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PART III. INTERNATIONAL TRADE
Chapter I. Doctrine of Comparative Cost
Chapter II. International Trade in its Relation to
the Rate of Wages
Chapter III. International Values
Chapter IV. Free Trade and Protection
Chapter V. On Some Minor Topics
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§ 1. it has been usual hitherto in treatises on Political Economy to consider the subject of international trade and international value, apart from the general theory of exchange and exchange value, as a distinct branch of economic doctrine: but the question has been lately raised whether this method of exposition is scientifically warrantable—whether, that is to say, it does not suggest a false view of the phenomena of commerce by implying a distinction in principle where in reality no such distinction exists. Assuming that the objection thus taken to the separate treatment of international trade is not a mere quibble on the use of the term "international," but in tended to apply to the substance of economic theory as commonly expounded, the question raised by it is one as to the nature of the phenomena embraced by international trade, and what we have to decide is whether those phenomena are such as to find their solution in the same theory of exchange which furnishes the explanation of the facts of domestic commerce In the event of their finding their solution in that theory, it is evident that the objection taken to the ordinary mode of exposition is well founded; while, in the opposite case, it is equally clear that the phenomena of international trade have need of special theory for their satisfactory elucidation.
[298] In order to determine this point, it will be well if we endeavor here to set before our minds in the most general way the fundamental circumstances on which trade, or the interchange of commodities, in all its forms, rests. These fundamental circumstances are to be found in the consequences arising from division of labor or separation of employments. In order that industry may be carried on upon this plan, and that advantage may be taken of the increased efficiency and economy thence resulting, the exchange of products among those carrying on the separated occupations becomes necessary, and in this fact we find the natural basis and explanation of trade. Trade, therefore, is the necessary means of giving effect to the separation of employments, and the advantages arising from it are the advantages incident to this scheme of things. The general nature of these advantages is familiar to all readers of economic works; but for our present purpose it will be convenient to consider them under two leading heads: first, we may consider those advantages which arise from the separation of employments, apart from any special circumstances which may give to this arrangement a peculiar importance; and, secondly, those which are due to the separation of employments, as furnishing the means of developing special faculties of production possessed by particular persons or places. As an example of the former class of advantages we may take the ordinary handicraft trades. There is an obvious advantage in having such employments as tailoring, boot-making, hat-making, and the various callings of blacksmith, locksmith, mason, joiner, etc., separated and carried on as distinct occupations; but, as most of them require the same, or nearly the same, sort of qualifications for their performance, it makes little difference to which of the group any particular member of the handicraft class devotes himself. A is a tailor, B a shoe-maker, and C a hatter; but if C had been a tailor, A a shoe-maker, and B a hatter, the arrangement would probably have answered equally well.
[299] Nothing is here gained from the separation of employments beyond the increased dexterity incident to the increased familiarity of each workman with his work, together with the saving of so much time as would be wasted if the laborer had occasion frequently to change his occupation. This, then, is one description of advantage arising from the separation of employments to the realization of which trade ministers. But, as I have said, this advantage may be combined with advantages of another kind, and this happens where the separation of employments, while promoting the results just noticed, furnishes, at the same time, the means of developing the special capacities or resources possessed by particular individuals or localities.
In the examples given above the advantage obtained was derived from the mere fact of the separation of employments, altogether independently of the mode in which the separated employments were distributed among the persons carrying them on, as well as of the places in which they were conducted. But a further gain arises when the employments are of a kind which, in order to their effective performance, call for special capacities in the workman or special natural resources in the scene of operation. There would be a manifest waste of special power in compelling to a mere mechanical or routine pursuit a man who is fitted to excel in a professional career; and similarly, if a branch of industry were established on some site which offered greater facilities to an industry of another sort, a waste, analogous in character, would be incurred. In a word, while a great number of the occupations in which men engage are such as, with proper preparation for them, might equally well be carried on by any of those engaged in. them, or in any of the localities in which they are respectively established, there are others which demand for their effective performance special personal qualifications and special local conditions; and the general effectiveness of productive industry will, other things being equal, be proportioned to the completeness [300] with which the adaptation is accomplished between occupation on the one hand and individuals and localities on the other.
There are thus two distinct kinds of advantage derivable from the separation of employments; and I have called attention to this circumstance in order to say that it is one only of those sorts of advantage that international trade in the main tends to develop. The great trades of the world are carried on between countries pretty widely removed from each other either in the scale of civilization or in respect to their natural resources and productions) while in proportion as countries approximate to each other in natural resources or in the industrial qualities of their inhabitants, the scope for international trade is narrowed: it is even possible that it should fail altogether. The reason of this is by no means mysterious. The advantage to be derived from the separation of employments; where this separation is not connected with any special facilities of production, are, in countries in which industry has made any considerable progress, in general realized in their fall extent by the separation which takes place within the limits of each of those countries. It is only when population is very sparse that the home market is not large enough to secure this result; and where this is so, it generally happens that any gain that might be obtained through a trade with foreign nations in articles in the production of which no special facilities, positive or comparative, are possessed by the trading countries, is more than counterbalanced by the loss incident to an increased cost of carriage. Accordingly in countries or districts which are very sparsely peopled, instead of the separation of employments in the simpler industries being carried out by an interchange with foreign nations, what usually happens is that no separation of employments, or a very imperfect one, takes place, and that things continue in a primitive state. International trade may thus be considered as [301] practically restricted to giving effect to those examples of the separation of employment in which the more ordinary advantages flowing from that principle are combined with those which are due to the adaptation of industrial operations to the special circumstances of persons and places; while again it is tolerably obvious that, of these two sorts of adaptation, that which relates to places is, in the international sphere, by much the more important. The only case indeed in which personal aptitudes go for much in the commerce of nations is where the nations concerned occupy different grades in the scale of civilization. In the trade, for example, between England and India it is probable that the different characters of the two peoples, incident to the different stage of social growth to which each has attained, go a considerable way in determining the character and the amount of their commercial dealings. But perhaps the most striking example which the world has ever seen of a foreign trade determined by the peculiar personal qualities of those engaged in ministering to it is that which was furnished by the Southern States of the American Union previous to the abolition of slavery. The effect of that institution was to give a very distinct industrial character to the laboring population of those States, which unfitted them for all but a very limited number of occupations, but gave them a certain special fitness for these. Almost the entire industry of the country was consequently turned to the production of two or three crude commodities, in raising which the industry of slaves was found to be effective; and these were used, through an exchange with foreign countries, as the means of supplying the inhabitants with all other requisites. This is, perhaps, the most noteworthy instance on record of personal aptitudes extensively affecting the external trade of a country. In the main, however, it would seem that this cause does not go for very much in international commerce. The principal condition, to which all others are subordinate, in determining [pp. 302-303 are missing] [304] out of the existence of an effective industrial competition, is the correspondence of remuneration with the sacrifices undergone—a substantial equality, that is to say, making allowance for the different circumstances of different industries, of profits and wages. Such a test, applied to domestic transactions, shows the existence of a very large amount of effective industrial competition operative throughout the various industries carried on within the limits of a single country. The competition of different capitals within such limits may be said to be universally effective; and that of labor, though interrupted at certain points, is effective over large industrial areas. Profits consequently within the same country, however great may be the fluctuations, gravitate steadily toward a common level, as likewise do wages within the limits of the industrial areas to which I have referred. The same test applied to international transactions shows an entirely different state of things. For, though capital migrates, it does not do so upon a scale large enough to establish an equality of profits in different countries, and profits consequently remain at a permanently higher level in some countries than in others. Indeed, in spite of all we hear of the international movements of capital, the amount of capital that can be truly called cosmopolitan—disposable for investment in countries other than that to which it properly belongs—is after all but a mere fraction of the national capital. It is in effect confined to a portion of what is called the "floating capital" of a country—that part of the capitalist's funds which he does not mean to superintend himself, and which he offers on loan. All that immensely larger part which the owners are not disposed to part with, but desire to superintend and work themselves—all this is practically confined to the capitalist's country. What passes off, though often considerable in its positive amount, is thus wholly unequal to producing a sensible impression on the general rate of profit in the country to which it goes; and so profits remain [305] permanently at different levels in different countries. And just as little has an equilibrium in the rates of wages been brought about by the international movements of labor. Great as has been the emigration from Europe to the United States, it may be doubted if, outside the range of a few towns on the eastern coast, any appreciable effect has been produced on the rates of wages in the latter country. Throughout the Union wages remain in all occupations very considerably higher than in the corresponding occupations in this country. Nor do they show any sign of declining. It thus appears, alike with regard to labor and capital, that notwithstanding a certain amount of international mobility in these instruments of production, the impediments to their transference from country to country are yet sufficiently great to prevent effective competition from taking place between the industries of different countries, such as is really operative in each separate country over a very large proportion of its domestic industry. And this, and no more than this, is all that is assumed by economists—all at least that is essential to the validity of their arguments—when they contend for the necessity of separating the facts of international from those of domestic trade.
§ 2. It will aid us in giving the due circumscription to the facts with which we have to deal if, before developing the consequences involved in the state of things just described, we note briefly the nature of the obstacles which impede the movements of labor and capital in the international sphere. The most important of these are the following: 1. Geographical distance; 2. Difference in political institutions;
3. Difference in language, religion, and social customs—in a word, in forms of civilization. Each of these circumstances is capable of hindering, and does in fact, to a greater or less extent, hinder the free movement of labor and capital. As regards their relative importance, the social and political causes are probably, in the [306] present, state of the world, «more powerful than the physical, more particularly when the former happened to be connected with differences of race; while geographical distance is apparently that which exerts the least obstructive force.
These being the principal obstacles to the movements of labor and capital from place to place, it will be at once apparent that the line of. demarcation which would result from their interference, though largely coincident with that indicated by the words "international" and "domestic," is by no means strictly so. Australia and Canada, for example, are portions of a single political system, but the geographical obstacles offered to trade between those places, or between either of them and England, are far greater than those which exist in the trade of many independent nations; and the same may be said of the trade between the Atlantic and the Pacific States of the American Union. Similarly, we find within the same country differences of race, of language, and of religion, and to some extent of social tastes and habits. It is thus clear that no hard and fast line can be drawn between domestic and international trade founded on the character of the obstacles presented to the movements of labor and capital; and it must, therefore, be owned that the terms "international" and "domestic" do not accurately express the distinction which it is designed to mark. What we want is a term which would cover all that portion of the trade of mankind carried on between localities sufficiently separated from each other, whether by moral or physical obstacles, to prevent the action, as between producers in the trading localities, of effective industrial competition, and which would exclude the trade carried on under those more favorable conditions where industrial competition is effective. So far as I know, there is no one word that accurately meets this requirement "International" is that which perhaps comes most nearly to what we want. In the intercourse of independent nations, all or most of the obstacles I have noted come into operation, [307] and in their combination offer a substantial impediment to the free movement of capital and labor; while, as among different localities in the same country, they do not exist in the same number or in the same degree of intensity, and, where they do exist and operate, they are always counteracted and largely neutralized by the powerfully assimilating influence of a single central government. In the case of colonies, however, the political causes tending to facilitate the movements of capital and labor are, on the whole, overborne by the geographical, climatic, and physical circumstances which obstruct those movements; and therefore, for the purposes of economic theory, we must include colonial under "international" trade. Oar economic nomenclature in this part of our subject is thus not free from objection; but, having noted its imperfection, we shall not be likely to be misled by it.
§ 3. "We have now ascertained the grounds in the facts of the case for the distinction between "international" and "domestic" trade, and the sense in which these terms are to be understood. It remains that we endeavor to trace the consequences which result in the trade of nations from the circumstances, such as they have been shown to be, under which it takes place.
First among these consequences we may note the following: A trade may arise between two independent countries and be profitable for each under conditions in which it would not arise If the trading localities were within the range of a single country, that is to say, if they were so situated that labor and capital moved freely between them. To perceive the grounds of this statement, we may consider the following case. Suppose a trade between North Wales on the one side and Lancashire and Yorkshire on the other, the articles exchanged being slates on the part of North Wales against woolen and cotton manufactures on the side of the English counties. North [308] Wales has evidently a great and unquestionable advantage over Yorkshire and Lancashire in the production of slates; and it is probable that Yorkshire and Lancashire have an advantage, less decided, but still real, over North Wales in the production of their staple products. Of one thing at all events we may be sure: neither district is under a positive disadvantage, as compared with the other, in raising or manufacturing the product which forms the staple of its trade; for, were this so, the product in question would no longer be produced in that locality: the capital and labor employed in the business would migrate thence to the other locality, which offered greater advantage for the production of this article, and the trade between the places would cease. In a word, a migration of the instruments of production would take the place of a trade in the products. This is what would happen when the trading districts are situated within the same country, and labor and capital move freely between them. But now suppose the trading localities to be situated in different countries, between which labor and capital move with difficulty, or not at all. Under such circumstances either might have an advantage over the other in respect of all the staples of their trade—in the case supposed in respect to textile fabrics as well as to slates—and the trade might nevertheless go on; for, though it is true that here too, as in the case just considered, there would be a gain in productive efficiency if the people and capital of the less favored district were to transfer themselves bodily to the other, yet, as in point of fact this transference, for very sufficient reasons, does not take place, the question arises what, under these circumstances, will be most for the interests of the two countries in supplying their needs by means of industry? A very little consideration is needed to show that, under the circumstances supposed—the superiority in productive power lying in the case of every branch of industry on the side of one country—it may yet be for the interest of both to satisfy [309] their wants by engaging in trade, provided only that the advantage enjoyed by the country possessing the superior industrial resources be not equally great in each instance; in other words, provided that each country possesses, in respect to the other, a greater advantage or a less disadvantage in the production of some than in that of other commodities. If, for example, it happened that North Wales and the manufacturing districts of England were situated in independent countries between which labor and capital refused to pass, under these circumstances North Wales might have an advantage over the English counties both in the production of slates and also in the production of textile fabrics; but if her superiority was not the same in both—if it were greater in the case of one than in that of the other class of commodity—greater, say, in the case of slates than in that of cloths, it would still be for the interest of the two districts to trade in those articles; for Wales, by devoting her industry to the production of slates, in which her superiority was greater than in the production of cloths, and using her slates as the means through trade of procuring cloths, would get them cheaper—with less real cost of labor and abstinence—than if she produced them; while, on the other hand, Yorkshire and Lancashire would get their slates cheaper by employing their industry in the production of fabrics in which their disadvantage was less, and using these as the means of obtaining their slates from Wales, than by attempting to produce slates or any substitute for them directly for themselves. It thus appears that a trade may take place between two districts, as independent countries, under circumstances in which no trade would occur, were those districts situated within the limits of a single country, and capital and labor free to move between them. This, I say, is a possible case, arid, as will presently appear, in actual experience, a very common one; indeed, it may be said to be typical of a large proportion of the entire trade carried on between independent countries. We are thus [310] brought, in the domain of international trade, into contact with a phenomenon of which the theory of trade in its simpler cases tarnishes no explanation, for which therefore a special theory is needed. The writer who first detected the fact, and supplied the theory, was Ricardo; and the theory involved in the foregoing exposition is in effect that which he gave. It may be thus stated: In order to the existence of a trade between different countries, the essential and also the sufficient condition is, that there should be in those countries a difference in the comparative cost of producing the commodities which are the subject of the trade. The commodity forming the staple of a trading country may be, and frequently is, more cheaply produced in that country than in the country which imports it, but this is not necessary to the existence of the trade; and a trade between nations may be carried on where the superiority in point of productive power with respect to all articles which form the subject of the trade is upon the side of one of them. On the other hand, a difference in the absolute cost of producing commodities in different countries does not necessarily render a trade between them possible, since, if the difference were the same in the case of each article, there would be no motive for an exchange. The one condition, therefore, at once essential to, and also sufficient for, the existence of international trade, is a difference in the comparative, as contradistinguished from the absolute, cost of producing the commodities exchanged.001
Such is the theory of international trade as it was left by Ricardo, and expounded, but not substantially altered, by Mill.002 It-can not be doubted that it sounds the depths of the [311] problem, and embraces in its scope all the most important— certainly all the most conspicuous—facts in the sphere of international dealings. Nevertheless, as I shall presently attempt to show, the doctrine as it stands is not absolutely complete, and in fact fails to take account of certain international exchanges, not perhaps very extensive in their range, bat still of considerable importance. Such criticisms, however, as I have to make upon this point will be more conveniently reserved for another chapter. For the present I shall confine myself to a few further remarks in elucidation of the doctrine as it has been stated above.
And, first, it must be observed that by "cost of production," as employed in the foregoing context, the reader is to understand the actual difficulties of production as measured by the sacrifices which production requires, not the amount of wages and profits, whether measured in money or produce, comprised in the capitalist's outlay and return. It was in the former sense that Ricardo, who first discovered the truth in question, understood the words, and, notwithstanding that Mr. Mill has in his chapters on Value adopted the latter conception of cost of production, it is in the same sense that he has employed it in his exposition of the doctrine-of international trade.003 Indeed, it may be doubted if the theory of comparative cost of production as the ruling principle of international trade could ever have been worked out from the point of view which regards cost as consisting in wages and profits; and, however this may be, it is at least quite certain, as I shall hereafter demonstrate, that the theory of international values, adopted [312] alike by Mill and Ricardo, is absolutely irreconcilable with that view.
Secondly, when it is said that international trade depends on a difference in the comparative, not in the absolute, cost of producing commodities, the costs compared, it must be carefully noted, are the costs in each country of the commodities which are the subjects of exchange, not the different costs of the same commodity in the exchanging countries. Thus, if coal and wine be the subjects of a trade between England and France, the comparative costs on which the trade depends are the comparative costs of coal and wine in France as compared with the comparative costs of the same articles in England. England might be able to raise coal at one-half the amount of labor and abstinence needed in France; but this alone would not render it profitable for France to obtain her coal from England. If her disadvantage in producing other commodities was as great as in producing coal, she would gain nothing by an exchange of products, and the conditions for a trade between the two countries would not exist. But supposing she was, in the case of some other commodity, under a less disadvantage than in that of coal, still more if she had with regard to that other—as in wine—a positive advantage, it would at once become her interest to employ this commodity as a means of obtaining through trade her coal from England, instead of producing coal directly from her own mines.
