Front Page Titles (by Subject) Sect. II.—: Real Exchange. - Treatises and Essays on Subjects connected with Economic Policy with Biographical Sketches of Quesnay, Adam Smith & Ricardo
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Sect. II.—: Real Exchange. - John Ramsay McCulloch, Treatises and Essays on Subjects connected with Economic Policy with Biographical Sketches of Quesnay, Adam Smith & Ricardo 
Treatises and Essays on Subjects connected with Economic Policy with Biographical Sketches of Quesnay, Adam Smith & Ricardo (Edinburgh: Adam and Charles Black, 1853).
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Having thus endeavoured to trace the influence which variations in the value of currencies have over the exchange, we proceed to consider how far it is influenced by fluctuations in the supply and demand for bills. To facilitate this inquiry, we shall exclude all consideration of changes in the value of money; and suppose the currencies of the different countries having an intercourse together to be equal in weight and purity to their mint standards, and that each has its proper supply of bullion.
When two nations trade together, and each purchases of the other commodities of the same value, their debts and credits are equal, and the real exchange is, of course, at par. But it rarely happens that the debts reciprocally due by any two countries are equal. There is almost always a balance owing on one side or other, which affects the exchange. If, for example, the debts due by London to Paris exceed those due by the former to the latter, the demand in London for bills on Paris will be greater than the demand in Paris for bills on London; and the real exchange will, consequently, be in favour of Paris and against London.
The expense of transferring bullion from one country to another limits the range within which the rise and fall of the real exchange between them is confined. In this respect, as in most others, transactions between foreign countries depend on the same principles which govern those between different parts of the same country. We have already seen that the fluctuations in the real exchange between London and Glasgow cannot exceed the expense of transmitting money between those cities. And this principle holds universally. Whatever may be the expense of transmitting bullion, which is the money of the commercial world, between London and Paris, London and Hamburg, New York, etc., the real exchange of the one on the other cannot, for any considerable period, be depressed to a greater extent. No merchant will pay a higher premium for a bill to discharge a debt abroad, than will suffice to cover the expense of transmitting bullion to his creditor.
Hence it appears that whatever obstructs or fetters the intercourse among different countries, proportionally widens the limits within which fluctuations in the real exchange may extend. And hence the reason why it varies so much more in war than in peace. The amount of the bills drawn on a country engaged in hostilities is liable, from various causes, to be suddenly increased; though, whatever may be the amounts thus thrown upon the market, the depression of the exchange cannot, for any length of time, exceed the expense of conveying bullion from the debtor to the creditor country. But during war this expense, which consists of freight, insurance, etc., is necessarily much augmented. The evidence annexed to the “Report of the Bullion Committee,” shows that the cost of conveying gold from London to Hamburg, which, prior to the late war, amounted to 2 or 2½, had increased, in the latter part of 1809, to about 7, per cent.; so that the limits within which fluctuations in the real exchange might range in 1809 were about three times as great as those within which they were confined in 1793.
This principle also accounts for the greater steadiness of the real exchange between closely neighbouring countries. It costs considerably less to transmit bullion from London to Dublin or Paris, than to New York or Petersburg. And, as fluctuations in the real exchange are limited by this cost, they may evidently extend proportionally farther between distant places than between such as are contiguous.
We have next to investigate the circumstances which give rise to a favourable or an unfavourable balance of payments, and to appreciate their effects on the real exchange, and on trade in general.
A very great, if not the principal, source of the errors into which merchants, and the majority of writers on exchange, have been betrayed in regard to the balance of payments, appears to have originated in their confounding the sum which imported commodities fetch in the home market, with their cost abroad. It is obviously, however, by the amount of the latter only, that the balance of payments, and consequently the real exchange, is influenced. A cargo of corn, for example, which cost £3,000 free on board at Odessa, may be worth £4,500 when imported into England; but the foreign merchant would not, unless he imported the corn, be entitled to draw on London for more than its original cost, or £3,000. It is clear, therefore, on the slightest consideration, that the fact of the imports being more valuable than the exports, does not authorise the conclusion that the balance of payments is unfavourable. A favourable or an unfavourable balance depends entirely on the sum due to foreigners for imported commodities being less or more than the sum due by them for commodities purchased from us. It has nothing to do with the prices eventually obtained for the imported or exported commodities.
