Principles Of Political Economy, by John Stuart Mill

That's French for "the ancient system," as in the ancient system of feudal privileges and the exercise of autocratic power over the peasants. The ancien regime never goes away, like vampires and dinosaur bones they are always hidden in the earth, exercising a mysterious influence. It is not paranoia to believe that the elites scheme against the common man. Inform yourself about their schemes here.

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Fri Aug 21, 2020 3:37 am

Chapter X. Of An Inconvertible Paper Currency.

§ 1. What determines the value of an inconvertible paper money?


After experience had shown that pieces of paper, of no intrinsic value, by merely bearing upon them the written profession of being equivalent to a certain number of francs, dollars, or pounds, could be made to circulate as such, and to produce all the benefit to the issuers which could have been produced by the coins which they purported to represent, governments began to think that it would be a happy device if they could appropriate to themselves this benefit, free from the condition to which individuals issuing such paper substitutes for money were subject, of giving, when required, for the sign, the thing signified. They determined to try whether they could not emancipate themselves from this unpleasant obligation, and make a piece of paper issued by them pass for a pound, by merely calling it a pound, and consenting to receive it in payment of the taxes.

In the case supposed, the functions of money are performed by a thing which derives its power of performing them solely from convention; but convention is quite sufficient to confer the power; since nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others. The only question is, what determines the value of such a currency, since it can not be, as in the case of gold and silver (or paper exchangeable for them at pleasure), the cost of production.

We have seen, however, that even in the case of metallic currency, the immediate agency in determining its value is its quantity. If the quantity, instead of depending on the ordinary mercantile motives of profit and loss, could be arbitrarily fixed by authority, the value would depend on the fiat of that authority, not on cost of production. The quantity of a paper currency not convertible into the metals at the option of the holder can be arbitrarily fixed, especially if the issuer is the sovereign power of the state. The value, therefore, of such a currency is entirely arbitrary.

The value of paper money is, of course, primarily and mainly dependent on the quantity issued. The general level of value depends on the quantity; but we also find that deviations from this general level, in the direction of further depreciation than could be due to quantity alone, is caused by any event which shakes the confidence of any one that he may get the existing value for his paper. The “convention” by which real value (the essential idea of money) was associated with this paper in the minds of all is thereby broken. Fiat money—that is, a piece of paper, not containing a promise to pay a dollar, but a simple declaration that this is a dollar—therefore, separates the paper from any connection with value. And yet we see that fiat money has some, although a fluctuating, value at certain times: if the State receives it for taxes, if it is a legal acquittal of obligations, then, to that extent, a certain quantity of it is given a value equal to the wealth represented by the taxes, or the debts. Jevons remarks on this point247 that, if “the quantity of notes issued was kept within such moderate limits that any one wishing to realize the metallic value of the notes could find some one wanting to pay taxes, and therefore willing to give coin for notes,” stability of value might be secured. If there is more in circulation than performs these functions, it will depreciate in the proportion of the quantity to the extent of the uses assigned to it; so that the relation of quantity to uses is the only thing which can give value to fiat money, but beyond a certain point in the issues other forces than mere quantity begin to affect the value. Although the paper is not even a promise to pay value, the form of expression on its face, or the term used as its designation, generally tends, under the force of convention and habit, to give a popular value to paper.

Although the State may not promise to pay a dollar, yet, wherever such paper money carries any purchasing power with it (which has very seldom happened, and then only for short periods), it will be found that there is a vague popular understanding that the State intends, at some time or other, to redeem the notes with value in coin to some amount. In the early cases of irredeemable money in our colonies, the income of taxes, or similar resources, were promised as a means of redemption. To some—although a slight—extent, the idea of value was associated with such paper. The actual quantity issued did not measure the depreciation. The paper did depreciate with increased issues. But only in so far as the increased issues proved to the community that there was less and less possibility of ever receiving value for them did they depreciate. In other words, we come to the familiar experience, known to many, of a paper money depending for its value on the opinions of men in the country. This was partially true, even of our own greenbacks, which were not fiat money, but promises to pay (although not then redeemable), as may be seen by the movement of the line in Chart XII (p. 359), which represents the fluctuations of our paper money during the civil war. The upward movement of the line, which indicates the premium on gold during our late war, of course represents correspondingly the depreciation of the paper. Every victory or defeat of the Union arms raised or lowered the premium on gold; it was the register of the opinion of the people as to the value to be associated with the paper. The second and third resorts to issues of greenbacks were regarded as confessions of financial distress; it was this which produced the effect on their value. It was not only the quantity but also that which caused the issue of the quantity. It is, of course, clear that the value of a paper money like the greenbacks, which were the promises to pay of a rich country, would bear a definite relation to the actual quantity issued; and this is to be seen by the generally higher level of the line on the chart, showing a steadily diminishing purchasing power as the issues increased. But the thing which weighed largely in people's minds was the possibility of ultimate redemption; and the premium on gold was practically a register of the “betting” on this possibility. In 1878, when Secretary Sherman's reserve was seen to be increasing to an effective amount, and when it became evident that he would have the means (i.e., the value represented by all the paper that was likely to be presented) to resume on the day set, January 1, 1879, the premium gradually faded away. The general shifting of the level to a lower stage in this later period was not due to any decrease in the quantity outstanding, because the contraction had been stopped in 1868, and that consequent on the resumption act in May, 1878.


Suppose that, in a country of which the currency is wholly metallic, a paper currency is suddenly issued, to the amount of half the metallic circulation; not by a banking establishment, or in the form of loans, but by the Government, in payment of salaries and purchase of commodities. The currency being suddenly increased by one half, all prices will rise, and, among the rest, the prices of all things made of gold and silver. An ounce of manufactured gold will become more valuable than an ounce of gold coin, by more than that customary difference which compensates for the value of the workmanship; and it will be profitable to melt the coin for the purpose of being manufactured, until as much has been taken from the currency by the subtraction of gold as had been added to it by the issue of paper. Then prices will relapse to what they were at first, and there will be nothing changed, except that a paper currency has been substituted for half of the metallic currency which existed before. Suppose, now, a second emission of paper; the same series of effects will be renewed; and so on, until the whole of the metallic money has disappeared [see Chart No. XIV, Chap. XV, for the exportation of gold from the United States after the issue of our paper money in 1862]: that is, if paper be issued of as low a denomination as the lowest coin; if not, as much will remain as convenience requires for the smaller payments. The addition made to the quantity of gold and silver disposable for ornamental purposes will somewhat reduce, for a time, the value of the article; and as long as this is the case, even though paper has been issued to the original amount of the metallic circulation, as much coin will remain in circulation along with it as will keep the value of the currency down to the reduced value of the metallic material; but the value having fallen below the cost of production, a stoppage or diminution of the supply from the mines will enable the surplus to be carried off by the ordinary agents of destruction, after which the metals and the currency will recover their natural value. We are here supposing, as we [pg 348]have supposed throughout, that the country has mines of its own, and no commercial intercourse with other countries; for, in a country having foreign trade, the coin which is rendered superfluous by an issue of paper is carried off by a much prompter method.

Mr. Mill's statement, that, if paper be not issued of as low a denomination as the lowest coin, “as much will remain as convenience requires for the smaller payments,” will not hold true. During our recent experiment of depreciated paper, the depreciation was such as to drive out the subsidiary silver coins, by July, 1862, and we were forced to supply their place by a fractional paper currency. By an amendment inserted June 17, 1862, into the act authorizing a second issue of $150,000,000 of greenbacks, it was ordered “that no note shall be issued for the fractional part of a dollar, and not more than $35,000,000 shall be of lower denominations than five dollars” (act, finally passed July 11, 1862). Although there were no fractional notes, yet one-dollar notes drove out subsidiary silver, simply because the paper had depreciated to a value below that of the 345.6 grains of silver in two halves or four quarters of a dollar. By July 2d the disappearance of small coin was distinctly noted. Let the value of gold be represented by 100; and a dollar of small silver coin (345.6 grains), relatively to a gold dollar, by 96. Now, if paper depreciates to 90, relatively to gold, it will drive out the subsidiary silver at 96, in accordance with Gresham's law.


Up to this point the effects of a paper currency are substantially the same, whether it is convertible into specie or not. It is when the metals have been completely superseded and driven from circulation that the difference between convertible and inconvertible paper begins to be operative. When the gold or silver has all gone from circulation, and an equal amount of paper has taken its place, suppose that a still further issue is superadded. The same series of phenomena recommences: prices rise, among the rest the prices of gold and silver articles, and it becomes an object, as before, to procure coin, in order to convert it into bullion. There is no longer any coin in circulation; but, if the paper currency is convertible, coin may still be obtained from the issuers in exchange for notes. All additional notes, therefore, which are attempted to be forced into circulation [pg 349]after the metals have been completely superseded, will return upon the issuers in exchange for coin; and they will not be able to maintain in circulation such a quantity of convertible paper as to sink its value below the metal which it represents. It is not so, however, with an inconvertible currency. To the increase of that (if permitted by law) there is no check. The issuers may add to it indefinitely, lowering its value and raising prices in proportion; they may, in other words, depreciate the currency without limit.

Such a power, in whomsoever vested, is an intolerable evil. All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious. The person who buys for himself, or gives to another, an annuity of one [hundred dollars], does not know whether it will be equivalent to [two hundred or to fifty dollars] a few years hence. Great as this evil would be if it depended only on accident, it is still greater when placed at the arbitrary disposal of an individual or a body of individuals, who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes, and who have at any rate a strong interest in issuing as much as possible, each issue being in itself a source of profit—not to add, that the issuers may have, and, in the case of a government paper, always have, a direct interest in lowering the value of the currency, because it is the medium in which their own debts are computed.

The United States Supreme Court had decided in December, 1870, by the second legal-tender decision, that the issue of greenbacks (inconvertible from 1862 to 1879) was constitutional during a time of war; but it was thought that the reissue of these notes since the war, when no war emergency could be pleaded, was unconstitutional. This view, however, was met by the unfortunate decision of the Supreme Court, delivered by Justice Gray, March, 1884, which announced the doctrine that the expediency of an issue of legal-tender paper money was to be determined solely by Congress; and that, if Congress judged the issue expedient, it was within the limits of those provisions [pg 350]of the Constitution (section 8), which gave Congress the means to do whatever was “necessary and proper” to carry out the powers expressly granted to it. Nothing now can prevent Congress, should it choose to do so, from issuing paper money of any description whatever, even if of absolutely no value. The disaster that might be brought upon the country by a rising tide of repudiation among debtors, taking its effect through a facile and plastic Congress (as in the case of the silver coinage in 1878), is appalling to reflect upon.


§ 2. If regulated by the price of Bullion, as inconvertible Currency might be safe, but not Expedient.

In order that the value of the currency may be secure from being altered by design, and may be as little as possible liable to fluctuation from accident, the articles least liable of all known commodities to vary in their value, the precious metals, have been made in all civilized countries the standard of value for the circulating medium; and no paper currency ought to exist of which the value can not be made to conform to theirs. Nor has this fundamental maxim ever been entirely lost sight of, even by the governments which have most abused the power of creating inconvertible paper. If they have not (as they generally have) professed an intention of paying in specie at some indefinite future time, they have at least, by giving to their paper issues the names of their coins, made a virtual, though generally a false, profession of intending to keep them at a value corresponding to that of the coins. This is not impracticable, even with an inconvertible paper. There is not, indeed, the self-acting check which convertibility brings with it. But there is a clear and unequivocal indication by which to judge whether the currency is depreciated, and to what extent. That indication is the price of the precious metals. When holders of paper can not demand coin to be converted into bullion, and when there is none left in circulation, bullion rises and falls in price like other things; and if it is above the mint price—if an ounce of gold, which would be coined into the equivalent of [$18.60], is sold for [$20 or $25] in paper—the value of the currency has sunk just that much below what the value of a metallic currency would be. If, therefore, the issue of inconvertible paper were subjected to [pg 351]strict rules, one rule being that, whenever bullion rose above the mint price, the issues should be contracted until the market price of bullion and the mint price were again in accordance, such a currency would not be subject to any of the evils usually deemed inherent in an inconvertible paper.

But, also, such a system of currency would have no advantages sufficient to recommend it to adoption. An inconvertible currency, regulated by the price of bullion, would conform exactly, in all its variations, to a convertible one; and the only advantage gained would be that of exemption from the necessity of keeping any reserve of the precious metals, which is not a very important consideration, especially as a government, so long as its good faith is not suspected, need not keep so large a reserve as private issuers, being not so liable to great and sudden demands, since there never can be any real doubt of its solvency.

The United States since 1879 finds that a reserve of from $130,000,000 to $140,000,000 is a sufficient reserve for outstanding notes to the amount of $346,000,000, and greenbacks are now at a par with gold.


Against this small advantage is to be set, in the first place, the possibility of fraudulent tampering with the price of bullion for the sake of acting on the currency, in the manner of the fictitious sales of corn, to influence the averages, so much and so justly complained of while the corn laws were in force. But a still stronger consideration is the importance of adhering to a simple principle, intelligible to the most untaught capacity. Everybody can understand convertibility; every one sees that what can be at any moment exchanged for five [dollars] is worth five [dollars]. Regulation by the price of bullion is a more complex idea, and does not recommend itself through the same familiar associations. There would be nothing like the same confidence, by the public generally, in an inconvertible currency so regulated, as in a convertible one: and the most instructed person might reasonably doubt whether such a rule would be [pg 352]as likely to be inflexibly adhered to. The grounds of the rule not being so well understood by the public, opinion would probably not enforce it with as much rigidity, and, in any circumstances of difficulty, would be likely to turn against it; while to the Government itself a suspension of convertibility would appear a much stronger and more extreme measure than a relaxation of what might possibly be considered a somewhat artificial rule. There is therefore a great preponderance of reasons in favor of a convertible, in preference to even the best regulated inconvertible, currency. The temptation to over-issue, in certain financial emergencies, is so strong, that nothing is admissible which can tend, in however slight a degree, to weaken the barriers that restrain it.

The French Government, in the Franco-Prussian War (1870), issued inconvertible paper on this plan, as explained by Mr. Mill; but, acting through the Bank of France, they conducted their issues so successfully that the notes never depreciated more than about one half of one per cent. But this was a very rare management of inconvertible paper, since the issues were actually limited as the price of gold in paper rose above par.


§ 3. Examination of the doctrine that an inconvertible Current is safe, if representing actual Property.

Projectors every now and then start up, with plans for curing all the economical evils of society by means of an unlimited issue of inconvertible paper. There is, in truth, a great charm in the idea. To be able to pay off the national debt, defray the expenses of government without taxation, and, in fine, to make the fortunes of the whole community, is a brilliant prospect, when once a man is capable of believing that printing a few characters on bits of paper will do it. The philosopher's stone could not be expected to do more.248

As these projects, however often slain, always resuscitate, it is not superfluous to examine one or two of the fallacies [pg 353]by which the schemers impose upon themselves. One of the commonest is, that a paper currency can not be issued in excess so long as every note issued represents property, or has a foundation of actual property to rest on. These phrases, of representing and resting, seldom convey any distinct or well-defined idea; when they do, their meaning is no more than this—that the issuers of the paper must have property, either of their own, or intrusted to them, to the value of all the notes they issue, though for what purpose does not very clearly appear; for, if the property can not be claimed in exchange for the notes, it is difficult to divine in what manner its mere existence can serve to uphold their value. I presume, however, it is intended as a guarantee that the holders would be finally reimbursed, in case any untoward event should cause the whole concern to be wound up. On this theory there have been many schemes for “coining the whole land of the country into money” and the like.

In so far as this notion has any connection at all with reason, it seems to originate in confounding two entirely distinct evils, to which a paper currency is liable. One is, the insolvency of the issuers; which, if the paper is grounded on their credit—if it makes any promise of payment in cash, either on demand or at any future time—of course deprives the paper of any value which it derives from the promise. To this evil paper credit is equally liable, however moderately used; and against it, a proviso that all issues should be “founded on property,” as for instance that notes should only be issued on the security of some valuable thing, expressly pledged for their redemption, would really be efficacious as a precaution. But the theory takes no account of another evil, which is incident to the notes of the most solvent firm, company, or government; that of being depreciated in value from being issued in excessive quantity. The assignats, during the French Revolution, were an example of a currency grounded on these principles. The assignats “represented” an immense amount of highly valuable property, [pg 354]namely, the lands of the crown, the church, the monasteries, and the emigrants; amounting possibly to half the territory of France. They were, in fact, orders or assignments on this mass of land. The revolutionary government had the idea of “coining” these lands into money; but, to do them justice, they did not originally contemplate the immense multiplication of issues to which they were eventually driven by the failure of all other financial resources. They imagined that the assignats would come rapidly back to the issuers in exchange for land, and that they should be able to reissue them continually until the lands were all disposed of, without having at any time more than a very moderate quantity in circulation. Their hope was frustrated: the land did not sell so quickly as they expected; buyers were not inclined to invest their money in possessions which were likely to be resumed without compensation if the revolution succumbed; the bits of paper which represented land, becoming prodigiously multiplied, could no more keep up their value than the land itself would have done if it had all been brought to market at once; and the result was that it at last required an assignat of five hundred francs to pay for a cup of coffee.

The example of the assignats has been said not to be conclusive, because an assignat only represented land in general, but not a definite quantity of land. To have prevented their depreciation, the proper course, it is affirmed, would have been to have made a valuation of all the confiscated property at its metallic value, and to have issued assignats up to, but not beyond, that limit; giving to the holders a right to demand any piece of land, at its registered valuation, in exchange for assignats to the same amount. There can be no question about the superiority of this plan over the one actually adopted. Had this course been followed, the assignats could never have been depreciated to the inordinate degree they were; for—as they would have retained all their purchasing power in relation to land, however much they might have fallen in respect to other things—before they had lost [pg 355]very much of their market value, they would probably have been brought in to be exchanged for land. It must be remembered, however, that their not being depreciated would presuppose that no greater number of them continued in circulation than would have circulated if they had been convertible into cash. However convenient, therefore, in a time of revolution, this currency convertible into land on demand might have been, as a contrivance for selling rapidly a great quantity of land with the least possible sacrifice, it is difficult to see what advantage it would have, as the permanent system of a country, over a currency convertible into coin; while it is not at all difficult to see what would be its disadvantages, since land is far more variable in value than gold and silver; and besides, land, to most persons, being rather an incumbrance than a desirable possession, except to be converted into money, people would submit to a much greater depreciation before demanding land, than they will before demanding gold or silver.249

It has been said that the assignats circulated without legal-tender power. They were received by the French treasury, and a law was passed condemning a man to six years in irons for exchanging gold or silver for assignats at a greater than the nominal or face value of the latter. The subsequent issues, called mandats, did not represent land, but were directly exchangeable for the land. Even that kind of money is no more valuable than a proportional amount of tax receipts for land. In a very short time mandats were worth 1/1000 of their face value, and assignats very much less. The assignats, moreover, were not limited in quantity to the money value of the lands they represented. By 1796, 45,000,000,000 francs of assignats had been issued.


§ 4. Experiments with paper Money in the United States.

The experience of the colonies before our Revolution is rich in warning examples of the over-issue of inconvertible paper money. Those of Rhode Island250 and the Province [pg 356]of Massachusetts251 are the most conspicuous, perhaps, because we have better knowledge of them, but other colonies suffered in as great a degree. The experience of the latter illustrates as well as any, perhaps, not only the general theory of inconvertible paper, but the device of supporting the paper by paying interest upon the notes. Although the issues since 1690 had depreciated, in 1702 £10,000 more notes were issued, because, as it was said, there was a scarcity of money. It is always noticeable that the more issues of paper money there are made, the more there is a cry of scarcity, much like the thirst of a hard drinker after the first exhilaration has passed off. On the new issues five per cent interest was paid, and even excises and imposts were set aside as security for their payment. The year 1709 saw a new expedition to Canada, and saw also the broken promises of the province, when £20,000 more notes were put out; the collection of the taxes with which to pay the notes was deferred in 1707 for two years; in 1709 deferred for four years; in 1710 for five years; in 1711 for six years. By 1712 they had depreciated thirty per cent, when the charm of legal tender was thrown around them, but to no purpose. The idea of value was not associated with them in people's minds, and they put no faith in promises. The usual result took place. People divided politically on the money question, and parties began to agitate for banks which should issue notes based on real estate, or for loans from the state to private persons at interest to be paid annually. Such facts show the train of evils following the first innocent departure from the maintenance of a currency equivalent to coin. The people forgot, or did not know, the nature of money, or the offices it performed. They did not understand that creating paper money did not create wealth. This experiment closed only in 1750 (March 31st), when the province had courage enough to resume specie payments. The effect was to transfer the West India trade from paper-issuing colonies to Massachusetts, and to produce a steady prosperity in her business interests.