So much in the way of explanation of terms. Let me now endeavor to set before the reader a few examples of the practical working of the principle of comparative cost in the actual commerce of the world. For this purpose I shall take, in the first place, a case to which I have both in this and in former publications frequently referred—the external trade of the principal Australian colonies before and since the discovery of the gold-fields. Previous to that discovery, which occurred in 1861, no gold being produced in the country, the cost to the [313] colony of such gold as circulated there would consist in the cost—by winch the reader will bear in mind I mean the labor and abstinence—incident to the production of those articles by the exchange of which with foreign countries Australia obtained her gold. Certain quantities of wool, tallow, and hides were exported, and sold in foreign countries for certain sums of the precious metals, and these, or their equivalents in value, came back to the Australian producers, to whom they became wages and profits. These wages and profits, therefore, measured in the precious metals, or, let us say, in gold, which was the standard of value in the colony, would be the return upon the labor and abstinence employed in producing the commodities through the sale of which they were obtained. In proportion as they were great, the cost of obtaining gold would be small; in proportion as they were small, the cost of obtaining gold would be great; in a word, the cost of obtaining gold would vary inversely with the money rates of wages and profits prevailing in the colony. Supposing, for example, that 4s. a day was the wages of unskilled labor in the colony in 1850, and ten per cent. per annum the ordinary return upon capital, then the cost of gold, so far as it consisted of labor, would be a day's unskilled labor for 4s. worth of gold, and, so far as it consisted of abstinence, a year's abstinence from the enjoyment obtainable by means of l.100 for l.10. For simplicity of illustration, as labor is so much the principal element in the case, we may confine our attention to it exclusively, and say briefly that the cost of gold in Australia previous to the gold discoveries was represented by a day's labor for as much gold as could be purchased with 4s. Under these circumstances the gold discoveries took place; and now mark what happened. At once the same workman who previously by a day's labor could earn but 4s. worth of gold could now by washing the auriferous sands earn from 15s. to 20s. worth. The same exertion could now procure for him four or five times as much: [314] gold as formerly; in other words, the cost of gold had fallen in the proportion of from four or five to one. But while the cost of gold in the colony was thus reduced, no change had taken place there in the cost of producing other things. A given exertion of labor and abstinence would still procure the same quantity as before of corn, of meat, of wool, of tallow. It followed that the comparative cost of producing gold and other things had been altered in the immense proportion indicated by the reduction in the positive cost of producing gold; in other words, the conditions were realized under which, according to the theory of Ricardo, an immense change ought to take place in the external trade of the colony; and this was precisely what happened. From that time until the conditions of trade were again modified, partly through the gradual exhaustion of the richer gold deposits, and partly through the advance of prices in foreign markets, a period of some four or five years, Australia became an importer of every thing that from its nature admitted of being imported; and, what is especially to be noted, among the things thus imported were many which she could have produced herself at far less cost, with far less labor and abstinence, than they were produced at in the countries from which they were brought. For example, timber was imported from the Baltic, although. there were forests in Australia capable of yielding timber quite good enough at least for the mining purposes for which timber was mostly required. Butter was largely imported from Ireland, and I believe also from England and Holland, though the advantages possessed by Australia for dairy farming in her unrivaled pastures and abundant cattle were exceptionally great. Similarly, with unlimited areas of fine agricultural land, she imported nearly all her food; and with the materials of leather cheaper than in any other part of the world, she imported all her shoes. What was the explanation of these facts? In all cases one and the same: it was to be found [315] in the principle of comparative cost. Australia had considerable advantages over other countries in respect to timber, butter, food, and shoes; but she had a greater advantage still in respect to gold; and so it became her interest to obtain the former things by means of the latter. I have always-regarded the commercial results of the Australian and Californian discoveries (for things in California followed a very similar course) as one of the most striking experimental verifications which a purely abstract doctrine has ever received. Ricardo was considered, and is still considered by some people, a dreamer of dreams, a spinner of abstract fancies; but his dreams and abstractions, when brought to the test of experiment, as commonly happens with the dreams and abstractions of men of genius, have proved to be far more practical, far more closely in accordance with actual occurrences, than the prognostics of so-called "practical men," based though these may have been upon one knows not what collections of carefully tabulated statistics. Compare the facts which I have stated in connection with the Australian trade, as illustrating his doctrine of "comparative cost," with the speculations of some of our leading bankers and actuaries at the time of the occurrence of the gold discoveries, as to the probable effects of those events on the course of the money market—speculations in which one writer confidently predicts that the increased abundance of gold must lead to a fall in its price; another, that it would lead to a fall in the rate of interest; a third, that the exportation of gold from Australia would cease to be profitable, and would therefore cease to be carried on, as soon as the price of gold in Sydney rose to the London level! All these, and many more absurdities no less glaring, are to be found in pamphlets, and even in pretentious volumes, published soon after the epoch of the gold discoveries, by commercial men who piqued themselves upon their knowledge of practical business and their contempt for abstract speculation.
[316] The external trade of the gold countries presents, in n somewhat exaggerated shape, the action of the principle of comparative cost. The superiority of productive power was here, in almost every instance, on the side of one of the exchanging parties—the Australian colonies. The reader will not, however, suppose that, in order to the existence of a trade between nations, there is any necessity that this particular state of things should occur. In point of fact, it is probable that the more frequent case is that in which the superiority of productive power is divided .between the trading countries, each having a positive as well as a comparative advantage over the other in respect of the commodities which form its own staples. Still it would be a mistake to suppose that the Australian example represents a purely exceptional case. So far from this I am inclined to believe that in a large portion of the trade of the world—in most of the trade, for example, carried on between tropical and temperate regions, as well as in the trade between old and new countries—the condition which we found so prominent in the Australian commerce—a superiority of productive power in respect to the staples on both sides possessed by one of the exchanging parties—will also be found to obtain. One instance, which I find in the work of Mr. Bowen, an American economist, may here be given.004 It occurs in the case of the trade between the State of New York, and some adjoining districts and the Island of Barbados. The trade consists chiefly of an exchange of breadstuffs and meat on the side of the former country against various kinds of tropical produce furnished by the latter. As will be readily understood, Barbados has an immense advantage over the State of New York in the raising of tropical products, such as sugar, coffee, spices, etc.; bat Mr. Bowen informs us that it has also a decided advantage over the same regions in the production [317] of food—that a given exertion of industry employed for a given time in raising food in Barbados would be attended with a larger result than the same exertion employed for the same time in the United States. The advantage, therefore, in respect to both the staples of the trade is on the side of Barbados, and the phenomenon of the Australian trade is here repeated. The explanation, of course, lies once more in the law of comparative cost. Barbados and the United States find their account in developing those of their resources in which either possesses the greatest comparative superiority, or the least comparative inferiority in respect of the other, employing the products thus obtained as the means of supplying themselves, through trade, with others in the production of which the advantage of either is relatively less pronounced, or its disadvantage greater. I have said that this is by no means an exceptional case, but rather the rule, in certain great departments of cosmopolitan trade. It is probable, for example, that in a large portion of the trade carried on between the United States and Europe the advantage of production in respect to the staples on both sides lies with the United States; but this fact is kept out of sight through the misty conception ordinarily prevailing as to the nature of cost of production. Thus, in comparing the costs of production of different commodities in, say this country and the United States, people allow their thoughts to run off on questions of comparative wages and profits; and finding wages and profits higher in the United States than here, they are apt to jump to the conclusion that this is evidence of higher cost of production in the former country. In truth, so far as wages and profits are indications of cost of production at all—a point to which I shall hereafter recur—high wages and profits are indications of a low cost of production, since they are indications—being in fact the direct results of—high industrial productiveness; and accordingly, if wages and profits are higher in the United States than here, it [318] is because those things in which wages and profits consist are more easily obtained—that is to say, are obtained at less cost — there than here. The prevailing theory, which makes cost of production consist in wages and profits, has thus thrown a dense haze over the working of the principle on which the interchange of commodities between different nations is carried on. Indeed, as I shall hereafter show, the doctrine in question is answerable for some of the most plausible fallacies of the Protectionist school. For the moment, however, I am merely concerned to point out how this erroneous notion of cost tends to conceal the true nature of no small portion of the trade of the world.
[319] § 1. I HAVE endeavored in the foregoing chapter to set forth the theory of international trade, as it was first thought out by Ricardo, and subsequently expounded by Mill. In doing so, I remarked that the doctrine, though undoubtedly comprising the more fundamental conditions determining the interchange of nations,-is, nevertheless, in certain respects defective. It remains for me now to point out wherein consists the shortcomings then referred to.
In the first place, I must observe that cost of production, though it may be, and generally is, the ultimate condition governing international exchange, is never in any case the proximate or immediate cause. That proximate or immediate cause is not cost, but price. The ordinary merchant whose business leads him into foreign trade knows nothing of "cost of production," as consisting of labor and abstinence, and still less does he know of "comparative cost of production." The consideration which determine his conduct are far more simple. He attends, not to the cost—the expenditure of labor and abstinence—at which commodities may be produced, but to the prices at which they may be bought and sold, and the only comparison he enters into is a comparison of the prices of the articles he deals in as they are in his own country and in the foreign market with which he trades. When the state of prices in these different localities .is such as to render it profitable to transport commodities from one to the other for the [320] purpose of sale, he engages in this operation and looks no farther: when the state of prices does not admit of this, he ceases to operate. Further, as Ricardo himself pertinently reminds us, "every transaction in commerce is an independent transaction;'' and if there be a prospect of profit on the export or import of any single commodity, that commodity will be exported or imported wholly irrespective of what may be the state of the markets as regards other commodities. How are these facts to be reconciled with the theory expounded in the last 'chapter, that international trade is governed by comparative cost of production? Ricardo's answer would run in some such form as this: first, he would say, by virtue of the fact that relative prices within each country correspond to, and vary with, the relative costs of commodities produced within that country; so that a state of relative prices which would make it profitable to export certain commodities and import others would indicate a corresponding condition of the relative costs of production of the commodities thus exchanged. And, secondly, he would meet the difficulty as to the independent character of each commercial transaction by showing that, though independent, in the sense of being undertaken without reference to any transaction beyond itself, each commercial transaction nevertheless entails consequences which connect it with subsequent commercial transactions. The case may be illustrated by a hypothetical example. Suppose the price of some commodity suitable for international commerce to be lower in country A than in country B—I assume the difference in price to be sufficient to yield a profit on the investment during the period between purchase and sale, and put aside, for simplicity of illustration, the element of cost of transport—nothing more than this is necessary in order that the commodity should be sent from the former to the latter country. It will accordingly be sent; and the merchant who undertakes the transaction will get his profit. But this is not [321] the end. The commodity being sold, its value must be transmitted from country B, in which the sale took place, to country A. The question arises, in what form will it be sent? If it be sent in the form of some commodity produced in country B, the price of this commodity, to make the transaction profitable, will need to be lower in country B than in country A. The former commodity was lower in country A than in country B: the latter will be lower in country B than in country A. The comparative prices of the two commodities will therefore be different in the two countries, and, prices being ruled by costs, the transaction will only be profitable when the comparative costs are different But country B might pay for its import, not by the export of a commodity of its own produce, but by remitting gold. Let us consider this case. There are two suppositions possible. Country B either produces gold or it does not. If, taking the former supposition, and assuming therefore that gold is for country B a staple of merchandise, the gold price of the imported commodity is higher in country B than in country A—this proves that the cost of obtaining gold is lower relatively to the cost of the commodity in the former than in the latter country. There is thus a difference in the comparative costs of gold and of the commodity in the two countries, and the trade would be carried on by an exchange of one for the other in strict conformity with Ricardo’s doctrine. But now take the other supposition. Gold, we will suppose, is not a product of country B. Under these circumstances, and assuming farther, for simplicity of illustration, that the two countries trade exclusively with one another, it is evident that the trade can not be carried on permanently upon the terms of an exchange of a commodity on the side of country A against gold on that of country B; for the continued transference of gold from the latter to the former country would sooner or later act upon prices in the two places, lowering them in B and raising them in A; and then one of two [322] things would happen: either the "commodity which formed, the, subject of the trade would rise in price in country A till it became no longer profitable to export it, and then the trade would come to an end; or before this occurred, the price of some commodity in country B would be brought below the level of its price in country A; and this commodity would become then for B the means of paying for its import. There would thus be established a difference in the comparative prices of the exchanged commodities in the two countries; and, prices within the limits of each country being governed by cost of production, this would imply a corresponding difference in their comparative costs. Under all circumstances, therefore, it would be concluded, notwithstanding that prices are the immediate consideration, and notwithstanding that each commercial transaction, so to speak, stands upon its own merits, the fundamental condition underlying the whole, supplying the motives and determining the result, is the comparative costs of producing commodities.
The logic of the foregoing argument, which is in substance the argument employed in Ricardo's exposition of the doctrine, appears to me to be without flaw. But to one of the premises involved in it I have already taken exception, and, .unless my reasoning is fallacious, it can no longer be admitted. It is assumed throughout that the relative prices of commodities within the limits of each country are universally—or at least so generally that the exceptions are not worth noticing—governed by the relative costs of their production. Now I have endeavored to show in an early chapter of this work005 that this assumption is not well founded. Cost of production, as a principle regulating value, is only operative within the limits of effective competition; and, though this condition is largely realized in this and most civilized countries and still more extensively [323] in new communities like our Australian colonies and some American States, it is yet far from being universal, and, especially in countries in which, as in England, the social structure is very complex and of long standing, suffers numerous and serious checks. The consequence is, that cost of production, though the principal influence in the case, is not the only one. To a considerable extent in countries of old civilization, to a less extent in new communities, Reciprocal Demand takes the place of Cost of Production as the regulator of domestic prices. In all those exchanges, for example, carried on between what I have called non-competing industrial groups, the law governing such exchanges, and therefore governing the relative prices of the products proceeding from such groups, is that furnished by the former, not that furnished by the latter principle. But prices, as we have seen, are the proximate conditions determining international exchange. It follows, therefore, that international exchange is sometimes determined, not merely proximately but ultimately by other .conditions than cost of production; and that the theory of that branch of trade, as left us by Ricardo, is by no means as complete and exhaustive as he and his most distinguished successors have regarded it.
§ 2. It remains, then, that we endeavor to bring the theory into correspondence with the facts such as we have found them to be; and in order to this it will be necessary to subject it to some such modification as the following: The proximate condition determining international exchange is the state of comparative prices in the exchanging countries as regards the commodities which form the subject of the trade. But comparative prices within the limits of each country are determined by two distinct principles—within the range of effective industrial competition, by Cost of Production outside that range, by Reciprocal Demand. The ultimate .conditions, therefore, [324] on which international trade depends are, where the commodities are produced in each country under a regime of competition, a difference in the comparative costs of producing them; where effective competition does not obtain such a state of Reciprocal Demand among non-competing groups as shall issue in a difference, in the exchanging countries, in the comparative prices of the products proceeding from such groups.
§ 3. And now, in order to exhibit the practical consequences involved in the modification of the received doctrine just proposed, and to satisfy the reader that the point raised is something more than a mere formal and barren criticism, I will ask his attention to a question which has been of late a good deal discussed—the connection, namely, between the rate of wages prevailing in a country and the course and character of its external trade.
It is a very general opinion among commercial men in this country that, if not the most important, at least at the present time the most urgent, condition required for promoting the development of British commerce, is that the rate of wages should generally be reduced, or, at the least, should not be permitted to rise above its present level. "Dear labor," says Mr. Brassey, expressing an opinion which has since been echoed in many a leading column, "is the great obstacle to the extension of British trade." Nor is this opinion by any means confined to Great Britain. Ask a New England merchant why the United States are unable to compete with Great Britain in the manufacture of cotton fabrics, and it is one hundred to one he will tell you it is owing to the high price of labor in the Union as compared with the low rates prevailing on this side of the Atlantic. Ask, again, a Melbourne merchant why Victoria, notwithstanding her fine agricultural resources, still continues to import a portion of her food, and the answer will be similar: the higher price of labor in Victoria than in the ether Australian [325] colonies, or in the districts of South America from which corn may be obtained, will be considered as telling us all it is needful to know in order to a full comprehension of the fact.
Such is the nearly universal opinion on this subject among commercial men; and yet it needs but little consideration to show that it is in direct conflict with the received economic doctrine, as expounded by Ricardo, as to the causes governing foreign trade. For it must be remembered that by cost of production, at all events in connection with the theory of foreign trade, both Ricardo and Mill understood what I have maintained to be in all cases the proper signification of the phrase— namely, cost as measured in number of days' labor and abstinence; and it is by comparative cost as thus measured that, according to the theory, international trade is governed. But inasmuch as a rise or fall in the rate of wages has no effect on the comparative quantities of labor required for the production of different commodities, it is evident that if the received theory be true, this circumstance must be incapable of altering in any way the course of foreign trade; and this was undoubtedly Ricardo's opinion. Indeed it was a leading doctrine in his scheme of ideas, on which he insisted with reiterated emphasis, that high wages do not make high prices—a position which of itself involves the negative of the prevailing view. There can be no question, therefore, that the opinion so widely entertained as to the effect of wages on foreign trade finds no sanction whatever in the theory of Ricardo. I have already, however, shown reasons for regarding that theory as imperfect As I view the case, external trade is governed proximately by relative prices, and relative prices are, in some instances, not indeed determined by wages, but so intimately connected with wages that the movements of the two phenomena are steadily coincident The theory of international trade, therefore, as I hold it, does not exclude the possibility of its course being [326] affected by movements in the rate of wages: at the same time I believe that what may be described as the commercial view of this subject is almost wholly erroneous.
Let us consider the sort of argument by which it may be supposed the opinion in question would be supported. It would, I apprehend, run in some such form as the following: taking, for example, the case of wheat imported into Victoria from South Australia or from the nearest South American ports, it would be argued that this was owing to the inability of Victoria to compete with these latter countries, owing to the high price of her labor. Let the price of labor in Victoria only fall to the same level as in the countries from which it imports its wheat, it would be plausibly urged, and it will at once become profitable to raise wheat in Victoria from soils from which it can not now be raised with profit What would be the reply of Ricardo t6 this argument? He would answer that if wages fell in agriculture, they would also fall in gold-mining, in sheep-farming, and in all the other industries of the colony. The relative attractiveness of the several occupations, as investments for capital, would not be altered, and there would be no reason that capital should be distributed among them in other proportions than at present. It is true indeed that, with a reduced rate of wages, the cultivation of wheat would yield a profit where it would not yield one now, but that is not the question. The question is, would it yield the rate of profit current in the colony? Now it must not be forgotten that the change which we suppose to have taken place—a fall in general wages while the conditions of production remain in other respects unaffected—would imply a rise in general profits. Australian farmers, therefore, would not be satisfied with the rate of profit which they now receive; they would expect as high a return upon their capital as—allowance made for the special circumstances of different pursuits—could be got in other occupations; and this they could only [327] obtain by confining their operations to lands of equal fertility with those which they now cultivate. In a word, the change in the rate of wages being general, and affecting all occupations alike,006 there would be no more reason for extending the employment of capital in agriculture than for doing so in any other branch of production. The capital at the disposal of the colony, under a low, as under a high, rate of wages, would, therefore, continue to be distributed among" the various industries pretty much as it now is; and Victoria would have precisely the same reasons as at present for importing a portion of her food.007 It need scarcely be added that this reply, whatever its merit, would be not less valid against the same argument whether urged in Melbourne, New York, or London.
§ 4. It is evident that the reply which I have attributed to [328] Ricardo is valid on the assumption which he constantly makes, that industrial competition is effective over the entire range of a country's industry; but it is equally plain that it ceases to be cogent just in the degree in which this assumption ceases to be true in fact. In old countries like England, as I have pointed out, the regime of industrial monopoly covers a considerable area, but even in new communities like the Australian colonies competition is not quite universal. I shall now advert to an example of this failure of industrial competition furnished by the industry of Australia which will set the point at issue in a clear light.
As all the world knows, the colonies of Australia have been mainly peopled by immigrants from this country and their descendants. Among the population as thus constituted industrial competition would, I should apprehend, be nearly, if not quite universally, effective. No one would be excluded by law, by social circumstances, or, after he bad been a short time in the colony, by want of means, from taking part as a laborer in any industrial occupation. If this be so, wages throughout the principal industries of the country would follow the law which apportions remuneration to sacrifice, as assumed by Ricardo; and a rise or fall of wages would consequently within this range have no effect upon the distribution of capital among the various industries, nor, therefore, upon its foreign trade. But into the ordinary population a small infusion of alien races has found entrance; in particular, the Chinese have found their way into Victoria and New South Wales, and for some years a considerable importation of Polynesian laborers into Queensland has been in progress. These people do not take part in the general industrial competition of the country; but partly through the prejudices existing against them, partly through physical or intellectual inability, are confined to a few of the simple and cruder industries. It results that the rate of remuneration in their case fails to follow [329] the same rule which holds among the Anglo-Saxon population. A rise or fall of wages may occur among those alien races without affecting wages generally in the colony, and consequently may affect the relative attractiveness, as investments for capital, of the particular industries in which they are employed. In this way the course of foreign trade may come to depend upon the price at which a particular kind of labor may be obtained. The most decisive example in point is that of the Polynesian laborers in Queensland. Sugar cultivation has been started in that colony, and it is asserted—so far as I can gather, with good reason—that the prosperity and even the continuance of the industry depends upon the possibility of obtaining cheap labor from Polynesia. The immigrant from this country is but ill fitted to endure the exposure to the extreme heat of that region which labor in the sugar fields demands, and consequently can not be drawn to that work unless by the inducement of a proportionally high reward. But the Polynesian can expose himself without detriment to a tropical climate; the processes of sugar cultivation are of a simple mechanical sort such as the rudest laborer may perform; and, his expectation of reward not being pitched high, he is easily induced, for a rate of pay considerably under that prevailing in the colony, to hire himself for the work. On the other hand, the Polynesian is unfitted, from his habits, and to some extent from his inferior physique, for taking part, except in a quite subordinate way, in the ordinary mining, pastoral, and agricultural occupations. It results from all this that the possibility of cultivating sugar in Queensland with the ordinary profits of the place depends almost entirely on the presence there of these Polynesian laborers; and sugar being mainly used as an article of export, it comes to pass that the course of foreign trade in this article turns almost entirely upon a question of wages. The case I have taken for illustration affords a somewhat [330] exaggerated example of the consequences which may arise in the foreign trade of a country from an interruption to the free play of industrial competition. But though the results may be less conspicuous, they are in character and principle the -same, wherever a similar interruption, in whatever degree, is experienced. In Australia the obstacle to free competition lies in difference of race. In Great Britain the impediments are of a social and material kind; but the economic 'effects are identical. In each case alike partial and limited movements in the wages of labor are rendered possible; and, in the manner I have explained in a former chapter,008 such partial and limited movements are always attended by corresponding changes in the relative prices of commodities. But, as we have seen, the relative prices of commodities are the proximate condition on which the coarse of foreign trade depends.
