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WAR EXPENDITURE 1824 - John Stuart Mill, The Collected Works of John Stuart Mill, Volume IV - Essays on Economics and Society Part I 
The Collected Works of John Stuart Mill, Volume IV - Essays on Economics and Society Part I, ed. John M. Robson, Introduction by Lord Robbins (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1967).
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Westminster Review, II (July, 1824), 27-48. Unsigned; not republished. Original heading: “Art. II. Observations on the Effects produced by the Expenditure of Government during the Restriction of Cash Payments. By William Blake, Esq. F.R.S. pp. 121. London, Murray, 1823.” Running head: “War Expenditure.” Identified in JSM’s bibliography as “An article in the third number of the Westminster Review, on Mr. Blake’s pamphlet on depreciation and war expenditure” (MacMinn, 5). The article is not specifically mentioned in his Autobiography, but during this period JSM was developing his ideas on economics during early morning discussions at George Grote’s house (see Autobiography, Columbia ed., 84-5). The article is identified as JSM’s in the Mills’ copy of the Westminster (Somerville College), but no corrections or variants are indicated therein.
although the clamour of the agriculturists has been silenced, for a time, by the return of comparatively high prices; and although the questions to which it gave rise have lost that peculiar interest, which temporary circumstances had conferred upon them; we deem no apology necessary for laying before our readers a review of a pamphlet, in which are propounded, and from no mean authority, not only the most incorrect views on the causes of agricultural distress, but various errors of a more general nature, and affecting the vital parts of the science of political economy.
Mr. Blake begins his pamphlet by the following words:
There never, perhaps, was a period which presented to the political economist so many interesting objects of enquiry as that which has occurred during the continuance, and since the termination of the late war. Peace, instead of its accustomed attendant blessings, seems to have brought calamity and distress upon almost every class of society; and the circumstances in which we are placed appear to be so peculiar and anomalous, as scarcely to admit of a satisfactory solution. We have seen landed proprietors without rents; farmers and manufacturers without a market; the monied capitalist ready to lend, and the merchant not wanting to borrow; a redundant capital, yet a redundant population; and the industrious poor compelled to apply, like mendicants, at the parish workhouse. (P. 1.)
Before broaching a theory to explain an alleged fact, it would have been better if Mr. Blake had first ascertained whether the fact itself was real. To us he appears to have pursued a contrary course. He first started a theory; and because it suited his theory that there should be universal distress, he persuaded himself that universal distress existed. We confess, however, that it has hitherto escaped our observation. We neither saw nor heard it, except in the cant of the agriculturists. Distress among the landlords, there undoubtedly was: as much distress as is implied in the necessity of contracting the expenses to which they had become habituated in the days of that good fortune, which was altogether unlooked-for and unearned, and of which, had they studied general principles, instead of scoffing at them, they would have foreseen the speedy termination. All classes, however, not directly or indirectly connected with the land, were so far from partaking in the agricultural distress, that they were actually in the enjoyment of unexampled prosperity. A few years before, the manufacturers complained of distress: but then, rents were high, and landlords insolent. Similar vicissitudes of distress and prosperity—to-day, agricultural prosperity and manufacturing distress—to-morrow, agricultural distress and manufacturing prosperity, may be expected to recur again and again without end, unless our corn laws should be repealed, or the seasons should cease to vary. But, although we are aware that, in the estimation of a great majority of members of parliament, the “landed interest” is the nation, and agricultural distress is national ruin, it is not so in ours; and we are very sceptical as to that universal distress, of which, at one time, we heard so much. Even Mr. Blake cannot assert it without contradicting himself. “A redundant capital, yet a redundant population:” in other words, too much to eat, and too many mouths to eat it.
The great fluctuations, however, which have taken place during the last thirty years, in the prices of agricultural produce, are highly interesting phenomena, and every plausible attempt to explain them is worthy of some attention. The ability, moreover, which Mr. Blake has displayed, even in the support of what we deem erroneous doctrines, and his general acquaintance, in which he is excelled by few, with the science of political economy, give an importance to his errors, even greater than they derive from the nature of the subject: since, if it can be shewn that even he could urge in their defence no arguments which may not be satisfactorily refuted, the true doctrines on this subject may be considered as placed beyond the reach of dispute.
There are three causes, to some one, or more, of which, the fluctuations in prices have been attributed:
1st. The alterations in the currency.
2dly. War, and the transition from war to peace.
3dly. The varieties of the seasons.
Mr. Tooke, in his excellent work on High and Low Prices, enters into a detailed examination of these three suppositions; and arrives at the conclusion, that the variations in prices were owing, in some degree, to the alterations in the currency, but mainly to the seasons, and in no degree to war, except in as far as it tended to obstruct the supply of imported commodities. In this opinion we fully coincide. To take even a cursory view of the evidence upon which it is founded, forms no part of our present purpose, and we must be content with referring the reader to Mr. Tooke’s work.*
Mr. Blake has adopted the theory of war demand: and upon this hypothesis, he endeavours to account, not only for that portion of the fluctuations in prices, which Mr. Tooke ascribes to the seasons, but even for that portion which Mr. Tooke (in conjunction, we believe, with all other political economists, except Mr. Blake) ascribes to the alterations in the currency. Mr. Blake, in fact, denies that any depreciation whatever took place during the Bank restriction: and to prove this, is the ostensible object of his pamphlet.
