McCulloch on the Balance of Trade
Source: Cyclopedia of Political Science, Political Economy, and of the Political History of the United States by the best American and European Authors, ed. John J. Lalor (Chicago: M.B. Carey, 1899). 3 vols. Chapter: BALANCE OF TRADE
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Hidden within the massive Lalor's Cyclopedia are some essays by important economists such as John Ramsay McCulloch (1789-1864) who was the leader of the Ricardian school following the death of Ricardo. He was a pioneer in the collection of economic statistics and was the first professor of political economy at the University of London in 1828. [The image comes from “The Warren J. Samuels Portrait Collection at Duke University.”] We have reproduced some of his essays from Lalor's Cyclopedia here in The Forum.
- BALANCE OF TRADE—J. R. M'CULLOCH and HUGH G. REID
- BILL OF EXCHANGE—J. R. M'CULLOCH and HUGH G. REID
- BROKERS—J. R. M'C.
- CANALS—J. R. M'C.
- COASTING TRADE—J. R. M'C.
- CORN LAWS.—J. R. M'C. and H. G. R.
- DRAWBACK—J. R. M'C. and H. G. R.
- HANSEATIC LEAGUE—J. R. M'CULLOCH AND H. G. REID
- SMUGGLING—J. R. M'CULLOCH
BALANCE OF TRADE
BALANCE OF TRADE, in commerce, the term commonly used to express the difference between the value of the exports from, and imports into a country: the balance used to be said to be favorable when the value of the exports exceeded that of the imports, and unfavorable when the value of the imports exceeded that of the exports. And in many countries this was long believed to be the case, and to a late period they were annually congratulated by their finance ministers on the excess of exports over the imports.
—The attainment of a favorable balance was formerly regarded as an object of the greatest importance. The precious metals, in consequence of their being used as money, were long considered as the only real wealth that could be possessed either by individuals or nations. And as countries without mines could not obtain supplies of these metals except in exchange for exported products, it was concluded, that if the value of the commodities exported exceeded that of those imported, the balance would have to be paid by the importation of an equivalent amount of the precious metals; and conversely. A very large proportion of the restraints imposed on the freedom of commerce during the last three centuries grew out of this notion. The importance of having a favorable balance being universally admitted, every effort was made to attain it; and nothing seemed so effectual for this purpose as the devising of schemes to facilitate exportation, and to hinder the importation of almost all products, except gold and silver, that were not intended for future exportation. But the gradual though slow growth of sounder opinions with respect to the nature and functions of money, showed the futility of a system of policy having such objects in view. It is now conceded on all hands that gold and silver are nothing but commodities; and that it is in no respect necessary to interfere either to encourage their importation or to prevent their exportation. In Great Britain they may be freely exported and imported, whether in the shape of coin or in that of bullion. The truth is, however, that the theory of the balance of trade was not erroneous merely from the false notions which its advocates entertained with respect to money, but proceeded on radically mistaken views as to the nature of commerce. The mode in which the balance was usually estimated was, indeed, completely fallacious. But had it been correctly ascertained, it would have been found, in opposition to the common opinion, that the imports into commercial countries must, speaking generally, exceed the exports; and that a balance, whether on the one side or the other, is but rarely cancelled by a bullion payment.
—I. The proper business of the wholesale merchant consists in carrying the various products of the different countries of the world from the places where their value is least to those where it is greatest, or, which is the same thing, in distributing them according to the effective demand. It is clear, however, that there could be no motive to export any species of produce, unless that which it was intended to import in its stead were of greater value. When an English merchant commissions a quantity of Polish wheat, he calculates on its selling for so much more than its price in Poland, as will be sufficient to pay the expense of freight, insurance, etc, and to yield, besides, the common and ordinary rate of profit on the capital employed. If the wheat did not sell for this much, its importation would obviously be a loss to the importer. It is plain, then, that no merchant ever did or ever will export, but in the view of importing something more valuable in return. And so far from an excess of exports over imports being any criterion of an advantageous commerce, it is directly 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—that is, were the value of the exports always greater than the value of the imports—merchants would lose on every transaction with foreigners, and the trade with them would be speedily abandoned.