The mercantile system of commercial policy, which continues to preserve a powerful influence in most European countries, and in the United States, had for its grand object the creation of a favourable balance of payments, by facilitating exportation and restricting importation. It is foreign to our purpose to make any inquiry in regard to the principles of this system, except in so far as they are connected with exchanges. But we hope to be able to show, in opposition to the commonly received opinions, that, under ordinary circumstances, the value of the imports always exceeds the value of the exports; and that this excess or balance has not, speaking generally, any tendency to render the real exchange unfavourable.
It is the business of the merchant to carry the products of different countries from those places where their value is least, to those where it is greatest; or, which is the same thing, to distribute them according to the effective demand. There could, however, be no motive to export any article, unless that which was to be imported in its stead were of greater value. When an English merchant orders a quantity of Polish wheat, he supposes it will sell for so much more than its price in Poland as will suffice to pay the cost of freight, insurance, etc., and to yield, besides, the ordinary rate of profit on the capital employed in the business. If the wheat did not sell for this much, its importation would be productive of loss. Merchants never export, but in the view of importing more valuable products. Instead of an excess of exports over imports being any criterion of an advantageous commerce, it is quite the reverse. And the truth is, notwithstanding all that has been said and written to the contrary, that unless the value of the imports exceeded that of the exports, foreign trade could not be carried on. Were this not the case—were the value of the exports always greater than that of the imports, there would be a loss on every transaction with foreigners, and the trade with them would either not be undertaken, or, if begun, would be speedily relinquished.
In England, the rates at which exports and imports are officially valued were fixed so far back as 1696. The very great alteration which has since taken place in the value of money, and in the cost of the greater number of the commodities of this and other countries, has rendered this official valuation, though valuable as a means of determining their quantity, of no use whatever as a criterion of the true value of the imports and exports. To obviate this defect, accounts of the real or declared value of the exports, prepared from the declarations of the merchants, are annually laid before Parliament. There is, however, no such account of the imports; and it is, perhaps, impossible to frame one with anything like accuracy. It has also been alleged, and apparently with some foundation, that merchants have frequently exaggerated the value of articles entitled to drawbacks. But the extension and improvement of the warehousing system, and the decrease in the number of drawbacks, has materially lessened whatever fraud or inaccuracy may have arisen from that source. The declared value of the exports may now be considered as pretty near the truth, at least sufficiently so for all practical purposes.
If perfectly accurate accounts could be obtained of the values of the exports and imports, there can be no manner of doubt that in all ordinary years the latter would considerably exceed the former. The value of an exported commodity is estimated when it is shipped, before its value is increased by the expense incurred in transporting it to the place of its destination; whereas the value of the commodity imported in its stead is estimated after it has arrived at its destination, and been enhanced by the charges on account of freight, insurance, importer’s profits, etc.
It is of little importance, in so far at least as the interests of commerce are concerned, whether a nation carries its own imports and exports, or employs others. A carrying nation appears to derive a comparatively large profit from its commercial transactions. But this excess of profit is seldom more than a fair remuneration for the capital it employs, and the risk it incurs, in transporting commodities. Were the trade between this country and France wholly carried on in British bottoms, our merchants, in addition to the value of the exports, would also receive the cost of their carriage to France. This, however, would be no loss to the French. They must pay the freight of the commodities they import. And if the English sail ships on cheaper terms than their own countrymen, there is no good commercial reason, though there may be others of a different kind, why they should not employ them in preference.
