The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Conversation I.: Introduction.
• Conversation II.: Introduction — Continued.
• Conversation III.: On Property.
• Conversation IV.: On Property— Continued.
• Conversation V.: On the Division of Labour.
• Conversation VI.: On Capital.
• Conversation VII.: On Capital — Continued.
• Conversation VIII.: On Wages and Population.
• Conversation IX.: On Wages and Population. Continued.
• Conversation X.: On the Condition of the Poor.
• Conversation XI.: On Revenue.
• Conversation XII.: On Revenue Derived From Property In Land.
• Conversation XIII.: On Revenue Derived From the Cultivation of Land.
• Conversation XIV.: On the Revenue of Those Who Do Not Employ Their Capital Themselves.
• Conversation XV.: On Value and Price.
• Conversation XVI.: On Money.
• Conversation XVII.: Subject of Money Continued.
• Conversation XVIII.: On Commerce.
• Conversation XIX.: On Foreign Trade.
• Conversation XX.: Continuation of Foreign Trade.
• Conversation XXI.: Subject of Foreign Trade Continued.
• Conversation XXII.: On Expenditure.

CONVERSATION XXI.

Subject of FOREIGN TRADE continued.

mrs. b.

I hope that you are now quite satisfied of the advantages which result from foreign commerce?

caroline.

Perfectly so; but there is one thing which perplexes me. In a general point of view I conceive that trade consists in an exchange of commodities; but I do not understand how this exchange takes place between merchants. The wine-merchant, for instance, who imports wine from Portugal, does not export goods in return for it; his trade is confined to the article of wine.

mrs. b.

There are many general merchants who both export and import various articles of trade. Thus the Spanish merchant, the Turkey merchant, and the West-Indian merchant, import all the different commodities which we receive from those countries, and generally export English goods in return. It is, however, the countries, rather than the individuals, who exchange their respective productions; for both the goods exported and imported are in all cases bought and sold, and never actually exchanged.

caroline.

But since the merchants of the respective countries do not literally exchange their goods, they must each of them send a sum of money in payment; and these sums of money will be nearly equivalent. If the London merchant has 1000l. to pay for wines at Lisbon, the Lisbon merchant will have nearly the same sum to pay for broad cloth in London. It is to be regretted, therefore, that the goods should not be actually exchanged, or that some mode should not be devised of reciprocally transferring the debts, in order to avoid so much useless expense and trouble.

mrs. b.

Such a mode has been devised, and these purchases and sales are usually made without the intervention of money, by means of written orders called bills of exchange.

caroline.

Is not then a bill of exchange a species of paper-money like a bank-note?

mrs. b.

Not exactly; instead of being a promissory note, it is an order addressed to the person abroad to whom the merchant sends his goods, directing him to pay the amount of the bill, at a certain date, to some third person mentioned in the bill. Thus when a woollen merchant sends broad cloths to Portugal, he draws such a bill on the merchant to whom he consigns them; but instead of sending it with the goods to Portugal, he disposes of it in London; that is to say, he enquires whether any person wants such a bill for the purpose of discharging a debt in Portugal. He accordingly applies to some wine merchant who owes a sum of money to a mercantile house at Lisbon for wines imported from that country, and who finds it convenient to avail himself of this mode of payment, in order to avoid the expense of sending money to Portugal. He therefore gives the woollen-merchant the value of his bill, and having his own name or that of his correspondent in Portugal inserted in the bill as the third person to whom the amount of the bill is to be paid, transmits it to his correspondent in Portugal, who receives the money from the person on whom it is drawn.

caroline.

The same bill then is the means of paying for both commodities, the broad cloth and the wine; and it supersedes the necessity of transmitting two sums of money for that purpose. A bill of exchange is a most convenient and economical contrivance, and I feel very much inclined to avail myself of it. A friend of mine at York owes me a sum of money for purchases I have made for her in London; and my sister Emily is indebted about the same sum to a glover at York. I might, therefore, draw a bill of exchange on my friend, which Emily would buy of me, and forward it to the glover at York for the purpose of discharging her debt for the gloves; and he would receive the money from my friend on whom it was drawn. It is, if I understand you right, by such transfers of debts that commodities are really exchanged between merchants.

mrs. b.