Image
Chart XI. Continental Currency, Issue and Depreciation.

The issue of paper money as a means of making a forced loan from the people, when there seem to be no other means of getting funds, has been fully illustrated in our country by the Continental currency issued during our Revolution. It is not, however, considered that this is also accompanied by a process by which every debtor takes “a forced contribution from his creditor.” Congress had no power to tax, and the separate [pg 358]States would not do it; and this has been considered as the excuse for making issues of that well-known paper money, which has given rise to the familiar by-word for absence of value, “not worth a Continental.” Without going into details,252 in one year, 1779, Congress issued $140,000,000, worth in coin only $7,000,000. They, however, bravely declared that paper had not depreciated, but that the price of coin had gone up! Legal attempts were made to repress the premium on silver; but resolutions do not create wealth as fast as money can be printed. The depreciation went on more rapidly than the issues (see Chart No. XI, in which the black line represents the amounts of issues, and the broken line the depreciation of paper, starting at 100); and, finally, March 18, 1780, Congress decided to admit a depreciation, and resumed in silver at the rate of one dollar in silver for forty in paper.

The question of government issues253 of paper money again came up in the United States in 1862, during the civil war, and part of our present currency is the result of the policy then adopted. The first step—the one that generally costs—however, was taken July 17, 1861, when the Treasury issued $50,000,000 of “demand notes,” not bearing interest. These notes, however, were not made legal tender. They could be used in payment of salaries and other dues from the United States. It may be well to state that the Treasury balanced the arguments for and against the issues of paper at the beginning of the experiment, and we can see how these views were realized as we go along. In favor of paper issues it was urged that we could borrow a large amount without interest, as in the case of the Continental currency; that there would be no expense beyond the coin necessary for keeping the paper at par; and that the country would gain a uniform currency. On the other hand, it was seen that there might be temptations to issue without provisions for redemption; that even if a fund were kept, a disturbance of the money market would precipitate a demand for coin, and all upon this single fund; and, lastly, that there were all the dangers of over-issue. Secretary Chase254 then decided [pg 359]against paper issues. Government bonds, however, did not sell, and the attempt of the banks toward the end of 1861 to carry $150,000,000 of bonds brought on a suspension of specie payments, December 31, 1861. Without any taxation policy, the country drifted along, until in a spasm of dread at seeing an empty Treasury, Congress passed the legal-tender act (February 25, 1862), issuing $150,000,000 of paper in the form of promises to pay. A committee of bankers showed that the issue could have been avoided by selling bonds at their market price; but Congress would not sell them below par. No necessity for the issues of paper need have arrived. In four months another issue of $150,000,000 was authorized (July 11, 1862); and a third issue of a like amount (March 3, 1863), in all $450,000,000. The depreciation took place (see Chart No. XII), for, as Secretary Chase anticipated, no provision was made for redemption. They were made legal tender, but this “essential idea” did not preserve their value; nor did the provision that they be received for taxes (except customs), avail for this purpose.

The effects of the depreciation were as evil as can well be imagined. (1) The expenses of the Government were increased by the rise in prices, so that (2) our national debt became hundreds of millions larger than it need have been; (3) a vicious speculation in gold began, leading to the unsettling of legitimate trade and to greater variations in prices; (4) the existence of depreciated paper later gave rise to all the dishonest schemes for paying the coin obligations of the United States in cheap issues, to the ruin of its credit and honor; and (5) it has practically become a settled part of our circulation, and a possible source of danger.

Of the whole $450,000,000, $50,000,000 were set aside as a reserve for temporary deposits; but in July, 1864, $431,000,000 were in circulation. At this time (June 30, 1864) Congress, retaining distinctly the feeling that the issue of paper was but a temporary measure, forbade any further issues. Secretary McCulloch, immediately on the close of the war, began to contract, and, by a resolution of the lower branch in Congress (December 18, 1865), a cordial concurrence in the measures for contraction was manifested. Of course, the return from the path of inflated credit and high prices was painful, and Congress began to feel the pressure of its constituents. Had they not yielded, much of the severity of the crisis of 1873 might have been avoided; but (April 12, 1866) they forbade any greater contraction than $4,000,000 a month. Here was a lack of courage not foreseen by Secretary Chase. This was again shown (February 4, 1868) by a law which absolutely forbade the Secretary to further reduce the currency, which now stood [pg 360]at $356,000,000. This marks an important change in the attitude of the Government, as compared with 1862. After the panic of 1873, the paper evil produced its usual effect in the cry for more money, and, as in the Province of Massachusetts in 1712, parties divided on the question of inflation or contraction. A bill to expand the Government issues to $400,000,000 (and the national-bank notes also to $400,000,000) actually passed both Houses of Congress, and we were fortunately saved from it only by the veto of President Grant (April 22, 1874). This was another landmark in the history of our paper money. Secretary Richardson, however, had already, without authority, reissued $26,000,000 of the $44,000,000 withdrawn by Secretary McCulloch, and the amount outstanding was thus $382,000,000. A compromise measure was passed (June 20, 1874), which retained this amount in the circulation.

When the resumption act was passed (January 14, 1875), the provision that, for every $100 of new national-bank notes issued, $80 of United States notes should be retired, resulted in a contraction of the latter from $382,000,000 to $346,000,000. The reason of this was, that there was no provision for the increase of United States notes when national banks withdrew their own issues; and after the crisis many banks naturally did so. The culmination of the policy of Congress came in a law (May 31, 1878) which absolutely forbade all further retirement of United States notes, and we are now left at the present time with an inelastic limit of $346,000,000. Finally, in 1877 and 1878, Secretary Sherman, aided by a most fortunate state of foreign trade, began to accumulate gold in order to carry out the provisions of the resumption act, which required him to resume specie payments on January 1, 1879. He successfully collected $133,000,000 of gold, and on December 17, 1878, the premium on gold disappeared, and resumption was accomplished quietly on the day appointed, without a jar to business.

But it is a significant fact that even after all the evils inflicted on our country by over-issues, in spite of the temptation to misuse paper money if it is in any way permitted, in spite of all the warnings of history, there seems to be a dangerous acquiescence in the presence of government paper money in our currency. It is an open pitfall, tempting to evils whenever sudden emergencies arise. It ought not to be allowed to remain any longer.


§ 5. Examination of the gain arising from the increase and issue of paper Currency.

Another of the fallacies from which the advocates of an inconvertible currency derive support is the notion that an increase of the currency quickens industry. Mr. Attwood maintained that a rise of prices produced by an increase [pg 361]of paper currency stimulates every producer to his utmost exertions, and brings all the capital and labor of the country into complete employment; and that this has invariably happened in all periods of rising prices, when the rise was on a sufficiently great scale. I presume, however, that the inducement which, according to Mr. Attwood, excited this unusual ardor in all persons engaged in production must have been the expectation of getting more of commodities generally, more real wealth, in exchange for the produce of their labor, and not merely more pieces of paper. This expectation, however, must have been, by the very terms of the supposition, disappointed, since, all prices being supposed to rise equally, no one was really better paid for his goods than before. It calculates on finding the whole world persisting forever in the belief that more pieces of paper are more riches, and never discovering that, with all their paper, they can not buy more of anything than they could before. At the periods which Mr. Attwood mistook for times of prosperity, and which were simply (as all periods of high prices, under a convertible currency, must be) times of speculation, the speculators did not think they were growing rich because the high prices would last, but because they would not last, and because whoever contrived to realize while they did last would find himself, after the recoil, in possession of a greater number of [dollars], without their having become of less value.

Hume's version of the doctrine differed in a slight degree from Mr. Attwood's. He thought that all commodities would not rise in price simultaneously, and that some persons therefore would obtain a real gain, by getting more money for what they had to sell, while the things which they wished to buy might not yet have risen. And those who would reap this gain would always be (he seems to think) the first comers. It seems obvious, however, that, for every person who thus gains more than usual, there is necessarily some other person who gains less. The loser, if things took place as Hume supposes, would be the seller of the commodities [pg 362]which are slowest to rise; who, by the supposition, parts with his goods at the old prices, to purchasers who have already benefited by the new. This seller has obtained for his commodity only the accustomed quantity of money, while there are already some things of which that money will no longer purchase as much as before. If, therefore, he knows what is going on, he will raise his price, and then the buyer will not have the gain, which is supposed to stimulate his industry. But if, on the contrary, the seller does not know the state of the case, and only discovers it when he finds, in laying his money out, that it does not go so far, he then obtains less than the ordinary remuneration for his labor and capital; and, if the other dealer's industry is encouraged, it should seem that his must, from the opposite cause, be impaired.

An issue of notes is a manifest gain to the issuers, who, until the notes are returned for payment, obtain the use of them as if they were a real capital; and, so long as the notes are no permanent addition to the currency, but merely supersede gold or silver to the same amount, the gain of the issuer is a loss to no one; it is obtained by saving to the community the expense of the more costly material. But, if there is no gold or silver to be superseded—if the notes are added to the currency, instead of being substituted for the metallic part of it—all holders of currency lose, by the depreciation of its value, the exact equivalent of what the issuer gains. A tax is virtually levied on them for his benefit.

But besides the benefit reaped by the issuers, or by others through them, at the expense of the public generally, there is another unjust gain obtained by a larger class—namely, by those who are under fixed pecuniary obligations. All such persons are freed, by a depreciation of the currency, from a portion of the burden of their debts or other engagements; in other words, part of the property of their creditors is gratuitously transferred to them. On a superficial view it may be imagined that this is an advantage to industry; since the productive classes are great borrowers, and generally owe [pg 363]larger debts to the unproductive (if we include among the latter all persons not actually in business) than the unproductive classes owe to them, especially if the national debt be included. It is only thus that a general rise of prices can be a source of benefit to producers and dealers, by diminishing the pressure of their fixed burdens. And this might be accounted an advantage, if integrity and good faith were of no importance to the world, and to industry and commerce in particular.

§ 6. Résumé of the subject of money.

Before passing on to another branch of our subject, it may be a gain to clearer ideas to collect in the form of the following classification the main points discussed (in Chaps. IV to X) under money and credit, in continuance of a similar classification of value:

Money measures and transfers value:
(1.) Hence best served by the precious metals, on account of their peculiar qualities.
(2.) Depends for its value, in the long run, on the cost of production at the worst mine worked (Class III); but practically on demand and supply (Class I). And (if no credit exists) its value changes exactly with the supply, which is expressed by V = 1/(Q × R)
(3.) Under two legal standards, obeys Gresham's law—e.g., experience of Japan and the United States.
(4.) Substitutes for money, called credit (which is not capital, but calls out inactive capital).
Of these substitutes for money, (1) Use of credit depends not on quality of coin and notes, and (2) Various kinds of credit.

Of those various kinds of credit, there are (1) Book credits, (2) Bills of exchange, (3) Promissory notes, and (4) checks processed via clearing-house.

Of the promissory notes, they are of either (1) Individuals, (2) Banks (Coin Banks or Land Banks, etc.), or (3) Governments.

Of Government notes, there are (1) Convertible or (2) Inconvertible.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Fri Aug 21, 2020 3:41 am

Chapter XII. Of Some Peculiar Cases Of Value.

§ 1. Values of commodities which have a joint cost of production.


The general laws of value, in all the more important cases of the interchange of commodities in the same country, have now been investigated. We examined, first, the case of monopoly, in which the value is determined by either a natural or an artificial limitation of quantity, that is, by demand and supply: secondly, the case of free competition, when the article can be produced in indefinite quantity at the same cost; in which case the permanent value is determined by the cost of production, and only the fluctuations by supply and demand: thirdly, a mixed case, that of the articles which can be produced in indefinite quantity, but not at the same cost; in which case the permanent value is determined by the greatest cost which it is necessary to incur in order to obtain the required supply: and, lastly, we have found that money itself is a commodity of the third class; that its value, in a state of freedom, is governed by the same laws as the values of other commodities of its class; and that prices, therefore, follow the same laws as values.

From this it appears that demand and supply govern the fluctuations of values and prices in all cases, and the permanent values and prices of all things of which the supply is determined by any agency other than that of free competition: but that, under the régime of competition, things are, on the average, exchanged for each other at such values, and sold at such prices, as afford equal expectation of advantage to all classes of producers; which can only be when things [pg 373]exchange for one another in the ratio of their cost of production.

Here, again, is a distinct recognition of the true meaning of cost of production, and its ruling influence within a competing group, which has been seen in its full significance by Mr. Cairnes.


It sometimes happens [however] that two different commodities have what may be termed a joint cost of production. They are both products of the same operation, or set of operations, and the outlay is incurred for the sake of both together, not part for one and part for the other. The same outlay would have to be incurred for either of the two, if the other were not wanted or used at all. There are not a few instances of commodities thus associated in their production. For example, coke and coal-gas are both produced from the same material, and by the same operation. In a more partial sense, mutton and wool are an example; beef, hides, and tallow; calves and dairy produce; chickens and eggs. Cost of production can have nothing to do with deciding the value of the associated commodities relatively to each other. It only decides their joint value. Cost of production does not determine their prices, but the sum of their prices. A principle is wanting to apportion the expenses of production between the two.

Since cost of production here fails us, we must revert to a law of value anterior to cost of production, and more fundamental, the law of demand and supply. The law is, that the demand for a commodity varies with its value, and that the value adjusts itself so that the demand shall be equal to the supply. This supplies the principle of repartition which we are in quest of.

Suppose that a certain quantity of gas is produced and sold at a certain price, and that the residuum of coke is offered at a price which, together with that of the gas, repays the expenses with the ordinary rate of profit. Suppose, too, that, at the price put upon the gas and coke respectively, the whole of the gas finds an easy market, without [pg 374]either surplus or deficiency, but that purchasers can not be found for all the coke corresponding to it. The coke will be offered at a lower price in order to force a market. But this lower price, together with the price of the gas, will not be remunerating; the manufacture, as a whole, will not pay its expenses with the ordinary profit, and will not, on these terms, continue to be carried on. The gas, therefore, must be sold at a higher price, to make up for the deficiency on the coke. The demand consequently contracting, the production will be somewhat reduced; and prices will become stationary when, by the joint effect of the rise of gas and the fall of coke, so much less of the first is sold, and so much more of the second, that there is now a market for all the coke which results from the existing extent of the gas-manufacture.

Or suppose the reverse case; that more coke is wanted at the present prices than can be supplied by the operations required by the existing demand for gas. Coke, being now in deficiency, will rise in price. The whole operation will yield more than the usual rate of profit, and additional capital will be attracted to the manufacture. The unsatisfied demand for coke will be supplied; but this can not be done without increasing the supply of gas too; and, as the existing demand was fully supplied already, an increased quantity can only find a market by lowering the price. Equilibrium will be attained when the demand for each article fits so well with the demand for the other, that the quantity required of each is exactly as much as is generated in producing the quantity required of the other.

When, therefore, two or more commodities have a joint cost of production, their natural values relatively to each other are those which will create a demand for each, in the ratio of the quantities in which they are sent forth by the productive process.

§ 2. Values of the different kinds of agricultural produce.

Another case of value which merits attention is that of the different kinds of agricultural produce. The case would present nothing peculiar, if different agricultural products [pg 375]were either grown indiscriminately and with equal advantage on the same soils, or wholly on different soils. The difficulty arises from two things: first, that most soils are fitter for one kind of produce than another, without being absolutely unfit for any; and, secondly, the rotation of crops.

For simplicity, we will confine our supposition to two kinds of agricultural produce; for instance, wheat and oats. If all soils were equally adapted for wheat and for oats, both would be grown indiscriminately on all soils, and their relative cost of production, being the same everywhere, would govern their relative value. If the same labor which grows three quarters of wheat on any given soil would always grow on that soil five quarters of oats, the three and the five quarters would be of the same value. The fact is, that both wheat and oats can be grown on almost any soil which is capable of producing either.

It is evident that each grain will be cultivated in preference on the soils which are better adapted for it than for the other; and, if the demand is supplied from these alone, the values of the two grains will have no reference to one another. But when the demand for both is such as to require that each should be grown not only on the soils peculiarly fitted for it, but on the medium soils which, without being specifically adapted to either, are about equally suited for both, the cost of production on those medium soils will determine the relative value of the two grains; while the rent of the soils specifically adapted to each will be regulated by their productive power, considered with reference to that one [grain] alone to which they are peculiarly applicable. Thus far the question presents no difficulty, to any one to whom the general principles of value are familiar.

Image
Illustration: Agricultural Produce.

This may be easily shown by a diagram, in which A represents the grade of land best adapted for oats; B, C, D, respectively, lands of diminishing productiveness for oats, until [pg 376]E is reached, which is, perhaps, equally good for oats or wheat; a, b, c, d, and E likewise represent the wheat-lands, the best beginning with a. The rent of A, or B, is determined by a comparison with whatever grade of land planted in oats is cultivated at the least return, as E, for example. So, if all the wheat-lands are cultivated, land a, or b, is compared with E, but in regard to the capacity of E to produce wheat.


It may happen, however, that the demand for one of the two, as for example wheat, may so outstrip the demand for the other, as not only to occupy the soils specially suited for wheat, but to engross entirely those equally suitable to both, and even encroach upon those which are better adapted to oats. To create an inducement for this unequal apportionment of the cultivation, wheat must be relatively dearer, and oats cheaper, than according to the cost of their production on the medium land. Their relative value must be in proportion to the cost on that quality of land, whatever it may be, on which the comparative demand for the two grains requires that both of them should be grown. If, from the state of the demand, the two cultivations meet on land more favorable to one than to the other, that one will be cheaper and the other dearer, in relation to each other and to things in general, than if the proportional demand were as we at first supposed.

As in the diagram just mentioned, if the demand for wheat forces its cultivation downward not only on to land E, suited to either indifferently, but, still farther on, to lands still less adapted for wheat (although good land for oats), wheat may be pushed down one stem of the V and up the other to D, or even to C. Then the value of wheat will be regulated by the cost of production on C, and the rent will be determined by a comparison between the productiveness of a, b, etc. (running downward through E), with C. The price of wheat will be high relatively to oats, which are now cultivated only on lands, A, B, better suited to growing oats, and whose cost of production on C is much less than on D or E.


Here, then, we obtain a fresh illustration, in a somewhat different manner, of the operation of demand, not as an occasional disturber of value, but as a permanent regulator of it, conjoined with, or supplementary to, cost of production.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Fri Aug 21, 2020 3:45 am

Chapter XIII. Of International Trade.

§ 1. Cost of Production not a regulator of international values. Extension of the word “international.”


Some things it is physically impossible to produce, except in particular circumstances of heat, soil, water, or atmosphere. But there are many things which, though they could be produced at home without difficulty, and in any quantity, are yet imported from a distance. The explanation which would be popularly given of this would be, that it is cheaper to import than to produce them: and this is the true reason. But this reason itself requires that a reason be given for it. Of two things produced in the same place, if one is cheaper than the other, the reason is that it can be produced with less labor and capital, or, in a word, at less cost. Is this also the reason as between things produced in different places? Are things never imported but from places where they can be produced with less labor (or less of the other element of cost, time) than in the place to which they are brought? Does the law, that permanent value is proportioned to cost of production, hold good between commodities produced in distant places, as it does between those produced in adjacent places?

We shall find that it does not. A thing may sometimes be sold cheapest, by being produced in some other place than that at which it can be produced with the smallest amount of labor and abstinence.

This could not happen between adjacent places. If the north bank of the Thames possessed an advantage over the south bank in the production of shoes, no shoes would be produced on the south side; the shoemakers would remove themselves and their capitals to the north bank, or would have established themselves there originally; for, being competitors [pg 378]in the same market with those on the north side, they could not compensate themselves for their disadvantage at the expense of the consumer; the amount of it would fall entirely on their profits; and they would not long content themselves with a smaller profit, when, by simply crossing a river, they could increase it. But between distant places, and especially between different countries, profits may continue different; because persons do not usually remove themselves or their capitals to a distant place without a very strong motive. If capital removed to remote parts of the world as readily, and for as small an inducement, as it moves to another quarter of the same town—if people would transport their manufactories to America or China whenever they could save a small percentage in their expenses by it—profits would be alike (or equivalent) all over the world, and all things would be produced in the places where the same labor and capital would produce them in greatest quantity and of best quality. A tendency may, even now, be observed toward such a state of things: capital is becoming more and more cosmopolitan; there is so much greater similarity of manners and institutions than formerly, and so much less alienation of feeling, among the more civilized countries, that both population and capital now move from one of those countries to another on much less temptation than heretofore. But there are still extraordinary differences, both of wages and of profits, between different parts of the world.

