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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

VI. The Prices of “Domestic” Commodities

While the distinction between “domestic” commodities and those entering into international trade dates at least from Ricardo,1 and subsequent writers made clear that international uniformity in the prices of identical commodities after allowance for transportation costs was a necessary condition under equilibrium only for “international” commodities,2 Taussig was the first to lay emphasis on the significance for the mechanism of adjustment of international balances to disturbances of changes in the level of domestic commodity prices as compared to the prices of international commodities. In 1917, Taussig argued that some of the proceeds of an international loan would ordinarily be directed in the first instance to the purchase of domestic commodities, instead of import commodities. But in order that the loan should be transferred wholly in the form of goods, it was necessary that there should develop an excess of imports over exports equal to the amount of the borrowings, and this could not occur if part of the proceeds of the borrowings continued to be directed to purchases of domestic goods. The increased purchases of domestic goods would raise their prices, however, relative to other commodities, and the rise in prices of domestic commodities as compared to international commodities, as well as the rise in export prices as compared to import prices, would operate to decrease exports, increase imports, sufficiently to effect a transfer of the loan in the form of goods.3

In my Canada's balance, I conceded that the increase in means of payment in the borrowing country would, even in the absence of price changes, result in both a decrease in exports and an increase in imports. I claimed, however, that in the absence of price changes and of special circumstances it was to be expected that the borrowings abroad would not disturb the proportions in which the total purchasing power in the borrowing country, including that derived from the loan, would be used in buying domestic and foreign commodities; and I claimed further that without a change in these proportions the direct effect of the transfer of means of payment would not suffice fully to adjust the balance. I held, therefore, that there would have to occur relative price changes of the type postulated by Taussig, namely, for the borrowing country, a rise of export prices relative to import prices and of domestic commodity prices relative to both export and import prices.4

To my statement that, in the absence of price changes, it was theoretically to be expected that increase in the amounts available for expenditure by the borrowing country would not result in a change in the proportions in which these expenditures were distributed among the different classes of commodities, it has been objected that “there are ample grounds to dispute this view,” 5 and that “there is every reason to believe, on the contrary, that borrowings abroad would disturb the proportions.” 6 But this statement was not intended to be a denial of the obvious fact that there were an infinite number of proportions in which the increased funds could conceivably be divided among the three classes of commodities, nor even as an assertion that in the absence of price changes the probability that the proportions in which the expenditures were divided among the three classes of commodities would not be disturbed was greater than the probability that these proportions would be disturbed, i.e., was greater than all the other probabilities combined. The probability that the proportions would be disturbed is obviously infinitely greater than the probability that they would not be. If an indifferent marks-man aims at a distant target, the probability that he will hit the bull's-eye is, on the basis of experience, small. But it is nevertheless much greater than the probability that he will hit any other single spot in the universe, and if a forecast of his shot must be made, the probable error will be minimized if, in the absence of a known bias in his marksmanship or in the conditions governing his shooting, it is forecast that he will hit the bull's-eye.7 The assumption that, in the absence of price changes and of known evidence to the contrary, the amounts available for expenditure in each country would after their increase or decrease be distributed among the different classes of commodities in the same proportions as before still seems to me more reasonable than any other specific assumption. It represents what Edgeworth in another connection described as “a neutral condition between two conditions of which neither is known to prevail.” 8 But this assumption was not sufficient to justify such definite conclusions as I drew from it, and in occupying themselves with the assumption instead of with the partly erroneous inferences I based upon it my critics have directed their ammunition at the wrong target.

The existence of domestic commodities affects the mechanism of adjustment only as it affects the manner in which the amounts available for expenditure are apportioned as between native9 and foreign products. The assumption of the existence of domestic commodities is not essential to any valid theory of the general mechanism of adjustment of international balances to disturbances; and certainly no quantitative proposition as to their importance relative to international commodities need be incorporated in an abstract explanation of the mechanism. But if “domestic” commodities do exist, certain important consequences ensue, and it becomes necessary to take specific account of them in the analysis. For a commodity to be a “domestic” commodity, be it noted, it is not necessary that its prices be wholly independent of the prices of similar commodities abroad, or of the prices of competitive or of complementary international commodities at home. If this were the case, there could obviously be no “domestic” commodities in a world in which all prices are parts of an interrelated system. It suffices to make a commodity a “domestic” commodity if it ordinarily does not cross national frontiers and if its price is not tied directly to the prices of similar commodities abroad in such manner that there is always a differential between them approximating closely to the cost of transportation between the two markets.10

That in the United States, for instance, there is an extensive and important range of commodities (including services) available for purchase whose prices are capable of varying within substantial limits while the prices of identical or similar products or services in other countries remain unaltered, seems to me so obvious that it would not require restatement had it not been disputed. One writer11 has claimed, however, not only that the existence of a substantial range of domestic commodities is a vital assumption of the ordinary theory of the mechanism but that such an assumption is contrary to the facts. But the evidence he offers in support of his argument consists only of an irrelevant demonstration that the prices in different markets of identical commodities actually moving in international trade in constant directions are bound together in a close relationship.

[1]Cf.supra, p. 315.

[2]Cf. R. H. Mills, Principles of currency and banking, 2d ed., 1857, p. 38: “there is, besides, a large proportion of every man's income expended on subjects which do not admit of exportation, as house-rent, many articles of diet, attendance, and various other matters. Of all these the prices vary considerably in different countries, and the general level of price is much higher in some than it is in others.”

Cf. also J. E. Cairnes, Leading principles, 1874, p. 409.

[3]F. W. Taussig, “International trade under depreciated paper,” Quarterly journal of economics, XXXI (1917); cf. also ibid., “Germany's reparation payments,” American economic review, supplement, X (1920), 39.

Graham used a similar classification of commodities in the analysis of the mechanism under depreciated paper.—“International trade under depreciated paper. The United States, 1860–1879,” Quarterly journal of economics, XXXVI (1922), 290–73.

[4]Canada's balance, pp. 205–06.

[5]Roland Wilson, Capital imports and the terms of trade, 1931, p. 80. Wilson continues: “Professor. Viner himself has since abandoned it, preferring to regard such a distribution of the added purchasing power derived from the loan as merely one of an infinite number of possible distributions.” (Italics mine.) This does not correctly state my position at present, or at any other time.

[6]Harry D. White, The French international accounts, 1880–1913, 1933, p. 20. Cf. also Carl Iversca, International capital movements, 1935, pp. 230 ff.

[7]Cf. J. S. Mill's treatment of the division of the gain in international trade, where the same problem of the a priori probabilities arises: “The advantage will probably be divided equally, oftener than in any one unequal ratio that can be named; though the division will be much oftener, on the whole, unequal than equal.” (On some unsettled questions, 1844, p. 14.)

[8]Edgeworth, Papers relating to political economy, II, 363.

[9]I use “native” to include both “domestic” and “exportable” commodities.

[10]For large countries, a commodity may be an international commodity near the frontier, but a domestic commodity in the interior, and some commodities may for practical purposes be hard to classify. The distinction, nevertheless, is both theoretically and practically valid. Commodities which are transportable can for our purposes be identified as domestic commodities of a particular country if their prices within that country remain as a general rule within their import and export points. Cf. the penetrating discussion by Theodore J. Kreps, “Export, import, and domestic prices in the United States, 1926–1930,” Quarterly journal of economics, XLVI (1932), 195–207.

[11]L. B. Zapoleon, “International and domestic commodities and the theory of prices,” Quarterly journal of economics, XLV (1931).