I am glad to see that you understand the use of a bill of exchange so well. It will therefore be evident to you that if, when two countries are trading together, the value of the goods exported and imported be equal, the amount of the bills of exchange in payment of those goods will be so likewise; and the debts will be mutually settled without the necessity of transmitting money.

caroline.

That is quite clear: but it must, I suppose, frequently happen that the value of the goods exported and imported is not equal, and in that case the bills of exchange will not settle the whole of the respective debts, and some balance or sum of money will remain due from one country to the other.

mrs. b.

This is called the balance of trade. In order to explain to you in what manner such a debt is settled, let us take, for example, our trade with Russia:—if, in trading with that country, our exports and imports are exactly equal in value, the exchange between Russia and England is said to be at par, or equal.

But if the value of our imports should have exceeded our exports, so that, for instance, we should have received more hemp and tallow from, than we have sent broad cloths and hardware to Russia, there will be a greater amount of bills drawn by Russian merchants on England, than by English merchants on Russia. After their reciprocal debts are settled, therefore, as far as the bills will enable them to do so, there will remain a surplus of Russian bills drawn on England, which will require to be paid in money.

caroline.

Then some of our merchants will be under the necessity of sending money to Russia in payment of their debts.

mrs. b.

This every merchant endeavours to avoid, on account of the heavy expenses of freight and insurance of the money; as soon, therefore, as there appears to be a scarcity of English bills on Russia, every English merchant who is indebted to that country is eager to procure them. The competition of merchants for these bills raises their price, for they find it answer to give something more than the amount of the bill rather than send gold to Russia to pay for their hemp and tallow. The sum thus given for a bill above its amount is called a premium, and our exchange with Russia is, in this case, said to be unfavourable, or below par.

caroline.

That is to say, that a man who owes a sum of money to Russia must give something more than the amount of the debt in order to pay it?

mrs. b.

Yes; and the amount of the premium given depends, of course, on the degree of scarcity of the bills.

caroline.

And as the scarcity of the bills is owing to the value of our imports exceeding that of our exports, our exchange must be favourable or unfavourable with any country in proportion as the exports or imports prevail.

But our exchange with Russia, I suppose, can never fall below what it would cost to transport gold to Russia; for as it is obtional with our merchants to pay either in bills or money, if the premium on the bill were greater than the expense of sending money, they would prefer the latter mode of payment.

mrs. b.

Undoubtedly; and as the expense of sending gold to different countries varies according to the distance, and to the facility or difficulty of our intercourse with them, a favourable or unfavourable exchange with those countries will vary accordingly.

caroline.

But the premium given for bills of exchange, after all, does not supersede the necessity of our paying the balance of debt in gold; it merely removes the difficulty from one individual to another: for those merchants who finally cannot obtain bills must transmit money in payment.

mrs. b.

I beg your pardon; an unfavourable exchange in a great measure corrects itself; but this, it is true, requires some explanation. There are merchants who make it their business to trade in bills of exchange; that is to say, to buy them where they are abundant and cheap, and sell them where they are scarce and dear. Thus bills of exchange become an article of commerce like cloth, or any other commodity. Therefore when English bills on Russia are scarce, those merchants buy up the bills drawn by other countries on Russia, and supply the English market with them.

caroline.

But when English bills on Russia are scarce, there may perhaps be no surplus of bills on Russia in other countries to supply the English market.

mrs. b.

Generally speaking, when there is a deficiency of bills on Russia in one country, there will be a redundancy of them in some other; for though the exportations and importations of Russia with any particular country may be unequal, her general exportations and importations will, upon the whole, nearly balance each other: because if there was a constant excess of importation, Russia would be drained of money to pay for it; if, on the contrary, there was an excess of exportations, the money received in payment would accumulate, and depreciate the value of the currency of the country. The goods which Russia purchases, therefore, from foreign countries, must, upon the long run, be to the same amount as the goods which she sells in exchange for them; so that if there is a balance of debt due to Russia from one country, there must be a balance of debt due from Russia to another country. The bills of exchange, therefore, drawn by Russia on foreign countries, and those drawn by foreign countries on Russia, will balance each other; and it is the business of the dealers in bills to discover where there is a superfluity, and where a deficiency of these bills, with a view to buy them in the one place, and sell them in the other.

caroline.