Between all distant places, therefore, in some degree, but especially between different countries (whether under the same supreme government or not), there may exist great inequalities in the return to labor and capital, without causing them to move from one place to the other in such quantity as to level those inequalities. The capital belonging to a country will, to a great extent, remain in the country, even if there be no mode of employing it in which it would not be more productive elsewhere. Yet even a country thus circumstanced might, and probably would, carry on trade with [pg 379]other countries. It would export articles of some sort, even to places which could make them with less labor than itself; because those countries, supposing them to have an advantage over it in all productions, would have a greater advantage in some things than in others, and would find it their interest to import the articles in which their advantage was smallest, that they might employ more of their labor and capital on those in which it was greatest.

It might seem that a special theory of value is required for international trade, as compared with domestic trade, for the particular reason that in the former there exists no free movement of labor and capital from one trading country to another. But we shall see that no new theory is necessary. As before pointed out,258 commodities exchange for each other at their relative costs wherever there is that free competition which insures perfect facility of movement for labor and capital. It has been usually assumed that capital and labor move freely as between different parts of the same country, but not between different countries. This, however, is not consistent with the facts. We saw that there were non-competing industrial groups within the same nation. Mr. Mill here, in a pointed way, suggests this, when he speaks of “distant places.” The addition, therefore, made to Mr. Mill's exposition by Mr. Cairnes259 is, that the word “international” (in default of a better term) should be applied to those conditions either within a country, or between two countries, which, because of the actual immobility of labor and capital from one occupation to another, furnishes a substantial interference with industrial competition. The obstacles to the free movement of labor and capital which produce the conditions called “international” are: 1. “Geographical distance; 2. Difference in political institutions; 3. Difference in language, religion, and social customs—in a word, in forms of civilization.” These differences exist between Maine and Montana; or even between two adjoining States, Ohio and Kentucky, one a free and the other an old slave State. Labor and capital have not in the past moved freely even across Mason and Dixon's line. There is, therefore, no treatment of international trade and values separate from the laws of value already laid down concerning non-competing groups, since there is also no free competition between all the industrial groups within a country.


§ 2. Interchange of commodities between distance places determined by differences not in their absolute, but in the comparative, costs of production.

As I have said elsewhere260 after Ricardo (the thinker who has done most toward clearing up this subject),261 “it is not a difference in the absolute cost of production which determines the interchange, but a difference in the comparative cost. It may be to our advantage to procure iron from Sweden in exchange for cottons, even although the mines of England as well as her manufactories should be more productive than those of Sweden; for if we have an advantage of one half in cottons, and only an advantage of a quarter in iron, and could sell our cottons to Sweden at the price which Sweden must pay for them if she produced them herself, we should obtain our iron with an advantage [over Sweden] of one half, as well as our cottons. We may often, by trading with foreigners, obtain their commodities at a smaller expense of labor and capital than they cost to the foreigners themselves. The bargain is still advantageous to the foreigner, because the commodity which he receives in exchange, though it has cost us less, would have cost him more.”

This may be illustrated as follows:

Articles interchanged. / England. / Sweden.

Cotton. / 10 days' labor produces x yds. / 15 days' labor produces x yds.
Iron. / 12 days' labor produces y cwts. / 15 days' labor produces y cwts.


Here England has the advantage over Sweden in both cotton and iron, since she can produce x yards of cotton in ten days' labor to fifteen days in Sweden, and y cwts. of iron in twelve days' labor to fifteen days in Sweden. The ship which takes x yards of cotton to Sweden, and there exchanges it, as may be done, for y cwts. of iron, brings back to England that which cost Sweden fifteen days' labor, while the cotton with [pg 381]which the iron was bought cost England only ten days' labor. So that England also got her iron at an advantage over Sweden of one half of ten days' labor; and yet England had an absolute advantage over Sweden in iron of a less amount (i.e., of one fourth of twelve days' labor). It is to be distinctly understood that by difference in comparative cost we mean a difference in the comparative cost of producing two or more articles in the same country, and not the difference of cost of the same article in the different trading countries. In this example, for instance, it is the difference in the comparative costs in England of both cotton and iron (not the different costs of cotton in England and Sweden) which gives the reason for the existence of the foreign trade.


To illustrate the cases in which interchange of commodities will not, and those in which it will, take place between two countries, the supposition may be made that the United States has an advantage over England in the production both of iron and of corn. It may first be supposed that the advantage is of equal amount in both commodities; the iron and the corn, each of which required 100 days' labor in the United States, requiring each 150 days' labor in England. It would follow that the iron of 150 days' labor in England, if sent to the United States, would be equal to the iron of 100 days' labor in the United States; if exchanged for corn, therefore, it would exchange for the corn of only 100 days' labor. But the corn of 100 days' labor in the United States was supposed to be the same quantity with that of 150 days' labor in England. With 150 days' labor in iron, therefore, England would only get as much corn in the United States as she could raise with 150 days' labor at home; and she would, in importing it, have the cost of carriage besides. In these circumstances no exchange would take place. In this case the comparative costs of the two articles in England and in the United States were supposed to be the same, though the absolute costs were different; on which supposition we see that there would be no labor saved to either country by confining its industry to one of the two productions and importing the other.

It is otherwise when the comparative and not merely [pg 382]the absolute costs of the two articles are different in the two countries. If, while the iron produced with 100 days' labor in the United States was produced with 150 days' labor in England, the corn which was produced in the United States with 100 days' labor could not be produced in England with less than 200 days' labor, an adequate motive to exchange would immediately arise. With a quantity of iron which England produced with 150 days' labor, she would be able to purchase as much corn in the United States as was there produced with 100 days' labor; but the quantity which was there produced with 100 days' labor would be as great as the quantity produced in England with 200 days' labor. By importing corn, therefore, from the United States, and paying for it with iron, England would obtain for 150 days' labor what would otherwise cost her 200, being a saving of 50 days' labor on each repetition of the transaction; and not merely a saving to England, but a saving absolutely; for it is not obtained at the expense of the United States, who, with corn that cost her 100 days' labor, has purchased iron which, if produced at home, would have cost her the same. The United States, therefore, on this supposition, loses nothing; but also she derives no advantage from the trade, the imported iron costing her as much as if it were made at home. To enable the United States to gain anything by the interchange, something must be abated from the gain of England: the corn produced in the United States by 100 days' labor must be able to purchase from England more iron than the United States could produce by that amount of labor; more, therefore, than England could produce by 150 days' labor, England thus obtaining the corn which would have cost her 200 days at a cost exceeding 150, though short of 200. England, therefore, no longer gains the whole of the labor which is saved to the two jointly by trading with one another.262

The case in which both England and the United States would gain from the trade may be thus briefly shown:

Articles interchanged. / United States. / England.

Corn. / 100 days' labor produces x bus. / 200 days' labor produces x bus.
Iron. / 125 days' labor produces y tons. / 150 days' labor produces y tons.


The ship which carries x bushels of corn from the United States to England can there exchange it for at least y tons of iron (costing England 150 days' labor, since x bushels in England would cost 200 days' labor), and bring it home, gaining for the United States the difference between the 100 days' labor in corn, paid for the y tons of iron, and the 125 days which the iron would have cost here if produced at home. In this case the United States has an advantage over England in both corn and iron, but still an international trade will spring up, because the United States will derive a gain owing to the less cost of corn as compared with the cost of iron. Our comparative advantage is in corn. England, also, by sending to the United States y tons of iron, gets in return for it x bushels of corn. To produce the corn herself would have cost her 200 days' labor, but she bought that corn by only 150 days' labor spent on iron. England's comparative advantage is in iron. Then both countries will gain.

Mr. Bowen263 gives an instance of international trade where one country has the advantage in both of the commodities entering into the exchange: “The inhabitants of Barbadoes, favored by their tropical climate and fertile soil, can raise provisions cheaper than we can in the United States. And yet Barbadoes buys nearly all her provisions from this country. Why is this so? Because, though Barbadoes has the advantage over us in the ability to raise provisions cheaply, she has a still greater advantage over us in her power to produce sugar and molasses. If she has an advantage of one fourth in raising provisions, she has an advantage of one half in regard to products exclusively tropical; and it is better for her to employ all her labor and capital in that branch of production in which her advantage is greatest. She can thus, by trading with us, obtain our breadstuffs and meat at a smaller expense of labor and capital than they cost ourselves. If, for instance, a barrel of flour costs ten days' labor in the United States and only eight days' labor in Barbadoes, the people of Barbadoes can still profitably buy the flour from this [pg 384]country, if they can pay for it with sugar which cost them only six days' labor; and the people of this country can profitably sell them the flour, or buy from them the sugar, provided the sugar, if raised in the United States, would cost eleven days' labor.... The United States receive sugar, which would have cost them eleven days' labor, by paying for it with flour which costs them but ten days. Barbadoes receives flour, which would have cost her eight days' labor, by paying for it with sugar which costs her but six days. If Barbadoes produced both commodities with greater facility, but greater in precisely the same degree, there would be no motive for interchange.”

It may be said, however, that in practice no business-man considers the question of “comparative cost” in making shipments of goods abroad; that all he thinks of is whether the price here, for example, is less than it is in London. And yet the very fact that the prices are less here implies that gold is of high value relatively to the given commodity; while in London, if money is to be sent back in payment, and if prices are high there, that implies that gold is there of less comparative value than commodities, and consequently that gold is the cheapest article to send to the United States. The doctrine, then, is as true of gold, or the precious metals, as it is of other commodities.264 It may be stated in the following language of Mr. Cairnes: “The proximate condition determining international exchange is the state of comparative prices in the exchanging countries as regards the commodities which form the subject of the trade. But comparative prices within the limits of each country are determined by two distinct principles—within the range of effective industrial competition, by cost of production; outside that range, by reciprocal demand.”265


§ 3. The direct benefits of commerce consist in increased Efficiency of the productive powers of the World.

From this exposition we perceive in what consists the benefit of international exchange, or, in other words, foreign commerce. Setting aside its enabling countries to obtain commodities which they could not themselves produce at all, its advantage consists in a more efficient employment of the productive forces of the world. If two countries which traded together attempted, as far as was physically possible, to produce for themselves what they now import from one another, the labor and capital of the two countries [pg 385]would not be so productive, the two together would not obtain from their industry so great a quantity of commodities, as when each employs itself in producing, both for itself and for the other, the things in which its labor is relatively most efficient. The addition thus made to the produce of the two combined constitutes the advantage of the trade. It is possible that one of the two countries may be altogether inferior to the other in productive capacities, and that its labor and capital could be employed to greatest advantage by being removed bodily to the other. The labor and capital which have been sunk in rendering Holland habitable would have produced a much greater return if transported to America or Ireland. The produce of the whole world would be greater, or the labor less, than it is, if everything were produced where there is the greatest absolute facility for its production. But nations do not, at least in modern times, emigrate en masse; and, while the labor and capital of a country remain in the country, they are most beneficially employed in producing, for foreign markets as well as for its own, the things in which it lies under the least disadvantage, if there be none in which it possesses an advantage.

The fundamental ground on which all trade, or all exchange of commodities, rests, is division of labor, or separation of employments. Beyond the ordinary gain from division of labor, arising from increased dexterity, there exist gains arising from the development of “the special capacities or resources possessed by particular individuals or localities.” International exchanges call out chiefly the special advantages offered by particular localities for the prosecution of particular industries.

“The only case, indeed, in which personal aptitudes go for much in the commerce of nations is where the nations concerned occupy different grades in the scale of civilization.... The most striking example which the world has ever seen of a foreign trade determined by the peculiar personal qualities of those engaged in ministering to it is that which was furnished by the Southern States of the American Union previous to the abolition of slavery. The effect of that institution was to give a very distinct industrial character to the laboring population of those States which unfitted them for all but a very limited number of occupations, but gave them a certain special fitness for these. Almost the entire industry of the country was consequently [pg 386]turned to the production of two or three crude commodities, in raising which the industry of slaves was found to be effective; and these were used, through an exchange with foreign countries, as the means of supplying the inhabitants with all other requisites.... In the main, however, it would seem that this cause [personal aptitudes] does not go for very much in international commerce.”266

In brief, then, international trade is but an extension of the principle of division of labor; and the gains to increased productiveness, arising from the latter, are exactly the same as those from the former.


§ 4. —Not in a Vent for exports, nor in the gains of Merchants.

According to the doctrine now stated, the only direct advantage of foreign commerce consists in the imports. A country obtains things which it either could not have produced at all, or which it must have produced at a greater expense of capital and labor than the cost of the things which it exports to pay for them. It thus obtains a more ample supply of the commodities it wants, for the same labor and capital; or the same supply, for less labor and capital, leaving the surplus disposable to produce other things. The vulgar theory disregards this benefit and deems the advantage of commerce to reside in the exports: as if not what a country obtains, but what it parts with, by its foreign trade, was supposed to constitute the gain to it. An extended market for its produce—an abundant consumption for its goods—a vent for its surplus—are the phrases by which it has been customary to designate the uses and recommendations of commerce with foreign countries. This notion is intelligible, when we consider that the authors and leaders of opinion on mercantile questions have always hitherto been the selling class. It is in truth a surviving relic of the Mercantile Theory, according to which, money being the only wealth, selling, or, in other words, exchanging goods for money, was (to countries without mines of their own) the only way of growing rich—and importation of goods, that is to say, parting with money, was so much subtracted from the benefit.

The notion that money alone is wealth has been long defunct, but it has left many of its progeny behind it. Adam Smith's theory of the benefit of foreign trade was, that it afforded an outlet for the surplus produce of a country, and enabled a portion of the capital of the country to replace itself with a profit. The expression, surplus produce, seems to imply that a country is under some kind of necessity of producing the corn or cloth which it exports; so that the portion which it does not itself consume, if not wanted and consumed elsewhere, would either be produced in sheer waste, or, if it were not produced, the corresponding portion of capital would remain idle, and the mass of productions in the country would be diminished by so much. Either of these suppositions would be entirely erroneous. The country produces an exportable article in excess of its own wants from no inherent necessity, but as the cheapest mode of supplying itself with other things. If prevented from exporting this surplus, it would cease to produce it, and would no longer import anything, being unable to give an equivalent; but the labor and capital which had been employed in producing with a view to exportation would find employment in producing those desirable objects which were previously brought from abroad; or, if some of them could not be produced, in producing substitutes for them. These articles would, of course, be produced at a greater cost than that of the things with which they had previously been purchased from foreign countries. But the value and price of the articles would rise in proportion; and the capital would just as much be replaced, with the ordinary profit, from the returns, as it was when employed in producing for the foreign market. The only losers (after the temporary inconvenience of the change) would be the consumers of the heretofore imported articles, who would be obliged either to do without them, consuming in lieu of them something which they did not like as well, or to pay a higher price for them than before.

If it be said that the capital now employed in foreign [pg 388]trade could not find employment in supplying the home market, I might reply that this is the fallacy of general over-production, discussed in a former chapter; but the thing is in this particular case too evident to require an appeal to any general theory. We not only see that the capital of the merchant would find employment, but we see what employment. There would be employment created, equal to that which would be taken away. Exportation ceasing, importation to an equal value would cease also, and all that part of the income of the country which had been expended in imported commodities would be ready to expend itself on the same things produced at home, or on others instead of them. Commerce is virtually a mode of cheapening production; and in all such cases the consumer is the person ultimately benefited; the dealer, in the end, is sure to get his profit, whether the buyer obtains much or little for his money.

E converso, if for any reason, such as a removal of duties, capital should be withdrawn from the production of articles consumed at home, and imported commodities should entirely take their place, the very importation of the foreign commodities would imply that an increased corresponding production was going on in this country with which to pay for the imported goods. The capital thus thrown out of employment in an industry in which we had no comparative advantage (when competition became free) would necessarily be employed in the industries in which we had an advantage, and would supply—and the transferred capital would be the only means of supplying—the commodities which would be sent abroad to pay for those, which by the supposition are now imported, but were formerly produced at home. The result is a greater productiveness of industry, and so a greater sum from which both labor and capital may be rewarded. Whenever capital, unrestrained by artificial support, leaves one employment as unprofitable, it means that that employment is naturally, and in itself, less productive than the usual run of other industries in the country, and so less profitable to both labor and capital than the majority of other occupations.


§ 5. Indirect benefits of Commerce, Economical and Moral; still greater than the Direct.

Such, then, is the direct economical advantage of foreign trade. But there are, besides, indirect effects, which must be counted as benefits of a high order. (1) One is, the [pg 389]tendency of every extension of the market to improve the processes of production. A country which produces for a larger market than its own can introduce a more extended division of labor, can make greater use of machinery, and is more likely to make inventions and improvements in the processes of production. Whatever causes a greater quantity of anything to be produced in the same place tends to the general increase of the productive powers of the world.267 There is (2) another consideration, principally applicable to an early stage of industrial advancement. The opening of a foreign trade, by making them acquainted with new objects, or tempting them by the easier acquisition of things which they had not previously thought attainable, sometimes works a sort of industrial revolution in a country whose resources were previously undeveloped for want of energy and ambition in the people; inducing those who were satisfied with scanty comforts and little work to work harder for the gratification of their new tastes, and even to save, and accumulate capital, for the still more complete satisfaction of those tastes at a future time.

But (3) the economical advantages of commerce are surpassed in importance by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, in the present low state of human improvement, of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. Commerce is now, what war once was, the principal source of this contact. Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress. Finally, (4) commerce first taught nations to see with goodwill the wealth and prosperity of one another. Before, the patriot, unless sufficiently advanced in culture to feel the world his country, wished all countries weak, poor, and ill-governed but his own: he now sees in their wealth and [pg 390]progress a direct source of wealth and progress to his own country. It is commerce which is rapidly rendering war obsolete, by strengthening and multiplying the personal interests which are in natural opposition to it. And it may be said without exaggeration that the great extent and rapid increase of international trade, in being the principal guarantee of the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Fri Aug 21, 2020 3:50 am

Chapter XIV. Of International Values.

§ 1. The values of imported commodities depend on the Terms of international interchange.


The values of commodities produced at the same place, or in places sufficiently adjacent for capital to move freely between them—let us say, for simplicity, of commodities produced in the same country—depend (temporary fluctuations apart) upon their cost of production. But the value of a commodity brought from a distant place, especially from a foreign country, does not depend on its cost of production in the place from whence it comes. On what, then, does it depend? The value of a thing in any place depends on the cost of its acquisition in that place; which, in the case of an imported article, means the cost of production of the thing which is exported to pay for it.

If, then, the United States imports wine from Spain, giving for every pipe of wine a bale of cloth, the exchange value of a pipe of wine in the United States will not depend upon what the production of the wine may have cost in Spain, but upon what the production of the cloth has cost in the United States. Though the wine may have cost in Spain the equivalent of only ten days' labor, yet, if the cloth costs in the United States twenty days' labor, the wine, when brought to the United States, will exchange for the produce of twenty days' American labor, plus the cost of carriage, including the usual profit on the importer's capital during the time it is locked up and withheld from other employment.268

The value, then, in any country, of a foreign commodity, [pg 392]depends on the quantity of home produce which must be given to the foreign country in exchange for it. In other words, the values of foreign commodities depend on the terms of international exchange. What, then, do these depend upon? What is it which, in the case supposed, causes a pipe of wine from Spain to be exchanged with the United States for exactly that quantity of cloth? We have seen that it is not their cost of production. If the cloth and the wine were both made in Spain, they would exchange at their cost of production in Spain; if they were both made in the United States, they would [possibly] exchange at their cost of production in the United States: but all the cloth being made in the United States, and all the wine in Spain, they are in circumstances to which we have already determined that the law of cost of production is not applicable. We must accordingly, as we have done before in a similar embarrassment, fall back upon an antecedent law, that of supply and demand; and in this we shall again find the solution of our difficulty.

§ 2. The values of foreign commodities depend, not upon Cost of Production, but upon Reciprocal Demand and Supply.