So far, therefore, the theory of foreign trade, modified in the manner I have proposed, finds room for the common notion, at least to the extent of admitting the existence of cases in which international trade may be affected by changes in the rate of wages—a view which the theory, as it came from the hands of Ricardo, absolutely excludes. The nature and extent, however, of the results which may accrue from occurrences of this kind are by no means of that simple and obvious character which is commonly supposed. It will serve to clear our ideas upon this point if we consider the possible consequences involved in the following hypothetical case.
Let us suppose a fall of wages to take place in some leading branch of English manufacture—say Sheffield cutlery—what would be the effect of this on the external trade of England? It has been already seen that, if the change supposed were accompanied by a corresponding change over the whole field of English industry, the effect would be nil upon the distribution of [331] capital in the country, and therefore upon the course of our external trade; but the same conclusion may easily be reached by another path. For example, the common notion is that a general fall of wages would lead to a general fall of prices, and this again to an immense extension of the export trade of the country. Now, supposing this result to happen, it is at least evident that there would be nothing in the case to cause a corresponding extension of our import trade. Observe then what would ensue. Foreign nations would become heavily our debtors, and a great flow of gold would set in from all quarters toward England, which, becoming the basis of new creations of credit, would quickly reproduce the former state of wages and prices, when our export trade would at once return to its former limits. We are thus, though by a different route, conducted to the same conclusion as before, that a movement of wages, where it is general, can have no effect upon foreign trade. Let us now consider what the result would be, supposing the fall in wages not to extend beyond the group of trades in effective competition with the principal industries of Sheffeld. It is evident that it is only in so far as the fall in wages is followed by a fall in prices that it can affect foreign trade at all. I will assume, then, that the prices of Sheffield manufactures fall in proportion to the fall in Sheffield wages; and on this assumption any of three possible consequences might ensue. The increased demand of .foreign countries for Sheffield wares might be in proportion to their increased cheapness, or it might be in less proportion or in greater. In the first case, while sending a greater quantity of cutlery abroad, we should only send the same value: foreign nations would be in our debt as regards this item in the international account to no greater extent than now, and—no change having occurred in the price of foreign commodities—we should consequently receive from them the same quantity of the produce of their industry, neither more nor less, than they now send us. The [332] net result, therefore, of what had happened, would be a gain for all consumers of Sheffield wares, whether living in this country or abroad, obtained at the expense of the workmen of Sheffield. Sheffield employers might reap some temporary gains, but competition would quickly reduce their profits to the usual rate: as a permanent result, they would be no better off than before; while the foreign trade of England would not be extended. Take now the second case, and let us suppose that the increased demand from abroad is less than in proportion to the fall in price of Sheffield wares. In this case, also, the consumers of those wares would everywhere be benefited, but the foreign trade of the country, so far as Sheffield contributed to it, would, at least in the first instance, be positively curtailed. This, however, would be merely the initial effect The reader must remember that, by hypothesis, the export of Sheffield manufactures, though greater in point of quantity, has, through the fall in price, become smaller in value than formerly. It follows that our exports—assuming the state of things previously in existence to have been one of commercial equilibrium, and that other things remain the same—would be insufficient to discharge our foreign liabilities. An efflux of gold from England to foreign countries would, therefore, set in, and would continue so long as prices here and in foreign countries remained at the same relative level which had rendered the drain necessary. This, however, could not be for long. The transfer of gold from England to foreign countries would, in the usual way, lead to a re-adjustment of relative prices, and, as a consequence of this, to a re-adjustment of reciprocal demand. What the exact character of this re-adjustment would be it is impossible a priori to say. English demand for foreign products might fall off, which would imply a contraction of English foreign trade, or foreign demand for English products might increase, which would imply an augmentation; or both consequences might in different degrees be realized, [333] which would be consistent with either diminution or increase. All that is certain is that, in the definitive result, commercial equilibrium would be restored—the exports of England, that is to say, would be brought into due relation to her foreign liabilities.009 The third possible case is that the foreign demand for Sheffield wares should increase in a proportion beyond that of their cheapness. In this event foreign nations would, in the first instance, become our debtors to a greater extent than the proceeds of their ordinary trade would cover. An efflux of gold would now set in from them to us; and the necessity would again arise of a change in the reciprocal demand of England and foreign nations. Commercial equilibrium would here, too, ultimately be re-established; but, as in the former case, the end might be reached by any of the same three methods, and the definitive result would be equally compatible with a contraction or an expansion of international trade.
In the foregoing example I have argued on the assumption of a fall in wages occurring in some leading branch of English industry. If instead of a fall we supposed a rise, and this rise to be confined to some particular departments of trade, we should find ourselves conducted, by a similar course of reasoning, to precisely the same conclusion. In the first instance the advance in price would check foreign demand for the English commodities which had risen, but this would lead to a re-distribution of the precious metals between England and the countries with which she traded, and this again to a change in relative prices, which would issue in a restoration of the equilibrium of trade—a result, in this case also, compatible alike with augmentation or decrease.
We may, then, sum up the results of this part of our investigation: Partial, as opposed to general, movements in the [334] wages of labor affect the foreign trade of a country, but it is impossible to say a priori in what direction, whether of expansion or of contraction. To know this it would be necessary to know what the definitive result would be as regards relative prices in the country in which the change of wages bad-occurred, and those with which it trades. If this were, on the whole, to augment the difference in relative prices in the two places, an extension of international trade would be the consequence; but in the contrary event, which is equally possible and probable, the opposite effect—a contraction of trade—is that which would be realized.
§ 6. Let me now state the point to which the general argument has been carried. I have endeavored to show that a rise or fall of wages in a country, so far forth as it is general, has no tendency to affect the course of foreign trade: a fall in the general rate does not tend to an extension of foreign trade, any more than a rise in that rate necessitates a contraction. On the other hand, I have pointed out that, where, owing to the existence of impediments to the action of free industrial competition, partial movements in the rate of wages occur, inasmuch as these issue in a change of relative prices, the course of foreign trade is in this case affected, though it is impossible, previous to experience, to say in what direction the change may take place. So far the argument has been carried. I desire now to consider a problem which, except upon its negative side, has not yet, so far as I know, received the attention of economists—I mean the nature of the connection that exists between general wages and foreign trade. We have seen that that connection is not one of cause and effect; but we have yet to discover what its nature is. General wages do not determine foreign trade, but it by no means follows that the two phenomena are not intimately connected; and this we shall find to be, in point of fact, the case.
[335] I recur once again to that rich repertory of economical experience, the recent history of our Australian colonies. As we have already seen, the discovery of gold in those colonies in 1851 was the signal for a sudden and extraordinary development of foreign trade, which was accompanied by an equally sudden and extraordinary advance in the wages of labor. This remarkable movement reached its culmination about the year 1852 or 1853, when the rate of wages in the rough work of gold mining was, for some time, maintained at the very high point of 20s. a day. We have unfortunately no exact commercial statistics previous to 1856; but in that year the total external trade of the principal gold colony, Victoria, amounted to over l.30,000,000 sterling. From 1856 to the present time the history of the colony has been one of extraordinary prosperity; but coincidently with this prosperity we notice two remarkable facts—a pretty steady decline throughout the whole of the period at once in the wages of labor and in the dimensions of external trade. As I have just said, that trade in 1856 had attained the large aggregate of l.30,000,000 sterling. In 1870, after fourteen years of such prosperity as I have referred to, it stood at less than l.25,000,000. The fall in wages has not been less striking. It had risen to 20s. a. day: it has now fallen for the same mining labor to about half that rate. Wages and foreign trade have thus declined pari passu; every step in the descent of wages having been accompanied by the dropping off of some former import, and, as a consequence of this, a corresponding extension of domestic: industry in the colony. The facts, it will be observed, negative most decisively the prevalent commercial opinion on the subject under consideration. Dear labor in 1852 did not prevent the sudden and extraordinary expansion of Victorian trade, any more than comparatively cheap labor in 1870 has been able to prevent its contraction. On the other hand, it must be allowed that the power of Victoria to compete with [336] foreign nations, evidenced as this has been by an extension of her domestic industry which has been coincident with a fall in the price of labor, seems to furnish corroboration of the popular notion at the root of the commercial doctrine. It is indeed very evident that all three facts—the decline of foreign trade, the fall in the rate of wages, and the extension of domestic production—are intimately connected; but the question is, what is the nature of the tie that binds them? The true answer is to be found in the fact that the several occurrences are co-ordinate effects of a common cause; that cause being the gradual exhaustion of the richer and more accessible gold deposits. As industry became less productive in raising gold, the amount to be divided between laborer and capitalist became less, and money wages therefore fell. As gold, with the increased difficulty of production, became more costly, it became, just in the same degree, a less profitable means of obtaining the various commodities which Victoria required: she ceased, therefore, to employ this means to the same extent as formerly, and began instead to produce commodities directly from her own resources: in other words, her foreign trade underwent contraction, and her domestic industry was extended. And as these results have been the consequence of a decline in the productiveness of the gold mines, so, it might be confidently predicted, a new discovery of auriferous deposits equal in abundance and richness to those of the earlier period would have the effect of reversing the present course of development, and by a single stroke send up money wages, give a fresh impulse to external trade, and arrest the extension of miscellaneous industries in the colony. Such is the nature of the connection between the rate of wages in a country and the course of its external trade and domestic industry. They are co-ordinate effects of a common cause, and are consequently symptoms and indications of each other. In the illustration just given the condition on which the several [337] results depended was the changing cost of gold; and—the change being great in point of degree, and gold being also the material of money—the results have been more palpable and striking than they would have been had the cheapened commodity been one of ordinary consumption. But the effect, though less palpable, would not really be different in this latter case—provided only the article affected were of a kind in tolerably extensive demand and suited fur exportation to foreign countries. I am unfortunately unacquainted with any actual occurrence sufficiently simple and decisive to enable me to exhibit, in a perfectly unequivocal light, the operation of the principle in this more general form, and I must, therefore, have recourse for this purpose to hypothesis. I will then suppose that, as the result of some mechanical invention not known-to other nations, a great improvement has been effected in the manufacture of woolen goods in England—an improvement which would reduce the cost of manufacturing this class of goods in as great a proportion as the cost of gold in Australia was reduced by the discovery of gold—what would be the effect of such an occurrence on the external trade of England and on the remuneration of labor in the country? In the first instance, it is evident, there would, be an extensive diversion of English capital into the branch of manufacture thus beneficially affected; and the increased production of woolen goods would lead to a fall in their price, which would only stop when brought into the usual relation with their now diminished cost of production. With the fall in price a large increase would take place in the foreign demand for English woolens. As» however, there would be nothing in the case to cause a corresponding increase in the demand of England for the commodities of foreign countries, a transfer of gold from the latter to the former in payment of the enlarged exportations would be necessary, and this would continue until, through a rise of prices in England and a fall of prices abroad, the equilibrium [338] of trade was re-established. At this point many articles which had formerly been produced in England, and perhaps produced for exportation, would now be selling at lower prices in foreign countries. Such articles would cease to be produced in England, or at all events to be produced on the same scale as formerly, and would in greater or less quantity begin to be imported from abroad. Ultimately we should arrive at this definitive result: a larger proportion than formerly of the aggregate capital of England would be devoted to the production of woolen goods, a smaller proportion to her other miscellaneous industries; while the things formerly produced by the displaced industries would now be obtained from abroad through an exchange for woolen goods. In other words, England would avail herself of her great comparative superiority in tlie production of woolens for the purpose of obtaining more cheaply than before all commodities in the production of which her superiority was relatively less. The result, so far as foreign trade was concerned, would thus be exactly analogous to what happened on the discovery of gold in Australia. But I shall be asked how as regards the wages of labor? The gold discoveries, as we saw, had the effect of raising the rate of money wages in Australia in proportion to the fall in the cost of money. Would a similar consequence follow on the hypothesis we are now considering? Beyond question, yes; that is to say, as wages in Australia rose, measured in the commodity of which the cost had been cheapened, so wages in England would, in the supposed case, rise, and in a corresponding proportion, measured in the commodity similarly affected. In the one case that commodity was gold, in the other woolen goods. English laborers, so far as they were consumers of woolen goods, would, in the supposed case, obtain that commodity more cheaply; so far as they were consumers of foreign goods, procured through an exchange for woolens, would also obtain those commodities more cheaply; [339] so far, again, as they were consumers of commodities produced in England other than woolen goods, would gain nothing by what had occurred. It may be added that those other commodities of English production, inasmuch as they were not affected by the same cause which had cheapened English woolens, would be represented in exchange by a larger quantity of the cheapened article than before, just as the products of Australia were represented by higher gold prices in proportion as the cost of gold fell. To state the result in a single phrase, the wages of English laborers, measured in woolen goods, would rise in proportion as the cost of those goods had fallen; in exact analogy with what happened in Australia. Here, then, we find, in the case of a commodity of general consumption, as we had before found in the case of gold, the course of foreign trade and the rate of wages intimately bound together through the link of a common cause in the state of productive industry. It is rare indeed that changes in the cost of production 'take place on so great a scale as that realized or assumed in our illustrations; but where such changes do occur, be the scale large or small, the results which follow, though different in point of magnitude, are in character such as I have described. Every new invention, every happy discovery, that cheapens the cost of producing particular commodities, and so alters their comparative cost, sets in action forces which operate in the directions I have indicated, however slight and even imperceptible may be the actual results which flow from each.
The real nature of the connection between the rate of wages prevailing in a country and the character and course of its external trade ought now, I think, to be tolerably clear. They are co-ordinate effects of a common cause, that cause being the degree and direction in which a nation's industry happens to be productive. Whatever be the articles with respect to which the industry of a nation is specially productive, these are the articles which will form the staple of its external trade, [340] and, measured in these, the wages of labor will be high. If wages are high, measured in money, this will indicate either rich mines of gold or silver, or a high productiveness of industry in some commodities in large demand abroad with which gold or silver may be purchased on favorable terms. If they be high, measured in food, clothing, and other necessaries and comforts, we may infer similarly a high productiveness of industry, direct or indirect, with regard to those commodities. Thus the commodities, whatever they are, measured in which wages are high, will either form the staples of her foreign trade, or will be such as may be obtained at small cost through those staples The notion, therefore, which prevails both here and in the United States that the high rate of general wages obtaining in each country is a hinderance to the extension of its foreign trade must be pronounced to be absolutely without foundation. Supposing a fall in wages to occur in either country, the other conditions of production remaining as at present, and supposing the fall to be general, this circumstance would not, as I have shown, affect the relative attractiveness of the different branches of industry as investments for capital. Capital would, therefore, be distributed among them as at present, and nothing would occur to alter the course of its foreign trade. The sole result would be a general rise of profits: capitalists would gain what laborers had lost A fall of general wages, on any other assumption, would inevitably imply diminished productiveness in some of the great departments of productive industry; and such diminished productiveness involving, as it would, changes in the comparative cost of commodities, would no doubt entail changes in external commerce. But the point to be borne in mind is that the latter result, though coincident with, would not be the effect of the fall in general wages, but that both would be co-ordinate effects of the decline in the productiveness of industry; and farther, that the changes in external commerce, occurring under the circumstances [341] supposed, would not necessarily be in the direction of extended trade. Quite as probably in either case, in the case of the United States much more probably, the movement would involve a contraction of dealings with foreign countries. Thus, supposing a general fall of wages in the United States, measured, let us say, in gold: and provisions, or, what comes to the same thing, supposing money wages to fall, the prices of provisions remaining as at present, let us consider what this would imply. Would it not imply that industry in the United States was less productive than it now is in procuring the commodities in question; and, therefore, more nearly on a par than at present, in the case of such products, with industry in other countries? "Would it not, in a word, imply that the comparative cost of producing commodities there and elsewhere had been brought into closer approximation, and that consequently the possible field for international exchange had been narrowed? The rate of wages and the course of foreign trade are thus intimately connected; but that connection (except within the limited range within which reciprocal demand governs domestic values) is not one of cause and effect, but of co-ordinate phenomena depending upon identical conditions.
§ 1. WE have now ascertained the circumstances under which international trade arises, and the nature of the advantages that flow from it. These advantages, as we have seen, are such as result from a more effective distribution of the productive forces of the world. Supposing a universal freedom of trade, it would not indeed follow that every product of industry would be raised precisely in that part of the world in which it could be raised with greatest advantage; for this would require that population and capital should be distributed with no other view than to economical gain. The course of population and capital, however, it is needless to say, is influenced by many other considerations as well; and what international trade, so far as it is allowed free scope, accomplishes for mankind is, that the industry of the world is carried on, not indeed with the utmost possible advantage, but with the utmost advantage practicable, regard being had to the manner in which the world is peopled and to the condition of its inhabitants.
Such is the nature of the gain; but here another question arises: On what principle is the increase of wealth which results shared among the nations which co-operate in producing it? To put the same point in a different form—What causes determine the proportions in which trading nations exchange their products? These proportions may conceivably be such as to give all the advantage to one only of the exchanging parties, or such as to share it among a few to the exclusion of [343] the rest, or such, again, as to distribute it in any ratio whatever among them all. According as one result or the other is attained, will be the quantum of advantage which each nation derives from its commercial dealings with others. We are thus conducted by the course of our investigation from the doctrine of international trade to the special problem of international values.
§ 2. It may be well, perhaps, to remind the reader that the subject of our present inquiry is normal, not market, values— the proportions in which nations exchange their products as a rule, or when trade is in a state of equilibrium, not those in which the exchange may take place on a particular occasion, or under the influence of exceptional conditions. Now we have already seen that normal values depend on one or other of two principles: where industrial competition prevails, on cost of production; and in the absence of effective industrial competition, on reciprocal demand. Inasmuch, however, as the condition of effective industrial competition (in the sense defined) is not satisfied in the intercourse of independent nations, it is at once evident that the ruling principle of international values is not cost of production, and can only be that other influence which prevails in the absence of effective competition. So much is recognized in the received text-books of Political Economy. But here I must call attention to an inconsistency in which those text-books are involved, to which, indeed, incidental reference has been already made. It will be remembered that in a former portion of this work I criticised at some length the received doctrine of Cost of Production, which, as expounded by Mr. Mill and others, is represented as consisting' in, and varying with, the wages and profits of producers. I stated then that this conception of cost was not reconcilable with the doctrine of international values upheld by the same. authorities, which refers these phenomena, not to cost of production, [344] but to the reciprocal demand of exchanging nations. I now propose to justify that criticism by showing that, regarding cost of production in the sense assigned to it, international values do, in point of fact, in all cases correspond with this principle; in other words, that, while they are said not to be governed by cost, they nevertheless invariably conform to it. A simple illustration will enable me to make good this position.