In the United States the value of the imports, deduced from the custom-house returns, almost always exceeds the value of the exports.1 And though our practical politicians have been accustomed to consider the excess of exports over imports as the only sure criterion of an advantageous commerce, “it is nevertheless true, that the real gain of the United States has been nearly in proportion as their imports have exceeded their exports.”2 The great excess of imports into the Union is in part occasioned by the Americans generally exporting their own surplus produce, and receiving from foreigners not only an equivalent for the exports, but also for the cost of their conveyance to their markets. “In 1811,” says the author just quoted, “flour sold in America for 9 dol. 50 cents per barrel, and in Spain for 15 dol. The value of the cargo of a vessel carrying 5,000 barrels of flour would, therefore, be estimated, at the period of its exportation, at 47,500 dol.; but as this flour would, because of freight, insurance, exporter’s profits, etc., sell in Spain for 75,000 dol., the American merchant would be entitled to draw on his agent in Spain for 27,500 dol. more than the flour cost in America, or than the sum for which he could have drawn had the flour been exported on account of a Spanish merchant. But the transaction would not end here: the 75,000 dol. would be vested in some species of Spanish or other European goods fit for the American market; and the freight, insurance, etc., on account of the return cargo would perhaps increase its value to 100,000 dol.; so that, in all, the American merchant might have imported commodities worth 52,500 dol. more than the flour originally sent to Spain.” It is as impossible to doubt that this transaction is advantageous, as it is to doubt that its advantage consists in the value of the imports exceeding that of the exports. And it is clear that America might have the balance of payments in her favour, though such transactions as the above were multiplied to any conceivable extent.
Instead, therefore, of endeavouring to limit the trade with countries from which we should otherwise import more than we exported, we should give it every possible facility. Every man considers that market as the best in which he obtains the highest price for his goods. Why then exclude him from it? Why compel a merchant to sell a cargo of muslin, iron, etc., for £10,500, rather than £11,000 or £12,000? The wealth of a state is made up of the wealth of individuals. And we have yet to learn that any more effectual method of increasing individual wealth can be devised than to permit buying in the cheapest and selling in the dearest markets.
It would be difficult to estimate the mischief which absurd notions relative to the balance of trade have occasioned in most commercial countries. They have been particularly injurious to Great Britain. The restrictions imposed on the trade with France, originated in the prevalence of prejudices to which they gave rise. The great, and indeed the only, argument insisted on by those who prevailed on the legislature to declare the French trade a nuisance,1 was founded on the alleged fact, that the value of the imports from France considerably exceeded the value of the exports to her. The balance was termed a tribute paid by England; and it was sagaciously asked, what had we done that we should be obliged to pay so much money to our natural enemy? Those considerate and patriotic persons seem to have supposed that our merchants brought commodities from France, for no better reason than that they were French, or to oblige that ingenious people. But they were not quite so disinterested. They imported French wines, silks, and so forth, for the same reasons that they imported the sugar of the West Indies, the teas and spices of the East, and the timber of the Baltic, that is, because there was a demand for them, and because they were worth more in our markets than the native products exported in their stead. The reason assigned for prohibiting the trade affords a conclusive proof of its having been highly advantageous. And there cannot be a doubt, that an unlimited freedom of intercourse between the two countries would be of great service to both. Supposing it to be so arranged, does any one imagine that we should export or import any commodity to or from France, provided we could either sell or buy it on better terms anywhere else? If restrictions on the trade with any particular country be not injurious, that is, if it be either a losing or a less advantageous trade than that with other countries, we may be assured that the throwing it completely open would not make a single individual engage in it.
Everybody knows that these conclusions are not only theoretically true, but have been practically verified. The abolition of the discriminating duty on French wines, the reduction of the exorbitant duty on brandy, the repeal of the prohibition against importing silks, and the opening of our ports to French corn and flour, have all been advantageous. And though it be true that the prejudices of the French, and the high duties which they continue to impose on most articles of British produce, confine the trade within comparatively narrow limits, they have not made it unprofitable, and are more injurious to themselves than to us. It is a curious fact, that notwithstanding the great amount of our imports from France, and our expenditure in that country on account of absentees, the state of the exchange shows that the balance of payments is usually in our favour.
But the partisans of the exclusive or mercantile system may perhaps say, that they do not mean to contend that it is profitable to export more than is imported; but that, by exporting an excess of raw and manufactured produce, the balance of payments is rendered favourable, and that this balance (which they regard as representing the entire nett profit made by the country on its transactions with foreigners) is always paid in bullion.