It has been previously explained that the conditions called. “international” are those, either within a nation, or those existing between two separate nations, which are such as to prevent the free movement of labor and capital from one group of industries to another, or from one locality to another distant one. Even if woolen cloth could be made cheaper in England than in the United States, we know that neither capital nor labor would easily leave the United States for England, although it might go from Rhode Island to Massachusetts under similar inducements. If shoes can be made with less advantage in Providence than in Lynn, the shoe industry will come to Lynn; but it does not follow that the English shoe industry would come to Lynn, even if the advantages of the latter were greater than those in England. If there be no obstacle to the free movement of labor and capital between places or occupations, and if some place or occupation can produce at a less cost than another place or occupation, then there will be a migration of the instruments of production. Since there is no free movement of labor and capital between one country and another, then two countries stand in the same relation as that of two “non-competing groups” within the same country, as before explained. When this fact is once fully grasped, the [pg 393]subject of international values becomes very simple. It does not differ from the question of those domestic values for which we found269 that the dependence on cost of production would not hold, but that their values were governed by reciprocal demand and supply.

Attention should be drawn to the real nature of the present inquiry. It is not here a question as to what causes international trade between two countries: that has been treated in the preceding chapter, and has been found to be a difference in the comparative cost. The question now is one of exchange value, that is, for how much of other commodities a given commodity will exchange. The reasons for the trade are supposed to exist; but we now want to know what the law is which determines the proportions of the exchange. Why does one article exchange for more or less of another? Not, as we have seen, because one costs more or less to produce than the other.

In the trade between the United States and England in iron and corn, formerly referred to (p. 383), it was seen that a 100 days' labor of corn buys from England iron which would have cost the United States 125 days' labor. England sends 150 days' labor of iron and buys from the United States corn which would have cost her 200 days' labor. But what rule fixes the proportions between 100 and 125 for the United States, and between 150 and 200 for England, at which the exchanges will take place? The trade increases the productiveness of both countries, but in what ratio will the two countries share this gain? The answer is, briefly, in the ratio set by reciprocal demand and supply, that is, the relative strength, as compared with each other, of the demands of the two countries respectively for iron and corn. This, however, may be capable of explanation in a simple form.

A has spades, and B has oats, to dispose of; and each wishes to get the article belonging to the other. Will A give one spade for one bushel of oats, or for two? Will B give two bushels of oats for one spade? That depends upon how strong a desire A has for oats; the intensity of his demand may induce him to give two spades for one bushel. But the exchange also depends upon B. If he has no great need for spades, and A has a strong desire for oats, B will get more spades for oats than otherwise, possibly two spades for one bushel of oats; that is, oats will have a larger exchange value. If, on the other hand, A cares less for oats than B does for spades, then the exchange will result in an increased value of spades relatively to oats. When two commodities exchange against each other, their exchange values will depend entirely upon the relative intensity of the demand [pg 394]on each side for the other commodity. And this simple form of the statement of reciprocal demand and supply is also the law of international values.

If instead of spades and oats we substitute iron and corn, and let the trade be between England and the United States, the quantity of corn required to buy a given quantity of iron will depend upon the relative demands of England for corn and of the United States for iron. Something may cut off England's demand for our breadstuffs, and they will then have a less exchange value relatively to iron (if we keep up our demand), and their prices will fall. But if, on the other hand, England has poor harvests, and consequently a great demand for corn, and if our demand for iron is not excessive at the same time, then our breadstuffs will rise in value. And this was precisely what happened from 1877 to 1879. Now, in the above illustration of corn and iron, how can we know whether or not x bushels of corn (the produce of 100 days' labor in the United States) will exchange for exactly y tons of English iron? That, again, will depend upon the reciprocal demands of the two countries for corn and iron respectively. Moreover, it will have been already observed that the ratio of exchange is not capable of being ascertained exactly, since it varies with changing conditions, namely, the desires of the people of the two countries, together with their means of purchase.

But yet these variations are capable of ascertainment as regards their extreme limits. The reciprocal demand can not carry the exchange value in either country beyond the line set by the cost of production of the article. For instance, an urgent need in England for corn (if the United States has a light demand for English iron) can not carry the ratio of exchange to a point such that England will offer so much more than 150 days' labor in iron for x bushels of American corn that it will go beyond 200 days' labor in iron. It will be seen at once, then, if that were the case, that England would produce the corn herself; and that she would then have no gain whatever from the trade. The ratio of exchange will thus be limited by the reciprocal demand on one side to the cost of production (200 days' labor) of English corn. On the other hand, if the supposition were reversed, and the United States had a great demand for iron, but England had little need for our corn, then we would not offer more than 125 days' labor of corn for y tons of iron, because for that expenditure of labor we could produce the iron ourselves.

In the above examples we have considered the case of a trade in corn and iron only. If corn were to typify all our goods wanted by England, and iron all English goods wanted by the United States, the conclusions would be exactly the [pg 395]same. The ratios of a myriad of things, each governed by its particular reciprocal demand, exchanging against each other, give a general result by which the goods sent out exchange against the goods brought back at such rates as are fixed by the reciprocal demands acting on all the goods. Goods are payments for goods; the ratio of exchange depends on reciprocal demand and supply. If we now add more countries to the example, we simply increase the number of persons (although in different countries) wanting our goods, as set off against our demands for the goods of this greater number of persons. If France, Germany, and England all want our corn, we must have some demand for the goods of France, Germany, and England also; and the same law of reciprocal demand gives the ratio of interchange. That this explanation is consistent with the facts is to be seen when we notice how eagerly the exporters of American staples watch the conditions which increase or diminish the foreign demand for these commodities, looking at them as the causes which directly affect their exchange value, or price.


When cost of carriage is added, it will increase the price of corn to England and of iron to the United States. But, as every one knows, an increase of price affects the demand; and, as the demand on each side is affected, a new ratio of exchange will finally be reached consistent with the strength of desires on each side. Who, therefore, will pay the most of the cost of carriage England or the United States? That will, again, depend on whether England has the greatest relative demand for American goods, as compared with the demand of the United States for English goods.

No absolute rule, therefore, can be laid down for the division of the cost, no more than for the division of the advantage; and it does not follow that, in whatever ratio the one is divided, the other will be divided in the same. It is impossible to say, if the cost of carriage could be annihilated, whether the producing or the importing country would be most benefited. This would depend on the play of international demand.

Cost of carriage has one effect more. But for it, every commodity would (if trade be supposed free) be either regularly imported or regularly exported. A country would make nothing for itself which it did not also make for other countries. But in consequence of cost of carriage there are many things, especially bulky articles, which every, or almost [pg 396]every, country produces within itself. After exporting the things in which it can employ itself most advantageously, and importing those in which it is under the greatest disadvantage, there are many lying between, of which the relative cost of production in that and in other countries differs so little that the cost of carriage would absorb more than the whole saving in cost of production which would be obtained by importing one and exporting another. This is the case with numerous commodities of common consumption, including the coarser qualities of many articles of food and manufacture, of which the finer kinds are the subject of extensive international traffic.

§ 3. —As illustrated by trade in cloth and linen between England and Germany.

Mr. Mill still further illustrates the operation of the law of reciprocal demand by the case of a trade between England and Germany in cloth and linen, as follows:


“Suppose that ten yards of broadcloth cost in England as much labor as fifteen yards of linen, and in Germany as much as twenty.” This supposition then being made, it would be the interest of England to import linen from Germany, and of Germany to import cloth from England. “When each country produced both commodities for itself, ten yards of cloth exchanged for fifteen yards of linen in England, and for twenty in Germany. They will now exchange for the same number of yards of linen in both. For what number? If for fifteen yards, England will be just as she was, and Germany will gain all. If for twenty yards, Germany will be as before, and England will derive the whole of the benefit. If for any number intermediate between fifteen and twenty, the advantage will be shared between the two countries. If, for example, ten yards of cloth exchange for eighteen of linen, England will gain an advantage of three yards on every fifteen, Germany will save two out of every twenty. The problem is, what are the causes which determine the proportion in which the cloth of England and the linen of Germany will exchange for each other? Let us suppose, then, that by the effect of what Adam Smith [pg 397]calls the higgling of the market, ten yards of cloth, in both countries, exchange for seventeen yards of linen.

“The demand for a commodity, that is, the quantity of it which can find a purchaser, varies, as we have before remarked, according to the price. In Germany the price of ten yards of cloth is now seventeen yards of linen, or whatever quantity of money is equivalent in Germany to seventeen yards of linen. Now, that being the price, there is some particular number of yards of cloth, which will be in demand, or will find purchasers, at that price. There is some given quantity of cloth, more than which could not be disposed of at that price; less than which, at that price, would not fully satisfy the demand. Let us suppose this quantity to be 1,000 times ten yards.

“Let us now turn our attention to England. There the price of seventeen yards of linen is ten yards of cloth, or whatever quantity of money is equivalent in England to ten yards of cloth. There is some particular number of yards of linen which, at that price, will exactly satisfy the demand, and no more. Let us suppose that this number is 1,000 times seventeen yards.

“As seventeen yards of linen are to ten yards of cloth, so are 1,000 times seventeen yards to 1,000 times ten yards. At the existing exchange value, the linen which England requires will exactly pay for the quantity of cloth which, on the same terms of interchange, Germany requires. The demand on each side is precisely sufficient to carry off the supply on the other. The conditions required by the principle of demand and supply are fulfilled, and the two commodities will continue to be interchanged, as we supposed them to be, in the ratio of seventeen yards of linen for ten yards of cloth.

“But our suppositions might have been different. Suppose that, at the assumed rate of interchange, England had been disposed to consume no greater quantity of linen than 800 times seventeen yards; it is evident that, at the rate supposed, this would not have sufficed to pay for the 1,000 times [pg 398]ten yards of cloth which we have supposed Germany to require at the assumed value. Germany would be able to procure no more than 800 times ten yards at that price. To procure the remaining 200, which she would have no means of doing but by bidding higher for them, she would offer more than seventeen yards of linen in exchange for ten yards of cloth; let us suppose her to offer eighteen. At this price, perhaps, England would be inclined to purchase a greater quantity of linen. She would consume, possibly, at that price, 900 times eighteen yards. On the other hand, cloth having risen in price, the demand of Germany for it would probably have diminished. If, instead of 1,000 times ten yards, she is now contented with 900 times ten yards, these will exactly pay for the 900 times eighteen yards of linen which England is willing to take at the altered price; the demand on each side will again exactly suffice to take off the corresponding supply; and ten yards for eighteen will be the rate at which, in both countries, cloth will exchange for linen.

“The converse of all this would have happened if, instead of 800 times seventeen yards, we had supposed that England, at the rate of ten for seventeen, would have taken 1,200 times seventeen yards of linen. In this case, it is England whose demand is not fully supplied; it is England who, by bidding for more linen, will alter the rate of interchange to her own disadvantage; and ten yards of cloth will fall, in both countries, below the value of seventeen yards of linen. By this fall of cloth, or, what is the same thing, this rise of linen, the demand of Germany for cloth will increase, and the demand of England for linen will diminish, till the rate of interchange has so adjusted itself that the cloth and the linen will exactly pay for one another; and, when once this point is attained, values will remain without further alteration.”

§ 4. The conclusion states in the Equation of International Demand.

“It may be considered, therefore, as established, that when two countries trade together in two commodities, the exchange value of these commodities relatively to each other will adjust itself to the inclinations and circumstances of the consumers on both sides, in such manner that the quantities [pg 399]required by each country, of the articles which it imports from its neighbor, shall be exactly sufficient to pay for one another. As the inclinations and circumstances of consumers can not be reduced to any rule, so neither can the proportions in which the two commodities will be interchanged. We know that the limits within which the variation is confined are the ratio between their costs of production in the one country and the ratio between their costs of production in the other. Ten yards of cloth can not exchange for more than twenty yards of linen, nor for less than fifteen. But they may exchange for any intermediate number. The ratios, therefore, in which the advantage of the trade may be divided between the two nations are various. The circumstances on which the proportionate share of each country more remotely depends admit only of a very general indication.”

If, therefore, it be asked what country draws to itself the greatest share of the advantage of any trade it carries on, the answer is, the country for whose productions there is in other countries the greatest demand, and a demand the most susceptible of increase from additional cheapness. In so far as the productions of any country possess this property, the country obtains all foreign commodities at less cost. It gets its imports cheaper, the greater the intensity of the demand in foreign countries for its exports. It also gets its imports cheaper, the less the extent and intensity of its own demand for them. The market is cheapest to those whose demand is small. A country which desires few foreign productions, and only a limited quantity of them, while its own commodities are in great request in foreign countries, will obtain its limited imports at extremely small cost, that is, in exchange for the produce of a very small quantity of its labor and capital.

The law which we have now illustrated may be appropriately named the Equation of International Demand. It may be concisely stated as follows: The produce of a country exchanges for the produce of other countries at such values as are required in order that the whole of her exports may [pg 400]exactly pay for the whole of her imports. This law of International Values is but an extension of the more general law of Value, which we called the Equation of Supply and Demand.270 We have seen that the value of a commodity always so adjusts itself as to bring the demand to the exact level of the supply. But all trade, either between nations or individuals, is an interchange of commodities, in which the things that they respectively have to sell constitute also their means of purchase: the supply brought by the one constitutes his demand for what is brought by the other. So that supply and demand are but another expression for reciprocal demand; and to say that value will adjust itself so as to equalize demand with supply, is, in fact, to say that it will adjust itself so as to equalize the demand on one side with the demand on the other.

The tendency of imports to balance exports may be seen from Chart No. XIII, on the next page, which shows the relation between the exports and imports solely of merchandise, and exclusive of specie, to and from the United States. From 1850 to 1860, after the discoveries of the precious metals in this country, we sent great quantities of gold and silver out of the country, purely as merchandise, so that, if we should include the precious metals among the exports in those years, the total exports would more nearly equal the total imports. The transmission of gold at that time was effected exactly as that of other merchandise; so that to the date of the civil war there was a very evident equilibrium between exports and imports. Then came the war, with the period of extravagance and speculation following, which led to great purchases abroad, and which was closed only by the panic of 1873. Since then more exports than imports were needed to pay for the great purchases of the former period; and the epoch of great exports, from 1875 to 1883, balanced the opposite conditions in the period preceding. It would seem, therefore, that we had reached a normal period about the year 1882.271 A fuller statement as to the fluctuations of exports and imports about the equilibrium will be given when the introduction of money in international trade is made. The full statement must also include the financial account.


Image
Chart XIII. Value of Merchandise imported into (dotted line) and exported from (black line) the United States from 1835 to 1883.

§ 5. The cost to a country of its imports depends not only on the ratio of exchange, but on the efficiency of its labor.

We now pass to another essential part of the theory of the subject. There are two senses in which a country obtains commodities cheaper by foreign trade: in the sense of value and in the sense of cost: (1.) It gets them cheaper in the first sense, by their falling in value relatively to other things; the same quantity of them exchanging, in the country, for a smaller quantity than before of the other produce of the country. To revert to our original figures [of the trade with Germany in cloth and linen]: in England, all consumers of linen obtained, after the trade was opened, seventeen or some greater number of yards for the same quantity of all other things for which they before obtained only fifteen. The degree of cheapness, in this sense of the term, depends on the laws of International Demand, so copiously illustrated in the preceding sections. (2.) But, in the other sense, that of cost, a country gets a commodity cheaper when it obtains a greater quantity of the commodity with the same expenditure of labor and capital. In this sense of the term, cheapness in a great measure depends upon a cause of a different nature: a country gets its imports cheaper, in proportion to the general productiveness of its domestic industry; to the general efficiency of its labor. The labor of one country may be, as a whole, much more efficient than that of another: all or most of the commodities capable of being produced in both may be produced in one at less absolute cost than in the other; which, as we have seen, will not necessarily prevent the two countries from exchanging commodities. The things which the more favored country will import from others are, of course, those in which it is least superior; but, by importing them, it acquires, even in those commodities, the same advantage which it possesses in the articles it gives in exchange for them. What her imports cost to her is a function of two variables: (1) the quantity of her own commodities which she gives for them, and (2) the cost of those commodities. Of these, the last alone depends on the efficiency of her labor; the first depends on the law of international values; that is, on the [pg 403]intensity and extensibility of the foreign demand for her commodities, compared with her demand for foreign commodities.

The great productiveness of any industry in our country has thus two results: (1) it gives a larger total out of which labor and capital at home can receive greater rewards; and (2) the commodities being cheaper in comparison than other commodities not so easily produced, furnish the very articles which are most likely to be sent abroad, in accordance with the doctrine of comparative cost. In the United States, those things in the production of which labor and capital are most efficient, and so earn the largest rewards, are precisely the articles entering most largely into our foreign trade. That is, we get foreign articles cheaper precisely because these exports cost us less in labor and capital. These, of course, since we inhabit a country whose natural resources are not yet fully worked, are largely the products of the extractive industries, as may be seen by the following table of the value of goods entering to the greatest extent into our foreign export trade in 1883:

Raw cotton / $247,328,721
Breadstuffs / 208,040,850
Provisions and animals / 118,177,555
Mineral oils / 40,555,492
Wood / 26,793,708
Tobacco / 22,095,229


These six classes of commodities are arranged in the order in which they enter into our export trade, and are the six which come first and highest in the list.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Fri Aug 21, 2020 3:54 am

Chapter XV. Of Money Considered As An Imported Commodity.

§ 1. Money imported on two modes; as a Commodity, and as a medium of Exchange.


The degree of progress which we have now made in the theory of foreign trade puts it in our power to supply what was previously deficient in our view of the theory of money; and this, when completed, will in its turn enable us to conclude the subject of foreign trade.

Money, or the material of which it is composed, is, in Great Britain, and in most other countries, a foreign commodity. Its value and distribution must therefore be regulated, not by the law of value which obtains in adjacent places, but by that which is applicable to imported commodities—the law of international values.

In the discussion into which we are now about to enter, I shall use the terms money and the precious metals indiscriminately. This may be done without leading to any error; it having been shown that the value of money, when it consists of the precious metals, or of a paper currency convertible into them on demand, is entirely governed by the value of the metals themselves: from which it never permanently differs, except by the expense of coinage, when this is paid by the individual and not by the state.

Money is brought into a country in two different ways. It is imported (chiefly in the form of bullion) like any other merchandise, as being an advantageous article of commerce. It is also imported in its other character of a medium of exchange, to pay some debt due to the country, either for goods exported or on any other account. The existence of these two distinct modes in which money flows into a country, [pg 405]while other commodities are habitually introduced only in the first of these modes, occasions somewhat more of complexity and obscurity than exists in the case of other commodities, and for this reason only is any special and minute exposition necessary.

§ 2. As a commodity, it obeys the same laws of Value as other imported Commodities.

In so far as the precious metals are imported in the ordinary way of commerce, their value must depend on the same causes, and conform to the same laws, as the value of any other foreign production. It is in this mode chiefly that gold and silver diffuse themselves from the mining countries into all other parts of the commercial world. They are the staple commodities of those countries, or at least are among their great articles of regular export; and are shipped on speculation, in the same manner as other exportable commodities. The quantity, therefore, which a country (say England) will give of its own produce, for a certain quantity of bullion, will depend, if we suppose only two countries and two commodities, upon the demand in England for bullion, compared with the demand in the mining country (which we will call the United States272) for what England has to give.

The bullion required by England must exactly pay for the cottons or other English commodities required by the United States. If, however, we substitute for this simplicity the degree of complication which really exists, the equation of international demand must be established not between the bullion wanted in England and the cottons or broadcloth wanted in the United States, but between the whole of the imports of England and the whole of her exports. The demand in foreign countries for English products must be brought into equilibrium with the demand in England for the products of foreign countries; and all foreign commodities, bullion among the rest, must be exchanged against English products in such proportions as will, by the effect they produce on the demand, establish this equilibrium.

There is nothing in the peculiar nature or uses of the [pg 406]precious metals which should make them an exception to the general principles of demand. So far as they are wanted for purposes of luxury or the arts, the demand increases with the cheapness, in the same irregular way as the demand for any other commodity. So far as they are required for money, the demand increases with the cheapness in a perfectly regular way, the quantity needed being always in inverse proportion to the value. This is the only real difference, in respect to demand, between money and other things.

Money, then, if imported solely as a merchandise, will, like other imported commodities, be of lowest value in the countries for whose exports there is the greatest foreign demand, and which have themselves the least demand for foreign commodities. To these two circumstances it is, however, necessary to add two others, which produce their effect through cost of carriage. The cost of obtaining bullion is compounded of two elements; the goods given to purchase it and the expense of transport; of which last, the bullion countries will bear a part (though an uncertain part) in the adjustment of international values. The expense of transport is partly that of carrying the goods to the bullion countries, and partly that of bringing back the bullion; both these items are influenced by the distance from the mines; and the former is also much affected by the bulkiness of the goods. Countries whose exportable produce consists of the finer manufactures obtain bullion, as well as all other foreign articles, cæteris paribus, at less expense than countries which export nothing but bulky raw produce.