There can be no doubt, [says he,] that, subsequently to the restriction on cash payments in 1797,[*] every symptom that indicates an over-issue of paper circulation, and an alteration in the value of the currency, has manifested itself. We have witnessed a depression of the exchanges, to a degree, and for a continuance, that has been unexampled. We have had the market price of gold exceeding the mint price, far beyond the limits that could have occurred if the Bank had been paying in specie. We have seen the legislature compelled to pass an act to make Bank notes a legal tender, in order to prevent an avowed difference between payments in gold, and payments in paper. And all this accompanied by a general rise of price in most of the articles of consumable produce.
Now, I have no hesitation in admitting, that all the symptoms just enumerated, are indications of an excess of currency, and of depreciation: and, further, that an over-issue of currency could not exist for any length of time, without producing these symptoms.
I have, however, perfectly convinced my own mind, that all the results above specified, may have arisen from causes not necessarily connected with an alteration in the value of the currency; and moreover, that such other causes are not hypothetical merely, but have been in actual operation. (Pp. 3-4.)
These other causes, it seems, are to be sought for in the war expenditure of government.
I have very little doubt that the whole of these appearances may be traced, and will be found to have originated, in the enormous expenditure occasioned by the late war, the extent of which has perhaps had no parallel either in degree or duration, and never before has been combined with a restriction on payments in specie by the Bank. By object is, to shew, that these effects not only may have arisen, but must have arisen, from such an enormous and continued expenditure, although the currency had remained in its most perfect state, and had been invariably kept to the due proportion which it ought to bear in relation to the commodities to be circulated by it. (Pp. 4-5.)
In order not to perplex the argument, [he continues,] it will be advisable to divide the subject into two distinct parts: in the first of which, I shall endeavour to prove that the adverse exchanges, and the excess of the market price above the mint price of bullion, were mainly caused by the large foreign expenditure of government:—and in the second, that the general rise in the price of all consumable produce was the necessary effect of circumstances connected with the war, and the increased internal expenditure of government. (Pp. 5-6.)
Mr. Blake has divided his work into two parts, corresponding with these two divisions of his subject. As the second part is of far greater importance than the first, because it includes the peculiar features of Mr. Blake’s theory, and because some of the fallacies urged in it are very commonly received, we shall hasten to the discussion of it, after bestowing upon the first part as few words as possible, beyond what is absolutely necessary for a satisfactory exposition.
Mr. Blake ascribes the high premium on foreign bills to the increased demand for them on the part of government during the war, for the purpose of foreign payments. In corroboration of this theory, he states, that the news of Buonaparte’s landing from Elba, produced in one day an advance of ten per cent in the price of bills, arising solely from the anticipation of an increased government demand.[*]
It might be asked, Why, after the premium on foreign bills had risen so much as to exceed the expense of transmitting bullion, when debtors would of course find it more advantageous to discharge their debts by the transmission of bullion than of bills, bullion was not sent abroad, and the equilibrium by that means restored? In answer to this objection, Mr. Blake admits, that if the Bank Restriction Act had not then been in operation, the process which we have described would actually have taken place. As, however, no gold could be procured at the Bank, it was necessary to apply to the bullion-broker; who would consider that, by exporting bullion, and drawing a bill against it, which he could sell at a premium, he would gain the difference between the premium and the cost of carriage. If, therefore, instead of exporting his bullion, he consented to sell it to an exchange broker for exportation, it must be at a price which would afford him at least equal profit. And thus, according to Mr. Blake, bullion rose in price, and gave rise to the supposition that our paper currency was depreciated; whereas in fact, it was not paper which fell, but gold which rose.*
This reasoning, we fear, will not bear examination. There can be no doubt that an absorption of bullion, either from a sudden government demand, or from any other cause, may raise the price of bullion, and depress the exchanges for a few days, or even for a few weeks; but it is well known by what process these effects are corrected. A sudden enhancement of the value of the precious metals, which is tantamount to a sudden fall in the bullion values of all commodities, infallibly remedies itself, by causing an increase of exports, and a proportional diminution of imports. The steps of this process are so very generally understood, that we shall not weary the reader by tracing them. Mr. Blake himself does not call in question the general principle. But he endeavours to prove this case to have been an exception. His argument principally rests upon the obstacles thrown in the way of exportation by the anti-commercial decrees of the French government. Because these obstacles greatly enhanced the cost of conveying goods from this country to the continent, he assumes that they counteracted the effect which the rise in the value of bullion would otherwise have had in promoting exportation.
Some estimate, [says he,] of the extent of these difficulties, and of the expenses of sending goods to the continent, may be formed from the fact that during the Milan decrees, the insurance against the risk of seizure in the ports of the Baltic could not be effected for a less premium than from 20 to 30 per cent. (Note to p. 32.)*
The expense of exportation may have attained any amount, and the argument might not be affected by it. The question is, not what was the expense, but whether the profit exceeded the expense.
