree that it is profitable, and nothing is clearer than that if the voyage out and home does not give a greater amount of imports than of exports, the trade would be abandoned. Of this proposition there can be no dispute, and it is quite probable that an export of a hundred millions of dollars would purchase abroad as many commodities as would show an import on the custom house books of a hundred and twenty or more millions of dollars, thus overthrowing the theory of that class of reasoners who maintain that the balance of trade is against a country when it imports more than it exports, and who consequently believe that a nation is growing poor when she is in reality growing rich.

But to make this matter perfectly plain, I will illustrate it by a practical case that every body can understand.

A merchant in Philadelphia purchases one thousand barrels of flour at eight dollars per barrel, and ships it to the West Indies. The custom house books in this case would show an export of eight thousand dollars. On the arrival of the cargo abroad it sells for twelve dollars per barrel, and after paying freight, duties, commissions, and all other charges, leaves the nett proceeds ten thousand dollars. This sum is invested in coffee, and brought home, where it is entered upon the custom house books as an import of that amount. Here, then, we would have an export of eight thousand dollars and an import of ten thousand dollars, showing a clear gain of two thousand dollars, without leaving any balance due one way or the other. A stronger illustration than this even, is to be found in the operation of our whaling ships. A vessel with a cargo consisting of nothing but provisions sufficient to feed a crew for a voyage, and as many staves, hoops, and headings, as will make casks enough to hold a cargo of oil, clears out at New Bedford for the South seas. The custom house books show an export of ten thousand dollars, perhaps, and when the ship returns with a cargo of oil, they give us an import of fifty thousand dollars, thus showing what the superficial reasoners above referred to would call a balance of trade against the country of forty thousand dollars, but which is a clear evidence of a gain to the owners and crew, and consequently to the country.

But even if the custom house books were to furnish accurate statements of the nett proceeds of the sales of the cargoes exported, as well as of the foreign cost of the homeward cargoes, they would not be sufficient to enable us to form a correct estimate of the real balance of trade. Debits and credits are created in the foreign trade of every country, which never appear on the custom house books. Specie is imported and exported by emigrants and passengers in their trunks, or secretly shipped by merchants to avoid penalties or odium, or, exposure of their operations. Goods are smuggled, and others are purchased with funds earned by vessels abroad, engaged in the carrying trade, and thereby augment the imports, whilst ships are frequently sold abroad, and thereby augment the exports. Large amounts of property are also exported from some countries for which no proceeds are to return, or at least, to return at an early day, such as happens in the case of foreign subsidies, the maintenance of troops and navies abroad, the transmission of revenues to non-resident capitalists, and funds for the expenses of travellers in foreign countries. To these may be added losses at sea, or by fires abroad, the bankruptcy of the persons to whom the exported commodities are sold, and investments in foreign loans and joint-stock companies. In most of these cases property of some kind or other is sent abroad which appears on the custom house books amongst the exports; and, although in many of them the actual transmission for these specific objects may be in the form of bills of exchange, yet it is manifest, that these bills could only be drawn upon shipments of property.

In the foregoing remarks it has been laid down as an axiom, that the price of bills of exchange is determined by the balance of trade. Strictly speaking, however, this is not always the case, for this balance is liable to be modified by what is called the balance of payments; and in truth this latter principle it is which regulates the daily rate of the exchanges. If all the merchandise exported and imported was to be immediately paid for at the time of its changing hands, the balance of trade and the balance of payments would be identical. But, in the intercourse between nations we know that this is not always the case, and that circumstances occur to prevent the immediate influence of the balance between imports and exports from acting directly upon the exchanges. Amongst these circumstances are the following:—

1. Where the imported articles are bought on a credit, and are to be paid for at a distant time, whilst the exported articles are sold for cash, or vice versa.

2. Where in the case of both imports and exports the sale is on credit, but the credits are not of the same length.

3. Where the articles shipped abroad from one of the countries should not meet with a ready sale, and should be kept on hand for a length of time without being drawn upon, whilst on the other side a prompt sale is made, and bills drawn for the proceeds.

In either of these cases, the operation of the balance of payments on the exchanges might be such as not only to neutralise for a time the operation of the balance of trade, but to turn the exchanges against the country which had the balance of trade in its favor. A case in point can readily be referred to.

If an account current were to be made out of the past state of debits and credits between the United States and Great Britain, it would no doubt be found, that from the date of planting the first British colony in this hemisphere, we have owed a balance of trade that has never been discharged, and which at times may have amounted to a hundred millions of dollars or more; and yet, owing to the credit that has been extended to us, by which the pay-day has been deferred, the exchange has not always been against us, but has, on the contrary, been so controlled by the balance of payments as frequently to have been in our favor.*

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