To be quite accurate, therefore, we must say: The countries whose exportable productions (1) are most in demand abroad, and (2) contain greatest value in smallest bulk, (3) which are nearest to the mines, and (4) which have least demand for foreign productions, are those in which money will be of lowest value, or, in other words, in which prices will habitually range the highest. If we are speaking not of the value of money, but of its cost (that is, the quantity of the country's labor which must be expended to obtain it), [pg 407]we must add (5) to these four conditions of cheapness a fifth condition, namely, “whose productive industry is the most efficient.” This last, however, does not at all affect the value of money, estimated in commodities; it affects the general abundance and facility with which all things, money and commodities together, can be obtained.273

The accompanying Chart, No. XIV, on the next page, gives the excess of exports from the United States of gold and silver coin and bullion over imports, and the excess of imports over exports. The movement of the line above the horizontal baseline shows distinctly how largely we have been sending the precious metals abroad from our mines, simply as a regular article of export, like merchandise. From 1850 to 1879 the exports are clearly not in the nature of payments for trade balances; since it indicates a steady movement out of the country (with the exception of the first year of the war, when gold came to this country). The phenomenal increase of specie exports during the war, and until 1879, was due to the fact that we had a depreciated paper currency, which sent the metals out of the country as merchandise. This chart should be studied in connection with Chart No. XIII.

Image
Chart XIV. Chart showing the Excess of Exports and Imports of Gold and Silver Coin and Bullion, from and into the United States, from 1835 to 1883. The line when above the base-line shows the excess of exports; when below, the excess of imports.

From the preceding considerations, it appears that those are greatly in error who contend that the value of money, in countries where it is an imported commodity, must be entirely regulated by its value in the countries which produce it; and can not be raised or lowered in any permanent manner unless some change has taken place in the cost of production at the mines. On the contrary, any circumstance which disturbs the equation of international demand with respect to a particular country not only may, but must, affect the value of money in that country—its value at the mines remaining the same. The opening of a new branch of export trade from England; an increase in the foreign demand for English products, either by the natural course of events or by the abrogation of duties; a check to the demand in England for foreign commodities, by the laying on of import duties in England or of export duties elsewhere; these and all other events of similar tendency would [pg 409]make the imports of England (bullion and other things taken together) no longer an equivalent for the exports; and the countries which take her exports would be obliged to offer their commodities, and bullion among the rest, on cheaper terms, in order to re-establish the equation of demand; and thus England would obtain money cheaper, and would acquire a generally higher range of prices. A country which, from any of the causes mentioned, gets money cheaper, obtains all its other imports cheaper likewise.

It is by no means necessary that the increased demand for English commodities, which enables England to supply herself with bullion at a cheaper rate, should be a demand in the mining countries. England might export nothing whatever to those countries, and yet might be the country which obtained bullion from them on the lowest terms, provided there were a sufficient intensity of demand in other foreign countries for English goods, which would be paid for circuitously, with gold and silver from the mining countries. The whole of its exports are what a country exchanges against the whole of its imports, and not its exports and imports to and from any one country.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Fri Aug 21, 2020 4:00 am

Chapter XVI. Of The Foreign Exchanges.

§ 1. Money passes from country to country as a Medium of Exchange, through the Exchanges.


We have thus far considered the precious metals as a commodity, imported like other commodities in the common course of trade, and have examined what are the circumstances which would in that case determine their value. But those metals are also imported in another character, that which belongs to them as a medium of exchange; not as an article of commerce, to be sold for money, but as themselves money, to pay a debt, or effect a transfer of property.

Money is sent from one country to another for various purposes: the most usual purpose, however, is that of payment for goods. To show in what circumstances money actually passes from country to country for this or any of the other purposes mentioned, it is necessary briefly to state the nature of the mechanism by which international trade is carried on, when it takes place not by barter but through the medium of money.

In practice, the exports and imports of a country not only are not exchanged directly against each other, but often do not even pass through the same hands. Each is separately bought and paid for with money. We have seen, however, that, even in the same country, money does not actually pass from hand to hand each time that purchases are made with it, and still less does this happen between different countries. The habitual mode of paying and receiving payment for commodities, between country and country, is by bills of exchange.

A merchant in the United States, A, has exported American [pg 411]commodities, consigning them to his correspondent, B, in England. Another merchant in England, C, has exported English commodities, suppose of equivalent value, to a merchant, D, in the United States. It is evidently unnecessary that B in England should send money to A in the United States, and that D in the United States should send an equal sum of money to C in England. The one debt may be applied to the payment of the other, and the double cost and risk of carriage be thus saved. A draws a bill on B for the amount which B owes to him: D, having an equal amount to pay in England, buys this bill from A, and sends it to C, who, at the expiration of the number of days which the bill has to run, presents it to B for payment. Thus the debt due from England to the United States, and the debt due from the United States to England, are both paid without sending an ounce of gold or silver from one country to the other.274

Image

This implies (if we exclude for the present any other international payments than those occurring in the course of commerce) that the exports and imports exactly pay for one another, or, in other words, that the equation of international demand is established. When such is the fact, the international transactions are liquidated without the passage of any money from one country to the other. But, if there is a greater sum due from the United States to England than is due from England to the United States, or vice versa, the debts can not be simply written off against one another. After the one has been applied, as far as it will go, toward covering the other, the balance must be transmitted in the precious metals. In point of fact, the merchant who has the amount to pay will even then pay for it by a bill. When a person has a remittance to make to a foreign country, he does [pg 412]not himself search for some one who has money to receive from that country, and ask him for a bill of exchange. In this, as in other branches of business, there is a class of middle-men or brokers, who bring buyers and sellers together, or stand between them, buying bills from those who have money to receive, and selling bills to those who have money to pay. When a customer comes to a broker for a bill on Paris or Amsterdam, the broker sells to him perhaps the bill he may himself have bought that morning from a merchant, perhaps a bill on his own correspondent in the foreign city; and, to enable his correspondent to pay, when due, all the bills he has granted, he remits to him all those which he has bought and has not resold. In this manner these brokers take upon themselves the whole settlement of the pecuniary transactions between distant places, being remunerated by a small commission or percentage on the amount of each bill which they either sell or buy. Now, if the brokers find that they are asked for bills, on the one part, to a greater amount than bills are offered to them on the other, they do not on this account refuse to give them; but since, in that case, they have no means of enabling the correspondents on whom their bills are drawn to pay them when due, except by transmitting part of the amount in gold or silver, they require from those to whom they sell bills an additional price, sufficient to cover the freight and insurance of the gold and silver, with a profit sufficient to compensate them for their trouble and for the temporary occupation of a portion of their capital. This premium (as it is called) the buyers are willing to pay, because they must otherwise go to the expense of remitting the precious metals themselves, and it is done cheaper by those who make doing it a part of their especial business. But, though only some of those who have a debt to pay would have actually to remit money, all will be obliged, by each other's competition, to pay the premium; and the brokers are for the same reason obliged to pay it to those whose bills they buy. The reverse of all this happens, if, on the comparison of exports and imports, the country, [pg 413]instead of having a balance to pay, has a balance to receive. The brokers find more bills offered to them than are sufficient to cover those which they are required to grant. Bills on foreign countries consequently fall to a discount; and the competition among the brokers, which is exceedingly active, prevents them from retaining this discount as a profit for themselves, and obliges them to give the benefit of it to those who buy the bills for purposes of remittance.

When the United States had the same number of dollars to pay to England which England had to pay to her, one set of merchants in the United States would want bills, and another set would have bills to dispose of, for the very same number of dollars; and consequently a bill on England for $1,000 would sell for exactly $1,000, or, in the phraseology of merchants, the exchange would be at par. As England also, on this supposition, would have an equal number of dollars to pay and to receive, bills on the United States would be at par in England, whenever bills on England were at par in the United States.

If, however, the United States had a larger sum to pay to England than to receive from her, there would be persons requiring bills on England for a greater number of dollars than there were bills drawn by persons to whom money was due. A bill on England for $1,000 would then sell for more than $1,000, and bills would be said to be at a premium. The premium, however, could not exceed the cost and risk of making the remittance in gold, together with a trifling profit; because, if it did, the debtor would send the gold itself, in preference to buying the bill.

If, on the contrary, the United States had more money to receive from England than to pay, there would be bills offered for a greater number of dollars than were wanted for remittance, and the price of bills would fall below par: a bill for $1,000 might be bought for somewhat less than $1,000, and bills would be said to be at a discount.

When the United States has more to pay than to receive, England has more to receive than to pay, and vice versa. [pg 414]When, therefore, in the United States, bills on England bear a premium, then, in England, bills on the United States are at a discount; and, when bills on England are at a discount in the United States, bills on the United States are at a premium in England. If they are at par in either country, they are so, as we have already seen, in both.275

Thus do matters stand between countries, or places which have the same currency. So much of barbarism, however, still remains in the transactions of the most civilized nations, that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbors, a peculiar currency of their own. To our present purpose this makes no other difference than that, instead of speaking of equal sums of money, we have to speak of equivalent sums. By equivalent sums, when both currencies are composed of the same metal, are meant sums which contain exactly the same quantity of the metal, in weight and fineness.

The quantity of gold in the English pound is equivalent to $4.8666+ of our gold coins. If the bills offered are about equal to those wanted, a claim to a pound in England will sell for $4.86. If many are wanted, and but few to be had, their price will go up, of course; but it can not go more than a small fraction beyond $4.90, since about 3-¼ cents is sufficient to cover the brokerage, insurance, and freight per pound sterling in a shipment of gold to London. Therefore, in order to get money to a creditor in London, no one will pay more for a pound in the form of a bill than he will be obliged to pay for sending it across in the form of bullion. Bills of exchange, then, can not rise in price beyond the point ($4.90 +) since, rather than pay a higher sum for a bill, gold will be sent. This point is called the “shipping-point” of gold. When the exchanges are at $4.90, it will be found that gold is going abroad. On the other hand, when the supply of bills is greater than the demand, their price will fall. A man having a bill on London to sell—i.e., a claim to a pound in London—will not sell it at a price here lower than $4.86, by more than the expense of bringing the gold itself across. Since this expense is about 3-¼ cents, bills can not fall below about $4.83. When exchange is at that price, it will be [pg 415]found that gold is coming to the United States from England. This price is the “shipping-point” for imports of gold. This, of course, applies to sight-bills only.

Formerly, we computed exchange on a scale of percentages, the real par being about 109. This was given up after the war.


When bills on foreign countries are at a premium, it is customary to say that the exchanges are against the country, or unfavorable to it. In order to understand these phrases, we must take notice of what “the exchange,” in the language of merchants, really means. It means the power which the money of the country has of purchasing the money of other countries. Supposing $4.86 to be the exact par of exchange, then when it requires more than $1,000 to buy a bill of £205, $1,000 of American money are worth less than their real equivalent of English money: and this is called an exchange unfavorable to the United States. The only persons in the United States, however, to whom it is really unfavorable are those who have money to pay in England, for they come into the bill market as buyers, and have to pay a premium; but to those who have money to receive in England the same state of things is favorable; for they come as sellers and receive the premium. The premium, however, indicates that a balance is due by the United States, which must be eventually liquidated in the precious metals; and since, according to the old theory, the benefit of a trade consisted in bringing money into the country, this prejudice introduced the practice of calling the exchange favorable when it indicated a balance to receive, and unfavorable when it indicated one to pay; and the phrases in turn tended to maintain the prejudice.

§ 2. Distinction between Variations in the Exchanges which are self-adjusting and those which can only be rectified through Prices.

It might be supposed at first sight that when the exchange is unfavorable, or, in other words, when bills are at a premium, the premium must always amount to a full equivalent for the cost of transmitting money. But a small excess of imports above exports, or any other small amount of debt to be paid to foreign countries, does not usually affect the exchanges to the full extent of the cost and risk of transporting bullion. The length of credit allowed generally permits, on the part of some of the debtors, a postponement [pg 416]of payment, and in the mean time the balance may turn the other way, and restore the equality of debts and credits without any actual transmission of the metals. And this is the more likely to happen, as there is a self-adjusting power in the variations of the exchange itself. Bills are at a premium because a greater money value has been imported than exported. But the premium is itself an extra profit to those who export. Besides the price they obtain for their goods, they draw for the amount and gain the premium. It is, on the other hand, a diminution of profit to those who import. Besides the price of the goods, they have to pay a premium for remittance. So that what is called an unfavorable exchange is an encouragement to export, and a discouragement to import. And if the balance due is of small amount, and is the consequence of some merely casual disturbance in the ordinary course of trade, it is soon liquidated in commodities, and the account adjusted by means of bills, without the transmission of any bullion. Not so, however, when the excess of imports above exports, which has made the exchange unfavorable, arises from a permanent cause. In that case, what disturbed the equilibrium must have been the state of prices, and it can only be restored by acting on prices. It is impossible that prices should be such as to invite to an excess of imports, and yet that the exports should be kept permanently up to the imports by the extra profit on exportation derived from the premium on bills; for, if the exports were kept up to the imports, bills would not be at a premium, and the extra profit would not exist. It is through the prices of commodities that the correction must be administered.

Disturbances, therefore, of the equilibrium of imports and exports, and consequent disturbances of the exchange, may be considered as of two classes: the one casual or accidental, which, if not on too large a scale, correct themselves through the premium on bills, without any transmission of the precious metals; the other arising from the general state of prices, which can not be corrected without the subtraction [pg 417]of actual money from the circulation of one of the countries, or an annihilation of credit equivalent to it.

It remains to observe that the exchanges do not depend on the balance of debts and credits with each country separately, but with all countries taken together. The United States may owe a balance of payments to England; but it does not follow that the exchange with England will be against the United States, and that bills on England will be at a premium; because a balance may be due to the United States from Holland or Hamburg, and she may pay her debts to England with bills on those places; which is technically called arbitration of exchange. There is some little additional expense, partly commission and partly loss of interest in settling debts in this circuitous manner, and to the extent of that small difference the exchange with one country may vary apart from that with others.

A common use of bills of exchange is that by which, when three countries are concerned, two of them may strike a balance through the third, if both countries have dealings with that third country. New York merchants may buy of China, but China may not be buying of New York, although both may have dealings with London.

Image
Illustration.

A, we will suppose, is a buyer of £1,000 worth of tea from F, in Hong-Kong; B is an exporter of wheat (£1,000) to C in London; D has sent £1,000 worth of cotton goods to E in Hong-Kong. A can now pay F through London without the transmission of coin. A buys B's claim on C for £1,000, and sends it to F. E wishes to pay D in London for the cotton goods he bought of him; therefore, he buys from F for £1,000 the claim he now holds (i.e., a bill of exchange on London) against C for £1,000. E sends it to D, and, when D collects it from C, the whole circle of exchanges is completed without the transmission of the precious metals.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Tue Aug 25, 2020 6:52 am

Chapter XVII. Of The Distribution Of The Precious Metals Through The Commercial World.

§ 1. The substitution of money for barter makes no difference in exports and imports, nor in the Law of international Values.


Having now examined the mechanism by which the commercial transactions between nations are actually conducted, we have next to inquire whether this mode of conducting them makes any difference in the conclusions respecting international values, which we previously arrived at on the hypothesis of barter.

The nearest analogy would lead us to presume the negative. We did not find that the intervention of money and its substitutes made any difference in the law of value as applied to adjacent places. Things which would have been equal in value if the mode of exchange had been by barter are worth equal sums of money. The introduction of money is a mere addition of one more commodity, of which the value is regulated by the same laws as that of all other commodities. We shall not be surprised, therefore, if we find that international values also are determined by the same causes under a money and bill system as they would be under a system of barter, and that money has little to do in the matter, except to furnish a convenient mode of comparing values.

All interchange is, in substance and effect, barter; whoever sells commodities for money, and with that money buys other goods, really buys those goods with his own commodities. And so of nations: their trade is a mere exchange of exports for imports; and, whether money is employed or not, things are only in their permanent state when the exports and imports exactly pay for each other. When this is the [pg 419]case, equal sums of money are due from each country to the other, the debts are settled by bills, and there is no balance to be paid in the precious metals. The trade is in a state like that which is called in mechanics a condition of stable equilibrium.

But the process by which things are brought back to this state when they happen to deviate from it is, at least outwardly, not the same in a barter system and in a money system. Under the first, the country which wants more imports than its exports will pay for must offer its exports at a cheaper rate, as the sole means of creating a demand for them sufficient to re-establish the equilibrium. When money is used, the country seems to do a thing totally different. She takes the additional imports at the same price as before, and, as she exports no equivalent, the balance of payments turns against her; the exchange becomes unfavorable, and the difference has to be paid in money. This is, in appearance, a very distinct operation from the former. Let us see if it differs in its essence, or only in its mechanism.

Let the country which has the balance to pay be the United States,276 and the country which receives it, England. By this transmission of the precious metals, the quantity of the currency is diminished in the United States, and increased in England. This I am at liberty to assume. We are now supposing that there is an excess of imports over exports, arising from the fact that the equation of international demand is not yet established: that there is at the ordinary prices a permanent demand in the United States for more English goods than the American goods required in England at the ordinary prices will pay for. When this is the case, if a change were not made in the prices, there would be a perpetually renewed balance to be paid in money. The imports require to be permanently diminished, or the exports to be increased, which can only be accomplished through [pg 420]prices; and hence, even if the balances are at first paid from hoards, or by the exportation of bullion, they will reach the circulation at last, for, until they do, nothing can stop the drain.

When, therefore, the state of prices is such that the equation of international demand can not establish itself, the country requiring more imports than can be paid for by the exports, it is a sign that the country has more of the precious metals, or their substitutes, in circulation, than can permanently circulate, and must necessarily part with some of them before the balance can be restored. The currency is accordingly contracted: prices fall, and, among the rest, the prices of exportable articles; for which, accordingly, there arises, in foreign countries, a greater demand: while imported commodities have possibly risen in price, from the influx of money into foreign countries, and at all events have not participated in the general fall. But, until the increased cheapness of American goods induces foreign countries to take a greater pecuniary value, or until the increased dearness (positive or comparative) of foreign goods makes the United States take a less pecuniary value, the exports of the United States will be no nearer to paying for the imports than before, and the stream of the precious metals which had begun to flow out of the United States will still flow on. This efflux will continue until the fall of prices in the United States brings within reach of the foreign market some commodity which the United States did not previously send thither; or, until the reduced price of the things which she did send has forced a demand abroad for a sufficient quantity to pay for the imports, aided perhaps by a reduction of the American demand for foreign goods, through their enhanced price, either positive or comparative.

Now, this is the very process which took place on our original supposition of barter. Not only, therefore, does the trade between nations tend to the same equilibrium between exports and imports, whether money is employed or not, but the means by which this equilibrium is established are essentially [pg 421]the same. The country whose exports are not sufficient to pay for her imports offers them on cheaper terms, until she succeeds in forcing the necessary demand: in other words, the equation of international demand, under a money system as well as under a barter system, is the law of international trade. Every country exports and imports the very same things, and in the very same quantity, under the one system as under the other. In a barter system, the trade gravitates to the point at which the sum of the imports exactly exchanges for the sum of the exports: in a money system, it gravitates to the point at which the sum of the imports and the sum of the exports exchange for the same quantity of money. And, since things which are equal to the same thing are equal to one another, the exports and imports which are equal in money price would, if money were not used, precisely exchange for one another.277

§ 2. The preceding Theorem further illustrated.

Let us proceed to [examine] to what extent the benefit of an improvement in the production of an exportable article is participated in by the countries importing it.

The improvement may either consist in the cheapening of some article which was already a staple production of the country, or in the establishment of some new branch of industry, or of some process rendering an article exportable which had not till then been exported at all. It will be convenient to begin with the case of a new export, as being somewhat the simpler of the two.