It is necessary here to call in some chronological considerations. Down to the year 1809, the difference between paper and gold was a mere trifle. So early as the close of the year 1807, the obstacles to direct commercial intercourse between this country and the continent, were as great as at any subsequent period. From these facts, two inferences may be drawn. First, that, at a period when the alleged cause of a high price of gold was in full operation, namely, a great foreign expenditure, combined with great difficulties of exportation, the alleged effect nevertheless did not take place, or, at least, only to a trifling extent; while two years afterwards, without any perceptible increase of the cause, the effect sustained a great and sudden augmentation; the price of gold having been, in April and May 1809, as high as £4. 10s. per oz. This renders Mr. Blake’s theory, to say the least, improbable: but there is another consideration which, in our opinion, is still more decisive.
In the years 1807 and 1808, notwithstanding the enhanced expenses of transit, exportation proceeded not only to its usual extent, but to an extent rather exceeding the average of the preceding four years: as is apparent from the following table.
At the end of this period, it is to be observed, that the exchange was nearly at par, and gold nearly at the mint price. Then came, according to Mr. Blake, a sudden rise of the value of bullion, not only relatively to paper, but relatively to commodities: a rise, let us suppose, of 10 per cent, equivalent to a fall of 10 per cent in the bullion values of commodities. There can be no doubt, that if this 10 per cent were the whole of the profit upon exportation, and the charges exceeded 10 per cent, no exportation could take place. But, in the present case, the 10 per cent, instead of being the whole of the profit, was exactly 10 per cent superadded, to a profit already sufficient. Nothwithstanding the obstructions to commerce, goods could be exported and sold with the ordinary profit, while they remained at their former value in the home market. It follows, that when goods fell 10 per cent below their former value, the profit upon their exportation must have been increased by 10 per cent. They could already be exported with the ordinary profit; they could now be exported with the ordinary profit, and 10 per cent more. It will not be maintained, that an occurrence took place which must necessarily have added 10 per cent to the profit upon exportation, and that an increase of exportation was not the consequence. A rise of three, two, or even one per cent, in the value of bullion, would have sufficed to produce such an exportation of goods, as would have speedily sunk bullion to its former level.
This reasoning appears to us conclusive. It proves that gold neither did, nor could, experience a rise of any duration as compared with commodities, by reason of the government expenditure. The conclusion, however, does not rest solely upon this basis, strong as it is.
Let it be supposed for a moment, that gold rises in this country 10 per cent; or which is the same thing, that all commodities fall 10 per cent, as compared with gold. This effect would correct itself, partly, as we have observed, by promoting exportation; but partly also by discouraging importation. If some commodities, which were before too dear, are now cheap enough, to be exported; there are some commodities also, which were imported before, but which, having fallen in the home, without falling in the foreign market, can be imported no longer. The exports therefore would be increased, the imports diminished, and gold would be imported, until prices, in both countries, were restored to their former level. Suppose, now, that from any cause whatever, an increase of exportation should become impossible: the same result which was formerly brought about by two causes, increased exportation and diminished importation, would now be brought about by the latter cause only. Merchants might be prevented from exporting at a profit, but they could not be forced to import at a loss. The imports must be diminished: and as the inducement to diminish them would only cease, when the influx of gold had sunk the metal to its former value, a much greater diminution would be necessary, than would have been required if the current of gold had been swelled by an increase of exportation.
If then we were to grant to Mr. Blake the full value of his assertion, that the obstructions to commerce prevented any increase of exports, the refutation would not be, on that account, the less complete. He will scarcely contend that anti-commercial decrees prevent commerce from being diminished, however much they may prevent it from being increased. He may urge, indeed, that the imports were not in fact diminished, or not to the extent which would have been necessary to restore the value of gold. This we admit: and we regard it as a decisive reductio ad absurdum of his own argument. It must, we think, be allowed, that if bullion rose in value, and the exports were not increased, the imports must have been diminished. If then it be true that the imports were not diminished, one of two things must necessarily follow. Either bullion did not rise, or, bullion having risen, the exports were increased. Both suppositions are equally fatal to the hypothesis of Mr. Blake.
If Mr. Blake should still hold out against arguments to all appearance so convincing, there is one fact, which we think, even he himself will acknowledge to be decisive.
In the years 1813 and 1814, all obstacles to exportation were removed; and in consequence of speculations on supplying the continental market with goods which had long been partially excluded from it, exportation was going on to an extent almost unexampled. If, therefore, Mr. Blake’s theory be correct; if the high price of gold was owing to the obstructions to exportation; we should expect that, in 1814, when those obstructions were removed, gold would fall to its ordinary price. Yet so far was this from being the case, that gold was in that year at its highest elevation, being nearly 25 per cent above the mint price. On what principles can Mr. Blake explain this? We leave it for his consideration.
There is one fact, to which Mr. Blake attaches the greatest importance: we mean, the sudden fall of the exchanges, on the news of Napoleon’s landing from Elba. This, however, only proves what no one ever denied; that a great and sudden disturbance in the ordinary state of the interchange between two countries, does not rectify itself all at once. The fall of the exchanges was evidently owing to a speculation upon the profit to be derived by supplying government with bills at a high premium, for immediate transmission to the continent. It was a speculation such as no one who could trace the connexion of cause and effect would have made, since it was easy to foresee that the foreign payments would eventually be performed, by the transmission, not of bullion, but of goods. Had the war continued somewhat longer than it did, this would soon have been experimentally proved. But in consequence of the speedy termination of the war, the foreign expenditure of government did not take place to the extent which had been anticipated, and the exchanges and the price of gold speedily returned to their former level.