Let us suppose two commodities, one the product of English industry, the other produced in the United States, and selling for the same sum of money, say l.1000 each. These commodities will (cost of carriage being omitted on both sides) exchange for each other, and will, therefore, represent equal values in international trade. This being so, how stands the ease as to their respective costs of production? Assuming» these to consist in wages and profits, the answer must be that their costs of production are equal also; for, as I have elsewhere shown, the wages and profits of producers are, where industry is continuous, in effect the outcome of the values they produce. The former, therefore, must be constantly proportional to the latter; and accordingly, where the values of commodities are equal, as these values resolve themselves into wages and profits, the wages and profits of their producers— that is to say, according to the view we are now considering, their costs of production—must be equal. Now it is obvious that this argument admits of being applied to every instance whatever of international exchange;010 and we are thus confronted with this singular result, that, while cost of production, according to our text-books, has no place in determining international values, international values, nevertheless, according to principles supplied by the same authorities, invariably correspond [345] to it. I must leave those who accept both doctrines of the received Political Economy to reconcile the two positions as they best can.
On tlie other hand, if we take as our conception of cost that view of it for which I have contended, according to which it consists in labor and abstinence, the truth of the accepted doctrine on its negative side follows as a matter of course. To establish this we need not go beyond the illustration just given. Two commodities respectively of English and American production, each worth l.1000, exchange for each other, and therefore represent equal values in international trade. Further, as I have just pointed out, their values being equal, they constitute equal aggregates of wages and profits for the producers on each side. The American scale of remuneration, however, is much more liberal than the English, and the proceeds of those equal values will therefore be distributed in higher wages and larger profits on one side than on the other. It follows that they will not be distributed in proportion to the labor and abstinence remunerated: in other words, the costs, to which they correspond, will not be equal. The sacrifice will be less on the American than on the English side. English and American commodities, therefore, do not exchange for each other in proportion to their costs of production, as consisting in the real sacrifices undergone by the producers. The negative side of the received doctrine respecting international values is thus found to be true, but only on the condition of understanding cost of production in the sense for which I have contended.
§ 3. The argument just stated brings into view a principle already more than once referred to in these pages, which, as it will be found to have important bearings on some problems of international value, may conveniently be set forth with some distinctness here. The principle to which I refer is, that the relative rates of wages and profits in the different branches of [346] industry afford an indication, in an inverse sense, of the relation in which the exchange values of the commodities, proceeding from such branches of industry, stand to their costs of production. It will of course be understood that I use the term "cost of production" here in the sense which I hold to be the right one. Thus, to revert to a former illustration, supposing that in the manufacture of scientific instruments wages and profits ranged considerably higher than in ordinary handicraft trades, let us say, carpentry, the fact would show that, in the exchange of the products of the former for those of the latter industry, the sacrifices involved in the production of mathematical instruments bore a smaller proportion to the values of those instruments than the sacrifices involved in producing common tables and chairs, for example, bore to their values. The cost would be low relatively to the value in the trades in which wages and profits were high, high in the trades in which they were low, while the relation would be one of equality where the rates of wages and profits were equal on each side. We are thus furnished with an easy means of determining the relation in which the exchange values of any two compared commodities stand to their costs of production. If the rates of wages and profits obtained by the respective producers of the two commodities be equal—that is to say, in proportion to the sacrifices undergone—it is matter of demonstration that the commodities in question exchange in proportion to their costs. If they are unequal, the contrary conclusion not less certainly follows; and further, the difference in the relative rates of remuneration will indicate the degree in which the exchange values of the commodities deviate from the proportion existing between their costs of production. But this simple criterion may be made simpler still. For practical purposes, we shall not lose appreciably in point of accuracy if, instead of making it consist in wages and profits, we confine our attention to wages alone. Profits form but a small element in the value [347] of most commodities, and the divergence of the rates of profit in different occupations and in different countries is (owing to the greater mobility of capital than labor) much less considerable than that of the rates of wages. We may, therefore, without danger of serious error, substitute "wages" for "wages and profits," and we are at once provided with an easy means of determining the relation of exchange value to cost of production in all cases whatever.
To give now some examples of the application of our criterion to the transactions of international trade, I find that, according to investigations made by Mr. Wells,011 the United States Commissioner, which on the whole have been confirmed by the Reports lately received from our agents in foreign countries, the relative rates of wages for similar kinds of labor in the leading manufacturing industries in the United States, England, Belgium, France, and Germany range nearly as follows: As compared with England, wages in the United States are from 25 to 50 per cent. higher; as compared with Belgium, from 48 to 70 per cent. higher; while, as compared with France and Germany, the difference rises to nearly 100 per cent.012 I need hardly say that if the comparison were extended so as to include Oriental states, for example, India and [348] China, the differences in the scales of remuneration would become still more striking, the remuneration of a day's labor in the United States being probably equivalent to that of four or five in the latter countries, Now what, according to our criterion, do these differences indicate as regards the terms of international exchange? They indicate this—in the first place, that the several nations named do not exchange their products with the "United States in proportion to their costs of production; and, secondly, that the proportion in which the exchange takes place deviates from the principle of cost in the degree marked by the differences between the rates of wages in each country and in the United States; in other words, our criterion shows us this—that, in the commercial dealings of those several nations, the product of a day's labor in the United States enables the workman to command the product, in round numbers, of a day and a third's labor in Great Britain, the product of a day and a half's labor in Belgium, the product of from one and three-quarters to nearly two days' labor in France and Germany; while it probably would command the product of four or five days' labor in China and India. Such, or nearly such, are the proportions, measured by the standard of cost, in which the leading commercial nations of the world, at the present time, exchange their productions; and so very far is it from being true that international values, in the actual dealings of commerce, correspond with that standard.013
§ 4. So far as to the negative side of our argument. The [349] products of trading nations do not exchange for each other in proportion to their costs of production. There is no reason that they should do so, inasmuch as industrial competition is not effective in the intercourse of nations; and the evidence just adduced proves that they do not do so in point of fact The principle, therefore, which determines international values must be that one which operates in the absence of effective industrial competition, namely, Reciprocal Demand, and this, as I have already said, is the received doctrine of Political Economy. But though Cost of Production is not in this case the determining cause, it does, nevertheless, exercise an Important influence in international trade by controlling the aberrations of value which are possible under a regime where monopoly is the presiding principle. This, indeed, is implied in the ordinary expositions of the doctrine; but I do not think the fact has hitherto been brought out with as much distinctness and prominence as it deserves.
To aid toward this result, it may be observed that industrial monopoly may exist under various conditions involving a corresponding variety in the results which flow from it. It may exist, in the first place, in an absolute form, as where an individual or a nation possesses the exclusive power of producing certain commodities; or, secondly, it may be qualified, springing from the possession of certain special facilities of production not shared by others, as in the case of those peculiarities of soil and climate which give an advantage to some districts and countries over others in the production of certain articles, which it is still possible for the latter to produce, though under less favorable conditions; while again, in commercial dealings, monopoly may be either one-sided or reciprocal—confined to one of the trading parties, or extending to both with regard to their respective staples. Examples of monopoly in all these forms will be found in international trade, and the power of reciprocal demand over value will be greater or less, according [350] to the form which the monopoly in any given case may assume.
For example, where the monopoly is at once strict and reciprocal—a case not frequent in international trade, but which sometimes does occur, as in the traffic which takes place between the tropical and the frozen zones, in the exchange, suppose, of spices for ice—in this case the influence of reciprocal demand on value is unqualified and absolute, since under such circumstances there is nothing but the desires on each side, supported by such means as are available to give them effect, to determine the bargain.
A more frequent and important case is that in which the monopoly is strict, but one-sided, or, if existing on both sides, only strict on one side, while it is qualified on the other. This species of monopoly is largely exemplified in the trade between tropical and temperate countries, and again in that between the gold-producing districts of the earth and the countries which trade with them. Reciprocal demand here operates, but subject to a limit on the side of the country which has the power of producing both the commodities, or classes of commodities, forming the subject of exchange. To give an example: in the trade between England and Australia (for simplicity of illustration, I suppose all other gold countries to be excluded from the commerce) there is no limit to the possible rise which might take place in the value of gold—to the possible quantity, that is, of her products which England might give in exchange for gold—save in the desire of England for gold and her ability to pay for it; but, on the other hand, the fall in the value of gold—the price in gold which Australia will consent to pay us for our goods—has a very definite limit short of Australian needs for what we produce—the limit, namely, set by the cost at which Australia can produce those articles for herself. So soon as prices in gold have reached the point at which Australia can satisfy her requirements more easily by [351] the direct production of the commodity than by producing gold to be exchanged for it, the fall of gold, in relation to that commodity, has reached its limit, and no increasing requirements on the Australian side will have any further effect on its international value.
But again, there is a third case, the most frequent and important of all in international trade—that, namely, in which monopoly exists on both sides, but is qualified on both. This occurs when each of the trading nations is in the possession, not of an exclusive power of production, but of a comparative superiority (in the sense in which this phrase has been explained) with reference to the articles which constitute its staples in the trade. Here reciprocal demand still determines inter national values, but the range of its influence finds a limit on both sides. This, I say, is the most frequent and important case of all in international commerce. It is largely exemplified in the trade between the various countries of Europe, and still more strikingly in that between Europe and North America. In the exchange, for example, of wheat for cotton yarn, or of timber for iron, each of the exchanging countries has a comparative advantage in its own staple; and any terms of international exchange which are within the limits of that advantage will imply a gain, though not necessarily an equal gain, for both countries. Within these limits, therefore, reciprocal demand will operate to determine what the precise terms of the exchange shall be; but beyond those limits on either side international values can not permanently remain, since the moment the limits thus set are transcended the resources of the country so placed at disadvantage can be brought into requisition, and the motive for the trade ceases.
These limitations on the action of reciprocal demand in international exchange are such as would exist if each country only traded with one other. But when we take into account the actual state of things, and consider that the external trade [352] of each country comprises dealings with. many others, we find that the limits to the deviations of value under the action of demand are considerably narrower than we might at first have supposed. For example, reverting to the illustration already given of the trade between certain parts of the United States and Barbados, it is probable that the difference in the comparative costs of sugar and flour in those two countries is very considerable; and that consequently a very considerable latitude would exist for possible variations in the terms on which the staples are exchanged under the influence of American demand for sugar and Barbadian demand for flour. But before the extreme limit could be reached on either side, the resources of other countries would come into requisition. Any considerable advance of sugar in relation to flour, or of flour in relation to sugar, or, let us say (since money is the medium through which the transactions would be effected), any considerable advance of United States prices in relation to prices in Barbados, or the reverse, would bring other countries into the field, and make their resources available for controlling the advancing price, on whichever side it might happen to be. The cereal capacities of Canada and South America would control the aberrations on the side favorable to the United States; while those on the side favorable to Barbados would be kept in check by the competition of the sugar producers of Jamaica and Cuba. It thus appears that it is not the difference in the comparative costs of production in each pair of trading countries that fixes the limits to the possible variations of international values under the influence of reciprocal demand, but, among all countries mutually accessible for commercial intercourse, the difference of comparative costs, as it exists in the particular countries in which that difference is least. The limits of variation are thus set by the minimum, not by the maximum, difference in comparative cost among the various exchanging and competing countries.
[353] Such is the nature of the influence exercised respectively by reciprocal demand and by cost of production in international exchange. The former determines; the latter only controls. The distinction between these two functions will be made. clear by comparing the action of cost, as just described, with its action in domestic trade. In domestic trade cost of production, within the limits of effective competition, not merely controls, but determines normal value—not merely sets limits to the variations, but establishes a point toward which they converge. It has accordingly been aptly represented by Adam Smith as a central point about which market values move, and toward which they gravitate. In the instance of international trade, the correct figure by which to describe its action would be, not a point about which values move, but a circle within which they move. Accordingly, it must be carefully remarked that, even in those cases in which its influence is operative, there is no correspondence—at all events no necessary correspondence—between values and costs. The examples I have already given of the relative rates of remuneration prevailing in different countries sufficiently establish this point.
§ 6. As regards the mode of operation by which international values are determined under the action of international demand, I do not propose to attempt any detailed illustration here. The subject will be found very fully treated in textbooks in every one's hands. There is one point, however, on which it seems to me the correct doctrine has not been quite clearly laid down, and on this it may be well here to attempt a few remarks.
The transactions of international trade are of course carried on through the medium of money—that is to say, of gold and silver; and Ricardo has shown that the effect of the play of international demand is to produce such a distribution of the precious metals, and such a relative scale of prices in commercial [354] countries, as on the whole to cause the trade of each country with all others to be carried on upon the same terms as it would be if conducted by barter. When this state of things is realized, the precious metals (so far as they are employed as a medium of exchange, and not as a staple of commerce) cease to pass from country to country; and international trade is in a condition of equilibrium.014 The point I desire now to call attention to is the condition of international demand which issues in this result.
The solution commonly given of this problem is that commercial equilibrium is attained when the value of the imports into a country, measured in gold or silver, the universal money of commerce, is equal to the value of the exports from that country. In the language of Mr. Mill, "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."015 Now, as a matter of fact, it very rarely happens that the whole exports of a country, even if we take an average of many years, exactly pay for the whole of its imports; nor can it be truly said that there is any tendency in the dealings of nations toward this result. The evidence of this is to be found in any statistical [355] table showing the exports and imports of different countries. An examination of such a table will show that there are countries which constantly, and as a normal state of things, import largely in excess of their exportations, while there are others of which the exports as regularly exceed the imports. In other cases, again, the imports will be found for a time to have exceeded the exports, after which the relation is inverted, and the exports begin to outstrip the imports. With such facts before us we can not easily admit that an equalization of imports and exports is the necessary condition of a staple trade; and this being so, we have to consider what that condition is.
To elucidate this, a better example can not be found than the external trade of the United Kingdom. I take it as set forth in the Statistical Abstract for the years between 1856 and 1870 inclusive. During the whole of this time the imports remained constantly and largely in excess of the exports. At the commencement of the period the exports stood at, in round numbers, l.115,000,000, the imports at l.172,000,000; the imports thus exceeding the exports by the amount of l.57,000,000 sterling. At the end, that is to say in the year 1870, the exports were l.199,000,000, while the imports reached l.303,000,000, showing a difference in favor of imports of l.104,000,000; and the returns of the intervening years exhibit a constant predominance on the same side, and nearly in the same proportion. The question arises, How has this large excess of imports been paid for? The answer is, to a small extent it has been paid for in services, principally in the services of our mercantile marine, performing as it does a large proportion of the carrying trade of the world, but, in the main, it has not been paid for at all. It came to us from foreign nations, as all our imports have come, in the ordinary course of trade, but the proceeds on sale have never been returned in any form to those from whom the goods came: they were applied instead to the discharge of debts owing to us—debts, [356] however, incurred on account of transactions wholly apart from our export trade. In point of fact, what has happened has been this: Great Britain has for a long time occupied the position of a lender of capital to other nations; she has invested her capital freely in her own colonies; she has lent money to many countries for industrial undertakings, and has been a large purchaser of foreign stocks. On all these accounts foreign nations, including under this term our own colonies, have become her debtors, and, in discharge of their obligations accruing in the form of profits, interest, and dividends on stock, are compelled to send her, year by year, value to a large extent for which no payment in return is required. Here we find the explanation of the large normal excess of our imports over our exports. But an examination of the facts will further evince that this excess is, in the case of Great Britain, the indispensable condition of commercial equilibrium; that under any other circumstances the present relation of prices between her and foreign countries, or, what amounts to the same thing, the present proportion in which they exchange their products, could not be maintained. This will be evident if we consider what would be the consequence of an equality of value being established between British imports and exports, the financial relations of the country with the rest of the world being such as they are. Foreign nations would have to pay us, as now, for what we export, and for this, bills drawn against the goods they send us, that is, our imports, would exactly suffice. But they owe us besides, say a hundred millions, on account of dividends, interest, and other obligations. How are they to discharge this latter liability? It is evident they could do so only in one way, namely, by sending us gold to the value of the amount in question. An extensive-influx of gold from foreign countries to Great Britain would thus set in, and—so long as the state of international prices, and therefore of international demand, remained at the [357] point which had produced the equality of imports and exports — would continue. It is plain, however, that international prices and demand could not long remain steady under the circumstances supposed. The large and continued influx of gold into England would necessarily be attended by a rise of prices here, and a fall in foreign countries; and this would quickly lead to a change in the demand of England and of foreign countries for their respective products. England, in possession of enlarged monetary resources, and finding prices falling abroad, would extend her demand for foreign commodities; while, for precisely opposite reasons, foreign countries would curtail their demand for the commodities of England. English imports would thus increase, and English exports diminish; and this would go on, year by year, so long as gold continued to flow. But the question arises at what point would the process terminate, and trade find its equilibrium? The answer is: precisely when the excess of imports over exports had attained its present dimensions—when the former, that is to say, had exceeded the latter by a hundred millions sterling; for it would only be then that foreign countries could discharge all their liabilities to us without remitting gold. Gold would, therefore, at this point cease to flow, and prices would remain at the level they had reached. In a word, the trade between England and the world would once more have attained equilibrium.
And now we are enabled to answer the question propounded a few pages back. The answer may be formulated thus: The state of international demand which results in commercial equilibrium is realized when the reciprocal demand of trading countries produces such a relation of imports and exports among them as enables each country by means of her exports to discharge all her foreign liabilities—a position from which the following corollary may be deduced, that all payments, due from one country to another or to other countries on other [358] accounts than that of imports, of a permanent character—for example, an annual tribute, interest on borrowed capital, dividends on stock, and so forth — and in excess of similar payments due from these latter to the former, will be represented in the foreign trade of that country by an excess of exports over imports; while, conversely, an excess of payments of this character to be received over payments due will find its commercial expression in an excess of imports over exports. This is, in truth, merely to say that the foreign trade of each country will adapt itself to the pecuniary requirements of that country in relation to the countries with which it trades. If a country has been a large borrower of foreign capital, and so is indebted to foreign nations in annual interest, or if, again, her people are much given to traveling in foreign countries, and so have occasion to remit annually large sums abroad for which no return is required, under such circumstances her exports will tend to exceed her imports; while, under an opposite state of things, that is to say, if a country has been a large foreign lender, or if it be the scene of travel for the inhabitants of other countries—the imports will tend to exceed the exports. With many, indeed with most countries, it will happen that they are debtors to foreign countries upon one score and creditors "upon another; and the state of the import and export trade will be such as the state of the balance in each case may prescribe. For example, Great Britain makes large remittances abroad every year to meet the expenses of Englishmen residing or traveling in foreign countries. This would tend to make her exports exceed her imports, and would actually produce this effect, if it were not that the debts due on this account to foreign nations are more than balanced by larger debts due on 'other accounts by them to us. The balance of such non-commercial payments being, on the whole, largely in favor of Great Britain, it results, as we have seen, that her imports are, as a rule, largely in excess of her exports. An illustration of the [359] same principle in an opposite sense is afforded by the foreign trade of the United States previous to 1860. As all the world knows, the people of the United States had long been, as they are still, much addicted to foreign travel: they had also for a long time been extensive borrowers in European money markets. Both these practices combined to place them under the necessity of remitting annually large sums to Europe over and above what they owed on commercial account; and this obligation was discharged in the only way, in the long run, possible, namely, through the medium of United States products exported. Accordingly, if we turn to the Reports on the external trade of the United States for the period previous to 1860, we find, as the normal state of things in that trade, a pretty steady excess of exports over imports—an excess which in her dealings with Europe assumes very large proportions.016
§ 6. The foregoing examples show tlie effects of international lending and borrowing on the external trade of nations after these practices have issued in monetary relations of a definitive kind. At the commencement, however, and for so long as the process of incurring debt is still in actual operation, the effect of such practices on the foreign trade of a country is exactly the reverse of that which is subsequently realized. The nations which have engaged to lend are, during this period, those which have pecuniary obligations to discharge; the nations [360] which borrow, those which are entitled to receive payments in excess of what is due to them on their ordinary trade; and for a time the external trade of both tends to. adapt itself to this state of things. The subject is perhaps of sufficient importance to deserve some detailed illustration.