It may, however, be easily shown that this statement is altogether erroneous; that a balance, whether on the one side or the other, is seldom or never cancelled by means of bullion; and that it is not a measure, and has, indeed, nothing to do with the profit or loss attending foreign commercial transactions.
If the premium on foreign bills, in a country with an unfavourable real exchange, be less than the cost of sending bullion abroad, it would be contradictory to suppose that it should be exported. And though the premium on such bills were to increase, till it become equal to, for it cannot exceed, the cost of exporting the precious metals, it does not follow that they will then be exported. That would depend on whether bullion were, at the time, the cheapest exportable commodity; or, in other words, whether a remittance of bullion was the most advantageous way in which a debt might be discharged. If a London merchant owe £1,000, or other sum, in Paris, he endeavours to find out the cheapest method of paying it. On the supposition that the real exchange is 2 per cent. below par, and that the expense of remitting bullion is also 2 per cent., it will be indifferent to him whether he pay £20 of premium for a bill of £1,000, payable in Paris, or incur an expense of £20 in remitting £1,000 worth of bullion direct to that city. If the prices of cloth in Paris and London be such, that it would require £1,030 to purchase and send as much cloth to Paris as would sell for £1,000, he would no doubt prefer buying a bill or exporting bullion. But if, by incurring an expense of £1,010, the debtor may send as much hardware or cotton to Paris as would sell for £1,000, he would as certainly prefer paying his debt by exporting the one or the other. It would save him 1 per cent. more than if he bought a foreign bill or remitted bullion, and 2 per cent. more than if he exported cloth. Had there been any other commodity which might have been exported with more advantage, he would have used it in preference.
It is obvious, therefore, that the trade in bullion is governed by the same principles which govern the trade in other things. It is exported when its exportation is advantageous; that is, when it is less valuable at home, and more valuable abroad, than anything else; and it cannot be otherwise exported. The balance of payments might be twenty or thirty millions against a country, without depriving it of a single ounce of bullion. No merchant would remit £1,000 worth of gold or silver from England to discharge a debt in Paris, if he could invest £970, £980, £990, or any sum under £1,000, in any other species of merchandise which, exclusive of expenses, would sell in France for that amount. Those who deal in the precious metals are as much alive to their interests, as those who deal in coffee, or sugar, or indigo. But who would attempt to discharge a foreign debt by exporting coffee which cost £100, if he could effect the same object by exporting indigo which cost only £95? No bullion will ever be exported unless its value be less in the exporting country than in that to which it is sent; and unless it be, at the same time, the most advantageous article of export.
2. It is in vain to contend that an unrestricted freedom of trade might render some unfortunate country indebted to another, so happily situated that it had no demand for any sort of ordinary merchandise, and would only accept of cash or bullion in exchange for its exports. A case of this sort never did, and never will, occur. It is not even possible. A nation which is in want of money must be in want of other things; for men desire money only because it is the readiest means of increasing their command over necessaries and enjoyments. The extreme variety, too, in the soils and climates—in the machinery, skill, and industry of the people of different countries—occasion extraordinary differences in their products and their prices. Some articles of the highest utility are peculiar to certain districts. And there will ever be a demand, not only for such articles, but also for those which, though they may be produced at home, may be imported of a better quality, or at a lower price. Nor, till the passion of accumulation be banished from the human breast, will there cease to be a desire to send commodities from places where their exchangeable value is least, to those where it is greatest.