The attempt, therefore, to prove that the high price of gold and the low exchanges were the effect of war expenditure, in whatever light we regard it, appears equally abortive.
Not content with maintaining his own position, Mr. Blake steps out of his way to combat one of the most important principles in the theory of foreign commerce, as laid down by Mr. Ricardo; a principle which, by the way, we are almost led to doubt whether he fully comprehends.
Mr. Ricardo, whose opinions upon subjects connected with political economy will always be received with the deference due to one whose writings have so much contributed to the advancement of the science, entertains such very peculiar notions on the subject of exchanges, that I do not see how he can attain a correct view of the bearings of this question: for he seems to maintain, in all his publications, that the variations of the exchange arise solely from the variations in the comparative value of the currencies of different countries, and does not admit that the exchange is dependent upon the balance of debts and credits. (P. 26.)
Now we will take upon ourselves to assert that Mr. Ricardo never maintained so preposterous a doctrine, as that the exchange is not dependant upon the balance of debts and credits. What he maintained was, that the balance of debts and credits among the countries of the world, is dependant upon the comparative values of their currencies, and in the ordinary state of the intercourse between one nation and another, when their mutual transactions are of a purely commercial nature, and when neither goods nor gold are exported and imported for any other purpose than that of deriving profit from them; the proposition of Mr. Ricardo, is, in our opinion, strictly true. And this, we think, a very slight consideration will suffice to show.
There is a certain state of the precious metals throughout the world, to which they have a constant tendency to approximate: a state in which their value, although not equal in all countries, differs only in proportion to the unavoidable differences in the cost of conveying them from the mines, and in which, therefore, they cannot be exported from one country to another with advantage. When the precious metals are distributed in this manner among commercial countries, their imports and exports exactly balance one another, and the exchange is at par. Let us now suppose that the exchange between England and some other country, say France, has become unfavourable to England: and let us consider, what may be inferred. In the first place, it is evident, that a balance of the precious metals is due from England to France. England, therefore, must have imported more than she has exported: in other words, it does not suit her to pay for the whole of her imports by means of goods. Now this is in itself a proof that the habitual distribution of the precious metals has been disturbed. Had it been otherwise, it would still have been, as before, more profitable for England to pay for her imports in goods than in gold. She now exports gold; formerly she exported goods only: gold, which was before a disadvantageous remittance, has now become an advantageous one. One of two things, therefore, must have happened: gold must either have fallen in England, or risen in France. In either case, the variation in the exchange is caused by a variation in the comparative values of the two currencies.
It does not enter into our present purpose, to refute all the objections which have been brought against this theory; but one objection, which has been urged by Mr. Blake, as it is extremely plausible, is worthy of a concise refutation.
It is easy to conceive an intercourse between trading nations of the following description. England might send hardware to Spain, Spain might send wool to France, and France send wine to England; in which case the respective debts and credits would be liquidated through a circuitous remittance, known technically by the term arbitration of exchange. The direct exchanges, however, between England and Spain would be in favour of England; between Spain and France, in favour of Spain; and between France and England, in favour of France. If these exchanges are to be considered as indicating a corresponding difference in the value of the respective currencies, it would follow that the currency of England was more valuable than that of Spain; that of Spain more valuable than the currency of France; and the currency of France more valuable than that of England: that is, A greater than B, B greater than C, and C greater than A, which is evidently impossible. (P. 29, note.)
This reasoning, as it appears to us, is wholly founded upon a misconception of the facts. The case is, that the exchange between England and Spain would not be in favour of England, nor that between France and England in favour of France. The exchange would, in all the three countries, be at par. And we are surprised that Mr. Blake, who is not only an acute reasoner but a practical man, should not be aware that this would necessarily be the case. The exchanges in any country, in England for instance, do not depend upon the balance of her commercial transactions with one country, but upon the balance of her total commercial transactions with all countries. England may export to Spain, without importing any thing in return: she may also import from France, without exporting the value of a farthing to that country. But it does not follow, either that her exchange with Spain would be favourable, or that her exchange with France would be unfavourable. She would pay her debt to France with bills upon Spain: and it is abundantly manifest, that if the balance due by Spain to England, was exactly equal to the balance due by England to France, the supply of bills would precisely equal the demand, and the exchanges would neither be favourable nor unfavourable to England, but would be exactly at par.
The first part of Mr. Blake’s argument being now disposed of; we shall next turn our attention to the second.
Having proved, as he thinks, that the high price of gold, and the depression of the exchanges, do not afford any conclusive evidence of a depreciation, Mr. Blake informs us, that the only remaining circumstance from which the existence of a depreciation was inferred, the high range of general prices, remains to be accounted for.
One of the causes which he considers to have been instrumental in producing this phenomenon, is taxation: but, if we may judge from the very elaborate attempt which follows, to trace up the greater part of the effect to a very different cause, Mr. Blake himself does not attach much weight to the influence of taxation, in occasioning the high prices. We shall therefore content ourselves with repeating a remark which has been made by Mr. Tooke,[*] and which is, on this point, a decisive answer to Mr. Blake. The whole of the taxes, which existed during the war, including land-tax, tithe, and poor-rate, with the exception of the income-tax, continued without any diminution, down to the summer of 1822. The lowest point in the depression of prices was thus attained, before a single tax, by which prices could possibly be affected, was taken off. If taxation had raised prices, taxation would have prevented them from falling. How can that be the cause of the high prices, which equally subsisted when prices were at the lowest?