Let us, then, suppose an industrial colony, starting on its career, to become a borrower of capital from its mother-country; and, for simplicity of illustration, we will assume that neither is a producer of the precious metals, which, therefore, would only pass between them in discharge of pecuniary debts. The amount which the mother-country undertakes to lend, and the colony to receive, we will set down at one million sterling annually. This being the position of affairs, it becomes necessary that the sum to be lent should be remitted each year from the mother-country to the colony, and this, it is manifest, can only be done, either by a remittance of gold to the amount required, or by an exportation, in addition to that ordinarily taking place, of commodities to the same value, or by a combination of both these methods. If the colony is content to take the entire amount, or any portion of it, in commodities, this would imply a corresponding increase in colonial imports over colonial exports; for it would only be in the event of the increased importation being unbalanced by exports from the colony to the mother-country that the proceeds arising from it would be available for the mother-country in discharge of the loan, and there would obviously be nothing in what had occurred to lead the latter to increase her demand for colonial products. But it is probable that at least a portion of the loan would be sent in gold; and this would operate indirectly toward the same result. For the flow of gold into the colony year by year would necessarily raise colonial prices, while it would tend in the opposite direction in the mother-country; and this, through a play of forces I have already more than once described, would be followed by an increase of colonial [361] importations, and a corresponding decline in the exportation of colonial products—a process which would manifestly continue, until at length the excess of commodities sent from the mother-country to the colony over those received from thence would enable the former to pay the whole annual loan by means of her commodities alone. At this point the trade between them would be in equilibria; the exportations from the mother-country having become sufficient to enable her to discharge by this means all her liabilities to the colony. Up to this stage, then, the effect of foreign borrowing on the colony would, so far as we have yet traced it, tend toward an excess in her importations from the mother-country over her exportations thither. This would be the initial effect.017 But during the continuance of the process just described, the grounds of an opposite state of things would be steadily developed. With every million sterling annually remitted, the colony would become indebted to the mother-country for the interest on the amount Supposing the rate of interest to be five per cent. per annum, at the end of the first year the debt of the colony to the mother-country would be l.50,000: consequently, in making her next remittance on account of capital, the mother-country would only need to send value to the amount, whether in commodities or gold, of l.950,000. In the following year, the colony would owe on account of interest l.100,000, which, still supposing the same amount of capital to be lent, would reduce the liabilities of the mother-country on this score to l.900,000, and this process of gradual diminution of the mother-country's extra commercial liabilities to the colony would, at the end of twenty years, issue in this result, that the sum due by the colony on account of interest would equal the entire [362] amount of the annual loan. What would be the effect on the external trade of the colony of this growing indebtedness to the mother-country? Manifestly to neutralize that produced by the operation of the influences developed in the early stages of these transactions. The obligation of the mother-country to remit value to the colony, in addition to what she owed on account of goods imported thence, gave an impulse to her export trade, and caused the importations of the colony to exceed her exportations. The obligation of the colony to discharge its growing liability to the mother-country would now, year by year, operate to reduce the excess, until at length the liabilities incident to the loans on each side balancing each other, the equilibrium of trade would be found in such a relation of exports and imports as would balance their remaining obligations—on the supposition that these latter should consist exclusively of commercial debts, then in an equality of imports and exports. This state of things, however, would be but momentary.
We have supposed the colony to have continued borrowing at the rate of l.1,000,000 sterling annually for twenty years. At this stage, let us make the supposition that she suddenly ceases to borrow, and observe what, on this hypothesis, would be her financial position in relation to the mother-country. In the first place, she would be bound to pay l.1,000,000 sterling annually on account of interest; but, no longer receiving the proceeds of the loan as formerly, she could not set off one obligation against the other. It would, therefore, be necessary for her to remit value to the amount required—in other words, her position relatively to the mother-country at this stage of affairs would be financially identical with that of the mother-country toward her at the outset, with this difference, that no new indebtedness would be growing up on the side of the mother-country to neutralize the permanent obligations incurred by the colony. The financial conditions of the case being thus changed, the external commerce of the two countries [363] would adapt itself to the altered state of their reciprocal liabilities. Gold would once again begin to flow, but the tide would this time be directed from the colony to the mother-country, and it would be followed by a series of effects similar in character, though opposite in direction, to what we have already traced. Year by year the exports from the colony to the mother-country would exceed its imports thence, until at length the excess became sufficient to enable the former to discharge its financial liability in the products of its own industry. The efflux of gold would at this point cease, and the trade between the two countries would be in equilibrio once more.
We may make yet another supposition. The colony, instead of suddenly ceasing to borrow at the end of the twentieth year, might continue her borrowings on the former scale of l.1,000,000 annually. On this supposition, her debt to the mother-country, on account of interest, at the end of the twenty-first year would be l.1,050,000; but l.1,000,000 of this could now be set off against the annual loan. In other words, the net balance due to the mother-country would be l.50,000; but, on the supposition that the borrowing continued, this balance would grow year by year in arithmetical proportion, and would act upon her external trade, in proportion to its amount, in the manner already shown. In course of time we may assume that, as wealth increased in the colony, she would have less need of foreign capital, and would borrow less or not at all, but she would still be liable to send abroad value in excess of her commercial obligations to the amount of the interest due on all debts previously incurred. The normal state of the external trade of the colony would, therefore, under the circumstances supposed, be one in which her exports largely exceeded her imports; and such it would continue to be until either the original debt was paid off, or the colony herself had become a lender, and by this means imposed a similar tribute upon other countries.
[364] § 7. Such is the nature of the influences, immediate and remote, exerted on the external trade of countries by the practice of foreign borrowing. In order to render the principle clear, it was necessary, in the first place, to exhibit its operation under very simple conditions; and I, therefore, had recourse to a hypothetical case. But so much, it is hoped, having now been accomplished, it may be well to turn from our imaginary mother-country and colony to an actual instance of international lending and borrowing on a vast scale. During the last thirteen years the financial transactions of the United States with Europe have far exceeded all former examples of the same kind, and the effects which they have produced, both on her external trade up to the present time, and still more on her commercial and financial position with reference to the future, have been of a magnitude correspondingly great. As furnishing, therefore, a striking practical illustration of the principles we have been considering, and in particular of the modes in which international settlements on a great scale are effected, it will, I think, be profitable to consider here in some detail the character and scope of those transactions.
It has been already seen that previous to 1860 the normal condition of the external trade of the United States was one in which the exports steadily exceeded the imports, this being the natural commercial outcome from the state of her financial relations with Europe. But the advent of the Civil War brought with it a series of events, each of potent influence, and which in their combination have sufficed to shake American trade to its centre, and to render the financial position of the Union in presence of Europe unprecedented and critical in the extreme. Of these events the most important were (1), the enactment of the Morrill tariff in 1861, by which the United States passed from what was substantially a free trade commercial regime to one of high protection; (2), the sudden cessation of cotton cultivation, and, as a consequence of this and [365] of the Civil War, the temporary collapse of the cotton trade with Europe; (3), the creation of an enormous national debt, simultaneously with considerable additions made to State and other debts previously contracted, a large proportion of the funds in both cases being furnished by foreigners; and, lastly, the issue of an inconvertible paper currency to take the place of the mixed system of coin and convertible credit which formerly prevailed. The passing of the Morrill tariff and the present rigidly protective system of the United States will be the subject of special examination in a future chapter. For our present purpose it will be sufficient if we attend to the three last of the occurrences named, and mainly to the consequences involved in the sudden increase in foreign indebtedness, taken in connection with the collapse of the cotton trade.
Let us first observe the scale on which the new debt was created. It amounted—we may say in round numbers—to about five hundred millions sterling, of which some two hundred millions were taken by foreigners.018 In addition to this, numerous other loans were effected on State, railway, mining, and other securities, reaching in the aggregate a very large sum, of which the amount that found its way to Europe was, according to Mr. Wells, not less than one hundred millions sterling. These transactions were spread over several years— we may say broadly, over the last three years of the war, and the two or three immediately succeeding. Regarding them as they affected the financial relations of Europe and the United States, the result may be thus stated: Europe undertook to send immediately, that is to say, as fast as the several obligations were incurred, some l.800,000,000 sterling to the United States; while the United States on her side engaged to pay the interest on this sum to Europe for all time, or until the principal was discharged. The transactions, as I have said, [366] were spread over. some five or six years, and, making allowance for the dividends which would be accruing on the investments from the time they were effected, and which might be used as a set-off against the principal sums still becoming due as new investments were made, the amount required to be sent from Europe to the United States daring the period under review would not be less than some l.40,000,000 sterling annually. Under ordinary circumstances—in such a state of external trade, for example, as had existed previous to 1860—so enormous and sudden an increase of payments from one continent to the other could only have been effected through the medium of bullion. The ordinary flow of gold from New York to Europe would have been suddenly checked, and a counter-current would have set in from Europe to New York—operations which could not fail to produce a profound ferment in the money markets of the two continents. As it was. however, the settlement of these vast transactions occasioned very little disturbance of any kind. The explanation is mainly to be found in another of the circumstances to which I have called attention, the collapse of the cotton crop; for the effect of this was suddenly to leave the United States without the means of paying Europe for her ordinary importations thence, swollen as these had recently been by large purchases of material of war. In the result the United States stood largely a debtor to Europe on commercial account; while on financial account the balance was not less decidedly against Europe; and, the amounts on both sides nearly corresponding, the settlement of the complex transactions became possible by the simple expedient of setting off one class of obligations against the other. This, in effect, is what was done. The reciprocal obligations of Europe and the United States were thus adjusted for the time, though by a sort of financial coup de main that could not well be repeated; and now I invite the reader to contemplate the state of things which has supervened.
[367] § 8. On the termination of the war the cultivation of cotton was, of course, resumed, and already that staple, as an article in the trade of the United States with Europe, has attained its former proportions, if not in quantity at least in value. On her other domestic exports (in which, be it remembered, specie is included) there has been an increase, though not a large one, and only during the last two years. But while this has been the case as regards exports, her imports have risen from 385,200,000 dollars, at which they stood in 1860, the year previous to the war, to 617,000,000 dollars, their amount according to the latest returns.019 The reader will remember that previous to the war the exports of the United States had, as a normal state of things, exceeded the imports; the excess on this account during the ten years between 1851 and 1860 (inclusive) having amounted to an average sum of 6,000,000 dollars annually. Now, however, the balance is on the other side. It is the imports which are in excess of the exports. In the [368] five years, 1868-1872 (inclusive), the excess amounted on an average to 44,000,000 dollars annually; while in the last year of the period (1872) it grew to no less a sum than 116,000,000 dollars. Now, from the explanations already given, the reader will understand that such a state of external trade, assuming it be sound and normal, would imply a state of financial relations between the United States and Europe in which the former country was largely a creditor of the latter; for it is only on this supposition that a large excess of imports over exports could continue consistently with national solvency. So far, however, from the facts being in accordance with this supposition, they are exactly the reverse of this. The United States is largely a debtor to Europe on financial account, while her exports are not even sufficient to cover her commercial liabilities. It will be worth while to consider this position of affairs somewhat more in detail.
As I learn from figures given by Mr. Wells in his Report for 1868, the dividends due to European holders of United States stocks of various kinds amounted in that year to 80,000,000 dollars. This, however, is but a portion of her extra commercial obligations to Europe. Her remittances to foreign countries to meet the expenses of her citizens residing or traveling abroad reached in the same year, according to the same authority, so large a sum as 25,000,000 dollars, and it does not appear that there was any thing exceptional in this expenditure. Lastly, we learn from Mr. "Wells that an annual debt to foreign countries of 24,000,000 dollars more is incurred on account of freights carried in foreign bottoms. The aggregate of these various sums is 129,000,000 dollars, in round numbers we may say about l.26,000,000 sterling; and this sum the United States has to pay annually to foreign countries, over and above what she owes on account of her importations. Now, as I have already explained, there is but one means by which a nation can in the last resort discharge her [369] liabilities to other nations—namely, through the value of her products exported. We have seen, however, that the exports of the United States, as things now stand, far from being adequate to the liquidation of her annual aggregate liabilities; are insufficient to meet those incurred on commercial account alone; the deficiency, taking the average of the last five years, having, as I have just shown, reached the 'large sum of 44,000,000 dollars—let us say in round numbers about .69,000,000 sterling. We have thus a balance of l.9,000,000 on commercial account, plus a further sum of l.26,000,000 on extra-commercial account—in all l.35,000,000 sterling—due, year by year, by the United States to foreign countries, in excess of what the value of her exported goods enables her to discharge. The question arises, How is this liability to be met? How it has been met up to the present time I have no means of accurately determining; but one expedient, we know, has been brought extensively into requisition. During the period since the war the sale of American securities in the markets of Great Britain and the Continent has been large and increasing. The United States has ceased, indeed, to add to her public debt, and has even made some progress in reducing it, but it is probable that the proportion of this debt in the hands of European holders has of late increased, and it is certain that the amount of European capital which now finds its way to private investment in America is immensely greater than it has ever been at any former period. Here, then, is a resource which, so far as it goes, and so long as it lasts, the United States may employ in liquidation of her uncovered liabilities; the sums payable by Europe in purchase of American securities being as much available in discharge of American debts as if they were obtained in payment of exports.020 Whether those sums [370] have hitherto proved sufficient for the purpose required, must. for the moment, remain matter for conjecture, but it may be confidently asserted that, in any case, they can only be regarded as a temporary make-shift. No nation can continue to pay its foreign debts by the process of incurring new debts to meet a balance yearly accruing against it; yet this, in truth, is the nature of the financial operation by which of late years the United States has contrived to settle accounts with the rest of the world. Even on the supposition that European investment is to continue on its present scale, the interest upon it would, as I have shown, come in time to exceed the principal annually invested; while the balance uncovered by exports would still remain absolutely unprovided for. These considerations lead me to the conclusion that the present condition of the external trade of the United States is essentially abnormal and temporary. If that country is to continue to discharge her liabilities to foreigners, the relation which at present obtains between exports and imports in her external trade must be inverted. Her exports must once again, as previous to 1860, be made to exceed her imports, and this by an amount greater than the excess of that former time in proportion as her financial obligations to foreign countries have in the interval increased. This, it seems to me, is a result which may be predicted with the utmost confidence. The end may be reached either by an extension of exportation, or by a curtailment of importation, or by combining both these processes, but by one means or other reached it will need to be. It is simply the condition of her remaining a solvent nation. The people of that country may, therefore, if I am right in this speculation, look forward to witnessing a result for which the promoters of their present commercial policy have often sighed—they expounded by Mr. Goschen in his work on the Foreign Exchanges," to which the reader is referred.
[371] may expect, before many years, to see United States commodities selling in foreign countries in vastly greater quantities than tlie commodities of foreign countries in the markets of the United States. How far their estimate of this condition of their trade will be affected by the circumstance that a large proportion of the proceeds from those augmented foreign sales will find its way into European pockets, is a point on which it would be scarcely becoming in the present writer to offer an opinion.021
The conclusion just stated suggests a further reflection. A change in the relation of exports and imports in the trade of a country can only be effected through a change in relative prices (measured in gold or silver) as they exist in that country and in those with which it trades. To establish, therefore, an excess of exports over imports in the trade of the United States, in lieu of the balance the other way which now exists, prices there must be lowered in relation to prices in Europe. This may be accomplished partly by an advance in prices here not shared by the United States, as in fact has already happened in the case of some important commodities; but it [372] is probable that the end will be reached mainly through a decline of prices on the other side. A considerable fall of general prices, however, is a remedy to which manufacturers and merchants will only submit when pushed to extremity. It will, therefore, only come when credit has been strained to the utmost, and a catastrophe is seen to be inevitable; and then it will probably come with a crash. For these reasons I should be disposed to look forward to the immediate future of American trade as a period of much disturbance and fluctuation, culminating, it is possible, from time to time in commercial crises.022
In offering these remarks on the prospective character of the external commerce of the United States, I have deliberately abstained from adverting to some contingencies, and in particular to two, which can not fail, more or less seriously, to affect it—I mean the course that country may adopt with regard to Protection, as well as with regard to the redemption of her paper money. I have thus far avoided these topics, because I do not conceive that any decision she may come to with reference to either—powerfully operative as no doubt it will be on her future commercial fortunes in various directions—can possibly affect the particular issue to which the preceding remarks have been addressed. A persistent policy of Protection will, no doubt, have the effect of preventing the due expansion of her external trade in the future as it has done in the past, if it does not lead to its positive curtailment; while the adoption of free trade would as certainly tend to its rapid development, and thus greatly relieve the extreme tension of the situation. But, under all circumstances, if the United States is to remain a solvent [373] nation, she must contrive to send a larger value out of the country than is received into it, and tins larger value can take no other form than the products of her industry. Free trader or protectionist, therefore, an excess of exports over imports in her foreign trade, sufficient in amount to discharge her international liabilities, is a condition she can not evade.
I may venture on a further remark. It appears to me that the influence, attributed by many able writers in the "United States to the depreciation of the paper currency as regards its effects on the foreign trade of the country, is, in a great degree, purely imaginary, founded, as I conceive it to be, upon an erroneous view of the circumstances which determine international demand. An advance in the scale of prices, measured in gold, in a country, if not shared by other countries, will at once affect its foreign trade, giving an impulse to importations, and checking the exportation of all commodities other than gold. A similar effect is very generally attributed by American writers to the action on prices of the greenback inconvertible currency. But it may be easily shown that this is a complete illusion. Foreigners do not send their products to the United States to take back greenbacks in exchange. The return which they look for is either gold or the commodities of the country; and if these have risen in price in proportion as the paper money has been depreciated, how should the advance in paper prices constitute an inducement for them to send their goods thither? The nominal gain in greenbacks on the importation is exactly balanced by the nominal loss when those greenbacks come to be converted into gold or commodities. To put the argument in a still more practical shape: Whatever the importing merchant gains in the increased price at which he sells his goods, precisely the same amount he looses when he comes to purchase a bill by which to remit the proceeds of the sale to the country whence the goods came. The nominal premium on the bill will just neutralize what he had appeared to gain [374] on the sale through the depreciation of the paper money. It is true the gain may, in particular cases, exceed the loss, but if it does,-the loss will also, in-other cases, exceed the gain. On the 'whole, and on an average, they can not bat be the equivalents of each other. In making these remarks the reader will not understand me as contending that a depreciated currency is absolutely without influence on the foreign trade of a country. So far as it introduces uncertainty and risk into commercial transactions it no doubt affects foreign as well as domestic trade, and affects both injuriously; but this is an entirely different thing from acting as an encouragement to importation, and a check upon exportation—the effect attributed to a depreciated currency by the writers to whose views I have referred.
[375] 1. THE foregoing discussions have exhibited the conditions under which international trade arises, and the nature of the advantages that flow from it. It has been seen that nations only trade with one another when by doing so they can satisfy their desires at smaller sacrifice or cost than by direct production of the commodities which minister to them. The establishment of this position is the justification of the doctrine of free-trade; since it is manifest that, if nations only engage in trade when an advantage arises from their doing so, any interference with their free action in trading can only have the effect of debarring them from an advantage. For those, therefore, who accept the economic theory of international trade, no further proof of the essential soundness of this fundamental principle of commercial policy is needed. Nevertheless, I am unwilling to leave the subject of these chapters without some fuller consideration than has yet been given to it of the great controversy, not yet, unfortunately, extinct, of Free Trade versus Protection. I have said, "not yet extinct: perhaps I should rather have said, even now active and glowing with something of its pristine fervor; for we have only to turn our eyes to France, or to the United States, not to speak of our own colonies, to see with what vigor, and I regret to say with what success, the venerable sophism still maintains itself, alike in the public press and in national legislatures. Under such circumstances an examination of the specific doctrine of Protection will even yet, perhaps, not seem altogether out of date; and, [376] thanks to Mr. Wells, the United States Commissioner, we are not without abundant illustrations of the recent working of the principle, which have only to be duly pondered in the light of economic theory, to teach a lesson such that be who runs may read.