If, then, the bill-merchants, instead of supplying the English market with bills on Russia, bought up the surplus of Russian bills on England, it would equally answer the purpose of paying our debt to that country?

mrs. b.

Exactly. In our trade with Italy, for instance, we import large quantities of silk, olive oil, and various other articles, and our exportations are manufactured goods only to a trifling amount. The exchange would, in this case, be so unfavourable as to reduce us to the necessity of exporting gold in payment for the excess of imports, did not the bill-merchants come to our assistance. This useful class of men buy up the surplus of Italian bills on England, and send them for sale to Germany, France, Spain, or wherever there is a deficiency of bills on England, and where they will consequently sell with profit.

caroline.

Thus Germany, France, or Spain, discharge our debt to Italy.

mrs. b.

Yes; provided any of those countries are in our debt; otherwise, you know they would not purchase our bills of exchange.

caroline.

One would imagine that these operations of the bill-merchants would invariably have the effect of counteracting the fluctuations of exchanges, and keep them constantly at par.

mrs. b.

If the business of the bill-merchant could be transacted with the same celerity and regularity as that of the bankers in London, who meet together every day, after the hours of business, to settle their respective accounts, it might influence the exchanges in the manner you suppose. But the speculations of the bill-merchant embrace so wide a sphere, and so many circumstances occur in the course of trade, or of political events, by which the exchanges are affected, that no individual prudence or foresight can prevent great fluctuations.

caroline.

Are then merchants often reduced to the necessity of sending abroad money in payment of foreign goods?

mrs. b.

Scarcely ever, I believe, excepting where there is a greater demand for money than for goods; for independently of the operations of the bill-merchants, there is yet another means of preventing that expense. When the English merchants who export goods to Russia find that the excess of imports over exports produces a scarcity of their bills on Russia, which enables them to sell them to the importing merchants at a premium, such an addition to their usual profits of trade induces them to increase their exportations, and has, in fact, the effect of a bounty; for they can now afford to export goods which, before, did not yield sufficient profits to enable them to do it. Whilst, on the contrary, our importing merchants of Russian commodities, who are obliged to purchase these bills at a premium, (which has the effect of a duty, since it is a clear deduction from their profits,) will confine their importations to such commodities only as will leave them their usual profits, after deducting the premium upon the bills, with which they were to be paid.

caroline.

The premiums, then, which our importing merchants lose, our exporting merchants gain. This must undoubtedly have a considerable effect in encouraging exportation, and restraining importation, and tend rapidly to restore the equality of the exchange.

mrs. b.

The evil, then, of an unfavourable exchange immediately gives rise to the remedy which corrects it, and actually tends to equalise the exports and imports. But in order to have completely that effect, it would be necessary that the country with whom the exchange is unfavourable should require as much of our productions as we do of theirs, which is not always the case. The unfavourable exchange, however, enables the exporting merchant to afford his goods abroad at a lower rate, because a part of his profit is derived from the premium on the exchange, and thus more persons abroad being able to purchase at the reduced price, the market for the goods is enlarged, and a greater quantity consumed.

caroline.

All these circumstances, then, together must nearly supersede the necessity of sending money to balance the account?

mrs. b.

Very nearly so, I believe, except with such countries as, having mines of their own, may be said to produce money. If Spain and Portugal were to retain all the gold and silver which they derive from their mines, it would fall so much in value in those countries, that no laws could prevent its conveyance to others where its value was greater. It would be the most profitable article a Spanish or Portuguese merchant could export in payment for the goods imported; and, indeed, we find that they supply Europe with gold and silver, in the same manner as we supply it with the produce of our West-Indian colonies, coffee and sugar. We have, in a former conversation, observed how the precious metals were diffused throughout all civilised nations, and the supply every where so proportioned to the demand, as to admit of no other variation of value than the small difference arising from the expense of bringing them from the mines to the different countries where they are wanted.

caroline.