The cause, however, to which Mr. Blake principally ascribes the high range of general prices, affirmed to have existed during the war, is a supposed extra demand, which he considers to have been produced by the war expenditure of government. The following is the substance of his argument:—[†]
Upwards of five hundred millions of capital were borrowed and spent by government from 1793 to 1815 inclusive. This sum was employed, partly in the purchase of commodities, partly in the hiring of soldiers, sailors, and various other classes of unproductive labourers. The large sums thus expended in the purchase of commodities, would not, he thinks, have been so expended, but for the war; and he considers it to have raised prices. The sum which was expended in the purchase of labour raised wages; and the increased funds thus placed at the command of the labourer, constituted in his hands an additional source of demand, which still further raised the prices of commodities. A strong stimulus was thus given to production, and a great extension to consumption. On the peace, this stimulus ceased: the extra demand generated by the war expenditure no longer had any existence: prices fell; producers were ruined; and the consequence was, a great diminution of production.
Two fallacies are involved in this reasoning: first, that of supposing that expenditure, as contradistinguished from saving, can by any possibility constitute an additional source of demand: and secondly, that of conceiving that capital which being borrowed by government becomes a source of demand in its hands, would not have been equally a source of demand in the hands of those from whom it is taken.
A mass of capital which is lent to government, and an equal mass which remains in the hands of the capitalist, are both consumed, and both, possibly, within the same space of time. The difference is, that the first, when consumed, leaves nothing behind it, the other, leaves in its place another capital not only equal, but greater: for, having been productively consumed, it has been re-produced with a profit. Both, while the consumption is going on, are equally sources of demand: but no sooner is the one consumed, than the demand which it afforded ceases to exist: the other continues to afford a demand, which instead of diminishing, continually increases, as often as the capital is re-produced with a profit.
From this it may be seen, how fallacious every argument is, which proceeds upon the supposition that a fund becomes a source of demand by being spent, while it would not have become so by being saved. A loan is a mere transfer of a portion of capital from the lender to the government: had it remained with the lender it would have been a constant and perennial source of demand: when taken and spent by the government, it is a transitory and fugitive one.
Mr. Blake maintains, that the capital borrowed by government is not removed from a productive employment, but would have lain dormant in the hands either of the lender or of some one else, in the shape of goods for which no market could be found. This he considers himself to have proved by a species of reductio ad absurdum.[*] The argument is ingenious, and has only one defect, that of not touching the question. He argues that if a sum amounting to upwards of twenty millions had been annually withdrawn from productive employments,—if the whole of the five hundred millions which were expended by government during the war, had been really subtracted from the capital of the country, production would have been diminished to that extent, wages would have been lowered, millions of people thrown out of employment, and misery and desolation would have overspread the kingdom.
Such a state of affairs, [says he (pp. 53-4)] is not only utterly inconceivable, but is at absolute variance with all our past experience. The funds which gave subsistence to twenty millions of people, cannot have disappeared without our being aware of the loss; and during a period when, instead of distress from want of employment, we have witnessed the greatest activity in every department of industry, every symptom of increasing capital, increasing wages, and increasing population, affording the strongest evidence of prosperity and wealth. There must either be some gross and radical error in the theory that leads to such absurd results, or, in making the application of the theory to the actual circumstances of the country, some material fact must have been overlooked that has either corrected or mitigated the desolation that would otherwise have ensued.
From this language it may be inferred, that Mr. Blake is ignorant of the arguments of those whom he professes to refute. They have never contended that the capital of the country was actually diminished to the extent of the funds spent by government. Their assertion has always been, that the accumulation going on in the hands of individuals was sufficient to counteract the effect of that wasteful expenditure, and to prevent capital from being diminished. The same accumulation would have sufficed, but for the government expenditure, to produce an enormous increase.
It being evident, that the capital expended by government is not a new fund suddenly called into existence, but a fund which already existed, in the hands of the producers; Mr. Blake is forced, as we have seen, to assert, that it existed in the form of goods, for which there was no demand. This compels him to maintain the fallacy of the universal glut: a fallacy of so much consequence, that a more than ordinary degree of attention is required for its examination.
To avoid the suspicion of misrepresenting any part of Mr. Blake’s argument, we shall quote it in his own words:—
The political economists of the present day have endeavoured to shew that profits never permanently fall in consequence of the competition of capitalists, lowering price by over-production. They admit that there may be a partial glut of particular commodities, from miscalculation of the wants of the market; but that over-production can never induce a general glut, and that profits will not fall from this cause, but will be regulated by the rate of wages, and the rate of wages by the quality of the last land taken into cultivation.
This doctrine, I think, has been pushed a little too far. It proceeds upon the assumption that every addition to capital necessarily creates its own demand; but in applying the theory to the actual circumstances of mankind, some inseparable conditions appear to me to have been overlooked. It takes for granted, that new tastes, new wants, and a new population, increase simultaneously with the new capital; a supposition which is not consonant with the fact. The advocates of this theory contend, that demand and supply are correlative terms, and must always exactly balance each other. That any commodity being in excess proves the efforts of the capitalists to have been misdirected, and that there must be a corresponding deficiency in other things.