The first effect is that the article falls in price, and a demand arises for it abroad. This new exportation disturbs the balance, turns the exchanges, money flows into the country (which we shall suppose to be the United States), and continues to flow until prices rise. This higher range of prices will somewhat check the demand in foreign countries for the new article of export; and will diminish the demand which existed abroad for the other things which the United States was in the habit of exporting. The exports will thus be diminished; while at the same time the American public, [pg 424]having more money, will have a greater power of purchasing foreign commodities. If they make use of this increased power of purchase, there will be an increase of imports; and by this, and the check to exportation, the equilibrium of imports and exports will be restored. The result to foreign countries will be, that they have to pay dearer than before for their other imports, and obtain the new commodity cheaper than before, but not so much cheaper as the United States herself does. I say this, being well aware that the article would be actually at the very same price (cost of carriage excepted) in the United States and in other countries. The cheapness, however, of the article is not measured solely by the money-price, but by that price compared with the money-incomes of the consumers. The price is the same to the American and to the foreign consumers; but the former pay that price from money-incomes which have been increased by the new distribution of the precious metals; while the latter have had their money-incomes probably diminished by the same cause. The trade, therefore, has not imparted to the foreign consumer the whole, but only a portion, of the benefit which the American consumer has derived from the improvement; while the United States has also benefited in the prices of foreign commodities. Thus, then, any industrial improvement which leads to the opening of a new branch of export trade benefits a country not only by the cheapness of the article in which the improvement has taken place, but by a general cheapening of all imported products.

Let us now change the hypothesis, and suppose that the improvement, instead of creating a new export from the United States, cheapens an existing one. Let the commodity in which there is an improvement be [cotton] cloth. The first effect of the improvement is that its price falls, and there is an increased demand for it in the foreign market. But this demand is of uncertain amount. Suppose the foreign consumers to increase their purchases in the exact ratio of the cheapness, or, in other words, to lay out in cloth the [pg 425]same sum of money as before; the same aggregate payment as before will be due from foreign countries to the United States; the equilibrium of exports and imports will remain undisturbed, and foreigners will obtain the full advantage of the increased cheapness of cloth. But if the foreign demand for cloth is of such a character as to increase in a greater ratio than the cheapness, a larger sum than formerly will be due to the United States for cloth, and when paid will raise American prices, the price of cloth included; this rise, however, will affect only the foreign purchaser, American incomes being raised in a corresponding proportion; and the foreign consumer will thus derive a less advantage than the United States from the improvement. If, on the contrary, the cheapening of cloth does not extend the foreign demand for it in a proportional degree, a less sum of debts than before will be due to the United States for cloth, while there will be the usual sum of debts due from the United States to foreign countries; the balance of trade will turn against the United States, money will be exported, prices (that of cloth included) will fall, and cloth will eventually be cheapened to the foreign purchaser in a still greater ratio than the improvement has cheapened it to the United States. These are the very conclusions which [would be] deduced on the hypothesis of barter.278

The result of the preceding discussion can not be better summed up than in the words of Ricardo.279 “Gold and silver having been chosen for the general medium of circulation, they are, by the competition of commerce, distributed in such proportions among the different countries of the world as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter.” Of this principle, so fertile in consequences, previous to which the theory of foreign trade was an unintelligible chaos, Mr. [pg 426]Ricardo, though he did not pursue it into its ramifications, was the real originator.

On the principles of trade which we have before explained, the same rule will apply to the distribution of money in different parts of the same country, especially of a large country with various kinds of production, like the United States. The medium of exchange will, by the competition of commerce, be distributed in such proportions among the different parts of the United States, by natural laws, as to accommodate itself to the number of transactions which would take place if no such medium existed. For this reason, we find more money in the so-called great financial centers, because there are more exchanges of goods there. In sparsely settled parts of the West there will be less money precisely because there are fewer transactions than in the older and more settled districts. So that there could be no worse folly than the following legislation of Congress to distribute the national-bank circulation: “That $150,000,000 of the entire amount of circulating notes authorized to be issued shall be apportioned to associations in the States, in the District of Columbia, and in the Territories, according to representative population” (act of March 3, 1865).


§ 3. The precious metals, as money, are of the same Value, and distribute themselves according to the same Law, with the precious metals as a Commodity.

It is now necessary to inquire in what manner this law of the distribution of the precious metals by means of the exchanges affects the exchange value of money itself; and how it tallies with the law by which we found that the value of money is regulated when imported as a mere article of merchandise.

The causes which bring money into or carry it out of a country (1) through the exchanges, to restore the equilibrium of trade, and which thereby raise its value in some countries and lower it in others, are the very same causes on which the local value of money would depend, if it were never imported except (2) as a merchandise, and never except directly from the mines. When the value of money in a country is permanently lowered (1) [as a medium of exchange] by an influx of it through the balance of trade, the cause, if it is not diminished cost of production, must be one of those causes which compel a new adjustment, more favorable to the country, of the equation of international demand—namely, either an increased demand abroad for her commodities, or [pg 427]a diminished demand on her part for those of foreign countries. Now, an increased foreign demand for the commodities of a country, or a diminished demand in the country for imported commodities, are the very causes which, on the general principles of trade, enable a country to purchase all imports, and consequently (2) the precious metals, at a lower value. There is, therefore, no contradiction, but the most perfect accordance, in the results of the two different modes [(1) as a medium of exchange; and (2) as merchandise] in which the precious metals may be obtained. When money [as a medium of exchange] flows from country to country in consequence of changes in the international demand for commodities, and by so doing alters its own local value, it merely realizes, by a more rapid process, the effect which would otherwise take place more slowly by an alteration in the relative breadth of the streams by which the precious metals [as merchandise] flow into different regions of the earth from the mining countries. As, therefore, we before saw that the use of money as a medium of exchange does not in the least alter the law on which the values of other things, either in the same country or internationally, depend, so neither does it alter the law of the value of the precious metals itself; and there is in the whole doctrine of international values, as now laid down, a unity and harmony which are a strong collateral presumption of truth.

§ 4. International payments entering into the “financial account.”

Before closing this discussion, it is fitting to point out in what manner and degree the preceding conclusions are affected by the existence of international payments not originating in commerce, and for which no equivalent in either money or commodities is expected or received—such as a tribute, or remittances, or interest to foreign creditors, or a government expenditure abroad.

To begin with the case of barter. The supposed annual remittances being made in commodities, and being exports for which there is to be no return, it is no longer requisite that the imports and exports should pay for one another; on the contrary, there must be an annual excess of exports over [pg 428]imports, equal to the value of the remittance. If, before the country became liable to the annual payment, foreign commerce was in its natural state of equilibrium, it will now be necessary, for the purpose of effecting the remittances, that foreign countries should be induced to take a greater quantity of exports than before, which can only be done by offering those exports on cheaper terms, or, in other words, by paying dearer for foreign commodities. The international values will so adjust themselves that, either by greater exports or smaller imports, or both, the requisite excess on the side of exports will be brought about, and this excess will become the permanent state. The result is, that a country which makes regular payments to foreign countries, besides losing what it pays, loses also something more, by the less advantageous terms on which it is forced to exchange its productions for foreign commodities.

The same results follow on the supposition of money. Commerce being supposed to be in a state of equilibrium when the obligatory remittances begin, the first remittance is necessarily made in money. This lowers prices in the remitting country, and raises them in the receiving. The natural effect is, that more commodities are exported than before, and fewer imported, and that, on the score of commerce alone, a balance of money will be constantly due from the receiving to the paying country. When the debt thus annually due to the tributary country becomes equal to the annual tribute or other regular payment due from it, no further transmission of money takes place; the equilibrium of exports and imports will no longer exist, but that of payments will; the exchange will be at par, the two debts will be set off against one another, and the tribute or remittance will be virtually paid in goods. The result to the interests of the two countries will be as already pointed out—the paying country will give a higher price for all that it buys from the receiving country, while the latter, besides receiving the tribute, obtains the exportable produce of the tributary country at a lower price.

It has been seen, as in Chart No. XIII, that, considering the exports and imports merely as merchandise, there is, in fact, no actual equilibrium at any given time in accordance with the equation of International Demand. Another element, the “financial account” between the United States and foreign countries, must be considered before we can know all the factors necessary to bring about the equation. If we had been borrowing largely of England, Holland, and Germany, we should owe a regular annual sum as interest, and our exports must, as a rule, be exactly that much more (under right and normal conditions) than the imports. Or, take another case, if capital is borrowed in Europe for railways in the United States, this capital generally comes over in the form of imports of various kinds; but, if our exports are not sufficient at once to balance the increased imports, we go in debt for a time—or, in other words, in order to establish the balance, we send United States securities abroad instead of actual exports. This shipment of securities is not seen and recorded as among the exports; and so we find a period, like that during and after the war, from 1862 to 1873, of a vast excess of imports. Since 1873 the country has been practically paying the indebtedness incurred in the former period; and there has been a vast excess of exports over imports, and an apparent discrepancy in the equilibrium. But our government bonds and other securities have been coming back to us, producing a return current to balance the excessive exports.280 In brief, the use of securities and various forms of indebtedness permits the period of actual payment to be deferred, so that an excess of imports at one time may be offset by an excess of exports at another, and generally a later, time. Moreover, the large expenses of people traveling in Europe will require us to remit abroad in the form of exports more than would ordinarily balance our imports by the amount spent by the travelers. The financial operations, therefore, between the United States and foreign countries, must be well considered in striking the equation between our exports and imports. As formulated by Mr. Cairnes,281 the Equation of International Demand should be stated more broadly, as follows: “The state of international demand which results in commercial equilibrium is realized when the reciprocal demand of trading countries produces such a relation of exports and imports among them as enables each country by means of her exports to discharge all her foreign liabilities.” If we were a great lending instead of a great borrowing country, we should have, as a rule, a permanent excess of imports.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Tue Aug 25, 2020 6:55 am

Chapter XVIII. Influence Of The Currency On The Exchanges And On Foreign Trade.

§ 1. Variations in the exchange, which originate in the Currency.


In our inquiry into the laws of international trade, we commenced with the principles which determine international exchanges and international values on the hypothesis of barter. We next showed that the introduction of money, as a medium of exchange, makes no difference in the laws of exchanges and of values between country and country, no more than between individual and individual: since the precious metals, under the influence of those same laws, distribute themselves in such proportions among the different countries of the world as to allow the very same exchanges to go on, and at the same values, as would be the case under a system of barter. We lastly considered how the value of money itself is affected by those alterations in the state of trade which arise from alterations either in the demand and supply of commodities or in their cost of production. It remains to consider the alterations in the state of trade which originate not in commodities but in money.

Gold and silver may vary like other things, though they are not so likely to vary as other things in their cost of production. The demand for them in foreign countries may also vary. It may increase by augmented employment of the metals for purposes of art and ornament, or because the increase of production and of transactions has created a greater amount of business to be done by the circulating medium. It may diminish, for the opposite reasons; or, [pg 431]from the extension of the economizing expedients by which the use of metallic money is partially dispensed with. These changes act upon the trade between other countries and the mining countries, and upon the value of the precious metals, according to the general laws of the value of imported commodities: which have been set forth in the previous chapters with sufficient fullness.

What I propose to examine in the present chapter is not those circumstances affecting money which alter the permanent conditions of its value, but the effects produced on international trade by casual or temporary variations in the value of money, which have no connection with any causes affecting its permanent value.

§ 2. Effect of a sudden increase of a metallic Currency, or of the sudden creation of Bank-Notes or other substitutes for Money.

Let us suppose in any country a circulating medium purely metallic, and a sudden casual increase made to it; for example, by bringing into circulation hoards of treasure, which had been concealed in a previous period of foreign invasion or internal disorder. The natural effect would be a rise of prices. This would check exports and encourage imports; the imports would exceed the exports, the exchanges would become unfavorable, and a newly acquired stock of money would diffuse itself over all countries with which the supposed country carried on trade, and from them, progressively, through all parts of the commercial world. The money which thus overflowed would spread itself to an equal depth over all commercial countries. For it would go on flowing until the exports and imports again balanced one another; and this (as no change is supposed in the permanent circumstances of international demand) could only be when the money had diffused itself so equally that prices had risen in the same ratio in all countries, so that the alteration of price would be for all practical purposes ineffective, and the exports and imports, though at a higher money valuation, would be exactly the same as they were originally. This diminished value of money throughout the world (at least if the diminution was considerable) would cause a suspension, or at least a diminution, of the annual supply from [pg 432]the mines, since the metal would no longer command a value equivalent to its highest cost of production. The annual waste would, therefore, not be fully made up, and the usual causes of destruction would gradually reduce the aggregate quantity of the precious metals to its former amount; after which their production would recommence on its former scale. The discovery of the treasure would thus produce only temporary effects; namely, a brief disturbance of international trade until the treasure had disseminated itself through the world, and then a temporary depression in the value of the metal below that which corresponds to the cost of producing or of obtaining it; which depression would gradually be corrected by a temporarily diminished production in the producing countries and importation in the importing countries.

The same effects which would thus arise from the discovery of a treasure accompany the process by which bank-notes, or any of the other substitutes for money, take the place of the precious metals. Suppose282 that the United States possessed a currency, wholly metallic, of $200,000,000, and that suddenly $200,000,000 of bank-notes were sent into circulation. If these were issued by bankers, they would be employed in loans, or in the purchase of securities, and would therefore create a sudden fall in the rate of interest, which would probably send a great part of the $200,000,000 of gold out of the country as capital, to seek a higher rate of interest elsewhere, before there had been time for any action on prices. But we will suppose that the notes are not issued by bankers, or money-lenders of any kind, but by manufacturers, in the payment of wages and the purchase of materials, or by the Government [as, e.g., greenbacks] in its ordinary expenses, so that the whole amount would be rapidly carried into the markets for commodities. The following would be the natural order of consequences: All prices would rise greatly. Exportation would almost cease; importation would be prodigiously [pg 433]stimulated. A great balance of payments would become due, the exchanges would turn against the United States, to the full extent of the cost of exporting money; and the surplus coin would pour itself rapidly forth, over the various countries of the world, in the order of their proximity, geographically and commercially, to the United States.

A study of Chart No. XIV will show how exactly this description fits the case of our country, when the rise of prices stimulated imports of merchandise (see Chart No. XIII) in 1862, and sent gold out of the country.


The efflux would continue until the currencies of all countries had come to a level; by which I do not mean, until money became of the same value everywhere, but until the differences were only those which existed before, and which corresponded to permanent differences in the cost of obtaining it. When the rise of prices had extended itself in an equal degree to all countries, exports and imports would everywhere revert to what they were at first, would balance one another, and the exchanges would return to par. If such a sum of money as $200,000,000, when spread over the whole surface of the commercial world, were sufficient to raise the general level in a perceptible degree, the effect would be of no long duration. No alteration having occurred in the general conditions under which the metals were procured, either in the world at large or in any part of it, the reduced value would no longer be remunerating, and the supply from the mines would cease partially or wholly, until the $200,000,000 were absorbed.283

Effects of another kind, however, will have been produced: $200,000,000, which formerly existed in the unproductive [pg 434]form of metallic money, have been converted into what is, or is capable of becoming, productive capital. This gain is at first made by the United States at the expense of other countries, who have taken her superfluity of this costly and unproductive article off her hands, giving for it an equivalent value in other commodities. By degrees the loss is made up to those countries by diminished influx from the mines, and finally the world has gained a virtual addition of $200,000,000 to its productive resources. Adam Smith's illustration, though so well known, deserves for its extreme aptness to be once more repeated. He compares the substitution of paper in the room of the precious metals to the construction of a highway through the air, by which the ground now occupied by roads would become available for agriculture. As in that case a portion of the soil, so in this a part of the accumulated wealth of the country, would be relieved from a function in which it was only employed in rendering other soils and capitals productive, and would itself become applicable to production; the office it previously fulfilled being equally well discharged by a medium which costs nothing.

The value saved to the community by thus dispensing with metallic money is a clear gain to those who provide the substitute. They have the use of $200,000,000 of circulating medium which have cost them only the expense of an engraver's plate. If they employ this accession to their fortunes as productive capital, the produce of the country is increased and the community benefited, as much as by any other capital of equal amount. Whether it is so employed or not depends, in some degree, upon the mode of issuing it. If issued by the Government, and employed in paying off debt, it would probably become productive capital. The Government, however, may prefer employing this extraordinary resource in its ordinary expenses; may squander it uselessly, or make it a mere temporary substitute for taxation to an equivalent amount; in which last case the amount is saved by the tax-payers at large, who either add it to their [pg 435]capital or spend it as income. When [a part of the] paper currency is supplied, as in our own country, by banking companies, the amount is almost wholly turned into productive capital; for the issuers, being at all times liable to be called upon to refund the value, are under the strongest inducements not to squander it, and the only cases in which it is not forthcoming are cases of fraud or mismanagement. A banker's profession being that of a money-lender, his issue of notes is a simple extension of his ordinary occupation. He lends the amount to farmers, manufacturers, or dealers, who employ it in their several businesses. So employed, it yields, like any other capital, wages of labor, and profits of stock. The profit is shared between the banker, who receives interest, and a succession of borrowers, mostly for short periods, who, after paying the interest, gain a profit in addition, or a convenience equivalent to profit. The capital itself in the long run becomes entirely wages, and, when replaced by the sale of the produce, becomes wages again; thus affording a perpetual fund, of the value of $200,000,000, for the maintenance of productive labor, and increasing the annual produce of the country by all that can be produced through the means of a capital of that value. To this gain must be added a further saving to the country, of the annual supply of the precious metals necessary for repairing the wear and tear, and other waste, of a metallic currency.

The substitution, therefore, of paper for the precious metals should always be carried as far as is consistent with safety, no greater amount of metallic currency being retained than is necessary to maintain, both in fact and in public belief, the convertibility of the paper.

But since gold wanted for exportation is almost invariably drawn from the reserves of the banks, and is never likely to be taken directly from the circulation while the banks remain solvent, the only advantage which can be obtained from retaining partially a metallic currency for daily purposes is, that the banks may occasionally replenish their reserves from it.

§ 3. Effect of the increase of an inconvertible paper Currency. Real and nominal exchange.

When metallic money had been entirely superseded and expelled from circulation, by the substitution of an equal amount of bank-notes, any attempt to keep a still further quantity of paper in circulation must, if the notes are convertible [into gold], be a complete failure.

This brings up the whole question at issue between the “Currency Principle” and the “Banking Principle.” The latter, maintained by Fullerton, Wilson, Price, and Tooke (in his later writings), held that, if notes were convertible, the value of notes could not differ from the value of the metal into which they were convertible; while the former, advocated by Lord Overstone, G. W. Norman, Colonel Torrens, Tooke (in his earlier writings), and Sir Robert Peel, implied that even a convertible paper was liable to over-issues. This last school brought about the Bank Act of 1844.284


[A] new issue would again set in motion the same train of consequences by which the gold coin had already been expelled. The metals would, as before, be required for exportation, and would be for that purpose demanded from the banks, to the full extent of the superfluous notes, which thus could not possibly be retained in circulation. If, indeed, the notes were inconvertible, there would be no such obstacle to the increase in their quantity. An inconvertible paper acts in the same way as a convertible, while there remains any coin for it to supersede; the difference begins to manifest itself when all the coin is driven from circulation (except what may be retained for the convenience of small change), and the issues still go on increasing. When the paper begins to exceed in quantity the metallic currency which it superseded, prices of course rise; things which were worth $25 in metallic money become worth $30 in inconvertible paper, or more, as the case may be. But this rise of price will not, as in the cases before examined, stimulate import and discourage export. The imports and exports are determined by the metallic prices of things, not by the paper prices; and it is only when the paper is exchangeable at pleasure for the metals that paper prices and metallic prices must correspond.

Let us suppose that the United States is the country which has the depreciated paper. Suppose that some American production could be bought, while the currency was still metallic, for $25, and sold in England for $27.50, the difference covering the expense and risk, and affording a profit to the merchant. On account of the depreciation, this commodity will now cost in the United States $30, and can not be sold in England for more than $27.50, and yet it will be exported as before. Why? Because the $27.50 which the exporter can get for it in England is not depreciated paper, but gold or silver; and since in the United States bullion has risen in the same proportion with other things—if the merchant brings the gold or silver to the United States, he can sell his $27.50 [in coin] for $33 [in paper], and obtain as before 10 per cent for profit and expenses.