But have I not heard of the exchange having been much below what it would cost to send money abroad?

mrs. b.

That is true; but I believe it is principally to be ascribed to another and a totally different cause, which nominally influences the exchanges to a very great extent. We formerly observed, that a depreciation of value of the currency of a country raises the price of commodities in that country. Whether the depreciation arises from an unnecessary increase of currency, from an adulteration of the coin, or from any other cause, it invariably produces this effect.

Let us suppose the currency of England to be depreciated 25 per cent.; that is to say, that a sum worth 100l. previous to the depreciation is now really worth only 75l., though it retains its nominal value of 100l. An English bill of exchange, which represents a certain portion of the currency, will partake of this depreciation, and will no longer be equal in value to a foreign bill of the same amount. It would require an English bill of 133l. 6s. 8d. to exchange for a foreign one of 100l.; therefore, if before the depreciation the exchange were at par, this circumstance would make it immediately fall 25 per cent.

caroline.

Would not the evil, then, be remedied by increasing the exports, and diminishing the imports, as when the unfavourable state of the exchange arises from the unequal balance of trade?

mrs. b.

Certainly not. For though it is true that in both cases the exporting merchant can sell his bills at a premium, yet when this premium arises from a depreciation of the currency, it cannot be considered as any gain to him, because it is exactly balanced by the advanced price of the goods he exports, which operates as a loss.

caroline.

I think I understand it. The depreciation of currency which produces the premium on the bill of exchange produces also an increase in the price of the merchandise, and these effects, resulting from the same cause, must always correspond and be felt in the same proportion. Thus if a merchant exports cloth to Hamburgh which costs him 200l., whatever profits he might expect under the ordinary state of the currency must be diminished 25 per cent., in consequence of his giving 50l. more for his cloth than he would otherwise have done. Yet as he will sell the bill of exchange which he draws on Hamburgh for the payment of his cloth at a premium of 50l., his profits will remain precisely the same, upon the whole transaction, as if every thing had gone on its regular way.

mrs. b.

You have explained it perfectly well. Remember therefore that when the exchange is unfavourable in consequence of the depreciation of the currency, it is only nominally, not really unfavourable; for it may take place when the exports and imports are perfectly equal. And recollect, also, that the difference the exchange produces in the sale or purchase of bills is neither a loss nor a gain to the parties, and that it has no effect either on exportation or importation.

caroline.

But is it easy to distinguish between two causes which are so similar in their effects, and to ascertain at any time which of them it is that influences the exchange?

mrs. b.

Far from it: this has been a subject of much discussion, particularly during the late war. If it be true that the currency of the country has been increased beyond what was required, it must be considered as depreciated, and as having nominally affected the exchange.

On the other hand, as the system of warfare engaged us in very great expense on the Continent, whilst it was remarkably unfavourable to our exportations, the balance of foreign debt was very much against us, and the expense of transmitting gold considerably increased; so far the exchange may be said to have been really unfavourable. It is probable that both these causes contributed to the very low rate of our exchange during the late war.

Notwithstanding all the investigation which these subjects have undergone, there still prevails, even amongst our legislators, the old popular error respecting the balance of trade. Even at this day we find persons congratulating the country, that the exports exceed the imports, and that in consequence a balance of money remains due to us, which is considered as so much gain to the country.

caroline.

But do those who maintain such an opinion know, that this money would not be due to us, unless we had exported a surplus of merchandise to an equal amount?

mrs. b.

It is from that circumstance they conceive the advantage arises. They assert that since the poor are maintained by labour, the more work we perform for other countries, and the more money we receive for our work, the richer we must be.

caroline.

Not if we export the fruits of their labour and receive only gold in return: for the poor are maintained not by the act of labour, but by its produce; and if all that produce were exported, and nothing but gold received in exchange, we should be much in the situation of King Midas, who was starved because every thing he touched was converted into gold.