3. In treating of the nominal exchange, we endeavoured to show that no single country can continue, for any length of time, to import or export a greater amount of bullion than may be necessary to preserve the precious metals in it in their proper relation to those of other countries; or, which is the same thing, to have the real exchange either permanently favourable or unfavourable. But though this principle be strictly true in reference to its aggregate exchanges, it may be incorrect if its exchange with one country only be considered. Great Britain, for example, may generally have the exchange in her favour with America, provided she have it generally, and to a nearly equal extent, against her with the East Indies, or some other country. “She may,” to use the words of Mr Ricardo, “be importing from the north the bullion which she is exporting to the south. She may be collecting it from countries where it is relatively abundant, for others where it is relatively scarce, or where, from some particular causes, it is in great demand. Spain, who is the great importer of bullion from America, can never have an unfavourable exchange with her colonies; and as she must distribute the bullion she receives among the different nations of the world, she can seldom have a favourable exchange with the countries with which she trades.”1
On this principle, Lord King successfully accounted for the favourable exchange between this country and Hamburg, from 1770 to 1799. He showed that the importation of bullion from Hamburg and other parts was not more than equivalent to the exports to the East Indies and the home consumption; that the demand corresponded to the supply; and that its value remained pretty stationary. The extraordinary influx of bullion into this country from the Continent at the æra of the Bank restriction in 1797, and the favourable state of the exchange, were undoubtedly owing to the reduction in the issues of bank paper, and to the diminution of the gold currency caused by the hoarding of guineas. In 1797 and 1798, above five millions of guineas were coined at the mint; and this extraordinary demand for gold is of itself abundantly sufficient to account for the very favourable exchange of that period, and for the length of time during which it continued. But, at the same time that the demand for gold bullion for the mint was thus increased, the demand for silver bullion, for export to India, was proportionally augmented.
From this period the exportation rapidly declined; and, in the years in which the exchange was most unfavourable, little or no silver was sent to India.
Instead, therefore, of the extraordinary importation of bullion from Hamburg in 1797 and 1798 affording, as Mr Bosanquet and others supposed, a practical proof of the fallacy of the opinion of those who contend that it is impossible, for any length of time, to subvert the natural equality in the value of bullion in different countries, it is a striking example of its truth. Without this influx, bullion in this country could not have maintained its proper comparative value. We imported it, because the reduction of the paper currency, and the increased exports of the East India Company, rendered its value higher here than on the Continent; and made it advantageous for the Continental merchants to send it to us, in the same manner as they would have sent corn, or anything else for which we had an unusual demand. For, however favourable the real exchange between Hamburg and London might have been to the latter, we should not have imported an ounce of bullion, had it not been, at the time, the article with which Hamburg could most advantageously discharge her debt to London.
4. In the absence of other arguments, it would be sufficient to state, that it is physically impossible that the excess of exports over imports, as indicated by the custom-house returns, should be paid in bullion. Every country, with the exception of the United States, has its apparently favourable balance; and, of course, if they really existed, they would have to be paid by an influx of bullion from the mines correspondent to their aggregate amount. It is certain, however, that, previously to the late discoveries in California and Australia, the entire produce of the mines, though it had been increased in a ten-fold proportion, would have been insufficient for this purpose! This fact is decisive of the degree of credit which ought to be attached to the commonly received opinions on this subject.
5. In the last place, the profit on transactions with foreigners does not consist in the quantity of bullion imported from abroad, but in “the excess of the value of the imports over the value of the exports.” If, in return for exported commodities worth ten or twenty millions, we import such as are worth fifteen or thirty, we shall gain 50 per cent. by the transaction, though the exports should consist entirely of bullion, and the imports of corn, sugar, coffee, etc. It is a ridiculous prejudice that would make bullion be imported rather than any other article. But whatever the partisans of the exclusive system may say about its being a preferable product, a marchandise par excellence, we may be assured that it will seldom appear in the list of exports or imports, while there is any other thing with which to carry on trade that will yield a larger profit.
Thus it appears that the excess of exports over imports, instead of being any proof of an advantageous commerce, is distinctly and completely the reverse; that the value of the imports into commercial countries may, and almost always does, exceed the value of their exports, without rendering them indebted to foreigners; and that when a balance of debt has been contracted, that is, when the sum payable to foreigners for imports is greater than the sum receivable from them for exports, bullion will not be sent from the debtor to the creditor country, unless it be at the time the most profitable article of export.