Nothing can be more clear than that, in order to make a demand, you must have an equivalent to offer in exchange. Something must be produced to demand with. In other words, the terms demand and supply merely express that one sort of supply is exchanged against another sort of supply. This is perfectly true as far as both sorts of supply are wanted for consumption. If one set of capitalists produce a given quantity of cloth beyond their own immediate wants, and another set of capitalists produce an equivalent quantity of corn, also beyond their wants, the surplus quantity of corn may be exchanged against the surplus quantity of cloth, and thus afford a profitable market to each other. But this proposition implies that there is not more corn and cloth in the whole than the two classes of capitalists want to consume. If more than that is produced, the surplus is absolute waste on both sides; and all the labour thrown away. I shall be asked, no doubt, does not this arise from miscalculation on the part of the producers? Undoubtedly it does, but it is not an excess of one commodity, and a deficiency in another. It is an excess of both. Why then were the corn and the cloth produced? For this plain reason: neither the corn grower, nor the cloth maker, could know that there would be an excess, till the excess occurred. Each depended upon a market, and was mistaken. If every thing could be foreseen, mankind would not miscalculate, and there would be no overstocking of the market. But they do miscalculate, and the market is overstocked. When savings are devoted to re-production, each manufacturer employs the additional capital in fabricating that class of commodities which he has been in the habit of making. But if there was already more than sufficient, the addition must still further increase the excess. How is it possible for this process to continue without a fall in prices, and a lower rate of profit to the capitalist? (pp. 58-60.)
The argument which proves that there never can be that general want of market which is described in the above passage, possesses a greater degree of cogency than is often found in the moral sciences. It is not a deduction of probabilities. It possesses all the certainty of a mathematical demonstration: for it is involved in the very meaning of the words, demand and supply.
The demand of a country is made up of the demand of every individual in the country. The supply of a country is the aggregate of the supply of every individual. If, therefore, it can be proved, that every person’s demand exactly equals his supply, it will be established that the demand of the whole country, and its supply, exactly balance one another.
When an individual comes to market, he brings with him a supply consisting of all the commodities which he has to dispose of. But he also brings with him a demand, of exactly the same amount. His only reason for wishing to sell is, that he may be enabled to buy. The means which he possesses of buying are measured by the quantity of commodities which he brings to sell.
The same reasoning may be applied to a nation. The supply of a nation consists of its commodities. But those commodities are also the measure of its purchasing power. A nation, therefore, has always a power of purchasing, equal in amount to the whole of the commodities which it has to sell.*
Mr. Blake admits this argument to be unanswerable, provided it be granted, that new tastes and new wants spring up with the new capital. We think it will appear, upon a slight consideration, that this is a misconception of the state of the question. He has assumed two things, first, that there is a limit beyond which human desires do not go, a quantum of enjoyment which mankind do not wish to exceed; and secondly, that if all their desires are satisfied, they will still continue to produce. We should be prepared to dispute the first point with Mr. Blake; but we are contented to rest our case upon the second.
It would be absurd to suppose, that men would forego the satisfaction of present desires in order to have the means of gratifying wants which they do not feel. New tastes and new wants may, or may not, spring up with new capital; but it is quite certain, that if a man continues to produce, he has either acquired new tastes and wants, or some of his old ones still remain unsatisfied. Thus, for instance, taking the case most favourable to Mr. Blake, that in which all mankind are supposed voluntarily to confine their consumption to the necessaries of life; let us, with Mr. Blake, exclude from the argument all commodities except corn and cloth. It is true, that the demand of both sets of producers for corn and cloth is limited; and that if more is produced of both commodities than they wish to consume, the surplus is absolute waste. But how can we suppose than the corn grower, after he has produced as much corn as he himself wishes to consume, and likewise as much as will enable him to purchase the requisite quantity of cloth, will continue to take the trouble of producing for no purpose?
The following is the plausible manner in which Mr. Blake disposes of this argument:—
Whenever savings are made from revenue, it is clear that the person entitled to enjoy the portion saved, is satisfied without consuming it. It proves that the industry of the country is capable of raising more produce than the wants of the community require. If the quantity saved is employed as capital in re-producing a value equivalent to itself, together with a profit, this new creation, when added to the general fund, can be drawn out by that person alone who made the savings; that is, by the very person who has already shown his disinclination to consume. (P. 56.)
This argument refutes itself. For if it be correct, it proves that there can be no addition to capital, without producing a glut. All accumulation is from saving. If it be true, that he who saves shows his disinclination to consume, it follows, that an increase of produce can never find a market, since no one else has the means of increasing his consumption, and he who accumulates, has not the will. Every increase of wealth would, on this supposition, be an increase of poverty. An argument which leads to such a result cannot be without a flaw.