It thus appears that a depreciation of the currency does not affect the foreign trade of the country: this is carried on precisely as if the currency maintained its value. But, though the trade is not affected, the exchanges are. When the imports and exports are in equilibrium, the exchange, in a metallic currency, would be at par; a bill on England for the equivalent of $25 would be worth $25. But $25, or the quantity of gold contained in them, having come to be worth in the United States $30, it follows that a bill on England for $25 will be worth $30. When, therefore, the real exchange is at par, there will be a nominal exchange against the country of as much per cent as the amount of the depreciation. If the currency is depreciated 10, 15, or 20 per cent, then in whatever way the real exchange, arising from the variations of international debts and credits, may vary, the quoted exchange will always differ 10, 15, or 20 per cent from it. However high this nominal premium may be, it has no tendency to send gold out of the country for the purpose of drawing a bill against it and profiting by the premium; because the gold so sent must be procured, not from the banks and at par, as in the case of a convertible currency, but in the market, at an advance of price equal [pg 438]to the premium. In such cases, instead of saying that the exchange is unfavorable, it would be a more correct representation to say that the par has altered, since there is now required a larger quantity of American currency to be equivalent to the same quantity of foreign. The exchanges, however, continue to be computed according to the metallic par. The quoted exchanges, therefore, when there is a depreciated currency, are compounded of two elements or factors: (1) the real exchange, which follows the variations of international payments, and (2) the nominal exchange, which varies with the depreciation of the currency, but which, while there is any depreciation at all, must always be unfavorable. Since the amount of depreciation is exactly measured by the degree in which the market price of bullion exceeds the mint valuation, we have a sure criterion to determine what portion of the quoted exchange, being referable to depreciation, may be struck off as nominal, the result so corrected expressing the real exchange.

The same disturbance of the exchanges and of international trade which is produced by an increased issue of convertible bank-notes is in like manner produced by those extensions of credit which, as was so fully shown in a preceding chapter, have the same effect on prices as an increase of the currency. Whenever circumstances have given such an impulse to the spirit of speculation as to occasion a great increase of purchases on credit, money prices rise, just as much as they would have risen if each person who so buys on credit had bought with money. All the effects, therefore, must be similar. As a consequence of high prices, exportation is checked and importation stimulated; though in fact the increase of importation seldom waits for the rise of prices which is the consequence of speculation, inasmuch as some of the great articles of import are usually among the things in which speculative overtrading first shows itself. There is, therefore, in such periods, usually a great excess of imports over exports; and, when the time comes at which these must be paid for, the exchanges become unfavorable and gold flows out of the [pg 439]country. This efflux of gold takes effect on prices [by withdrawing gold from the reserves of the banks, and so by stopping loans and the use of credit, or purchasing power]: its effect is to make them recoil downward. The recoil once begun, generally becomes a total rout, and the unusual extension of credit is rapidly exchanged for an unusual contraction of it. Accordingly, when credit has been imprudently stretched, and the speculative spirit carried to excess, the turn of the exchanges and consequent pressure on the banks to obtain gold for exportation are generally the proximate cause of the catastrophe.

A glance at Chart No. XIII will give illustration to the situation here described. After the war, and until 1873, while the United States was under the influence of high prices and a speculation which has been seldom equaled in our history, the resulting great excess of imports became very striking. It was an unhealthy and abnormal condition of trade. The sudden reversal of the trade by the crisis in 1873 is equally striking, and, as prices fell, exports began to increase. The effect on international trade of a collapse of credit is thus clearly marked by the lines on the chart.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Tue Aug 25, 2020 7:02 am

Chapter XIX. Of The Rate Of Interest.

§ 1. The Rate of Interest depends on the Demand and Supply of Loans.


The two topics of Currency and Loans, though in themselves distinct, are so intimately blended in the phenomena of what is called the money market, that it is impossible to understand the one without the other, and in many minds the two subjects are mixed up in the most inextricable confusion.

In the preceding book285 we defined the relation in which interest stands to profit. We found that the gross profit of capital might be distinguished into three parts, which are respectively the remuneration for risk, for trouble, and for the capital itself, and may be termed insurance, wages of superintendence, and interest. After making compensation for risk, that is, after covering the average losses to which capital is exposed either by the general circumstances of society or by the hazards of the particular employment, there remains a surplus, which partly goes to repay the owner of the capital for his abstinence, and partly the employer of it for his time and trouble. How much goes to the one and how much to the other is shown by the amount of the remuneration which, when the two functions are separated, the owner of capital can obtain from the employer for its use. This is evidently a question of demand and supply. Nor have demand and supply any different meaning or effect in this case from what they have in all others. The rate of interest will be such as to equalize the demand for loans with the supply [pg 441]of them. It will be such that, exactly as much as some people are desirous to borrow at that rate, others shall be willing to lend. If there is more offered than demanded, interest will fall; if more is demanded than offered, it will rise; and in both cases, to the point at which the equation of supply and demand is re-established.

The desire to borrow and the willingness to lend are more or less influenced by every circumstance which affects the state or prospects of industry or commerce, either generally or in any of their branches. The rate of interest, therefore, on good security, which alone we have here to consider (for interest in which considerations of risk bear a part may swell to any amount), is seldom, in the great centers of money transactions, precisely the same for two days together; as is shown by the never-ceasing variations in the quoted prices of the funds and other negotiable securities. Nevertheless, there must be, as in other cases of value, some rate which (in the language of Adam Smith and Ricardo) may be called the natural rate; some rate about which the market rate oscillates, and to which it always tends to return. This rate partly depends on the amount of accumulation going on in the hands of persons who can not themselves attend to the employment of their savings, and partly on the comparative taste existing in the community for the active pursuits of industry, or for the leisure, ease, and independence of an annuitant.

§ 2. Circumstances which Determine the Permanent Demand and Supply of Loans.

In [ordinary] circumstances, the more thriving producers and traders have their capital fully employed, and many are able to transact business to a considerably greater extent than they have capital for. These are naturally borrowers: and the amount which they desire to borrow, and can give security for, constitutes the demand for loans on account of productive employment. To these must be added the loans required by Government, and by land-owners, or other unproductive consumers who have good security to give. This constitutes the mass of loans for which there is an habitual demand.

Now, it is conceivable that there might exist, in the hands of persons disinclined or disqualified for engaging personally in business, (1) a mass of capital equal to, and even exceeding, this demand. In that case there would be an habitual excess of competition on the part of lenders, and the rate of interest would bear a low proportion to the rate of profit. Interest would be forced down to the point which would either tempt borrowers to take a greater amount of loans than they had a reasonable expectation of being able to employ in their business, or would so discourage a portion of the lenders as to make them either forbear to accumulate or endeavor to increase their income by engaging in business on their own account, and incurring the risks, if not the labors, of industrial employment.

The low rates of interest, rather, tempt people to take some additional risk, and enter into investments which offer a higher rate of dividends; so that a period of low interest is a time when speculative enterprises find victims, and then by bad and worthless investments much of the loanable funds is actually lost; thereby reducing the total quantity of loans more nearly to that demand which will give an ordinary rate of interest.


(2.) On the other hand, the capital owned by persons who prefer lending it at interest, or whose avocations prevent them from personally superintending its employment, may be short of the habitual demand for loans. It may be in great part absorbed by the investments afforded by the public debt and by mortgages, and the remainder may not be sufficient to supply the wants of commerce. If so, the rate of interest will be raised so high as in some way to re-establish the equilibrium. When there is only a small difference between interest and profit, many borrowers may no longer be willing to increase their responsibilities and involve their credit for so small a remuneration: or some, who would otherwise have engaged in business, may prefer leisure, and become lenders instead of borrowers: or others, under the inducement of high interest and easy investment for their capital, may retire from business earlier, and with smaller fortunes, than they otherwise would have done.

Or, lastly, instead of [capital] being afforded by persons not in business, the affording it may itself become a business. A portion of the capital employed in trade may be supplied by a class of professional money-lenders. These money-lenders, however, must have more than a mere interest; they must have the ordinary rate of profit on their capital, risk and all other circumstances being allowed for. [For] it can never answer, to any one who borrows for the purposes of his business, to pay a full profit for capital from which he will only derive a full profit: and money-lending, as an employment, for the regular supply of trade, can not, therefore, be carried on except by persons who, in addition to their own capital, can lend their credit, or, in other words, the capital of other people. A bank which lends its notes lends capital which it borrows from the community, and for which it pays no interest.

Of late years, however, banks are generally not permitted to issue notes on their simple credit. That privilege has been so often abused in this country that now, in the national banking system, a separate part of the resources are set aside for the security of the circulating notes (as is also true of the Bank of England since 1844). It is not generally true, then, that banks now create the means to make loans by issuing notes by which they borrow capital from the community without paying interest. They do, however, depend almost entirely on deposits.


A bank of deposit lends capital which it collects from the community in small parcels, sometimes without paying any interest, and, if it does pay interest, it still pays much less than it receives; for the depositors, who in any other way could mostly obtain for such small balances no interest worth taking any trouble for, are glad to receive even a little. Having this subsidiary resource, bankers are enabled to obtain, by lending at interest, the ordinary rate of profit on their own capital. The disposable capital deposited in banks, together with the funds belonging to those who, either from necessity or preference, live upon the interest of their property, constitute the general loan fund of the country; and [pg 444]the amount of this aggregate fund, when set against the habitual demands of producers and dealers, and those of the Government and of unproductive consumers, determines the permanent or average rate of interest, which must always be such as to adjust these two amounts to one another.286 But, while the whole of this mass of lent capital takes effect upon the permanent rate of interest, the fluctuations depend almost entirely upon the portion which is in the hands of bankers; for it is that portion almost exclusively which, being lent for short times only, is continually in the market seeking an investment. The capital of those who live on the interest of their own fortunes has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.

§ 3. Circumstances which Determine the Fluctuations.

Fluctuations in the rate of interest arise from variations either in the demand for loans or in the supply. The supply is liable to variation, though less so than the demand. The willingness to lend is greater than usual at the commencement of a period of speculation, and much less than usual during the revulsion which follows. In speculative times, money-lenders as well as other people are inclined to extend their business by stretching their credit; they lend more than usual (just as other classes of dealers and producers employ more than usual) of capital which does not belong to them. Accordingly, these are the times when the rate of interest is low; though for this too (as we shall immediately see) there are other causes. During the revulsion, on the contrary, interest always rises inordinately, because, while there is a most pressing need on the part of many persons to borrow, there is a general disinclination to lend.287

This disinclination, when at its extreme point, is called a panic. It occurs when a succession of unexpected failures has created in the mercantile, and sometimes also in the non-mercantile public, a general distrust in each other's solvency; disposing every one not only to refuse fresh credit, except on very onerous terms, but to call in, if possible, all credit which he has already given. Deposits are withdrawn from banks; notes are returned on the issuers in exchange for specie; bankers raise their rate of discount, and withhold their customary advances; merchants refuse to renew mercantile bills. At such times the most calamitous consequences were formerly experienced from the attempt of the law to prevent more than a certain limited rate of interest from being given or taken. Persons who could not borrow at five per cent had to pay, not six or seven, but ten or fifteen per cent, to compensate the lender for risking the penalties of the law; or had to sell securities or goods for ready money at a still greater sacrifice.

The pernicious and hurtful custom exists in various States in this country of making any interest beyond a certain rate illegal. When it is remembered that legitimate business is often largely done on credit—until the proceeds of goods sold on credit are collected—the rate of interest from day to day is very important to trade. So, when there is a sudden demand for loans, a rate higher than the legal one will certainly be paid, and the law violated, if the getting of a loan is absolutely necessary to save the borrower from commercial ruin. The effect of a legal rate is to stop loans at the very time when loans are most essential to the business public. It would be far better to adopt such a sliding scale as exists at great European banks, which allows the rate of interest to rise with the demand. No one, then, with good security, need want loans if he is willing to pay the high rates; and those not really in need will defer their demand until the sudden emergency is past. Already in New York the legal penalty has been removed for loaning at higher than the legal rates when charged upon call-loans; and it has mitigated the extreme fluctuations of the rate in a market when financial necessity is contending against the law.


Except at such periods, the amount of capital disposable on loan is subject to little other variation than that which arises from the gradual process of accumulation; which process, [pg 446]however, in the great commercial countries, is sufficiently rapid to account for the almost periodical recurrence of these fits of speculation; since, when a few years have elapsed without a crisis, and no new and tempting channel for investment has been opened in the mean time, there is always found to have occurred in those few years so large an increase of capital seeking investment as to have lowered considerably the rate of interest, whether indicated by the prices of securities or by the rate of discount on bills; and this diminution of interest tempts the possessors to incur hazards in hopes of a more considerable return.

The demand for loans varies much more largely than the supply, and embraces longer cycles of years in its aberrations. A time of war, for example, is a period of unusual draughts on the loan market. The Government, at such times, generally incurs new loans, and, as these usually succeed each other rapidly as long as the war lasts, the general rate of interest is kept higher in war than in peace, without reference to the rate of profit, and productive industry is stinted of its usual supplies.

The United States during the late war found that it could not borrow at even six or seven per cent. By receiving depreciated paper at par for its bonds it really agreed to pay six gold dollars on each loan of one hundred dollars in paper (worth, perhaps, at the worst only forty gold dollars), which was equivalent to fifteen per cent. This high rate was largely due to the weakened credit of the Government; but still it remains true that the rate was higher because the United States was in the market as a competitor for large loans. Now the Government can refund its bonds at three per cent.


Nor does the influence of these loans altogether cease when the Government ceases to contract others; for those already contracted continue to afford an investment for a greatly increased amount of the disposable capital of the country, which, if the national debt were paid off, would be added to the mass of capital seeking investment, and (independently of temporary disturbance) could not but, to some extent, permanently lower the rate of interest.

The rapid payment of the public debt by the United States, $137,823,253 in 1882-1883, and more than $100,000,000 in 1883-1884, has taken away the former investment for enormous sums of loanable funds, and to the same extent increased the supply in the market. Without doubt this aids in making the present rate of interest a very low one. Whether the rate will remain “permanently lower,” however, will depend upon whether the field of investment in the United States is already practically occupied. We believe it is not.


The same effect on interest which is produced by government loans for war expenditure is produced by the sudden opening of any new and generally attractive mode of permanent investment. The only instance of the kind in recent history, on a scale comparable to that of the war loans, is the absorption of capital in the construction of railways. This capital must have been principally drawn from the deposits in banks, or from savings which would have gone into deposit, and which were destined to be ultimately employed in buying securities from persons who would have employed the purchase-money in discounts or other loans at interest: in either case, it was a draft on the general loan fund. It is, in fact, evident that, unless savings were made expressly to be employed in railway adventure, the amount thus employed must have been derived either from the actual capital of persons in business or from capital which would have been lent to persons in business.

§ 4. The Rate of Interest not really Connected with the value of Money, but often confounded with it.

From the preceding considerations it would be seen, even if it were not otherwise evident, how great an error it is to imagine that the rate of interest bears any necessary relation to the quantity or value of the money in circulation. An increase of the currency has in itself no effect, and is incapable of having any effect, on the rate of interest. A paper currency issued by Government in the payment of its ordinary expenses, in however great excess it may be issued, affects the rate of interest in no manner whatever. It diminishes, indeed, the power of money to buy commodities, but not the power of money to buy money. If a hundred dollars will buy a perpetual annuity of four dollars a year, a [pg 448]depreciation which makes the hundred dollars worth only half as much as before has precisely the same effect on the four dollars, and therefore can not alter the relation between the two. Unless, indeed, it is known and reckoned upon that the depreciation will only be temporary; for people certainly might be willing to lend the depreciated currency on cheaper terms if they expected to be repaid in money of full value.

In considering the effect produced by the proceedings of banks in encouraging the excesses of speculation, an immense effect is usually attributed to their issues of notes, but until of late hardly any attention was paid to the management of their deposits, though nothing is more certain than that their imprudent extensions of credit take place more frequently by means of their deposits than of their issues. Says Mr. Tooke: “Supposing all the deposits received by a banker to be in coin, is he not, just as much as the issuing banker, exposed to the importunity of customers, whom it may be impolitic to refuse, for loans or discounts, or to be tempted by a high interest; and may he not be induced to encroach so much upon his deposits as to leave him, under not improbable circumstances, unable to meet the demands of his depositors?”

In truth, the most difficult questions of banking center around the functions of discount and deposit. The separation of the Issue from the Banking Department by the act of 1844, which renewed the charter of the Bank of England, makes this perfectly clear. After entirely removing from their effect on credit all influences due to issues, England has had the same difficulties to encounter as before, which shows that the real question is concerned with the two essential functions of banking—discount and deposit. Since 1844, there have been the commercial disturbances of 1847, 1857, 1866, and 1873. Although no expansion of notes, without a corresponding deposit of specie, is possible.


§ 5. The Rate of Interest determines the price of land and of Securities.

Before quitting the general subject of this chapter, I will make the obvious remark that the rate of interest determines the value and price of all those salable articles which are desired and bought, not for themselves, but for [pg 449]the income which they are capable of yielding. The public funds, shares in joint-stock companies, and all descriptions of securities, are at a high price in proportion as the rate of interest is low. They are sold at the price which will give the market rate of interest on the purchase-money, with allowance for all differences in the risk incurred, or in any circumstance of convenience.

The price of land, mines, and all other fixed sources of income, depends in like manner on the rate of interest. Land usually sells at a higher price, in proportion to the income afforded by it, than the public funds, not only because it is thought, even in [England], to be somewhat more secure, but because ideas of power and dignity are associated with its possession. But these differences are constant, or nearly so; and, in the variations of price, land follows, cæteris paribus, the permanent (though, of course, not the daily) variations of the rate of interest. When interest is low, land will naturally be dear; when interest is high, land will be cheap.

A lot of land, which fifty years ago gave an annual return of $100, if ten per cent was then the common rate of interest, would sell for $1,000. If the return from the land remains the same ($100) to-day, and if the usual rate of interest is now five per cent, the same piece of land, therefore, would sell for $2,000, since $100 is five per cent of $2,000.

The price of a bond, it may be said, also varies with the time it has to run. At the same rate of interest, a bond running for a long term of years is better for an investment than one for a short term. The lumberman, who looks at two trees of equal diameter at the base, estimates the total value of each according to the height of the tree. Then, again, a bond running for a short term may be worth less than one for a long term, even though the first bears a higher rate of interest. That is, to resume the illustration, one tree, not rising very high, although larger at the bottom, may not contain so many square feet as another, with perhaps a less diameter at the bottom, but which stretches much higher up into the air.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

Re: Principles Of Political Economy, by John Stuart Mill

Postby admin » Tue Aug 25, 2020 7:10 am

Chapter XX. Of The Competition Of Different Countries In The Same Market.

§ 1. Causes which enable one Country to undersell another.


In the phraseology of the Mercantile System, there is no word of more frequent recurrence or more perilous import than the word underselling. To undersell other countries—not to be undersold by other countries—were spoken of, and are still very often spoken of, almost as if they were the sole purposes for which production and commodities exist.

Nations may, like individual dealers, be competitors, with opposite interests, in the markets of some commodities, while in others they are in the more fortunate relation of reciprocal customers. The benefit of commerce does not consist, as it was once thought to do, in the commodities sold; but, since the commodities sold are the means of obtaining those which are bought, a nation would be cut off from the real advantage of commerce, the imports, if it could not induce other nations to take any of its commodities in exchange; and in proportion as the competition of other countries compels it to offer its commodities on cheaper terms, on pain of not selling them at all, the imports which it obtains by its foreign trade are procured at greater cost.


One country (A) can only undersell another (B) in a given market, to the extent of entirely expelling her from it, on two conditions: (1) In the first place, she (A) must have a greater advantage than the second country (B) in the production of the article exported by both; meaning by a greater advantage (as has been already so fully explained) not absolutely, [pg 451]but in comparison with other commodities; and (2) in the second place, such must be her (A's) relation with the customer-country in respect to the demand for each other's products, and such the consequent state of international values, as to give away to the customer-country more than the whole advantage possessed by the rival country (B); otherwise the rival will still be able to hold her ground in the market.

