It is claimed by many writers that international trade is carried on upon a gold basis, and that it is necessary, therefore, if a country is to maintain and increase such trade, that it should have its money based upon gold, since its “balance of trade” must be paid in gold.
The idea of foreign trade involved in such statements is a relic of the old “mercantile theory” that the great object of any country was to export as much as possible of its products and receive in return the largest possible amount of gold and silver,—to get gold, in fact, at any hazard. This theory was buried, a century ago, under the weight of Adam Smith’s arguments, and every economist since113 then has helped to bury it deeper; but its ghost still stalks and appears now and again in the form of such statements as the above, and in the common expressions “the balance of trade is against the country,” or “the balance of trade is in favour of the country,” meaning that gold is being exported or imported, and implying that the one is an injury or the other a benefit to the country.
From a mercantile point of view, there is some justification for these expressions, and for the satisfaction felt at a condition of things requiring the import of gold. As before stated, the value of gold is inversely as general prices in gold-standard countries, and the import of gold means a lowering of its value and a general rise of prices,—which, of course, is what merchants like to have happen; and the export of gold means a fall in prices,—which they dread.
From an economic standpoint the term balance of trade is a misnomer, and is misleading. Equally misleading and erroneous is the idea that gold or silver is in any way necessary to foreign commerce, or that in consequence of a money being based on one of these metals such trade will be in any way enhanced.
International trade is an exchange of commodities; not, to be sure, a direct barter, but an indirect one. One country exports those commodities which it can produce the cheapest, in exchange for those of other countries that are either not produced at all in the first country, or can be produced only at a greater cost than by import. The immediate force impelling to the export and import of commodities is, in all cases, a difference in their values in the two countries. This is no less true of gold than of other commodities, for gold will never move from one country to another115 except it be of lower value in the exporting than in the importing country, no matter how much the one may be owing the other. The expressions “balance of trade in favour of,” or “against a country,” means only that gold is at that time of higher value in one than in another country, by an amount above the cost of shipment, and is being exported or imported because there is a profit in so doing; but this furnishes no criterion whatever of the prosperity of a country. It frequently happens that gold moves for a considerable time from one country to another because of large production of gold in the exporting country. That cannot be considered a bad condition of business or unfortunate for the exporting country, unless the commodities received in exchange are useless, or are wasted. At other times it frequently happens that a country is importing gold, giving in exchange not only other commodities, but promises to pay back the value received, in the shape of bonds and stocks—running in debt, in fact.116 This may be a good or a bad thing for the country, as for an individual, according as the value received is profitably used or not. It certainly is no sure indication of real prosperity.
The operations of foreign trade create a great number of claims and obligations on the part of citizens of one country against, as well as in favour of, the citizens of all others. These claims consist of drafts, bills of exchange, letters of credit, etc., and are expressed in every kind of money that exists, whether based on gold or silver, or simply inconvertible paper. Through the medium of foreign exchange banks these claims are offset against each other and cancelled. Between two countries having the same monetary standard there exists what is called the par of exchange; that is, the ratio between the weights of gold or silver in their respective units. The actual rate of exchange—that is, the price which will be paid in one money for claims expressed in another—seldom conforms117 to this nominal par. The bills of exchange, etc., representing claims of the exporters of one country against the importers of another may be regarded as a sort of commodity, and subject to the law of supply and demand. If one country, A., has more claims against another, B., than B. has against A., then the demand will be stronger for those which are fewer, and the price will rise, and vice versa.
The prices of exchange cannot vary from the par of exchange between gold-standard countries much more than the cost of shipment of gold; for if they do, it will become profitable to export or import gold, and this will create new claims balancing the others. The variation of exchange rates within these limits is quite sufficient, however, to cause the actual exchange rate, and not the nominal one, to be reckoned on by those engaged in foreign trade.
There exists, and always has existed, an actual exchange rate between the money units118 of all countries, or between the claims expressed therein, no matter what the money was based on; although there cannot be a par of exchange except between moneys based on the same metal. These actual rates are continually varying, even between countries like England and Australia, which not only use the same standard, but a common unit, and there is, therefore, no difference in the practical working of exchange between countries having the same standard and those having different ones.
The inference to be drawn from these facts and theories is, that it would make no difference in the foreign trade of any country if it did not possess an ounce of gold or of silver, or whether its money was based on gold or was inconvertible paper; if the country produces commodities that other countries want, and wants some that other countries produce, the commerce will continue.