§ 2. The system of Protection naturally grew out of the system of the Balance of Trade. They were not, indeed, so much distinct systems as different aspects of the same system. As the Balance of Trade doctrine began to give way, that of Protection was gradually inserted in its place, as it were to underpin the tottering edifice. The aim of the former was to enrich the country by drawing to it the precious metals; that of the latter to do so by encouraging native industry; but the means adopted were identical, as was also the point of view from which the supporters of the two theories regarded commercial problems.023 Consistently carried out, the Balance of Trade [377] system must have extinguished foreign trade, since it is demonstrable that the permanently favorable balance which it aimed at producing is not capable of realization; and consistently carried out, Protectionism would put an end, if not to all foreign trade, at least to all such as furnished us with commodities capable of being produced in the protected country; for the essence of the doctrine is, to encourage native industry by excluding the products of foreign industry, wherever these come into competition with commodities which native industry can produce. Protectionists, however, rarely now attempt to carry out their doctrine in its rigor, and, instead of requiring an absolute exclusion of foreign products, are commonly content to demand such a measure of protection as, to borrow their language, shall put the home producer on a footing of equality with his foreign rival. If the latter possesses no advantage over the former, then the trade, as the phrase goes, "can stand alone," and no protective duty is asked for; but if the foreigner possesses an advantage, this must be neutralized by a countervailing duty. The reader who has followed the foregoing exposition of the grounds of international trade will perceive that this more modest form of the doctrine would, in its practical issue, be entirely tantamount to the former, since, as was there shown, the existence of international trade rests on the different productive capacities with respect to particular commodities of different countries: if, therefore, each nation is to [378] set itself to neutralize this difference, wherever it appears, by means of countervailing duties, it is plain that the triumph of the system would be the annihilation of foreign trade. If indeed equality in productive conditions could be attained by what might be described as a process of "leveling up;" if Protection could contrive that every commodity should be produced in every, country with the same facility with which it is produced on the spot of the globe most suitable to its production—though even so it would annihilate foreign trade,—there would yet bo something to be said for this mode of attaining equality. It may, however, be doubted if the gain which might accrue in material comforts from the increased productiveness of the earth would not be more than counterbalanced by the intellectual and moral loss which would result from the withdrawal of the principal motive to the intercourse of mankind. Protectionists, however, not being able to "level up," propose to "level down," and aim at reaching equality by, so to speak, handicapping commercial countries against each other, making each carry weight in the markets of the others exactly sufficient to counterpoise its special advantages. Such is the theory of trade which now, it seems, finds favor on the other side of the Atlantic.024 In the proposal, however, to sacrifice the very ends of industry and commerce in order to promote equality, we may, perhaps, detect the savor rather of a French than of an American origin. A theory essentially the same was propounded a few years ago by M. Alby, in the Revue des Deux Mondes, in an essay written with much elaboration and parade of scientific precision, and, it must be presumed, with skill and effect, since the exposition was accepted by protectionists in the United States as a triumphant statement of their argument, and met with consideration from even free-trade journals in that country. Under these circumstances I shall [379] make no apology for devoting a brief space to the consideration of the protectionist case as stated by M. Alby.
§ 3. The position taken by M. Alby in his article in the Revue des Deux Mondes025 is, that the doctrine of Protection is in theory sound, though he admits that in old countries like France it is not possible fairly to carry it. into effect. For this reason he is in favor of a modified free trade for France in her actual circumstances. But, while taking this line as a practical politician, he strenuously contends for the theoretic soundness of the protectionist's view. According to M. Alby, the apparent triumph which free-traders commonly gain over their opponents arises from the imperfect way in which the protectionist case is pub Free-traders attack the system in detail, joining issue on each particular duty; whereas the strength of the protectionist case lies in its ensemble, in its completeness as a whole.
"Let us take, for instance," says M. Alby, "the case of mining industry. Every one needs iron, and iron is produced in France by a very restricted number of furnaces; and here is the way free-traders put the case. 'The price of iron,' say they, 'is raised by the customs' duty on foreign iron. Is it just that thirty-eight millions of Frenchmen should pay more for iron than, in the absence of duty, it is worth, in order to enrich a few iron-masters?' If we go no further than this—if the case remains isolated, only one answer is possible. With the exception of the iron-masters, every one will exclaim, 'No, it is not just, it is an odious monopoly!' Very good; but let us put a similar case for another industry, the manufacture of cloth. The answer will be the same. Only this time the cloth manufacturer will turn round on the iron-master and say, 'Where is your grievance? I pay more for your iron than I should have to pay for foreign iron if it entered free. Is it not just that you pay me a higher price for my cloth than it might be purchased at abroad?' The argument is unanswerable. The iron-master will be forced to acknowledge this. As we run successively the entire circle of industrial [380] and agricultural production, with each new industry that we take account of, the area of the apparent injustice will be continually narrowing till we end by finding ourselves in presence of a series of people paying dearer for what they purchase, but making others pay dearer for what they sell. They have no ground for mutual reproach. Well, such," continues M. Alby, "is the system of Protection in its ensemble. It is a sort of mutual assurance against foreign competition, an associative pact which embraces the entire country. Each consents to pay for all the products he requires a price augmented by the customs' tariff, on the condition of obtaining for his own products in the home market a price equally augmented by the same means, so that they shall return him a profit."
M. Alby apparently overlooks the fact that it is only those industries which are carried on under a relative disadvantage that stand in need of protection; and that consequently—since in no country are all industries equally favored by nature— the consummation he contemplates with so much satisfaction is incapable of realization in any part of the world, during any stage of commercial progress. How, for example, could the wine-growers or silk-weavers of France, or again, how could the Western farmers or Southern cotton-planters of the United States, be compensated, under M. Alby's system, for the price they pay for foreign imports in consequence of a protective tariff? By obtaining in return, forsooth, a protective duty, in France on wine and silk, and in the United States on wheat and cotton! But passing by this "little rift within the lute," let us, in order to exhibit the radical absurdity of this pretty theory, assume that all branches of production in France stand equally in need of protection. The argument is, that, provided each person receives in his capacity of producer a price for his commodity as much higher than its price under free trade as that which he pays in his capacity of consumer for what he requires, no harm will be done. Accepting this view, a perfect system of Protection might seem to be tantamount simply to a general depreciation of money. All persons would receive [381] higher money remuneration than under free trade, and would pay this away in higher prices—a consummation, the advantage of which to native industry is not apparent. This mode of conceiving the case, however, implies a most inadequate appreciation of the consequences involved in M. Alby's scheme. M. Alby fails to perceive that tlie high price which Protection secures is rendered necessary in consequence of the more onerous conditions under which native industry, tempted by its inducements, is encouraged to work. Frenchmen are encouraged to produce iron from ores of inferior quality by the high price secured to them through their protective tariff. In the absence of Protection they would obtain their iron on more favorable terms—at a smaller sacrifice of labor and abstinence—by exchanging for it their wines and silks with England. A similar remark applies to every protective duty that is really effective for its purpose. It necessarily implies production carried on under more onerous conditions. On tlie supposition, therefore, that M. Alby's system were feasible, tlie practical result would be, not simply a general rise of prices, but an increase in the cost—cost, be it remembered, in the sense not of mere money outlay, but of actual difficulty, of real sacrifice—of producing every article the creation of French industry. All Frenchmen would be compelled to labor half as hard again, and to save half as much again, in order to procure every necessary and comfort they enjoy. Bat then equality and justice would be realized. No doubt, just as they might be realized by compelling every one to move about with a weight attached to his leg. The weight would, indeed, be an impediment to locomotion, but provided it were in each case exactly proportioned to the strength of the limb which drew it, no one, according to M. Alby's way of looking at things, would have any reason to complain. No one would walk as fast as if his limbs were free, but then his neighbor would be equally fettered, and if it took him twice as long to [382] reach his destination as before, he would at least have company on his journey. Strange that such speculation should find acceptance in the country of Say and Bastiat!
§ 4. Such is the theory of Protection in its most general form, as set forth by one of its latest expositors, and accepted in the country in which its influence is at present supreme, almost to the degree of absolutely controlling legislation. But it will be instructive to enter into the argument in somewhat more of detail. As I have said, the position taken in the United States is, that Protection is only needed and only asked for where American industry is placed under a disadvantage as compared with the industry of foreign countries. What, then, we have to ask, in the first place, is the criterion by which the alleged disadvantage attaching to American industry is established? As we learn from Mr. Wells,026 the criterion taken is the cost of production of the articles claiming protection, which again, he informs us» is estimated almost exclusively by reference to the money price of labor. The rates of wages measured in money are higher in the United States than in Europe, and therefore, it is argued, the cost of producing commodities is higher there than here. It is strange that those who employ this argument should not have perceived that it proves too much. The high rates of wages in the United States are not peculiar to any branch of industry, but are universal throughout its whole range. If, therefore, a high rate of wages [383] proves a high cost of production, and a high cost of production proves a need for Protection, it follows that the farmers of Illinois and the cotton-planters of the Southern States stand in as much need of fostering legislation as the cotton-spinners of New England or the iron-masters of Pennsylvania! A criterion which leads to such results must, I think, be regarded as sufficiently condemned. The fallacy is, in truth, the same as that which so awkwardly marred the pretty theory of M. Alby, who, as we saw, in carrying the boon of Protection with impartial hand round the whole circle of the industries, unfortunately overlooked the trifling circumstance that all industries are not in each country equally favored or disfavored by nature, and have not, therefore, equal need of his protecting care. If American protectionists are not prepared to demand protective duties in favor of the Illinois farmer against the competition of his English rival, they are bound to admit either that a high cost of production is not incompatible with effective competition, or else that a high rate of wages does not prove a high cost of production; and if this is not so in Illinois, then I wish to know why the case should be different in Pennsylvania or in New England. If a high rate of wages in the first of these States be consistent with a low cost of producing corn, why may not a high rate of wages in Pennsylvania be consistent with a low cost of producing coal and iron? or a high rate of wages in New England be consistent with a low cost of producing calico? I must own that Mr. Wells's treatment of this branch of the argument is, to my mind, eminently unsatisfactory. It .is true he objects to the protectionist criterion of cost of production—money wages, but .only on the ground that it fails to take account of the varying efficiency of labor, and of the varying purchasing power of money in relation to the laborer's requirements.027 The fallacy, however, [384] involved in that criterion goes far deeper than this, and is only fully exposed when exhibited as inverting the real relation of facts. As I have already proved,028 the rate of wages, whether measured in money or in the real remuneration of the laborer, affords an approximate criterion of the cost of production, either of money or of the commodities that enter into the laborer's real remuneration, but in a sense the inverse of that in. which it is understood in the argument under consideration: in other words, a high rate of wages indicates not a high but a low cost of production for all commodities, measured in which the rate of wages is high; as, on the other hand, a low rate of wages indicates a high cost for all, measured in which the rate is low. Thus in the United States the rate of wages is high, whether measured in gold or in the most important articles of the laborer's consumption—a fact which proves that the cost of producing gold, as well as that of producing those other commodities, is low in the United States. On the other hand, the rates of wages in Europe measured by the same standards are—at least as compared with rates in the United States—low, founded on these exceptions wholly fails, in my judgment, to meet the protectionist argument. What he shows is that labor in England, though much higher priced than in most European countries, and in particular than in Russia, is still so much more efficient here than there, that the high English rates are practically cheaper for the English capitalist than the lower Continental rates for the capitalist of the Continent. What is the bearing of this upon the American demand for protection against England? Will Mr. Wells maintain that, as the efficiency of English labor is to that of Russian, so is the efficiency of American labor to that of English? If not, how does his objection to the protectionist criterion of cost, founded on the different degrees of industrial efficiency, affect the argument? And as little does he seem to me to make good the pertinency of his objection on the other ground taken. It is possible that in a few manufacturing districts in the United States the rent of an artisan's dwelling is higher than in some manufacturing districts in England, but in the most important articles of the laborer's consumption, in the whole list of "provisions," for example, the advantage in respect to price is unquestionably with the American consumer, [385] which again merely proves that the cost of producing the commodities constituting those standards is high in Europe, as compared with their cost in the United States. This elementary truth is so far from being generally appreciated that I should not be surprised if its simple statement should appear to some persons, and possibly even to some economists, as paradoxical.029 I would ask such to consider what are the true causes of the high remuneration of American industry. It will surely be admitted that, in the last resort, these resolve themselves into the one great fact of its high productive power. Capitalists and laborers receive large remuneration in America because their industry produces largely. That is the simple and patent fact which all must acknowledge. But what is the meaning of a highly productive industry, if it be not a liberal industrial return as compared with the sacrifice undergone? And what, again, does this mean if not a low cost in relation to the thing produced? I must, therefore, contend that the high scale of industrial remuneration in America, instead of being evidence of a high cost of production in that country, is distinctly evidence of a low cost of production—of a low cost of production, that is to say, in the first place, of gold, and, in the next, of the commodities which mainly constitute the real wages of labor—a description which embraces at once the most important raw materials of industry and the most important articles of general consumption. As regards commodities not included in this description, the criterion of wages stands in no constant relation of any kind to their cost, and is, therefore, simply irrelevant to the point at issue. And now we may see what this claim for protection to American industry, founded on the high scale of American remuneration, really comes to: it is a demand for special legislative aid in consideration of the [386] possession of special industrial facilities—a complaint, in short, against the exceptional bounty of nature.
§ 5. Perhaps I shall here be asked how, if the case be so— if the high rate of industrial remuneration in America be only evidence of a low cost of production—the fact is to be explained, since fact it undoubtedly is, that the people of the United States are unable to compete in neutral markets, in the sale of certain important wares, with England and other European countries. No one will say that the people of New England, New York, and Pennsylvania are deficient in any industrial qualities possessed by the workmen of any country in the world. How happens it, then, that, enjoying industrial advantages superior to other countries, they are yet unable to hold. their own against them in the general markets of commerce? I shall endeavor to meet this objection fairly, and, in the first .place, let me state what my contention is with regard to cost of production in America. I do not contend that it is low in the case of all commodities capable of being produced in the country, but only in that of a large, very important, but still limited group. With regard to commodities lying outside this group, I hold that the rate of wages is simply no evidence as to the cost of their production, one way or the other. But, secondly, I beg the reader to consider what is meant by the alleged "inability" of New England and Pennsylvania to compete, let us say, with Manchester and Sheffield in the manufacture of calico and cutlery. What it means, and what it only can mean, is that they are unable to do-so consistently with obtaining that rate of remuneration on their- industry which is current in the United States. If only American laborers and capitalists would be content with the wages and profits current in Great Britain, there is nothing that I know of to prevent them from holding their own in any markets to which Manchester and Sheffield send their wares. And this brings us to [387] the heart of the question. Over a large portion of the great field of industry the people of the United States enjoy, as compared with those of Europe, advantages of a very exceptional kind; over the rest the advantage is less decided, or they stand on a par with Europeans, or possibly they are, in some instances, at a disadvantage. .Engaging in the branches of industry in which their advantage over Europe is great, they reap industrial returns proportionately great; and, so long as they confine themselves to these occupations, they can compete in neutral markets against all the world, and still secure the high rewards accruing from their exceptionally rich resources. But the people of the "Union decline to confine themselves within these liberal bounds. They would cover the whole domain of industrial activity, and think it hard that they should not reap the same rich harvests from every part of the field. They must descend into the arena .with Sheffield and Manchester, and yet secure the rewards of Chicago and St. Louis. They must employ European conditions of production, and obtain American results. What is this but to quarrel with the laws of nature? These laws have assigned to an extensive range of industries carried on in the United States a high scale of return, far in excess of what Europe can command, to a few others a return on a scale not exceeding the European proportion. American enterprise would engage in all departments alike, and obtain upon all the high rewards which nature has assigned only to some. Here we. find the real meaning of the "inability" of Americans to compete with the "pauper labor" of Europe. They can not do so, and at the same time secure the American rate of return on their work. The inability no doubt exists, but it is one created, not by the drawbacks, but by the exceptional advantages of their position. It is as if a skilled .artisan should complain that he could not compete with the hedger and ditcher. Let him only be content with the hedger and ditcher's rate of [388] pay, and there will be nothing to prevent him from entering the lists even against this rival.
The end here proposed by American enterprise is, it must be owned, unattainable under free trade; for free trade is content to turn natural laws to the best account: it does not seek to transcend them. But, though unattainable under free trade, protectionists assure us that the thing may be done by means of their system. It is only necessary, say these authorities, to exclude foreign competition by laying high import duties on the products in which American superiority over Europe is not assured, and the same high returns which attend on American industry in its most productive fields will—the laws of nature notwithstanding—be realized throughout its entire range. And this is, in fact, the undertaking in which those who guide the commercial policy of the Union have been engaged since 1861. Let us for a moment pause and consider how this bold attempt to override the laws of nature has fared.
§ 6. And here we are confronted at once with the difficulty of interpreting an industrial experiment. The system of American Protection, in its present exaggerated form, may be regarded as dating from 1861, when the Morrill tariff became law. If all the other conditions of the case had remained substantially the same since that time, we might now, by a mere inspection of results, pronounce without hesitation on the effect of the policy then inaugurated; but instead of this observe how the facts stand. In the same year the great Civil War commenced, in the course of which the destruction of human life and of wealth in every form probably exceeded any thing which bad before occurred within the same time in the history of human affairs. This was soon followed by the creation of an immense national debt, entailing a large permanent increase of taxation, and by the issue of an inconvertible paper currency, circulating throughout the Union, and affecting alike prices [389] and wages in every branch of trade. On the other hand, occurrences of a very different kind marked the course of the period under review. Mineral resources were discovered which are now yielding vast wealth, and oil springs which have become the source of an entirely new and rapidly increasing trade. Railway enterprise, again, during the same time appears to have taken on a new activity, while the progress of invention in the mechanical arts has never for a moment flagged. la presence of influences so numerous, so novel, and so vast, each affecting industry in its own fashion so powerfully, who shall say what portion of what we now find existing can properly be attributed to any one of them? The problem, in its mere statement, brings into striking relief the utter futility of that so-called "inductive method" which some writers hold to be the proper one in social and economic inquiries—the method, that is to say, which would proceed by drawing general conclusions as to the operation of particular causes from the summarized results of statistical tables. For, assuming that we have taken accurate stock of the present industrial condition of the United States, as well as of that which was in existence previous to 1861, so long as we confine our view to the mere statistical aspect of the ease, what warrant have we for attributing any portion of the change that has taken place to one cause rather than to another? Manifestly we have none; nor can we advance a single step toward the solution of any problem involved in the facts, till we pass from the mere tabulation of results to an examination of the nature and tendencies of the causes in operation. When we have ascertained these, and shown by deductive reasoning from them the effects they are fitted to produce, we are then for the first time in a position to attempt an interpretation of the varied and complex phenomena.
