Front Page Titles (by Subject) ESSAY No. XLVIII. - The Principles of Free Trade
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ESSAY No. XLVIII. - Condy Raguet, The Principles of Free Trade 
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. XLVIII.
july 28, 1830.
Doctrine of the balance of trade. Errors of the common opinion in relation to it, refuted. True doctrine of exchange.
THE doctrine of the balance of trade has ever been a source of confusion to many who have passed in the world for statesmen, and although one of the simplest matters to be understood that is to be found in the whole science of political economy, it has been at the bottom of almost all the bad legislation upon commerce which has taken place in Europe and this country. The great difficulty which the friends of free trade have at all times had to correct the common error on this point, has not arisen from any difficulty in explaining the subject, but from an obstinate refusal, on the part of those who have embraced the theory which supposes that gold and silver are of more importance to a country than an equal value of other commodities, to listen to their arguments. That this is the case, we shall undertake to demonstrate, and we think we can present the subject in so plain and clear a light, that any one may understand it who will take the trouble of reading these remarks.
The doctrine we are to combat, asserts that the balance of trade has been against this country for many years past; that we have imported more than we have exported; and that on this account the country has been drained of its specie; and that the inevitable tendency of a long perseverance in such a commerce as we have been thus carrying on, is to impoverish the country. The proof which is brought forward in support of these positions, is, first the custom-house returns of imports and exports, by which it appears that, during the last nine years, for example, the nation has imported, upon an average, about four millions of dollars per annum more than she has exported;* and secondly, the current rate of exchange upon London, which, within the same period, has ranged, nominally, from 5 to 13 per cent. above par.
Our present object is to show, that the facts here brought forward to prove an unfavourable balance of trade, do not sustain the proposition; and first, let us examine the evidence afforded by the custom-house returns.
The value of the articles exported, as given therein, is their value in this country at the time of shipment, and before the expenses of freight, insurance, commission, &c., have been incurred. The value of the articles imported, is their estimated value after they have reached this country, and it is therefore clear, that, so far from the excess of imports over exports being a proof of an unfavourable balance of trade, it is usually a proof of a favourable one. Let us illustrate this by a case. A merchant at Baltimore loads a vessel for Brazil with 1000 barrels of flour, which cost $5 a barrel, that is, $5000. This cargo, in order to give him a profit, must sell abroad for as much more than the first cost, as the freight and other expenses incurred in the shipment. Supposing these to amount to three dollars a barrel, he must obtain at least $8000 for his cargo, and then supposing the nett proceeds of the sales to be invested in sugar or coffee or hides, upon which also the expense of commissions, porterage, freight, and insurance must be incurred, equal, we will suppose, to one dollar more per barrel, he must obtain for those articles at least $9000, in order to replace his original capital, and to repay the freight of his vessel, insurance, and other charges. Here then we see an export, according to the custom-house estimate of $5000, and an import, according to the same estimate of $9000, and yet there is no balance of trade against the country. The inward cargo is procured by the sale of the outward cargo, and just in proportion as the voyage is profitable, must the value of the return cargo be greater than that of the outward cargo. It will thus be manifest, that, as far as the custom-house returns throw any light upon the subject, they prove, that an excess of imports over exports is evidence of a favourable balance of trade, and if there be any truth in figures, this point is conclusively demonstrated.
In reference to the other position, relied upon as evidence that the balance of trade is against the country, namely, that the exchange upon England has, for many years, been greatly above par, a little reflection will show that it is just as groundless as the other. When we say that a bill on London is 10 per cent. above par, we say so in conformity to an old custom, which was established at a time when a dollar was equivalent to 4s. 6d. of British currency, and when, consequently, a pound sterling was the equivalent of $4.44 of American currency. If, however, these proportions have undergone a change of late years—if the silver dollar has lost part of its former value as exchangeable for gold, which is the currency in which debts are contracted by our merchants who trade to Great Britain, it is very clear that the same starting point will not answer for the calculation that used to answer. The par of former days is not the par of the present day, and hence any calculations which are built upon the former must be erroncous. Now what are the facts of the case? Every one who reads a commercial newspaper, must have seen, during many years past, the price of Spanish dollars quoted in the London market, in British gold currency (the currency, let it be observed, in which all contracts above 42 shillings are payable) at about 4s. 10d. per ounce, which, estimating the weight of the dollar at 17dwt. 6grs. is 4s. 2d. each. The real par, then, as nearly as one can be assumed between two commodities which are liable to fluctuations in their relative value, is 4s. 2d., and it is from this valuation, as a basis, that all sound calculations must, for the time being, be made. But we will prove this.
A merchant sends an order to Manchester for an invoice of goods, to cost exactly £100 sterling in gold. When he imports these goods, he knows that he must sell them for silver, and the first thing he does, is to calculate whether twenty silver shillings are equivalent to twenty gold shillings; or, in other words, whether an Englishman means by a shilling, the same amount of money that an American means. He soon finds this out by referring to the estimation in which each of them holds the Spanish dollar. He finds that the Englishman considers the Spanish dollar as worth but 4s. 2d., because, as it is not a legal tender in Great Britain, any more than cotton or tobacco, it is only worth what it will sell for as merchandise. The American, on the contrary, has a notion, which it is difficult to beat out of his head, that a Spanish dollar is 4s. 6d. sterling. But the merchant discovers that, whatever the notion may be which the American entertains as to the value of the dollar, it can have no influence on the Englishman, to whom he owes the £100, and he, accordingly, in fixing his price upon the imported article, takes into consideration that every Spanish dollar he receives will only pay 4s. 2d. of his debt, and that, consequently, in contracting a debt in England, for £100 sterling, he has contracted a debt for precisely $480. This, to be sure, in the common parlance of merchants, is called allowing for the exchange, but it is in reality nothing more than the reduction of one money of account into another.
The market price at New York, of a bill on London, some short time since, was quoted at 7 per cent. above par. In order, therefore, to procure a bill for £100 sterling, a merchant would have to pay $475 55, that being the actual sum with which he could discharge his debt. So far, then, from finding exchange to be against him, it is actually in his favour; for by purchasing a bill at 7 per cent. nominal premium, he can pay his debt with a less number of dollars than if he were to ship the coin, besides saving the expense of its shipment.
We ought to beg pardon of many of our readers, for so frequent a repetition of the A B C’s of economical science. But let it be remembered, that the constant dropping of water will wear away stone. Iron requires a good many blows on the anvil, before a strong impression is made on it; and, strange as it may appear at this enlightened day, we every now and then come across a man to whom the simplest elements are altogether new, and who truly believes that an excess of imports over exports, or an exchange, nominally unfavourable, is evidence that the country is going fast to ruin.
[* ] The following are the amounts of imports and exports to and from all parts of the world, as furnished by the Reports of the Secretary of the Treasury. Prior to 1821 the value of imports was not given.