Let us suppose a trade between England and the United States, in iron and wheat. England being capable of producing ten cwts. of iron at the same cost as fifteen bushels of wheat, the United States at the same cost as twenty bushels, and the two commodities being exchanged between the two countries (cost of carriage apart) at some intermediate rate, say ten for seventeen. The United States could not be permanently undersold in the English market, and expelled from it, unless by a country (such as India) which offered not merely more than seventeen, but more than twenty bushels of wheat for ten cwts. of iron. Short of that, the competition would only oblige the United States to pay dearer for iron, but would not disable her from exporting wheat. The country, therefore, which could undersell the United States, must, in the first place, be able to produce wheat at less cost, compared with iron, than the United States herself; and, in the next place, must have such a demand for iron, or other English commodities, as would compel her, even when she became sole occupant of the market, to give a greater advantage to England than the United States could give by resigning the whole of hers; to give, for example, twenty-one bushels for ten cwts. For if not—if, for example, the equation of international demand, after the United States was excluded, gave a ratio of eighteen for ten—the United States would be now the underselling nation; and there would be a point, perhaps nineteen for ten, at which both countries would be able to maintain their ground, and to sell in England enough wheat to pay for the iron, or other English commodities, for which, on these newly adjusted terms of interchange, they had a demand. In like manner, England, as an exporter of iron, could only be driven from the American market by some rival whose superior advantages in the production of iron enabled her, and the intensity of whose demand for American produce compelled her, to offer ten cwts. of iron, not merely for less than seventeen bushels of wheat, but for less than fifteen. In that case, England could no longer carry on the trade without loss; but, in any case short [pg 452]of this, she would merely be obliged to give to the United States more iron for less wheat than she had previously given.288


It thus appears that the alarm of being permanently undersold may be taken much too easily; may be taken when the thing really to be anticipated is not the loss of the trade, but the minor inconvenience of carrying it on at a diminished advantage; an inconvenience chiefly falling on the consumers of foreign commodities, and not on the producers or sellers of the exported article. It is no sufficient ground of apprehension to the [American] producers, to find that some other country can sell [wheat] in foreign markets, at some particular time, a trifle cheaper than they can themselves afford to do in the existing state of prices in [the United States]. Suppose them to be temporarily unsold, and their exports diminished; the imports will exceed the exports, there will be a new distribution of the precious metals, prices will fall, and, as all the money expenses of the [American] producers will be diminished, they will be able (if the case falls short of that stated in the preceding paragraph) again to compete with their rivals.

The loss which [the United States] will incur will not fall upon the exporters, but upon those who consume imported commodities; who, with money incomes reduced in amount, will have to pay the same or even an increased price for all things produced in foreign countries.

But the business world would regard what was going on under economic laws as a great and dreaded disaster, if it meant that prices were to fall, and gold leave the country. Those holding large stocks of goods would for that time suffer; and so, at first, it might really happen that “exporters,” in the sense of exporting agents (not the producers, perhaps, of the exportable article), would incur a loss. In the end, of course, the consumers of imports suffer. But, temporarily, and on the face of it, exporters do lose.


§ 2. High wages do not prevent one Country from underselling another.

According to the preceding doctrine, a country can not be undersold in any commodity, unless the rival country [pg 453]has a stronger inducement than itself for devoting its labor and capital to the production of the commodity; arising from the fact that by doing so it occasions a greater saving of labor and capital, to be shared between itself and its customers—a greater increase of the aggregate produce of the world. The underselling, therefore, though a loss to the undersold country, is an advantage to the world at large; the substituted commerce being one which economizes more of the labor and capital of mankind, and adds more to their collective wealth, than the commerce superseded by it. The advantage, of course, consists in being able to produce the commodity of better quality, or with less labor (compared with other things); or perhaps not with less labor, but in less time; with a less prolonged detention of the capital employed. This may arise from greater natural advantages (such as soil, climate, richness of mines); superior capability, either natural or acquired, in the laborers; better division of labor, and better tools, or machinery. But there is no place left in this theory for the case of lower wages. This, however, in the theories commonly current, is a favorite cause of underselling. We continually hear of the disadvantage under which the [American] producer labors, both in foreign markets and even in his own, through the lower wages paid by his foreign rivals. These lower wages, we are told, enable, or are always on the point of enabling, them to sell at lower prices, and to dislodge the [American] manufacturer from all markets in which he is not artificially protected.

It will be remembered that, as we have before seen, international trade, in actual practice, depends on comparative prices within the same country (even though the exporter may not consciously make a comparison). We send wheat abroad, because it is low in price relatively to certain manufactured goods; that is, we send the wheat, but we do not send the manufactured goods. But, so far, this is considering only the comparative prices in the same country. Yet we shall fail to realize in actual practice the application of the above principles, when we use the terms prices and money, if we do not admit that there is in the matter of underselling a comparison, also, between the absolute price of the goods in one country and the absolute [pg 454]price of the same goods in the competing country. For example, wheat is not shipped to England unless the price is lower here than there. If India or Morocco were to send wheat into the English market in close competition with the United States, and the price were to fall in London, it would mean that, if we continued our shipments of wheat to England, we must part with our wheat at a less advantage in the international exchange. In the illustration already used, we must, for example, offer more than seventeen bushels of wheat for ten cwts. of iron. The fall in the price of wheat, without any change in that of iron, implies the necessity of offering a greater quantity of wheat for the same quantity of iron, perhaps nineteen or twenty bushels for ten cwts. of iron. If the price went so low as to require twenty-one bushels to pay for ten cwts. of iron, then we should be entirely undersold; and the price here as compared with the price in London would be an indication of the fact. So that the comparison of prices here with prices abroad is merely a register of the terms at which our international exchanges are performed; but not the cause of the existence of the international trade. If the price falls so low in a foreign market that we can not sell wheat there, it simply means that we have reached in the exchange ratios the limit of our comparative advantages in wheat and iron; so that we are obliged to offer twenty or more bushels of wheat for ten cwts. of iron.

But in all this it must be noted that this price must include the return to capital also, and that it must be equal to the usual reward for capital in other competing industries, that is, the ordinary rate of profit. In exporting wheat from the United States the capital engaged will insist on getting the rate of profit to be found in other occupations to which the capital can go, in the United States. Now, the price, if it stands for the value (which is supposed to be governed by cost of production in this case), is the sum out of which wages and profits are paid. If the price were to fall in the foreign market, then there might not be the means with which to pay the usual rate of wages and the usual rate of profit also. Then we should probably hear of complaints by the shippers that there is no profit in the exportation of wheat, and of a falling off in the trade. In other words, as the capitalist is the one who manages the operation, and is the one first affected, the diminution of advantage in foreign trade arising from competition, generally shows itself first in lessened profits. The price, then, is the means by which we determine whether a certain article gives us that comparative advantage which will insure a gain from international trade.

An exportable article whose price in this country is low—since [pg 455]it is for this reason selected as an export—is one whose cost is low. If the cost be low, it means that the industry is very productive; that the same capital and labor produce more for their exertion in this than in other industries. And yet it is precisely in the most productive industries that higher wages and profits can be, and are, paid. Although each article is sold at a low price, the great quantity produced makes the total sum, or value, out of which the industrial rewards, profits, and wages, are paid, large. That is, the price may be very low (lower, also, in direct comparison with prices abroad) and yet pay the rate of wages and profits current in this country. Consequently, although wages and profits may be very high (relatively to older countries) in those industries of the United States whose productiveness is great, yet the very fact of this low cost, and consequently this low price (where competition is effective), is that which fits the commodity for exportation. We are, therefore, inevitably led to a position in which we see that high wages and low prices naturally go together in an exportable commodity. In practice, certainly, the high wages do not, by raising the price, prevent us, by comparing our price with English prices, from sending goods abroad—because we send goods abroad from our most productive employments. As an illustration of this principle, it is found that the leading exports of the United States, in 1883, were cotton, breadstuffs, provisions, tobacco, mineral oils, and wood.

But, since a direct comparison is in practice made between prices here and prices in England (for example), in order to determine whether the trade can be a profitable one, we constantly hear it said that we can not send goods abroad because our labor is so dear. It need scarcely be observed that we do not hear this from those engaged in any of the extractive industries just mentioned as furnishing large exports, which are admittedly very productive; it is generally heard in regard to certain kinds of manufactured goods. The difficulty arises not with regard to articles in which we have the greatest advantage in productiveness, but those in which we have a less advantage. If the majority of occupations are so productive as to assure a generally high reward to labor and capital throughout the country, these less advantageously situated industries—not being so productive as others (either from lack of skill or good management, or high cost of machinery and materials, or peculiarities of climate, or heavy taxation)—can not pay the usual high reward to labor, and at the same time get for the capitalist the same high reward he can everywhere else receive at home. For, at a price low enough to warrant an exportation, the quantity made by a given amount of labor and [pg 456]capital does not yield a total value so great as is given in the majority of other occupations to the same amount of labor and capital, and out of which the usual high wages and profits can be paid. The less productiveness of an industry, compared with other industries in the same country, then, is the real cause which prevents it from competing with foreign countries consistently with receiving the ordinary rate of profit. It is the high rate of profits as well as the high rate of wages common in the country which prevents selling abroad. It is absurd to say that it is only high wages: it is just as much high profits. Of course, if the less productive industries wish to compete with England, and if they pay—as we know they must—the high rate of wages due to the general productiveness of our country's industries, they must submit to less profits for the pleasure of having that particular desire. It is not possible that we should produce everything equally well here; nor is it possible that England should produce everything equally well. If we wish to send any goods at all to England, we must receive some goods from her. In order to get the gain arising from our productiveness, we must earnestly wish that England should have some commodity also in which she has a comparative advantage, in order that any trade whatever may exist. It is not, however, worth while, in my opinion, to go on in this discussion to consider the position of those who would shut us off from any and all foreign trade.

Our present high wages should be a cause for congratulation, because they are due to the generally high productiveness of our resources, or, in other words, due to low cost; and it is to be hoped that they may long continue high. We do not seem to be in imminent danger of not having goods which we can export in quantities which will buy for us all we may wish to import from abroad. (See Chart No. XIII, and note the vast increase of exports at the same time that wages are known to be higher in this country than abroad.) So long as wages continue high, we may possibly be unwilling to see gratified that false and ignorant desire which leads some people to think that we ought to produce, equally well with any competitor in the world, everything that is made. If, as was pointed out under the discussion on cost of labor,289 we must necessarily connect with efficiency of labor all natural advantages under which labor works, it is easy to see that high wages are entirely consistent with low prices; and that high wages do not prevent us to-day from having an hitherto unequaled export trade. Even if all wages and all profits were lower, it would, however, affect all industries alike, and some would still be more productive relatively [pg 457]to others, and the same inequality would remain. If, however, we learn to use our materials better, use machinery with more effect on the quantity produced, adapt our industries to our climate, get the raw products more cheaply, free ourselves from excessive and unreasonable taxation, it would be difficult to say what commodities we might not be able eventually to manufacture in competition with the rest of the world. For we have scarcely ever, as a country, had the advantage of such conditions to aid us in our foreign trade.

Mr. Mill now goes on to consider the suggestive fact that wages are higher in England than on the Continent, and yet that the English have no difficulty in underselling their Continental rivals.


Before examining this opinion on grounds of principle, it is worth while to bestow a moment's consideration upon it as a question of fact. Is it true that the wages of manufacturing labor are lower in foreign countries than in England, in any sense in which low wages are an advantage to the capitalist? The artisan of Ghent or Lyons may earn less wages in a day, but does he not do less work? Degrees of efficiency considered, does his labor cost less to his employer? Though wages may be lower on the Continent, is not the Cost of Labor, which is the real element in the competition, very nearly the same? That it is so seems the opinion of competent judges, and is confirmed by the very little difference in the rate of profit between England and the Continental countries. But, if so, the opinion is absurd that English producers can be undersold by their Continental rivals from this cause. It is only in America that the supposition is prima facie admissible. In America wages are much higher than in England, if we mean by wages the daily earnings of a laborer; but the productive power of American labor is so great—its efficiency, combined with the favorable circumstances in which it is exerted, makes it worth so much to the purchaser—that the Cost of Labor is lower in America than in England; as is proved by the fact that the general rate of profits and of interest is very much higher.

§ 3. Low wages enable a Country to undersell another, when Peculiar to certain branches of Industry.

But is it true that low wages, even in the sense of low Cost of Labor, enable a country to sell cheaper in the [pg 458]foreign market? I mean, of course, low wages which are common to the whole productive industry of the country.

If wages, in any of the departments of industry which supply exports, are kept, artificially or by some accidental cause, below the general rate of wages in the country, this is a real advantage in the foreign market. It lessens the comparative cost of production of those articles in relation to others, and has the same effect as if their production required so much less labor. Take, for instance, the case of the United States in respect to certain commodities. In that country tobacco and cotton, two great articles of export, are produced by slave-labor, while food and manufactures generally are produced by free laborers, who either work on their own account or are paid by wages. In spite of the inferior efficiency of slave-labor, there can be no reasonable doubt that, in a country where the wages of free labor are so high, the work executed by slaves is a better bargain to the capitalist. To whatever extent it is so, this smaller cost of labor, being not general, but limited to those employments, is just as much a cause of cheapness in the products, both in the home and in the foreign market, as if they had been made by a less quantity of labor. If the slaves in the Southern States were emancipated, and their wages rose to the general level of the earnings of free labor in America, that country might be obliged to erase some of the slave-grown articles from the catalogue of its exports, and would certainly be unable to sell any of them in the foreign market at the present price. Their cheapness is partly an artificial cheapness, which may be compared to that produced by a bounty on production or on exportation; or, considering the means by which it is obtained, an apter comparison would be with the cheapness of stolen goods.

Image
Chart XV.

How far Mr. Mill was in error may be seen by Chart No. XV, which shows the enormous increase of cotton production under the régime of free labor as compared with that of slave-labor in the United States. The abolition of slavery has been an economic gain to the South. Moreover, the exports of raw cotton have increased from 644,327,921 pounds in [pg 460]1869, to 2,288,075,062 pounds in 1883; while for corresponding years the exports of tobacco increased from 181,527,630 to 235,628,360 pounds. In other words, exports of tobacco were increased by 30 per cent, and those of raw cotton by no less than 255 per cent. Besides, the prices of cotton and tobacco are no higher now than before 1850.


An advantage of a similar economical, though of a very different moral character, is that possessed by domestic manufactures; fabrics produced in the leisure hours of families partially occupied in other pursuits, who, not depending for subsistence on the produce of the manufacture, can afford to sell it at any price, however low, for which they think it worth while to take the trouble of producing. The workman of Zürich is to-day a manufacturer, to-morrow again an agriculturist, and changes his occupations with the seasons in a continual round. Manufacturing industry and tillage advance hand in hand, in inseparable alliance, and in this union of the two occupations the secret may be found why the simple and unlearned Swiss manufacturer can always go on competing and increasing in prosperity in the face of those extensive establishments fitted out with great economic and (what is still more important) intellectual resources.

In the case of these domestic manufactures, the comparative cost of production, on which the interchange between countries depends, is much lower than in proportion to the quantity of labor employed. The work-people, looking to the earnings of their loom for a part only, if for any part, of their actual maintenance, can afford to work for a less remuneration than the lowest rate of wages which can permanently exist in the employments by which the laborer has to support the whole expense of a family. Working, as they do, not for an employer but for themselves, they may be said to carry on the manufacture at no cost at all, except the small expense of a loom and of the material; and the limit of possible cheapness is not the necessity of living by their trade, but that of earning enough by the work to make that social employment of their leisure hours not disagreeable.

§ 4. —But not when common to All.

These two cases, of slave-labor and of domestic [pg 461]manufactures, exemplify the conditions under which low wages enable a country to sell its commodities cheaper in foreign markets, and consequently to undersell its rivals, or to avoid being undersold by them. But no such advantage is conferred by low wages when common to all branches of industry. General low wages never caused any country to undersell its rivals, nor did general high wages ever hinder it from doing so.

To demonstrate this, we must turn to an elementary principle which was discussed in a former chapter.290 General low wages do not cause low prices, nor high wages high prices, within the country itself. General prices are not raised by a rise of wages, any more than they would be raised by an increase of the quantity of labor required in all production. Expenses which affect all commodities equally have no influence on prices. If the maker of broadcloth or cutlery, and nobody else, had to pay higher wages, the price of his commodity would rise, just as it would if he had to employ more labor; because otherwise he would gain less profit than other producers, and nobody would engage in the employment. But if everybody has to pay higher wages, or everybody to employ more labor, the loss must be submitted to; as it affects everybody alike, no one can hope to get rid of it by a change of employment; each, therefore, resigns himself to a diminution of profits, and prices remain as they were. In like manner, general low wages, or a general increase in the productiveness of labor, does not make prices low, but profits high. If wages fall (meaning here by wages the cost of labor), why, on that account, should the producer lower his price? He will be forced, it may be said, by the competition of other capitalists who will crowd into his employment. But other capitalists are also paying lower wages, and by entering into competition with him they would gain nothing but what they are gaining already. The rate, then, at which labor is paid, as well as the quantity [pg 462]of it which is employed, affects neither the value nor the price of the commodity produced, except in so far as it is peculiar to that commodity, and not common to commodities generally.

However, without there being any change in the productiveness of any industry, if the price of the article should rise, for instance, from an increased demand, that would make the total value arising from the products of the industry larger in its purchasing power, and so there would be a larger sum to be divided among labor and capital. If there be free competition, more capital would move into this one industry under the hope of larger profits, and so wages would rise. Therefore, it is possible that high wages and high prices may go together, but not as cause and effect. In fact, the change in price generally precedes the change in wages. On the other hand, while low wages are not the cause of low prices nor high wages of high prices, yet the two may be found together, as both due to a common cause, viz., the small or great value of the total product.291


Since low wages are not a cause of low prices in the country itself, so neither do they cause it to offer its commodities in foreign markets at a lower price. It is quite true that, if the cost of labor is lower in America than in England, America could sell her cottons to Cuba at a lower price than England, and still gain as high a profit as the English manufacturer. But it is not with the profit of the English manufacturer that the American cotton-spinner will make his comparison; it is with the profits of other American capitalists. These enjoy, in common with himself, the benefit of a low cost of labor, and have accordingly a high rate of profit. This high profit the cotton-spinner must also have: he will not content himself with the English profit. It is true he may go on for a time at that lower rate, rather than change his employment; and a trade may be carried on, sometimes for a long period, at a much lower profit than that for which it would have been originally engaged in. Countries which have a low cost of labor and high profits do not for that reason undersell others, but they do oppose a [pg 463]more obstinate resistance to being undersold, because the producers can often submit to a diminution of profit without being unable to live, and even to thrive, by their business. But this is all which their advantage does for them; and in this resistance they will not long persevere when a change of times which may give them equal profits with the rest of their countrymen has become manifestly hopeless.

§ 5. Low profits as affecting the carrying Trade.

It is worth while also to notice a third class of small, but in this case mostly independent communities, which have supported and enriched themselves almost without any productions of their own (except ships and marine equipments), by a mere carrying-trade, and commerce of entrepot; by buying the produce of one country, to sell it at a profit in another. Such were Venice and the Hanse Towns.

When the Venetians became the agents of the general commerce of Southern Europe, they had scarcely any competitors: the thing would not have been done at all without them, and there was really no limit to their profits except the limit to what the ignorant feudal nobility could and would give for the unknown luxuries then first presented to their sight. At a later period competition arose, and the profit of this operation, like that of others, became amenable to natural laws. The carrying-trade was taken up by Holland, a country with productions of its own and a large accumulated capital. The other nations of Europe also had now capital to spare, and were capable of conducting their foreign trade for themselves: but Holland, having, from the variety of circumstances, a lower rate of profit at home, could afford to carry for other countries at a smaller advance on the original cost of the goods than would have been required by their own capitalists; and Holland, therefore, engrossed the greatest part of the carrying-trade of all those countries which did not keep it to themselves by navigation laws,292 constructed, like those of England, for the express purpose.

In the United States, early in the century, a retaliatory policy against England gave us a body of navigation laws copied after the mediæval statutes of England and the Continent, which still remain on the statute-book. They do not permit an American to buy a vessel abroad and sail it under our flag without paying enormous duties; a provision which is intended to foster ship-building in the United States. Even with this legislation, ships, as a fact, are not built here for the foreign trade; and our ship-builders practically supply the coasting-trade only (which is not open to foreigners). The ability to buy ships anywhere, and enter them to registry under our flag free of duty, is what is meant by the demand for “free ships.” This, however, has to do with ship-building. But ship-owning or ship-sailing, is quite distinct from it. The ability to get as great a return from capital and labor invested in a ship as from other occupations open to Americans is another thing. Even if we had “free ships,” the higher returns in other industries in our country, particularly as regards profits, might cause capitalists naturally to neglect a less for a more productive business. In 1884 Congress has very properly taken away many vexatious restrictions upon ships, which diminished the returns from ship-sailing, and it remains to be seen whether we can thereby regain any of our foreign carrying-trade. At present we have a very small tonnage even in that part of the shipping engaged in carrying our own goods.
admin
Site Admin
 
Posts: 36125
Joined: Thu Aug 01, 2013 5:21 am

PreviousNext

Return to Ancien Regime

Who is online

Users browsing this forum: No registered users and 11 guests