Now this is the vantage ground on which a student of Political Economy in dealing with such a problem stands. He [390] has ascertained the direction in which the various industrial forces, operating in the field of the experiment, work; he knows, for example, that in the present instance the destruction caused by the Civil War must have left a large gap in the then existing wealth of the United States;030 but he knows also, what is not so obvious, the extraordinary rapidity with which countries devastated by war, but in which the industrial habits of the people have not been broken through, so soon as peace and security are restored, recover from the havoc which war has made. He knows, again, that the meaning of a national debt is the necessity of submitting, so long as it remains unpaid, to a known amount of taxation, tantamount in its effects to an equivalent deduction from the general earnings of the community. He knows, further, the consequences likely to flow from the issue of an inconvertible currency; that, once depreciated below the par of gold, it results in a scale of nominal prices, having for its effect to derange the monetary relations of the community, to relieve debtors from their obligations at the expense of their creditors, and to introduce much risk and uncertainty into general business, but not, as is commonly supposed, to affect in any serious manner the external trade of a country.031 At the same time, the economist can take account of the immense addition made to the material resources of the United States, by those mineral and other discoveries to which reference has been made, as well as by the progress of mechanical invention, the extension of the [391] railway system, and the other industrial improvements which have marked recent years. Now these—putting aside fur a moment the protectionist tariff—are the main and capital occurrences affecting the economic career of the United States since 1861; and, in order to judge experimentally of the action of Protectionism on the interests of the country since that date, it becomes necessary to effect some rough elimination of so much of the general result as may properly be attributed to those other causes. In other words, we must endeavor to determine in what direction, on the whole, has been the net bearing of their influence; whether in the direction of an abridgment of the productive power and commercial resources of the United States, or in that of their enlargement. For my part, I have no hesitation in accepting upon this point what appears to be the nearly universal opinion of Americans, that, the period of actual warfare once passed, the influences favoring industrial progress have, on the whole, largely preponderated over those tending to retard it; and that consequently, if there were nothing else in, the matter, we should be justified in expecting, at all events since 1866, a more rapid expansion of American commerce, and a more liberal return on American industry, than prevailed in the period previous to 1861.
Well, how do the facts tally with this reasonable expectation? I will allow Mr. Wells to answer this question. In his two Reports to Congress, and in his Cobden Club Essay, he has gone very fully and in great detail into the whole subject, and those who desire particulars must be referred to those writings. It suffices here to state in summary the results of his investigations; and these arc to the effect that, comparing the decade 1860-'70 with the previous decade, the commercial progress of the United States has, in the later period, suffered a serious check; that the commercial tonnage has during the same period positively declined; that the business of shipbuilding has undergone an almost complete collapse; that the [392] rate of increase in the external trade which during the decade 1850-60 had been represented by eighty-one per cent. on the trade of the preceding decade, has fallen to one represented by nineteen per cent.; and, lastly, and on this point I am content to rest the entire case, that—having regard, on the one hand, to the nominal rise in wages reckoned in a depreciated currency, and, on the other, to the nominal rise of prices measured in the same medium—the real remuneration of the United States laborer in all the leading departments of industry has during the nine years ending 1868 positively fallen in a proportion not less than twenty per cent. on his previous earnings.032 These are singular results to have accrued from a still unlimited command of rich virgin soil, from enlarged mineral resources, ever progressing mechanical invention, and an industrial energy and enterprise which have certainly suffered no abatement. To what cause are they to be ascribed, and more particularly how are we to account for this lowered rate of return upon American industry? It is possible the ravages of the war may not even yet have been wholly repaired; the gap made in the national capital may not be even now quite filled up. The increased taxation certainly remains, and constitutes a deduction, let us say of some five or six per cent.033 from American earnings. The depreciated currency [393] has, no doubt, caused much individual hardship, and introduced more or less derangement into commercial affairs But who will say that any of these occurrences, or all of them taken together, suffice to account fur the facts which Mr. Wells has brought to light—the slackened rate of progress, the arrested commercial growth, and, above all, the diminished reward for the workman? The problem, I must own, is for me insoluble, until I take account of that one influence which, for the moment, I had put aside. I turn to the Morrill tariff, and to the aggravations of that code which have since been enacted. I find there duties amounting, on an average, to forty-seven per cent. ad valorem, imposed on nearly all articles034 of any importance imported into the United States; on such raw products as coal, timber, iron, hides, and sugar; on such manufactures as clothing in every form, cottons, woolens, and every kind of textile fabric, on manufactured iron—in a word, on nearly all the raw materials of industry, and many of the most important articles of general consumption. And with these facts before me, the slackened rate of progress, the arrested commercial growth, and the workman's diminished reward become at once intelligible; for these are the precise results which such a system of protection is fitted to engender. With such a barrier as duties amounting to forty-seven per cent. ad valorem erected against foreign importation, what else could happen [394] than a retardation of the growth of external trade? While coal, timber, iron are loaded with heavy duties, can ship-building be expected to prosper? and, as with ship-building, so with some scores of other trades, the details of whose decline will be found in Mr. Wells's repertory. But I prefer to rest the case upon the simple fact of the reduced real wages of the Workmen; fur here the symptom may be regarded as specific. As I have already had occasion to explain, the direct effect of a protective duty, when it is really operative, is to compel, on the part of the community employing tills expedient, a resort to more onerous conditions of production for the protected article. Every article, therefore, produced in the United States, which would not have been produced there but for the protective tariff, represents an expenditure of labor and capital greater than would have been necessary to obtain the same article had it been obtained under free trade. In a word, American labor and capital, as a whole, have, effort for effort and outlay for outlay, been producing smaller results since 1861 than formerly; and this being so, what other explanation do we need of the actual facts which we encounter—of diminished returns on American industry, of a fall in the real wages of labor?
But, say the protectionists, though measured in products the returns on the protected industries may be less, we, by excluding foreign competition, secure for the producers a proportionally higher price; the effect of which is that, though working at a disadvantage, they nevertheless obtain the rate of profit current in the country. Let us observe the precise significance of this reply. It may be conceded that a small return upon industry in the form of products may be compensated to the producers by a proportional increase in the price; but then it is at the expense of those who pay the increased price; and the question remains, by whom are the higher prices paid in the present instance? There is only one possible answer—by the citizens of the United States. In effect these higher prices [395] are the machinery through which the real rewards of American industry have been reduced. Consider, for example, the case of an Illinois farmer: it is tolerably plain that if, producing corn under the same conditions as previous to 1861, and getting for it the same price in foreign markets, he has to pay a higher price for every article of his clothing, and for every article into the composition of which coal, timber, iron, or hides enter, his real remuneration can not but be considerably less than if all these things could be obtained at free-trade prices. And the case of the farmer is not isolated: it is that of the workers in every department of industry, and exhibits unequivocally the net outcome of the protectionist experiment which commenced with the passing of the Morrill tariff. Protectionists then undertook to secure for the protected interests of their country as high industrial rewards as are reaped in the most flourishing branches of United States production—and, it may be allowed, they have succeeded in their venturous enterprise. But how? Simply by lowering universally the level of those rewards; by enforcing, through the medium of artificially enhanced «prices, a huge deduction from the income of the community at large, and handing over the proceeds to the protected trades. Such is the upshot of this notable attempt to transcend physical laws, and to secure by legislation what nature has denied.
§ 7. In the foregoing examination of the working of Protection in the United States, the argument has been confined to what may be considered its purely economic side. It is not uncommon, however, to hear the system defended on social and political grounds; and it may, therefore, be well, before taking leave of the subject, to make some brief reference to this other aspect of the case. For example, the position is sometimes taken that, admitting all that can be urged economically in favor of free trade, a nation has yet other interests to [396] take account of than the production and distribution of wealth; it has to consider its moral, social, and political advancement—ends to which the working of free trade, it is alleged, is not always favorable. For the tendency of free trade, even on the showing of its supporters, it is argued, is to turn the industry of a nation mainly into a few channels—those channels, namely, in which it happens to enjoy, in relation to competing nations, exceptional advantages, so that, in the practical result, the nation adopting it is compelled to confine its industry within comparatively narrow bounds. Free trade thus tends to circumscribe industrial experience; and, by doing so, to interfere with that practical education which a nation derives from the prosecution of industry. Far better, it is urged, deliberately to sacrifice some of the results of material prosperity, if by this means we can secure scope for a wider and more diversified cultivation, such as is furnished by an industry branching in numerous directions and offering to enterprise a varied field. I can not deny that there is a certain basis of truth in the considerations just stated; and that circumstances may even be imagined in which they would possess real cogency. Indeed, the United States themselves at one time presented the world with a remarkable example in point. Free trade, as I had once occasion to point out, constituted undoubtedly one of the main supports of slavery in the South; for by its means Southern slave-masters were enabled, while employing their thralls in the few crude industries in which alone their labor was efficient, to command all the comforts and luxuries of civilized existence. Free trade thus undoubtedly favored, and rendered possible, the low state of civilization which up to 1860 was characteristic of the southern portion of the United States. Had that part of the country been dependent exclusively or mainly on its own industry for the direct supply of its material wants, a greater variety of industrial occupations would have been necessary. At the least a considerable portion of the negro [397] population must have been educated and trained to mechanical pursuits, and a foundation would thus have been laid for social progress. It must be owned, therefore, that the line of argument we are considering is not without a certain support in the facts of past experience; an admission, however, which amounts to no more than this, that barbarism and tyranny have sometimes gained in strength by availing themselves of the expedients of civilization. But the practical question is, not whether under extraordinary and exceptional circumstances free trade may be made to serve the purposes of despotism, but whether in a country, such as the United States, of great and varied resources, peopled by free men in possession of all the most advanced industrial knowledge and trained in the usages of civilization—whether in such a country, artificial restraint upon the freedom of trade is needed, in order to secure for the people that variety of occupations which, it may be freely conceded, is favorable to national development.
And here, in the first place, it must be remembered that the capacity possessed by a country of yielding particular elements of wealth is never of a uniform character, but exists in general in very great variety, according to the fertility, accessibility, or other incidents of the natural agents from which such elements are derived. As a consequence of this, commodities obtained directly from natural agents, that is to say, raw products, are raised in all countries at various costs, and as, in conformity with the well-known economic principle, it is the cost of the most costly portion raised that governs the price of the whole, it follows that the actual price at which a commodity of this description sells, depends not simply on the inherent fertility of the sources of supply, but on this taken in connection with the total quantity of the commodity produced in the country. As the richest and most accessible natural agents are those which are first resorted to, the supply, tip to a certain point, is obtained at the lowest cost at which the country, in the actual [398] state of its industry, Can yield it; but as the requirements of the community increase, recourse is had to natural agents of inferior capacity, and, as population progresses, to agents of capacity inferior still; the cost of production rising with each extension of the area of cultivation, and the price with the cost of production. Now, from this law governing the cost of raw products, it results that, however superior one country may be to others in its natural capacity of yielding particular elements of wealth, it yet rarely happens that these latter are not able to encounter its competition in raising even those products in respect to which its capacity is greatest, and this under the most perfect freedom of trade. Great Britain, for example, would be said to have a natural superiority over the United States in the production of coal and iron, just as the United States would be said to have a natural superiority over Great Britain in producing corn; but in neither case is the superiority of a kind to cause the United States, under a perfectly free trade, to give up producing iron and coal, any more than to cause Great Britain to give up producing corn. The effect of free trade would not be to extinguish any of those branches of production in either country, but merely to alter the proportions in which they are carried on. Great Britain would continue, as she does now, to produce corn so far as it was profitable for her to do so, and would satisfy her remaining requirements by importation, while the United States would follow a like course in the case of iron and coal. And so also it would be with such products as lumber and leather. It may be that Canada has in these products greater resources than the United States; and it is probable that the abolition of the high import duties now imposed by the latter country would lead to some more or less considerable re-adjustment of the proportions in which the industries they occasion are now carried on; but this is a very different thing from the extinction of those industries. Probably the utmost that under the freest [399] tariff would occur is the abandonment in the United States of some of the least productive sources of supply, combined with a corresponding extension of the area of production in Canada, while the capital now employed in the United States in developing resources which would be better reserved for another day would not be slow in finding employment in more profitable channels. It is unnecessary to pursue further this line of illustration. The same argument, it is evident, may be applied in turn to every branch of production employed in extracting commodities directly from the store-house of nature. Within this circle of industries, at all events, it may be confidently asserted that Protection does not maintain in the United States a single one which would not exist equally under free trade. It is only when her people, not content with cultivating their magnificent resources in the degree in which nature has endowed them, seek to disturb the natural proportion and to push enterprise in certain directions beyond the profitable point, that the need arises for artificial support. The tendency of Protection, therefore, at least within this particular department of industrial activity, is not to create new industries, not to diversify industrial pursuits, but to disturb the natural development of the country, and to turn capital from profitable to unprofitable fields.
So far, however, the argument applies only to the industries of raw produce—as they are called, the "extractive industries;" and, it will be urged, that it is especially in manufactures that scope would be sought for the cultivation of industrial intelligence and skill. Carried, however, even thus far, I may observe, the argument at least suffices to destroy the raison d'etre, so far as it rests on the ground we are now considering, of a large portion of the present tariff of the United States, which makes no distinction between raw and manufactured products, but loads alike both classes with heavy duties, But though the particular considerations that are applicable [400] to the industries of raw produce do not apply to those of manufacture, it will not be difficult to show that here also the policy of Protection is wholly unnecessary as a means of securing for a nation that help to its general progress which is furnished by variety in its industry.
At the utmost, it must be remembered, all that Protection can do for producers is to secure for them a monopoly of the home market. But, in supplying the home market, manufacturers in a country like the United States, or in any new country rich in varieties of raw material, have, for a large circle of productions, very substantial advantages, even when matched against countries of long established and highly organized industry such as Great Britain. In the first place, most kinds of raw material will in the former class of countries be cheap, much cheaper for the most part than in old countries—supposing, that is to say, that the price is not artificially raised by protective tariffs. In the next, the manufacturer is close to the source of supply, and is thus saved the cost of transport on the raw material, always a considerable item; and, lastly, he is also saved the cost of transport, which falls on his foreign competitor, in sending to market the manufactured article. On all these accounts, manufacturers in old countries like those of Western Europe lie under heavy disadvantages in competing in the home markets of countries like the United States—disadvantages which constitute for the latter countries a sort of natural protection, which can not fail to secure for them under all circumstances a considerable field for the cultivation of manufacturing industry.
But it will be urged that, the disadvantages in question notwithstanding, experience has proved that, over a considerable area of manufacturing industry, European manufacturers are capable, under free trade, of underselling those of the United States even in their own home markets. The fact is undeniable; and I can only meet the objection founded on it by asking [401] those who urge it, whether their object is to produce a state of things in which foreign nations shall be excluded from the markets of the United States in the sale of all commodities whatever; for if this be their object, its attainment must, let them well understand, be tantamount to the extinction of the foreign trade of their country. If foreign merchants can find a sale for no product whatever, raised in the countries from which they come, in United States markets, they are deprived of the means by which a trade with that country is permanently possible. It must be remembered that the point we are now considering is the utility of Protection as a means of helping the social and political progress of peoples, and supposing those who advocate this view are prepared to go the lengths just described, it comes to this, that their scheme for promoting civilization amounts to a plan for putting an end to international trade—putting an end to the chief occasion, and main and most enduring motive, for the intercourse of mankind! Now it must be freely admitted that this mode of advancing human interests is not compatible with the maintenance of free trade —nay, that it is precisely on the ground of its tendency to promote the interchange of commodities among nations that free trade claims for itself the credit of being one of the principal and most powerful of civilizing agencies. It can not, therefore, be denied that under free trade American manufacturers would not improbably have to undergo the patriotic anguish of finding themselves undersold in some kinds of goods by foreign merchants in their own markets. But there would be no need for them, therefore, to despair. It by no means follows that the range of their manufacturing industry would suffer contraction: it is even exceedingly probable—I am inclined to add, certain—that it would, on the whole, be largely extended. Particular branches of manufacture now carried on would probably be brought within narrower limits, or might altogether disappear; but on the other hand, others, [402] now barely existing, would quite certainly take fresh root, and in all probability become the staples of a new export trade; for, be it well observed, Protection is not less efficacious—I would say, is far more efficacious—to circumscribe and crush, than to sustain and encourage. Once recognized as governing the policy of a country, every industry which can make out a plausible case becomes entitled to its supposed benefits, and industries engaged in raising raw material are as anxious to be protected as others. Accordingly, in the United States, as we have seen, coal, iron, lumber, and leather are all loaded with heavy import duties. But what is the consequence? Just this, that American manufacturers are thus deprived of the advantage they would naturally possess of obtaining their raw material cheap. They are placed at a disadvantage in relation to manufacturers in Europe precisely where under free trade their position would be strongest: a necessity for Protection is created which could never arise under natural conditions of trade: in this way Protection in the end becomes its own Nemesis, and the vicious circle is complete.
I have now, I trust, shown that, at all events in such countries as the United States, Protection is not needed to secure an extensive diversity in the national industries. And when we further take account of an influence to which I have not yet referred—an influence inseparable from the maintenance of a protective system—I think I may even venture to question whether a single industry of importance is kept alive by Protection in the United States which would not equally exist there in a healthier condition in its absence. I refer now to the effect of Protection on the morale of industry. When once the industrial classes of a country have been taught to look to the legislature to secure them against the competition of rivals, they are apt to trust more and more to this support, and less and less to their own skill, ingenuity, and economy in [403] conducting their business. The inevitable result is that industry becomes unprogressive wherever it is highly protected.035 It was so in France in the days previous to the commercial treaty, and it is so now in the United States, as may be learned from Mr. "Wells's Reports. "The French manufacturers," says M. Chevalier, "if not all, at least a large number of them, had, anterior to the treaty of commerce, a serious disadvantage—that of old and defective machinery, which augmented the cost of production. This was due to prohibition, which prevented the manufacturers from feeling the spur of foreign competition, and dispensed them from the necessity of perfecting indefinitely, and without delay, their machinery and their processes. The treaty of commerce aroused them from this apathy as if an alarm-bell had sounded. There was a general [404] renewing of machinery in the numerous factories which were badly or imperfectly furnished. Each wished to place himself in this respect on a level with England. The treaty of commerce encouraged this renovation by the lowering of duties upon every thing which enters into the composition of workshop machinery; and the Treasury even advanced to a certain number of establishments considerable sums, in all 40,000,000 of francs, or $8,000,000. French industry has drawn from this transformation of its machinery (materiel) a new force, of which it makes proof every day, and this is a reason why today, face to face with foreign competition, it has a confidence which it did not know before."036
To this statement of M. Chevalier's I will only add a single example, taken from Mr. Wells's Report: "In the summer of 1867, while studying the industries of Europe, the Commissioner visited a factory the products of which had for many years found an extensive market in the United States. The product being staple, and the industry one that it was exceedingly desirable should be extended in the United States, the Commissioner studied the process of manufacture with great care, from the selection of the raw material to the packing of the finished product; the rates of wages; the intelligence of the operatives, and the hours of labor. When his investigation was completed, the Commissioner said to the foreign manufacturer—a man whose name is a household word in his own country for integrity and philanthropy—'The duty on the import of these articles into the United States is, respectively, 35 per cent. ad valorem, and 30 per cent. ad valorem and 20 cents per pound; if you have given me your prices, products of machinery, and cost of labor correctly, I do not well see how you could export your fabrics to the United States, even if there was substantially no duty, as the advantage of raw material is [405] mainly upon our side.' 'I am sometimes at a loss myself to account for the course of trade,' was the reply; 'but perhaps it will help you to a conclusion if I tell you that some time ago, finding ourselves pressed with German competition, we threw out our old machinery, and replaced it with a new and improved pattern; and the machinery by us rejected was sold to go to the United States.' To complete the story, it is only necessary for the Commissioner to add that the owners of this second-hand machinery have since its importation demanded and received an increased protection on its products."037
I may now sum up the general result of this latter portion of my argument: (1) As regards the industries of raw produce, Protection does not call into existence a single branch of production which would not equally have existed under free trade; it merely alters the proportions in which such industries are carried on, hindering their natural and healthy development: (2) in the domain of manufacturing industry it is equally inefficacious as a means of creating variety in industrial pursuits; for if on the one hand it secures a precarious existence for certain kinds of manufactures, on the other, by artificially enhancing the price of raw material, it discourages other kinds which in its absence would grow and flourish: while (3) over and above all these injurious effects, it vitiates the industrial atmosphere by engendering lethargy, routine, and a reliance on legislative expedients, to the great discouragement of those qualities on which, above all, successful industry mainly depends—energy, economy, and enterprise.
