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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

V. The International Mechanism and Business Cycles

In the older literature there are to be found only scattered and incidental references to the repercussions on the international mechanism of cyclical fluctuations in business activity. Within the last few years the question has been more seriously tackled, but in the instances which have come to my attention the treatment has frequently been based on a somewhat mechanical application of a particular—if not peculiar—cycle theory to a superficial analysis of the mechanism of international trade. Given the disturbed—though in my opinion exceedingly promising—state of business cycle theory at the moment and the absence of the necessary inductive spadework on the international aspects of business fluctuations, it seems to me that we must await further developments in both directions before we can expect very fruitful results from any attempt systematically to incorporate cycle theory into the theory of international trade, or, a more important task, to apply international trade theory to cycle theory. A cursory survey of the recent literature bearing on this question suggests, however, some comments of a primarily methodological order.

In the formulation of an a priori description of the relation of cyclical fluctuations to the international mechanism, it is necessary to make clear which of the following possibilities is assumed to be the fact: that the cyclical fluctuations in the country in question are (a) peculiar to it, conditions in the outside world being assumed to be stable, or (b) are synchronized with, or (c) lag behind, or (d) precede fluctuations in the same direction in the outside world. Each of these situations would, a priori, be expected to have associated with it a different cyclical pattern in the international aspects of the economic phenomena of the country in question. Since any particular country may at one time be in one of these situations and at another time in another, or, as is most probable, may generally be in one of these situations with respect to some phases of business activity and in some other of the situations with respect to other phases of business activity, attempts such as are to be encountered in the literature to formulate a single and precise pattern of relationship between cyclical fluctuations and specific elements of the international mechanism without discrimination between the situations here differentiated seem to me to be based on an excessive simplification of the problem.

Recognition of the existence of close relationship between the cyclical fluctuations of business activity and the behavior of the various items in the international balances was common during the currency school-banking school controversy. As a rule, however, it was tacitly assumed either that the cyclical fluctuations in volume of means of payment, prices, etc., were confined to England (which corresponds to my assumption [a] above) or that the cycle came earlier and was more pronounced in England than abroad (which corresponds substantially to my assumption [d] above). An expansion of means of payment in England was therefore treated as resulting in a relative rise in prices in England, a decline in exports and increase in imports, a relative rise in interest rates in England, and specie exports and short-term borrowing from abroad to liquidate the adverse balance of payments. Given the assumptions this was correct analysis, but it was certainly not made sufficiently clear by those presenting such analysis that they recognized the dependence of their conclusions on the particular type of relationship, with respect to timing, direction, and degree, assumed to exist between the fluctuations within England and those in the outside world.

This can be illustrated by contrasting the probable pattern of behavior of the international phenomena when the cycle comes earlier and is more pronounced in England than abroad, as is usually assumed by these writers, with what the pattern would be if the cycle came later in England and was less pronounced than abroad. Taking first the expansion phase, in both situations the amount of means of payment in England, prices, interest rates, output, and imports, would be rising. But imports would be rising relative to exports in the first case, falling in the second, and the balance of payments on trade account would be moving against England in the first case, in her favor in the second, with reverse movements of specie in the two cases. A corresponding contrast between the two cases holds for the contraction phase.

For similar reasons, it seems a mistake to assume that there is one definite pattern of relationship between business fluctuations and international capital movements. During the expansion phase of a cycle in a particular country the volume of investment will increase. If that country is normally a capital-exporting country and is having an earlier or more marked expansion of business activity than the outside world, the ratio of investment at home to export of capital should be expected to rise. On a priori grounds alone, there would seem to be somewhat of a presumption that the volume of export of capital would fall absolutely as well as relatively to total investment, since domestic interest rates would be rising relative to interest rates abroad. It is even conceivable that the international movement of capital may under these circumstances reverse its usual direction, capital being borrowed from abroad or withdrawn from abroad instead of being exported.1

It is easy, however, to conceive of a different pattern. Paradoxical though it may seem at first glance, the increased export of capital may be the cause, and may in fact constitute the bulk, of the internal expansion of business activity, where the export of capital and the export of capital goods are so closely associated that a marked expansion of capital directly involves a substantial increase in the production of capital goods. To the extent that international capital movements result directly and immediately in movements of capital goods in a corresponding direction they tend to operate as an inflationary rather than a deflationary factor in the capital-exporting country, and perhaps also as a deflationary instead of an inflationary factor in the capital-importing country. It is the fraction of the capital movement which takes the form of a specie movement which exercises the deflationary influence in the capital-exporting country and the inflationary influence in the capital-importing country. The specie phase of a capital movement represents for the exporting country domestic saving with which domestic investment is at least not directly associated, and for the importing country it represents domestic investment unaccompanied by domestic saving. The capital-goods phase of a capital movement, on the other hand, may represent for the exporting country an increase in domestic investment whose products are, in part only, to be transferred abroad, and for the importing country may result in decreased domestic investment.2

Given this wide range of possibilities, I see no a priori grounds for expecting to find a significant correlation, whether positive or negative, between the fluctuations in the export of capital by particular countries and the fluctuations in their general level of business activity, unless there is ground for assuming that capital-exporting countries are typically countries whose business cycles always precede or always lag after world cycles, or are countries in which fluctuations in the volume of foreign investment are major factors in initiating fluctuations in the internal level of business activity rather than by-products of the latter.3

Similar reasoning leads also to skepticism as to the validity of the grounds on which it is often argued nowadays that free trade exercises in general a stabilizing influence. It is held that foreign trade exercises a moderating influence on the amplitude of the cycle, since internal expansion tends to result in an adverse trade balance, with its deflationary pressure, while contraction tends to result in a favorable trade balance, with its inflationary stimulus.4 This moderating influence, however, operates exclusively in the country where the infection starts or is making most rapid progress. For other countries the trade balance is, with capital movements, sympathetic price trends, and psychological contagion, a major vehicle for the international spread of the infection. I would agree that high tariffs bear an important share of the responsibility for the recurrence of major booms and depressions, but on different considerations. Without rigid price structures, major business cycles are inconceivable, and high tariffs are an important factor in making price rigidity possible.

Chapter VIII

GAINS FROM TRADE: THE DOCTRINE OF COMPARATIVE COSTS

It is always to be remembered that the failure of an argument in favor of a proposition does not, generally speaking, add much, if any probability, to the contradictory proposition.— Jevons, Principles of Science.

[1]Cf., however, Wesley Mitchell, Business cycles, 1927, p. 447: ... prosperity, with its sanguine temper and its liberal profits, encourages investments abroad as well as at home, and the export of capital to other countries gives an impetus to their trade.

[2]Cf. K. Wicksell, Lectures on political economy, 1935, II, 100–02; Marco Fanno, “Credit expansion, savings and gold export,” Economic journal, XXXVIII (1928), 126–31; and, for gold movements, Saint-Peravy, in 1786! (Supra, p. 187.) (“Investment” is used here to mean expenditures for productive purposes.)

[3]Cf., for substantially similar conclusions, J. W. Angell, Theory of international prices, 1926, pp. 174, note; 396–97; 527–28; and the additional references listed in his index, p. 561, under “Cyclical movements of business.”

[4]Cf., e.g., Folke Hilgerdt, “Foreign trade and the short business cycle,” in Economic essays in honour of Gustav Cassel, 1933, pp. 273–91.