We have in the previous section shown that fluctuations in the nominal exchange have no influence over foreign trade. When the currency is depreciated, the premium which an exporter derives from the sale of bills on his correspondent abroad, is barely equivalent to the increase in the price of the exports, occasioned by the depreciation. But when the premium on foreign bills is not caused by a fall in the value of money, but by a deficient supply of bills, there is no rise of prices, and then the unfavourable exchange undoubtedly operates as a stimulus to exportation. As soon as the real exchange diverges from par, the mere inspection of price currents is no longer enough to guide the operations of the merchant. If it be unfavourable, the premium which the exporters receive on the sale of bills must be included in the estimate of the profit they are likely to derive from the transaction. The greater that premium, the less will be the difference of prices necessary to make them export. An unfavourable real exchange has, in truth, exactly the same effect on exportation as a bounty equal to the premium on foreign bills.
But for the same reason that an unfavourable real exchange increases exportation, it diminishes importation. When it is unfavourable, the prices of foreign products brought to our markets must be so much under their prices here, as not merely to afford, exclusive of expenses, the ordinary profit on their sale, but also to pay the premium which the importer must give for a foreign bill, if he remit one to his correspondent, or for the discount, added to the invoice price, if the latter draw upon him. A less quantity of foreign goods will therefore suit our markets when the exchange is really unfavourable; and fewer payments having to be made abroad, the competition for foreign bills is diminished, and the exchange rendered proportionally favourable. A favourable real exchange, consequently, operates as a duty on exportation and a bounty on importation.
Hence it is obvious that fluctuations in the real exchange have a necessary tendency to correct themselves. They can never, for any considerable period, exceed the expense of transmitting bullion from the debtor to the creditor country. And the exchange cannot continue permanently favourable or unfavourable even to this extent. When favourable, it corrects itself by restricting exportation and facilitating importation; and when unfavourable, it produces the same effect by stimulating exportation, and obstructing importation. The true par forms the centre of these oscillations. And though the thousand circumstances which daily and hourly affect the state of debt and credit, prevent the ordinary course of exchange from being almost ever precisely at par, its fluctuations, whether on the one side or the other, are confined within certain limits, and have a constant tendency to disappear.
The natural tendency which the exchange has to correct itself is powerfully assisted by the operations of the bill merchants.
England, for example, may owe an excess of debt to Amsterdam, yet, as the aggregate amount of the debts due by a commercial country, is generally balanced by the amount of those which it has to receive, the deficiency of bills on Amsterdam in London will most probably be countervailed by their redundancy in some other quarter. And, it is the business of the merchants who deal in bills, as of those who deal in bullion or any thing else, to buy them where they are cheap, that they may sell them where they are dear. They, therefore, buy up the bills drawn by other countries on Amsterdam, and dispose of them in London; and, by so doing, prevent any great fall in the price of bills on the former in the countries in which their supply exceeds the demand, and any great rise in Great Britain and the countries in which their supply happens to be deficient. In our trade with Italy, the bills drawn on England generally amount to a greater sum than those drawn on Italy. The bill merchants, however, by buying up the excess of Italian bills on London, and selling them in France, Holland, and other countries indebted to England, prevent the real exchange from being much depressed.
An unusual deficiency in the supply of corn, or of any article of prime necessity, by causing a sudden augmentation of imports, materially affects foreign debts and credits, and depresses the exchange. In time of war, the balance of payments is liable to be still further disturbed; the amount of the bills drawn on a country carrying on foreign hostilities, being increased by the whole expense of its armaments abroad, and of subsidies to foreign powers. But neither the conjoined nor separate influence of both or either of these causes has any permanent influence over the exchange. A sudden increase in the accustomed supply of bills must, in the first instance, by glutting the market, occasion their selling at a discount; but this effect will only be temporary. The unusual facilities which are then afforded for exportation, and the difficulties which are thrown in the way of importation, never fail speedily to bring the real exchange to par.