To conclude, having regard to the geographical position, extent of territory, and extraordinary natural resources of the United States, as well as to the character of its people, trained in all the arts of civilization, and distinguished beyond others by their eminent mechanical and business talents, there seems [406] no reason that they should not take a position of commanding influence in the world of commerce—a position to which no other people on earth could aspire. But, to do this, they must eschew the miserable and childish jealousy of foreign competition which is now the animating principle of their commercial policy. If they desire to command a market for their products in all quarters of the world, they must be prepared to admit the products of other countries freely to their own markets, and must learn to seek the benefits of international trade, not in the vain ambition of underselling other countries, and so making them pay tribute in gold and silver to the United States, but in that which constitutes its proper end and only rational purpose—the greater cheapening of commodities and the increased abundance and comfort which result to the whole family of mankind.
§ 1. I PROPOSE to devote this concluding chapter on International Trade to the consideration of some topics which seem to fall more easily under this than under other headings—topics more or less involved, and in general tacitly decided in one sense or another, in most commercial and monetary discussions, but the current ideas respecting which are by no means in accordance with the main principles of international trade as these have been developed in the foregoing pages.
The first of those questions to which I would ask the reader's attention is the following: What is the interest of a country in the scale of its general prices? Is it for the advantage of the people, as a whole, that the scale should be high or low? and, assuming that they have an interest in either alternative, what is the nature of the advantage, and what are its limits? A moment's reflection will enable us to take at least one step toward the solution of our problem: the interest involved, whatever be its character and extent, can only be real so far forth as the high or low scale of prices is not universal—so far forth, that is to say, as it is not shared in the same degree by . all countries. A country can have no permanent interest in an advance, or in a fall of prices, which embraces the whole commercial world. Such a change leaves the purchasing power of each country in relation to every other precisely where it was before; reciprocal demand, therefore, would continue unaffected, and, by consequence, international values, and all interests that depend on that relation. But where the [408] advance or fall is not general—where the high or low scale of prices is confined to one, or to a few countries — it is not at once apparent how it may affect the interest of those concerned.
I ought here, perhaps, to refer to a maxim advanced by some writers on monetary questions which, if well founded, would seem to preclude the existence of the phenomenon, the character of which I propose to discuss. It is held by the writers to whom I refer that the value of gold is, and must ever be, "the same all the world over."038 Now if this be so, as the value of gold is merely another expression for the gold prices of commodities, it must follow that a high or a low scale of general prices existing in any country, and not shared by every other, is an impossible occurrence. As there is no local value of gold, so there can be no local scale of prices. I have no hesitation, however, in expressing my opinion that the doctrine in question, with whatever confidence advanced, is absolutely destitute of foundation.039 The truth on the subject [409] seems to me to be as follows: among countries commercially connected there is a large class of commodities—all those, namely, which constitute the great staples of commerce, such as corn, flour, tea, sugar, metals, and most raw materials of industry—of which the prices can not vary much in different localities. As a rule the difference of prices will not be greater than the cost of carriage between the countries of production and consumption, always, of course, excepting the case where such articles come under the operation of local fiscal laws. In the exchange for commodities of this description, the value of sold, though not the same all the world over, does not greatly vary within the range of general commerce. But besides the commodities which form the staples of commerce, there are those which, through unsuitableness for distant traffic, or owing to same other obstacle, do not enter into international trade. With regard to these, there is nothing to prevent the widest divergence in their gold prices, or, therefore, in the value of gold in relation to them, not merely in remote quarters of the world, but sometimes even in localities within the same country; and the class of goods to which this description applies—it will vary in extent with the situation of each country and the means of communication at its command—far from being insignificant, must under all circumstances include some of the most important articles of general consumption. To perceive this, it is only necessary to remember that the group includes the items of house accommodation, meat, and a large proportion of those things which fall under the head of "provisions"—a list which would have to be greatly enlarged if we had to deal with countries lying aside from the leading thoroughfares of commerce, or in which the means of communication have been imperfectly developed.
It is not true, therefore, that gold is of the same value "all the world over." On the contrary, it varies in value in different countries, and sometimes in different localities within the [410] same country, in some degree in relation to almost all commodities, but, in relation to a numerous and important class of commodities, in a very considerable degree, and this, not merely as a temporary fluctuation, but permanently, as a normal state of things; and the problem we have now to consider is, whether, the case being so, it is advantageous for the inhabitants of a country that the scale of its prices, within the possible limits of permanent divergence, should be high or low in relation to the cosmopolitan level.
The majority of those who write or speak on commercial questions would, I imagine, have little hesitation in pronouncing in favor of the former alternative; and plainly the most obvious appearances support this view. A high scale of prices and large accumulated wealth for the most part go together, while low prices are the incident of districts remote from the main current of civilization, and in general poor and barbarous. If we inquire, however, as to the. nature of the connection between the phenomena in each case, the answer does not by any means lie upon the surface. Let it be remembered that a difference in local prices, if considerable and permanent, can only exist in the case of commodities which can not be made the subject of foreign commerce. High prices, therefore, can not serve us in our dealings with foreign nations, and it is not by any means clear how the people of a country can be profited by exchanging their goods among themselves on a high pecuniary scale. Moreover it is evident that, with regard to those commodities which do enter into foreign commerce, it is the interest of each competing nation that their prices should be relatively as low as possible; this being the condition of commanding a sale for them in neutral markets. Granting, therefore, that high prices and accumulated wealth on the one hand, and low prices and poverty on the other, are generally coincident phenomena, we have yet to discover wherein consists the bond that connects them.
[411] The solution of the problem is contained in the following statement: What a nation is interested in is, not in having its prices high or low, but in having its gold cheap—understanding by cheapness040 not low value, but low cost—a small sacrifice of ease and comfort; and it generally happens that cheap gold is accompanied by a high scale of prices. I say "generally happens," because it by no means follows as a necessary consequence that the two phenomena should go together. Gold may be cheap, and prices, at the same time, low, as a little reflection will easily convince us. The range of prices that actually prevails in a country is, speaking broadly, the resultant of two conditions—the cost at which that country produces or obtains its gold, and the cost at which it produces or obtains commodities. Fluctuations and disturbing causes apart, the gold and the commodities will exchange for each other in proportion to their costs; and cheap gold, therefore, will be the concomitant of high prices, only in so far as the cheapness incident to the gold is not shared by the other products of industry. The cheapness of gold, for example, in Australia does not occasion a high price of meat, of flour, of wool, of tallow, of hides, or of many other articles in that country, because the cost of producing those articles there is also very low. Any of them can be purchased in Australia at as low a price as in Europe: many of them, meat and wool, for example, at considerably lower prices. 'It is thus evident that cheap gold is no necessary concomitant of a high scale of prices. We must, therefore, distinguish between the two things; and, so distinguishing, I have now to show that the interest of a nation lies, [412] not in having its prices high, but in having its gold cheap; and that it is only in so far as high prices are an indication of cheap gold, and low prices an indication of dear gold, that either can be considered as furnishing any presumption whether in favor of or against the wealth or well-being of a community.
As I remarked just now, the problem we are considering can only arise with reference to relative prices. A rise or fall of prices shared by all nations equally can not affect the interest of any; and similarly the cheapness or dearness of gold—considered in the capacity in which we are now regarding it, as the instrument of general commerce, not as a commodity intended for consumption—is only of importance in so far as it is not universal. Gold cheapened everywhere and in the same degree, would mean, other things being the same, an equal and universal rise of prices, and there would obviously be no advantage in obtaining our gold at a lower cost if we were compelled to give proportionally more of it for all that we required. But assuming—what is simple matter of fact— that the cost at which different nations obtain their gold is different—that the cost may be reduced in some countries without undergoing a corresponding reduction in others—then a manifest advantage arises to a nation from the cheapness of its gold; for just in proportion as it obtains its gold at small cost —by a small expenditure of labor and abstinence—it will obtain at small cost all its imported commodities. The advantage would, indeed, be confined to its foreign trade. In domestic exchanges prices would adapt themselves to the cheapened cost of money, and in this field of its activity neither good nor evil would result for the nation as a whole; but in its dealings with foreign nations it would be otherwise. In relation to them, its position, as commanding gold on terms of exceptional cheapness, would be one of vantage, and would enable it through this cheapened medium to obtain from them, on terms [413] correspondingly advantageous, all that they are capable of supplying.
Such is the nature of the advantage which a country derives from the relative cheapness of its gold; and, as I have already remarked, in old countries cheap gold is generally accompanied by a high scale of prices for all commodities not falling within the range of international trade. To exhibit the grounds of this connection we may take the case of Great Britain. The cost of gold is lower in Great Britain than in any country in Europe, or, we may say broadly, than in any in the world, America and Australia excepted. The evidence of this is to be found in the scale of our industrial remuneration measured in gold.041 To what is the fact to be attributed? To this, that we possess in our coal, iron, and other mineral fields, combined with the skill and energy of our inhabitants, superior resources to those possessed by other countries for the production of certain manufactures in extensive demand throughout the world. Producing such manufactures at less cost than they can be produced at by other nations, and finding for them an extensive demand throughout the world, we are enabled at once to undersell other nations in neutral markets, and yet at the same time to obtain for our products a price which bears a larger proportion to their cost of production—to the labor and abstinence employed in producing them —than the price obtained by foreign nations for their products bears to the cost of such products. A given expenditure of labor and abstinence in this country thus enables us to command a larger result in gold than the same expenditure would enable foreign nations to command. In other words, we obtain our gold cheaper, while, as involved in this result, the scale of industrial remuneration, measured in gold, is higher [414] with us than with them. All this, I say, is the consequence of the great and exceptional advantages possessed by this country in certain departments of industry. We have here the explanation of our cheap gold, but not of our high scale of prices.042 The explanation of the latter phenomenon lies in the fact that those industrial advantages are not general, but confined to a few departments of production. Supposing that they extended over the whole, or the greater portion, of our industrial field, our position would resemble that of some of the Australian colonies; and we should, along with cheap gold, have a low scale of general prices. In fact, however, the case is otherwise. "We are in the position of an old country. Our land has all long since been appropriated, and, to supply us with food, even very inferior qualities of soil have been brought under the plow, and are cultivated at high cost. Food and provisions of all sorts, consequently are dear; so also is house accommodation, and in general all those things which can not easily be made the subject of international commerce. In these respects we enjoy no special advantages over other nations: in obtaining gold, however, as has been shown, we do possess such advantages. Gold, therefore, with us exchanges in larger proportion against all this class of commodities than in other countries; but this is only in other words to say that the scale of prices over this area of exchange is higher here than in them. High prices, thus, in England are a consequence of cheap gold; and our cheap gold enables us to command, on terms proportionally favorable, the products of other countries. But we should equally enjoy this advantage, while we should also enjoy others in addition, if, having our gold as cheap as now, our scale of prices was at the same time as low as in other countries; for this would imply that our industry [415] was as productive in all its departments as in those through which we obtain our gold. It can not, therefore, be said that high prices are in themselves advantageous to a country: nevertheless, in so far as they are an indication of cheap gold, they are an evidence that the country in which they exist occupies a position of vantage in the world of commerce, and high prices will therefore, under such circumstances, generally be accompanied with commercial prosperity and large accumulated wealth. There is just one exception to this statement. It occurs where the scale of prices is raised through the operation of a protective tariff. Gold might, in this case, be cheap, and yet none of the advantages of cheap gold would follow; for, as I have explained, it is only through foreign trade that those advantages are realized, and just in so far as Protection is operative, the country maintaining it will be excluded from foreign trade. Countries, therefore, in which prices are kept high by Protection, are in the singular position of securing cheap gold, subject to the condition that it shall not be spent in the only market where advantage would arise from its cheapness.
§ 2. So much I have thought it worth while to say on the subject of high and low prices. I now turn to another topic, also much implicated in commercial discussions, and on which some strange notions would seem to be afloat. That a nation is enriched by its foreign trade is mostly taken for granted, and with good reason; but what is the nature of the gain? and by what standard are we to measure its amount? We are all familiar with the doctrine of the Balance of Trade, according to which celebrated theory the gain on foreign trade was measured by the excess of exports over imports, and consisted in the gold and silver which were supposed to come from foreign countries in liquidation of the balance. That view is now, I suppose, pretty generally abandoned. But I [416] have observed of late, both in the press and among parliamentary speakers, a curious modern inversion of the ancient doctrine. I have seen it laid down, with much exultation over the ignorance of our ancestors, that the gain in our foreign commerce, instead of being measured, as was formerly thought by the excess of exports over imports, is, on the contrary, measured by the excess of imports over exports. A contributor to an important provincial paper, writing some time since under the influence of this notion, calculated that the gain of England from her foreign trade amounted to about l.100,000,000 sterling; this being about the amount by which her imports in that year exceeded her exports. If I mistake not, it was a part of the doctrine that this sum represented the profits of our merchants engaged in foreign trade. The reader who has followed the explanations given in a former chapter of the causes governing the relation of exports and imports in the external trade of countries will not need any further refutation of this extravagant notion. I may just add, as a sufficient reductio ad absurdum, that, inasmuch as the external trade of many prosperous communities exhibits a constant excess of exports over imports, it would follow from this view that all such communities are undergoing a steady course of impoverishment, and that those of their inhabitants who engage in foreign trade only incur losses on their investments. Such speculations show how little the Political Economy of some among us is in advance of the ideas of the seventeenth century.
Another method by which it is frequently attempted to estimate the gain on foreign trade proceeds on the assumption that such gain is identical with the mercantile profits accruing upon the capital thus invested. This view is only less absurd than the former in not identifying the amount of mercantile profit with the balance on the external trade. According to it, if we suppose the total capital embarked in the foreign trade of Great Britain to be l.500,000,000, and the rate of profit l.10 [417] per cent., it would follow that the gain to the country upon her foreign trade would be represented by l.50,000,000 sterling. This way of regarding the subject is, I imagine, sufficiently prevalent among our mercantile classes; but it only affords a proof the more how very little those classes have yet contrived to appropriate of the elementary truths of the science in whose name they so often speak. The notion betrays a fundamental misconception of the nature, not merely of foreign trade, but of all trade, and of the end and purpose for which it exists. "Consumption," says Adam Smith, " is the end and purpose of all production." . . . . " The maxim," he observes, "is so perfectly self-evident that it would be absurd to attempt to prove it." Not less self-evident is it that the end and purpose of all trade is to cheapen production, and so to minister more effectually to the ultimate end—the need of the consumer. But the gain upon trade must surely consist in the degree in which it fulfills its proper end—must, therefore, consist, not in the profits of traders, but in the advantage which it brings to those for whose behoof the trader exists. It is true the trader's motive when engaging in trade is to make a profit; but not the less is his raison d'etre as a trader to minister to the wants of others. He must have his profit, or be will cease to trade; but his profit, though an incident of the good resulting from his office, is not the measure of it The measure of the service which he renders—of the importance of his function—is not this, but the benefit he confers on the community whose servant he is; and this benefit is great in proportion to his success in serving the consumer; in other words, in cheapening commodities—in diminishing the obstacles which exist to the satisfaction of human wants. Nothing, therefore, can betray a more profound misconception of the true nature of trade and the purpose for which it exists than to represent the advantages derivable from it as measured by the profits of the agents who carry it on. It would be just as reasonable to represent [418] the advantages of learning as measured by the salaries of teachers.
What, then, is the true criterion of the gain on foreign trade? I reply, the degree in which it cheapens043 commodities, and renders them more abundant. Foreign trade not merely supplies us with commodities more cheaply than we could produce them from our own resources, but supplies us with many commodities which, without it, we could not obtain at all. The degree in which it does this is the true criterion and measure of the gain, but it is a measure which palpably does not admit of being applied in practice. To determine the amount or extent of the advantage derivable from foreign trade is, and, I venture to say, must ever be, an absolutely insoluble problem—a truth which will be sufficiently apparent if we advert to some of the data on which its solution depends.
As I have just said, one portion of the gain derived from foreign trade consists in the supply it yields us of commodities not capable of being produced in our own country. Great Britain, for example, obtains in this way her tea and sugar; and it will, perhaps, be thought that the satisfaction derived from the consumption of these articles constitutes the gain to the British consumer upon so much of our foreign trade. Even if this were so, it is pretty evident that the satisfaction in question is not capable of quantitative measurement. But, in point of fact, the problem is far more complicated than such a solution supposes; for it must not be forgotten that, in the event of our being excluded from the countries which furnish us with tea and sugar, we should have at our disposal all the capital now employed in producing the commodities in, exchange for which tea and sugar are now obtained. This capital would then be available for the production of substitutes, [419] or, in case none were forthcoming, for the production of other things; and the gain upon this portion of our foreign trade would be represented by the difference between the advantage conferred on the community by its present supply of tea and sugar, and that which it would receive from the substitutes, or other things, whatever these might be, which, in their absence, we might produce from our own resources. But, as we have no means of measuring accurately the satisfactions which we at present enjoy from the consumption of the articles in question, and still less of measuring those which we might derive from such things as in their absence we might provide ourselves with, it is evident that an accurate, or even an approximate, determination of the advantages accruing to us from our foreign commerce, so far at least as its function is to furnish us with articles we can not ourselves produce, is absolutely beyond our reach. All we can say with confidence is that the tastes and wants which are now satisfied through this service of foreign commerce are of a more imperious kind than any which our labor and capital, employed upon the materials furnished to us by our own country, are capable of satisfying; since, if it were not so, so much of our foreign trade as it represents would not exist. "We are thus justified in concluding that there is a real gain, but beyond this our data do not carry us. We are absolutely without the means of estimating its amount.
So much for one portion of our foreign trade. With regard to that more important part of it, of which the function is, not to supply us with commodities which we are incapable of producing, but to cheapen those which we might produce, the case might here seem to be more manageable. In order to ascertain the gain on this part of our trade, the data necessary would be, first, a determination of the cost at which we actually obtain our imported articles of the class under consideration; and, secondly, a determination of that at which we could produce [420] them if thrown upon our own resources. The difference would represent what we gain by importation, and the data might seem to be not beyond our reach. When, however, we come to look closely at the problem, we find ourselves once more estopped by insuperable difficulties; for, to take a simple illustration—on the supposition that we import from foreign countries 10,000,000 quarters of wheat, how are we to estimate the gain which the nation derives from obtaining so much of its food in this way? We know, indeed, or we may ascertain, at least approximately, the cost in labor and abstinence of the 10,000,000 quarters of wheat which we import, It would be represented by the cost of the commodities which we export to pay for them. We know again, or we may ascertain, the cost at which wheat is now raised in this country, when grown under conditions which determine its average selling price. Bat what we do not know, and what we have no possible means of ascertaining, is the cost at which an addition of 10,000,000 quarters to our present home supply could be produced from the soil of Great Britain. Inasmuch as, in order to produce this quantity, it would be necessary to bring under cultivation for wheat soils far inferior to any now devoted to that purpose, we may be quite confident that the cost would be immensely greater than any portion of our home supply is now raised at; immensely greater, therefore,044 than that at which we obtain the quantity now imported; but by bow much greater we are absolutely without the means of determining—I might almost say, of conjecturing; and it is evident that the same argument applies with equal force to every article of raw produce that we import. It follows that, with regard to commodities capable of being produced in the country, [421] no less than with regard to those which can only be obtained from foreign sources, the data for ascertaining the quantum of gain accruing to us from foreign trade are absolutely wanting. We know the nature of the gain: it consists in extending the range of our satisfactions, and in cheapening the cost at which such as in its absence would not be beyond our reach are obtained; and we know that the amount which it brings to us under each of these categories can not but be very great; but beyond this indefinite and vague result our data do not enable us to pass.
|
Imports
(less re-exports) |
Domestic
exports (including specie)
|
|
|
1858
|
$261,700,000
|
$293,700,000 |
|
Annual average |
$465,200,000 |
$421,060,000 |