But do not the bill-merchants prevent this importation of gold, by transferring the bills of exchange from one country to another? for if our balance of trade is favourable with one country, it must be unfavourable with another.

mrs. b.

No doubt they do. If it were possible to have what is called a favourable balance of trade with every country, we should accumulate a quantity of the precious metals which would answer no other purpose than to depreciate our currency.

The most advantageous trade for both parties concerned is when the exports and imports are equal, so that the balance does not preponderate on either side; for it is as injurious to one country to part with money which is wanted at home for purposes of currency, as it is to the other to receive it when it is not wanted.

When a country receives bullion, it should not be in payment of a balance of debt, but as a commodity for which there is a demand. This demand will always take place in thriving countries, not only because gold and silver bullion are wanted by jewellers and silversmiths for the purposes of luxury: but also because, as the saleable produce of the country increases, an additional quantity of currency is required for its circulation.

caroline.

According to this theory of the balance of trade, it should always be against Spain and Portugal, and favourable to every other country; because it is through Spain and Portugal that all the treasures of the new world flow into Europe?

mrs. b.

True; but they are not sent immediately from those countries to the most distant parts of Europe, but are transferred through the intermediate countries. Thus France sends Louis to Geneva to pay for the watches she imports from that place; or to Italy, in payment of raw silks, olive oil, &c. So that the countries most distant from Spain and Portugal would consequently have what is absurdly called the balance of trade in their favour; whilst the intermediate countries would have it favourable with those which were nearer Spain than themselves, and unfavourable with those which were more distant.

This, however, is a general principle, which, though true in theory, requires modification, if applied to practice. A great variety of circumstances occasion fluctuations in the regular distribution of the wealth of America. However extraordinary it may appear, it is not very long since we sent considerable quantities of specie to Spain and Portugal, to maintain our troops in those countries: so much does war reverse the natural order of things. Instead of exporting our manufactures to bring back gold, we were obliged to drain our circulation to send money in order to support our troops, whilst our manufacturers were either starving, or became members of that very army which caused their ruin.

caroline.

But if Spain, from the abundance of her gold and silver, imports such large quantities of manufactured goods, is it not a check to her industry at home?

mrs. b.

It certainly is; though not so much as you would imagine, because she does not obtain the gold and silver of America free of cost; she obtains it partly in the form of a tax imposed by the mother-country, or rent for the royal mines; and the rest by payment in produce or manfactured goods. But these goods are not necessarily manufactured in Spain or Portugal. A Spanish merchant having imported goods from England and sent them to America, receives back gold and silver in payment, which are transmitted to England, if wanted there, Spain and Portugal being the entrepôt, in consequence of the strict regulations by which the gold and silver are compelled to be brought to the mother-country.

The want of industry in Spain, though it proceeds in a great measure from the nature of its religion and government, is also in part attributable to the effect which the influx of the precious metals has produced.

In Townsend’s Travels in Spain, which abound with philosophical observations, it is stated, “that the gold and silver of America, instead of animating the country and promoting industry, instead of giving life and vigour to the whole community, by the increase of arts, of manufactures, and of commerce, had an opposite effect, and produced in the event weakness, poverty, and depopulation. The wealth which proceeds from industry resembles the copious yet tranquil stream, which passes silent, and almost invisible, enriches the whole extent of country through which it flows; but the treasures of the new world, like a swelling torrent, were seen, were heard, were felt, were admired: yet their first operation was to desolate and lay waste the spot on which they fell. The shock was sudden; the contrast was too great. Spain overflowed with specie, whilst other nations were comparatively poor in the extreme. The price of labour, of provisions, and of manufactures, bore proportion to the quantity of circulating cash. The consequence is obvious; in the poor countries industry advanced; in the more wealthy it declined.

“Even in the present day (1806), specie being about 6 per cent. less valuable in Spain than it is in other countries, operates precisely in the same proportion against her manufactures and her population.”

We may here, I think, conclude our observations on the principles of trade; and having now explained the different sources from which a revenue may be derived, we shall at our next meeting make a few enquiries into the nature and effects of expenditure.