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Subject Area: Economics
Topic: Free Trade

ESSAY No. XXVII. - Condy Raguet, The Principles of Free Trade [1835]

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The Principles of Free Trade illustrated in a series of short and familiar Essays originally published in the Banner of the Constitution, 2nd ed. (Philadelphia, 1840).

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ESSAY No. XXVII.

march 24, 1830.

Foreign capital. Employment of, shewn to be advantageous to the country, and one of the great sources of the prosperity of the United States. Fallacy shewn, of the assertion that an exportation of public stocks and bank stocks is injurious.

ONE of the great evils supposed to be inflicted on the country by the importation of foreign manufactures is, that it occasions the transmission abroad of immense quantities of public stock, bank stock and other similar securities. The constant repetition of this theme has made a very deep impression on the community, and many honest people do really believe that this operation is positively disadvantageous to the nation. We think we can demonstrate that it is not so, and with that view, submit the following remarks, which, although not new to most of our readers, may be so to some.

Ever since the colonies, which now form these United States, were planted by the mother country, it has been found advantageous for the inhabitants of this country to borrow capital from Europe; for, as capital invested here, would usually produce in agriculture, commerce, or manufactures, a greater revenue than the amount of the interest at which it could be borrowed, there was a clear gain to the country of the difference. Thus, if a man could borrow in London £100, at five per cent. interest, and apply it to some productive employment by which he could convert the £100 into £110, it is manifest that he would be a gainer of five pounds, and that although five pounds would have to be sent out of the country to pay to the foreign capitalist the interest on his loan, yet the country would still have been five pounds richer than if the loan had never been made.

Such foreign loans have always been made to a very great extent, and it is to this circumstance that is in a great degree to be ascribed the unexampled rapidity which has characterized the march of our population on the road to wealth. But let it not be understood that by loans of capital, we mean loans of money, from individual to individual. We allude to the loans of capital in the form of merchandise sold to our merchants upon credit, and which perhaps at no period since the revolution, have ever been less in amount than several millions of dollars. To those who are not accustomed to regard a sale of merchandise on credit, in the light of a loan of capital, the proposition may not perhaps at first sight appear to be clear, but a little reflection will shew that there is no difference in the two cases, except indeed that the man who borrows merchandize is better off than the one who borrows money, for the latter in reality only requires money that he may have the means of buying merchandise.

The advantages which a young and thriving country derives from the borrowing of capital from abroad, consists in this:—that she is thereby enabled to put into activity industry, which would otherwise remain idle and unproductive. For, it is evident that, without capital, either in the shape of agricultural produce, merchandize, raw materials, ships, or implements, &c., it is impossible to set people at work. Even the farmer who derives his food from the earth, cannot subsist, unless he possesses a capital in provisions sufficient to feed him until his crops come to maturity; and if the operations of these purchases on credit, should be traced through their remotest ramifications, it would be found that, fields in Missouri are now getting ploughed, which would have been this day lying waste, had not some merchant in England, sold upon a credit to some merchant in Philadelphia, articles, which he, solely by means of this credit, was enabled to sell to a merchant in St. Louis, who, owing to this facility, was enabled to sell to the farmer in question, as his only means of supporting himself, of buying implements and seed, and of hiring others to assist him, whilst his grain was growing. The same is true of the operations of commerce. What a vast proportion of our export trade consists of cargoes purchased on credit; and although these credits are not directly obtained by the exporting merchant from the foreign capitalist, yet they are indirectly obtained from him, for, without the aid of his loans to some person in the community, the domestic capitalist could not have given the credit on his produce. In many cases indeed, the credit obtained by the importer is clearly shewn to result from the credit given by the European capitalist—as, where foreign merchandize is exported to the West Indies or to South America, purchased at a credit, which the importer is only enabled to give, because he receives it.

From this it may be seen, that whenever capital can be borrowed abroad, at a less rate of interest than the profit which can be derived from its employment at home, it is advantageous to the country to borrow it, and that the more that is borrowed for purposes of productive industry, the better. Whenever such loans cease to be profitable, they will cease to be made, but so long as ten per cent. can be produced from agricultural, commercial, or manufacturing employments, and so long as domestic capital cannot be had at less than six per cent., whilst foreign capital can be had at four, so long will the country be a gainer by borrowing. Now, what are public stocks? Nothing but the promissory notes or bonds of the government, stipulating for the payment of certain sums of money at specified or at indefinite periods. They differ in nothing, except as to the supposed solidity of the security, from the notes or bonds of individuals, and the exportation of ten millions of them has no more unfavourable influence on the wealth or prosperity of the country, than the exportation of ten millions of notes and bonds issued and made payable at a future day by a hundred importing merchants. It is true, that the amount of the interest is annually withdrawn from the country, but how manifest is it that this interest is only a part of the profit which has been made by the employment of the capital, and to look upon that as an evil, would not be less absurd, than if a man who should borrow a hundred dollars at five per cent., and make ten out of it, should complain that he was getting ruined, because he was obliged to pay his creditor for the hire of the instrument by which he had put five dollars into his pocket.