The fallacy of Mr. Blake’s argument lies in the last phrase. He who saves from revenue, far from shewing any disinclination to consume that which he saves, demonstrates conclusively that he wishes to consume not only that but more. If he had not wished to consume it, he never would have produced it; but by abstaining from consuming it, for the purpose of adding it to his capital, he shews, that he desires to consume something more than it will purchase for him, and that in order to obtain this something more, he is willing to forego the consumption of that which he saves. The saving, therefore, instead of proving that the industry of the country is capable of raising more produce than the wants of the community require, proves the direct contrary. Men miscalculate, it is true; but it is concerning the desires of others, never concerning their own. Every man knows what he himself wishes for. If any man produces more, it must be because he desires more; not more cloth, or corn, perhaps, but more of something: and if all produce more, it is because all desire more. The requisites for demand are, the wish to consume, and the means of purchasing. By increasing their supply, they prove themselves to have the desire, and they obtain the means, of consuming.
We, therefore, conclude, that the funds, which were appropriated by government and spent during the war, were not lying dormant before that period for want of a market. The only remaining supposition, then, since they were not a new creation, is, that they must have been withdrawn from a productive employment; an employment in which they were expended in the purchase of goods, and of labour, just as completely as they afterwards were; and constituted fully as sufficient a source of demand.
Mr. Blake’s attempt, therefore, to prove that the government expenditure created an extra demand for commodities and labour, a demand which would not otherwise have existed, entirely falls to the ground; and with it, the whole of the theory which ascribes to that expenditure the high prices which prevailed during the war.
In addition to the general arguments which we have now examined, Mr. Blake has a number of facts, upon which we shall slightly touch; not for the sake of adding any thing to the evidence upon which our opinion is founded, but to shew how utterly fruitless are all attempts to prove, by particular facts, that which cannot be proved upon general principles.
Mr. Blake asserts that the rate of interest has usually been high in time of war and low during peace;[*] and from this he infers that profits have been subject to the same law. We admit the fact, as far as regards the rate of interest; but we are not equally prepared to allow the correctness of the inference. The rate of interest is governed in the long run, and on the whole, by the rate of profit; but from this rule there are occasional deviations. When government comes into the market, year after year, and takes off that floating capital which is usually disposed of in loans, the money market is kept constantly under-supplied; and so long as this state of things continues, interest may remain at a higher rate than the existing rate of profits would account for. Thus, during the American war, when trade and profits were considered to be at a very low ebb, the public funds were low, and the rate of interest high.
Mr. Blake also urges the eagerness for new speculation, as a proof that there may be a general want of market:—
That capital exists in a dormant state, and is capable of being called into increased activity by the application of the proper stimulus, there cannot be the smallest doubt. Every day’s experience affords practical evidence of it. No sooner is a market, or supposed market, opened at Buenos Ayres, or elsewhere, than cargoes to an immense amount are shipped to take advantage of it. The trade with India is thrown open, and instantly the different presidencies are glutted with English goods without any diminution in the supply of the home market. (Pp. 66-7.)
Is it not clear that a period when the interest of money is low, as, from whatever cause, it is at present, is precisely the period, when the tendency to all speculations appearing to hold out a chance of high profits, may be expected to be the strongest?
Mr. Blake, in various parts of his work, appeals to practical men.
The difficulty of finding employment for new capital is acknowledged by all practical men. They continually feel and complain that every channel is full. [P. 60.] Examine the evidence of Alderman Rothwell, Mr. Rous,[*] and various other witnesses who all agree, that, during the war, there was both greater production and greater consumption. [P. 67.]
A reasoner must be hard pressed, when he is driven to quote practical men in aid of his conclusions. There cannot be a worse authority, in any branch of political science, than that of merely practical men. They are always the most obstinate and presumptuous of all theorists. Their theories, which they call practice, and affirm to be the legitimate results of experience, are built upon a superficial view of the small number of facts which come within the narrow circle of their immediate observation; and are usually in direct contradiction to those principles which are deduced from a general and enlarged experience. Such men are the most unsafe of all guides, even in matters of fact. More bigotted to their own theories than the most visionary speculator, because they believe them to have the warrant of past experience; they have their eyes open to such facts alone as square with those theories. They are constantly confounding facts with inferences, and when they see a little, supply the remainder from their own imaginations.
In this instance, the appeal to practical men, is peculiarly unfortunate: for the only practical men whose authority is of any weight, those who join to their personal experience a knowledge of principle, certainly range themselves on any side rather than that of Mr. Blake.
In this class Mr. Tooke stands pre-eminent: and we observe, that the pamphlet before us has elicited from this gentleman (in the second edition, just published, of his work on High and Low Prices) a most complete refutation of the facts upon which Mr. Blake’s theory is founded.[†] He has proved, to our minds most conclusively, that of scarcely any commodity whatever, except those which are the peculiar object of war demand, naval and military stores, was there either greater production, or greater consumption, during the war, than there has been since the peace. Production increased, it is true; for even the almost boundless expenditure of the war, could not altogether counteract the tendency to accumulation: but it was increasing equally fast before the commencement of the war, and has increased much faster since its close.
Were the question to be decided by authority, Mr. Tooke might safely be set up against Alderman Rothwell, Mr. Rous, et hoc genus omne. But he has not suffered a single fact to rest upon his own authority. All his statements are given under the sanction of official documents.