During a period of pence we may, in the too great ardour of speculative enterprise, export an excess of produce, overload the foreign market, and occasion such a decline in the prices of our goods abroad, as to make the imports less valuable than the exports with which they have been purchased. But such a state of things can only be of limited duration. The distress of which it is productive, assisted by the fall of the exchange, occasions a diminution of exports. The supply of our commodities in the foreign markets is rendered more nearly commensurate with the demand; till in no long time the value of the imports again exceeds, as it always ought to do, the value of the exports. But when a country has a large foreign expenditure to sustain, its exports are proportionally augmented. Whatever may have been the foreign expenditure of Great Britain during the late war, it is evident it could not be defrayed otherwise than by our annually exporting an equal amount of the produce of our land, capital, and labour, for which payment was not received, as in ordinary cases, by a corresponding importation of foreign commodities, but from the treasury at home. This is strictly true, even though the expenditure should have happened to be, in the first instance, discharged by remittances of bullion; for the increased supply of bullion which was thus required could be obtained only by an equally increased exportation of other products to the countries possessed of mines, or from which it was imported. Foreign expenditure, by increasing exports in proportion to its own amount, has no permanent influence over the exchange.
Thus it appears that an excess of exports, instead of being any criterion of increasing wealth at home, is only a certain indication of commercial losses, or of expenditure abroad. “When,” says Mr Wheatley, “the exports exceed the imports, as they must do when there is a large foreign expenditure, the equivalents for the excess are received abroad in as full and ample a manner as if the produce which they purchased were actually imported and entered in the custom-house books, and afterwards sent to the seat of war for consumption. But from the circumstance of its not being inserted in the custom-house entries as value received against the produce exported for its payment, the latter is deemed to constitute a favourable balance, when it is in reality exported to liquidate a balance against us.”1
But how conclusive soever this reasoning may appear, it has been said to be at variance with the fact; and the rise of the exchange at the end of the war, during the suspension of cash-payments, has been appealed to as showing that its previous low rate had not been occasioned by any depreciation of the paper currency, but by the excessive amount of the bills drawn upon this country to defray war expenditure. The statements made in the preceding treatise (p. 73), render it unnecessary to enter into any detailed examination of this opinion. The question is not whether the exchange recovered from its depression during the suspension of cash-payments, for the influence of that measure depended entirely on the use made of it, but whether its recovery took place without the amount of bank paper of all sorts, or of the currency, being diminished? And the statements referred to are decisive upon this point. They show that the currency was very greatly diminished in 1814, 1815, and 1816; and that this diminution occasioned the rise in its value, and in the nominal exchange.
Mr Francis Horner, the chairman of the Committee on the High Price of Bullion, and celebrated for the extent and accuracy of his information on such subjects, made the following statement in regard to this very question in his place in the House of Commons:—
“From inquiries he had made, and from the accounts on the table, he was convinced that a greater and more sudden reduction of the circulating medium had never taken place in any country than had taken place since the peace in this country, with the exception of those reductions that had taken place in France after the Mississippi scheme, and after the destruction of the assignats. The reduction of the currency had originated in the previous fall of the prices of agricultural produce. That fall had produced a destruction of country-bank paper, to an extent which would not have been thought possible, without more ruin than had actually ensued. The Bank of England had also restricted its issues. As appeared by the accounts recently presented, the average amount of its currency was not, during the last year, more than between £25,000,000 and £26,000,000; while two years ago it had been nearer £29,000,000, and at one time even amounted to £31,000,000. But, without looking to the diminution of Bank of England paper, the reduction of the country paper was enough to account for the rise which had taken place in the exchange.”
Hence it appears that the rise of the exchange in 1815 and 1816, had nothing, or but little,1 to do with the cessation of hostilities, and was entirely, or mainly, a consequence of the increased value of the currency, caused by the reduction of its quantity. Instead of being at variance with the principles we have been endeavouring to elucidate, this fact affords a strong confirmation of their correctness. And having been sanctioned by the fullest experience, they may be considered as beyond the reach of cavil and dispute.
An objection of a different sort has been made, to another part of the theory maintained in this section, which it may be proper to notice.