—In England the rates at which all articles of export and import are officially valued were fixed so far back as 1696. But the very great alteration that has since taken place, not only in the value of money, but also in the cost of by far the greater number of the commodities of that and other countries, long ago rendered the official valuation of no use whatever, either as a means of learning the values or the quantities of the exports or imports. In so far, however, as respects the former, this defect was unintentionally remedied in 1798, when the "convoy duty," being an ad valorem tax laid on the exports, furnished the means of ascertaining their amount. And the importance of the information so obtained was such, that, whether articles of export have or have not been charged with duties, exporters have since been made to declare, in every case, the real value of the articles which they export.
—It has been alleged, and apparently with some probability, that merchants have not unfrequently been in the habit of exaggerating the value of articles entitled to drawbacks on exportation. But the extension and improvement of the warehousing system, and the diminution of the number of drawbacks, have materially lessened whatever fraud or inaccuracy may have arisen from this source. So long, indeed, as the greater number of articles were charged with an ad valorem duty of 10s. per cent. on exportation, it may be presumed that their value was rather under than overrated. But since the repeal of that duty (5 and 6 Vict. c. 47, s. 40), their declared value is believed to come very near the truth: at least, sufficiently so for all practical purposes.
—But until very recently no authentic information was obtained in regard to the value of the imports In 1848, however, the board of customs having approved a plan suggested by Mr. Messenger, inspector general of imports and exports, for ascertaining the value of the former, it was submitted by them to the treasury. And its advantages having been fully appreciated by Mr. James Wilson, M. P., then secretary to their lordships, it was carried into effect in 1854. It is needless to enter into any minute details with respect to the mode of computing the values of the imports. It is sufficient to state that it is effected by ascertaining the current prices of imported articles from price-currents, mercantile circulars, etc., and from these deducing the aggregate value of each. It would be idle to suppose that results derived from a process of this sort should be altogether exact; but the errors it involves are of no great moment, and for statistical purposes it may be reckoned quite correct and most valuable.
—We venture to say that, though we have no means of comparing the real values of the imports with those of the exports, we have no doubt that the former very considerably exceed the latter. It can hardly, indeed, be otherwise. The value of an exported commodity is estimated at the moment of its being sent abroad, and before its cost is increased by the expense of 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, consequently, after its cost has been enhanced by the expense of freight, insurance, importers' profits, etc.
—To measure, therefore, the advantage of commerce by the excess of the exports over the imports is a proceeding false alike in fact and principle. The value of the imports, in all but anomalous and extremely rare instances, invariably exceeds that of the exports. And it is plain that this excess, whatever it may be, forms the only fund whence the expenses and profits of the merchants can be derived. The larger, consequently, it becomes, the more will it be for their advantage.
—In the United States the value of the imports, as ascertained by the custom-house returns, has usually exceeded the value of the exports. And, although the English politicians were in the habit of considering the excess of the former as a certain proof of a disadvantageous commerce, "it is nevertheless true," says Mr. Pitkin, "that the real gain of the United States has been nearly in proportion as their imports have exceeded their exports." (Commerce of the United States, 2nd edit. p. 280.) The excess of American imports has in part been occasioned by the Americans generally exporting their own surplus produce, and, consequently, receiving from foreigners not only an equivalent for their exports, but also for the cost of conveying them to the foreign market. "In 1811," says the author just quoted, "flour sold in America for nine dollars and a half per barrel, and in Spain for fifteen dollars. 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; but as this flour would sell, when carried to Spain, for $75,000, the American merchant would be entitled to draw on his agent in Spain for $27,500 more than the flour cost in America; or than the sum for which he could have drawn had the flour been exported in a vessel belonging to a Spanish merchant. But the transaction would not end here. The $75,000 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 probably increase its value to $100,000; so that, in all, the American merchant might have imported goods worth $52,500 more than the flour originally sent to Spain." It is as impossible to deny that such a transaction as this is advantageous, as it is to deny that its advantage consists entirely in the excess of the value of the goods imported over the value of those exported. And it is equally clear that America might have had the real balance of payments in her favor, though such transactions as the above had been multiplied to any conceivable extent.