The following table contains a summary of Mr. Tooke’s statements. It is extracted from the second edition of his work, p. 202: and shows the rate of the increase of production during the twenty years of war, as compared with the rate of increase before, and after that period:—
After what has been done by Mr. Tooke, we should not have thought it necessary to say any thing farther, had our object been limited to the refutation of Mr. Blake. No general reasoning could have added to the conviction which every one must feel, who has perused Mr. Tooke’s detail of facts, that Mr. Blake’s theory is totally erroneous. What cannot, however, be proved by any detail of facts, but which it is of the highest importance to prove, is, that a state of war cannot, under any circumstances, generate an extra demand. This proposition can be proved only by general reasoning. If we have done any thing to render the evidence for it more clear to the mind of any of our readers, our end is attained.
It is, indeed, a most important proposition. For, although Mr. Blake contrives, by we know not what process, to evade all the consequences to which his reasoning, if correct, must necessarily lead, and to arrive by a round-about course at the very same conclusions, as if he had started from directly contrary premises, we cannot expect that his disciples, if he has any, will be equally careful to avoid drawing mischievous inferences, where those inferences legitimately follow from the principles which they acknowledge.
Mr. Blake protests (p. 85) against the supposition that he considers the Bank restriction to have been practically beneficial. Yet the only ground upon which that measure has ever been censured, is, that it caused the currency to vary in its value: and Mr. Blake is of opinion, that instead of causing a variation, it prevented that which would necessarily have taken place, if the currency had continued on a level with its nominal standard. We ourselves, if we could believe the Bank restriction to have had this effect, should be among the warmest of its defenders and supporters. And we cannot but feel surprise that Mr. Blake should rank among its mischievous consequences, that of preventing creditors from receiving a greater value than they lent.*
There is another and a still more mischievous effect, to which the conclusions of Mr. Blake, should they ever obtain vogue, could not fail to be made subservient. We have heard before now the fallacy of the universal glut adduced in justification of enormous taxation, of extravagant government expenditure, and particularly of wars. How convenient to all who are interested in these abuses, is such a theory as that of Mr. Blake! Here, they may say, is a portion of capital, which, if it remains in the hands of the producers, must lie dormant in the shape of goods, yielding no advantage to the owners: let the government take it, to be expended in hiring soldiers and sailors, and in purchasing naval and military stores; and a new demand will suddenly be created for all sorts of produce; prices will rise, the producers will be enriched, the labourers will obtain an increase of wages, industry will be vivified, and production itself will be stimulated by that very expenditure, which the people, in their “ignorant impatience of taxation,” believe to be a calamity.
These conclusions do not follow the less logically from Mr. Blake’s theory, that he does not alarm us by stating them. If he really is not aware of the practical inference from his doctrine, we hope that now, when his attention has been directed to it, he will be induced to re-consider the grounds upon which that doctrine is founded. That such a man should, at this time of day, stand forward as the supporter of refuted, and now almost forgotten, errors, is greatly to be deplored: and we should feel pride, in contributing any thing towards recalling to sound principles, one who ought never to have been found on any other side.
[* ]We owe Mr. Tooke an apology for not having reviewed his work [Thoughts and Details on the High and Low Prices of the Last Thirty Years. 4 parts. London: Murray, 1823]. But we should have done it great injustice by such a meagre abstract, as it would have been possible to give in the space of an article. We flatter ourselves that we are rendering a more useful service to science, as well as expressing more highly the estimation in which we hold Mr. Tooke’s work, by applying, as we shall do in the present article, his principles and his reasonings, in refutation of the fallacies with which his conclusions have been assailed.
[[*] ]37 George III, cc. 45, 91 (1797).
[[*] ]Blake, p. 6.
[* ]It is proper to remark, although it is not altogether essential to the argument, that Mr. Blake has here confounded the cause with the effect. Gold does not rise, in consequence of a fall of the exchange; on the contrary, if the exchange falls, it is because gold has risen. This will be admitted, if we reflect that persons having remittances to make, always consider, before they consent to give a premium for a bill, how much it will cost them to make the remittance in bullion; the market price therefore, of bullion, entering into the calculation of every purchaser of a bill, must necessarily determine the rate of exchange.
[* ]It may be observed, by the way, that Mr. Blake appears in some degree sensible of the weakness of this part of his argument. For, although that argument turns wholly upon the obstructions to commerce, he scarcely mentions those obstructions otherwise than incidentally.
[[*] ]Thoughts and Details, Part 2, pp. 4-5.
[[†] ]Pp. 43 ff.
[[*] ]Blake, p. 52.
[* ]This argument, we believe, was first stated by Mr. Mill: in whose Elements of Political Economy [London: Baldwin, Cradock, and Joy, 1821], it is fully and ably developed (pp. 186-195).
[[*] ]Blake, pp. 64-5.
[[*] ]“Minutes of Evidence taken before the Select Committee on the Depressed State of Agriculture,” Parliamentary Papers, 1821, IX, pp. 87-9, 178-80.
[[†] ]London: Murray, 1824, pp. 162ff.
[* ]“It has interfered, too, with all contracts between debtor and creditor; for, as the creditor is subject to the fluctuations that occur in the value of gold, and must submit to receive, in liquidation of his claim, the same nominal amount, whatever be the diminution in the value of the metal itself, he is justly entitled to receive the same nominal amount of gold, when any accidental circumstances occur to raise its value.” (Pp. 85-6.)