If the money of either country is fluctuating in value, relative to the other, to any great119 extent, it may introduce some uncertainty that will hamper and inconvenience trade,—though to a less extent than a variable money would in its own country, as there are means by which such fluctuations can be guarded against; but unless the changes are sudden and violent, no inconvenience will be experienced, as the actual exchange rates are more or less always fluctuating.
In support of these statements, and as showing that they are borne out by practical experience, the following quotations are given from Mr. Wells’ “Recent Economic Changes,” in reference to trade between a silver and a gold standard country when the relative values of the two metals were changing quite rapidly. He says, p. 239:—
“Mr. Lord, a director of the Manchester (England) Chamber of Commerce, testified before the Commission on the Depression of Trade, in 1886, that ‘So far as India was concerned, it is not necessary to run any risk at all from the uncertainties of exchange.’120 Mr. Blythell (representing the Bombay Chamber of Commerce) testified before the same commission, … ‘There is no difficulty in negotiating any transaction for shipping goods to India and in securing exchange.’”
Mr. Wells says: “Thus from returns officially presented to the British Gold and Silver Commission, 1886, it was established that the trade of Great Britain with India since 1874 had relatively grown faster than with any foreign country ‘except the United States and perhaps Holland.’” He also says, of Mexican exchange, p. 241: “The fluctuations in the price of silver since 1873—Mexican exchange having varied in New York in recent years from 114 to 140—would seem, necessarily, to have been a disturbing factor of no little importance in the trade between United States and Mexico; but the official statistics of the trade between the two countries since 1873 (notoriously undervalued) fail to show that any serious interruption has occurred.”
Mr. Wells further states:—
“In forming any opinion in respect to this problem, it is important to steadily keep in mind the fact that international trade is trade in commodities and not in money; and that the precious metals come in only for the settlement of balances…. The trade between England and India is an exchange of service for service. Its character would not be altered if India should adopt the gold standard to-morrow, or if she should, like Russia, adopt an irredeemable paper currency, or, like China, buy and sell by weight instead of tale…. Unless all the postulates of political economy are false—unless we are entirely mistaken in supposing that men in their individual capacity, and hence in their aggregate capacity as nations, are seeking the most satisfaction with the least labour, we must122 assume that India, England, and America produce and sell their goods to one another for the most they can get in other goods, regardless of the kind of money that their neighbours use or that they themselves use.”
From the time of the Civil War until 1879, this country, though nominally on a gold and silver basis, was actually using a depreciated paper money. No serious inconvenience was experienced in our foreign trade during the greater part of this time; when the currency was most fluctuating, it doubtless did disturb all business, both foreign and domestic, but this was due to its great and sudden changes, and may be regarded as abnormal, and unlikely under a proper system again to occur.
Walter Bagehot, in his work, “A Universal Money,” observes:—
“If France and America had the same currencies as England, it would still happen, as now, that bills on Paris or New York would be at a discount or a premium. The amount of money wishing to go eastward123 across the Atlantic, and the amount wishing to go westward, would then, as now, settle how much was to be paid in London for bills on New York, and how much was to be paid in New York for bills on London.”
It must be evident that if the people of one country have incurred debts to the people of another country expressed in foreign monetary units, nothing but such foreign money will satisfy the claim, and to procure it the debtors must ship some commodity in exchange for it. What this commodity will be, will depend on which is the cheapest—which one the debtor, everything considered, will have to give the least of in exchange for the necessary foreign money,—it may be claims against foreign merchants, or bankers, in the shape of drafts or bills of exchange, or it may be gold, if that is cheaper, or it may be wheat, or cotton, or any other commodity, but it will always be that which the debtor can purchase cheapest. If it be gold, it will be because the debtor can purchase enough124 gold to exchange for the required amount of foreign money for less of his own money (including transportation and other charges) than he can purchase a sufficient amount of any other commodity, and not because the foreign money is based on gold. In short, the gold differs in no way from any other commodity in such transactions; it is exchanged for the foreign money, which alone can satisfy the debt, precisely as any other commodity.
That both gold and silver may be a convenience at times in international trade is not denied; but they are not a necessity, and their convenience for this purpose is in no way enhanced by their coinage or by their use as a domestic money.
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