When the exchange becomes unfavourable, the premium, procured by the sale of the bill drawn on a foreign merchant to whom bullion has been consigned, is no greater than would be obtained by consigning to him an equivalent amount of coffee, tea, sugar, indigo, etc. An unfavourable real exchange permits a merchant to export commodities which could not be exported were it at par, or favourable. But the advantage still remains of exporting those commodities in preference, whose price in the country from which they are sent, compared with their price in that to which they are sent, is lowest. Suppose, for example, that the expense of transmitting bullion from this country to France is three per cent., that the real exchange is four per cent. against us, that the price of bullion is the same in both countries, and that coffee, exclusive of the expenses of carriage, is really worth four per cent. more in France than in England. In such a case, it is obvious that the exporters of bullion would realise a profit of only one per cent., while the exporters of coffee would realise, inclusive of the premium on the sale of the foreign bill, a profit of seven per cent. And hence the opinion maintained by Colonel Torrens,1 that when the exchange becomes unfavourable, those commodities which contain the greatest value in the smallest bulk, or on which the expense of carriage is least, are exported in preference, appears to have no good foundation. The prices of the commodities which nations trading together are in the habit of exporting and importing, are regulated not merely by the cost of their production, but also by the expense of their carriage from where they are produced to where they are consumed. If Great Britain were in the habit of supplying France with cottons and bullion, the average price of cottons in France, because of the expense required to convey them there, would probably be from 5 to 6 per cent. higher than in Britain; while, because of the comparative facility with which bullion may be transported from the one to the other, its value in Paris would not, perhaps, exceed its value here more than 1 per cent. Now, suppose that, when the prices of cottons and bullion in England and France are adjusted according to their natural proportions, the real exchange becomes unfavourable to us, it is clear that its fall gives no greater advantage to the exporters of bullion than to those of cottons. The rise in the price of foreign bills does not increase the expense of exporting the one or the other. It leaves the cost of their production and transportation exactly where it found it. During the depression of the exchange, the exporters of both articles get the premium on the bills drawn on their correspondents. But there is no inducement to export bullion in preference to cottons, unless the price of bullion increase more rapidly in France, or decline more rapidly in Great Britain, than that of cottons.
Whatever, therefore, may be the depression of the exchange, the merchant selects those commodities for exportation which, exclusive of the premium, yield the greatest profit on their sale. If bullion be one of these, it will of course be exported; if not, not. But of all commodities, bullion is that of which the value approaches nearest to an equality in different countries, so that it is the least likely to be exported during an unfavourable exchange. The demand for it is comparatively steady, and no great surplus quantity could be imported into one country without reducing, or exported from another without raising, its value, so as to unfit it either for exportation or importation. In most cases a small part only of an unfavourable balance is paid in bullion. The operations of the bullion merchants are chiefly confined to the distribution of the fresh supplies obtained from the mines, in proportion to the wants of different countries.
In corroboration of this argument, we may mention that it appears, according to the official statement, that the expenses incurred by this country on account of the armies acting in Portugal and Spain during the following years, were as under:—
Of which, according to the same official statement, only the following sums were remitted in coin or bullion:—
Of the sum of five millions voted to our allies in 1813 and 1814, not more than £300,000 was sent in bullion, the rest being made up by the exportation of manufactured goods and military stores.1 The high market price of gold and silver in 1809, 1810, etc., could not, therefore, be owing to the purchases made by Government, for they were not greater than the sums exported by the East India Company in 1798 and 1799, and in 1803, 1804, and 1805, when there was scarcely any perceptible rise in the price of bullion. The immense additions made to the paper currency in 1809, 1810, etc., sunk its value compared with bullion, and were the true cause of the unfavourable nominal exchange of that period.
[1 ] Such was always the case till the late extraordinary export of gold from California.
[2 ] Pitkin on the Commerce of the United States, 2d ed. p. 280.
[1 ] Prohibition Act, 1st William and Mary.
[1 ] See “Reply to Mr Bosanquet’s Observations on the Report of the Bullion Committee,” p. 17.
[1 ] Wheatley “On the Theory of Money,” p. 219.
[1 ] The real exchange might, probably, be affected to the extent of one or two per cent.
[1 ] Comparative Estimate, etc.
[1 ] Edinburgh Review, vol. xxvi. p. 154.