—II. In the second place, when a balance is due from one country to another, it is but seldom that it is paid by remitting bullion from the debtor to the creditor country. If the sum due by the British merchants to those of Holland be greater than the sum due by the latter to them, the balance of payments will be against Britain; but this balance will not, and indeed can not, be discharged by an exportation of bullion, unless bullion be, at the time, the cheapest exportable commodity; or, which is the same thing, unless it may be more advantageously exported than anything else. To illustrate this principle, let us suppose that the balance of debt, or the excess of the value of the bills drawn by the merchants of Amsterdam on London, over those drawn by the merchants of London on Amsterdam, amounts to £100,000 it is the business of the London merchants to find out the means of discharging this debt with the least expense; and it is plain, that if they find that any less sum, as £96,000, £97,000, or £99,900 will purchase and send to Holland as much cloth, cotton, hardware, colonial produce, or any other commodity, as will sell in Amsterdam for £100,000, no gold or silver will be exported. The laws which regulate the trade in bullion are not in any degree different from those which regulate the trade in other commodities. It is exported only when its exportation is advantageous, or when it is more valuable abroad than at home. It would, in fact, be quite as reasonable to expect that water should flow from a low to a high level, as it is to expect that bullion should leave a country where its value is great, to go to one where it is low! It is never sent abroad to destroy, but always to find its level. The balance of payments might be 10 or 100,000,000, against a particular country, without causing the exportation of a single ounce of bullion. Common sense tells us that no merchant will remit £100 worth of bullion to discharge a debt in a foreign country, if it be possible to invest any smaller sum in any species of merchandise which would sell abroad for £100 exclusive of expenses. The merchant who deals in the precious metals is as much under the influence of self interest as he who deals in coffee or indigo; and what merchant would attempt to extinguish a debt by exporting coffee which cost £100, if he could effect his object by sending abroad indigo which cost only £99?
—The argument about the balance of payments is one of those that contradict and confute themselves. Had the apparent excess of exports over imports, as indicated by the British custom-house books for the hundred years down to 1853, been always paid in bullion, as the supporters of the old theory contend is the case, there should at this moment be some 500,000,000 or 600,000,000 of bullion in the country, instead of 80,000,000 or 100,000,000, which it is supposed at most to amount to! Nor is this all. If the theory of the balance were good for anything—if it had not been a mere idle delusion—it follows, as every country in the world has had its favorable balance, that they must have been paid by an annual importation of bullion from the mines corresponding to their aggregate amount. But it is certain that the entire produce of the mines, great as it is, though it were increased in a fivefold proportion, would be insufficient for this purpose! This reductio ad absurdum is decisive of the degree of credit that should be attached to conclusions respecting the flourishing state of the commerce of any country drawn from the excess of the exports over the imports!
—Not only, therefore, is the theory with respect to the balance of trade erroneous, but the very reverse of that theory is true. In the first place, the value of the commodities imported by every country which carries on an advantageous commerce (and no other will be prosecuted for any considerable period) invariably exceeds the value of those which she exports. Unless such were the case, there would plainly be no fund whence the merchants and others engaged in foreign trade could derive either a profit on their capital, or a return for their outlay and trouble; and in the second place, whether the balance of debt be for or against a country, that balance will neither be paid nor received in bullion, unless it be at the time the commodity by the exportation or importation of which the account may be most profitably settled. Whatever the partisans of the doctrine as to the balance may say about money being a preferable product, or merchandise par excellence, it is certain it will never appear in the list of exports and imports while there is anything else with which to carry on trade, or cancel debts, that will yield a larger profit, or occasion a less expense to the debtors.
—It is difficult to estimate the mischief which the absurd notions relative to the balance of trade have occasioned in almost every commercial country. It is principally to the prevalence of prejudices to which they have given rise, that the restrictions on the trade between Great Britain and France are to be ascribed. The great or rather the only argument insisted upon by those who prevailed on the legislature, in the reign of William and Mary, to declare the trade with France a nuisance, was founded on the statement that the value of the imports from that kingdom considerably exceeded the value of the commodities exported to it. The balance was regarded as a tribute paid by England to France, and it was sagaciously asked, what had England done, that she should be obliged to pay so much money to her natural enemy? It never occurred to those who so loudly abused the French trade, that no merchant would import any commodity from France, unless it brought a higher price in England than the commodity exported to pay it; and that the profit of the merchant, or the national gain, would be in exact proportion to this excess of price. The very reason assigned by these persons for prohibiting the trade affords the best attainable proof of its having been a lucrative one; nor can there be any doubt that an unrestricted freedom of intercourse between the two countries would be of the greatest service to both.
J. R. M'CULLOCH and HUGH G. REID.
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