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his annual profits.

§ 212. Another questionable feature of modern commerce is
its transaction of business on credit, or " on time," as it is called.
The buyer of a quantity of goods does not pay for them in
ready money of any kind, but gives his note payable in tliirty,
sixty or ninety days, which the seller can only convert into
available money by having it discounted at the bank. If the
buyer does not pay the note at the date specified, the seller has
to pay it himself, and put the amount into his list of bad debts,
unless the law gives him redress by a levy on the property of
the buyer.

As we have already said, this method of creating the credit-
fund of money .of account on the books of the bank might be
abolished without abolishing the credit-fund itself, and the
separation of the two — of our money of account from our dis-
count system — is one of the problems that greatly concern the
future of modern business.)

Now, of course, the seller cannot afford to put the goods at as
low a figure as if he were paid in cash. He even in some cases
designates different prices according to the length of the credit;
in other cases, each house or each trade sells on time for a fixed
number of days. And the difference is not merely the amount
that he will lose by the discount of the note. He has to insure
himself against bad debts by an increase of his profits on all
transactions. He must charge more to good customers in order
to insure himself against bad ones. This has a tendency to


force up all prices, and to increase the value of the goods in
their passage from producer to consumer without adding to their

A transition to buying and selling for cash would greatly
simplify business. It would separate transactions that ought to
be treated distinctly and each on its own merits. It would rid
good houses of the burden of this mutual insurance system,
through which they suffer for the instability of others. It
would separate the business of borrowing money at the bank
from the business of buying and selling, and make "every tub
stand on its own bottom." It would send every man to bank to
borrow money on his own security, or that of his neighbors who
know something of his affairs, instead of enabling him to borrow
there on the credit of those from whom he buys.

§ 213. Whether and how far the change would be effectual
in restraining the spirit of reckless adventure and speculation,
without impeding legitimate enterprise, is a more difficult ques-
tion. It would at least bring distinctly into view the question
of the sufficiency of every person to whom an advance is made,
without complicating it with the desire to make a sale to him.
And this question would come before experts, whose business it
would be to make themselves acquainted with the facts, instead
of business men who have hands and heads full of other matters.
As a rule it would come before a man's own neighbors and
acquaintances, the directors of some local bank, instead of being
settled in a city where the statements of a " Commercial Direc-
tory" or some similar institution, are the only data for proceed-
ing. If joint guarantee were required it would have to be
furnished as in Scotland by two or more responsible neighbors,
who would need to know something of his standing before they
risked what would be a large loss to them, while it might be in
comparison a small loss to the wholesale firm in the city.

A great change for the better in this regard has been effected
since the war. Six months' credit has been generally shortened
to thirty or sixty days. The possession of a trustworthy me-
dium of exchange, of bank-notes that circulate throughout the


whole country, and that with a new rapidity, has done much
good in this respect. The loss of a multitude of bad debts, aud
the consequent decline of confidence in distant customers, have
done more. But there is still great need of improvement and
perhaps of the abolition of sales on time. For instance, one of
our largest dry goods houses made a thorough overhauling of its
list of creditors during the panic of 1874, and found that it
knew simply nothing of its prospect of ever getting any money
from nearly a third of them.

§ 214. When we know the function of the trader, and the part
he has played in industrial history, we are better able to decide
between the comparative benefits of home and foreign commerce.
The question is not of merely theoretical interest ; upon the
answer generally accepted as correct must depend the public
policy of each nation, for the revenue system of every country
has its effect to encourage or discourage one or both.

Adam Smith and Jean Baptiste Say, the founders of the mod-
ern school of economists in England and France, pronounce in
favor of domestic commerce as the more profitable of the two.
Smith says that if a given amount of capital be employed in
purchasing and interchanging goods within the same country,
that country will reap twice as much advantage from the activ-
ity of that capital, as if it had been employed in purchasing and
interchanging an equal value of goods with another country.
For in the one case encouragement is given to only one native
industry ; in the other to two. Nay more, — the operations of
domestic commerce beimrfar swifter than those of foreign trade,
the advantage to the country is proportionally great. In his
day it was possible to effect twelve such exchanges at home for
one abroad, making capital employed in the former twenty-four
times as useful to the country as if it were engaged in foreign
trade. (With modern facilities for transport, this ratio would
of course be very much decreased.) In his view the amount of
employment that a country can furnish to her people, depends
upon the amount of capital in circulation ; so that a pound em-
ployed in the purchase of British carpets for sale in the home


market might furnish twenty-four times as much work to
English workmen as a pound employed in trading with Portugal
for wines. A trade, therefore, by which the merchant grows rich
may be one from which his country derives no corresponding
advantage. In asserting so much, Adam Smith certainly yielded
the fundamental principle of his whole system, which was that
if society will simply remove all restrictions from individual
enterprise, and allow every one to do with his own what he will
— what he finds pays him best — society will reap the largest
possible benefit.

§ 215. The English school of course enter protest against
this concession, and try to refute the reasoning on which it is
based. Ricardo and McCulloch give substantially the same
answer. They assume in their answer that goods must be paid
for in goods ; that if England and Scotland give up a certain
commerce with each other, because the one can better supply
itself from one foreign country, and the other from another,
those countries will begin to purchase the products of English
and Scottish labor to the same amounts, and nobody will be
thrown out of employment in either country by the cessation of
the domestic exchange. Now this assumption, which they do
not put in so many words, but leave to be implied, is not to be
conceded without evidence, Rather there is much evidence to
the contrary. England and China have a large mutual foreign
commerce, but, in spite of the Christian forcing the pagan to
allow the importation of opium, millions upon millions of Eng-
lish silver are absorbed every year by the Chinese, in payment
fur teas and silks, which are not paid for in English goods. So
also India absorbs yearly millions of silver coin in payment for
her native goods, all that she takes from England being insuffi-
cient to pay for what England buys of her. The trade between
our own country and Europe is after the same fashion. England
and the Continent do not " call it square" at the end of every
year, balancing our raw cotton and breadstuff's against dry goods
and hardware. We pay over millions upon millions of gold and
silver to balance our accounts. Europe takes no more of what



we have to sell than she must ; she sells us all she can. For
US, therefore, their attempted refutations of Smith have no
force, and uuless some better be given, we must concede his
position that American capital, if spent in encouraging the pro-
duction of some of those articles that we pay Europe gold and
silver for, would confer greater benefits on the country than if
spent in importing them. The second part of his argument—
that from the comparative rapidity of the two forms of com-
merce— Ricardo and McCulloch do not touch.

§ 216. " But after all, even when the balance is paid in gold
and silver, still the fact is that the exchange is of commodities
for commodities. For in that case gold and silver are them-
selves given in exchange as commodities, not as money. And
it is in this new capacity alone that they are productive; in all
other cases they merely facilitate interchanges of parts of the
national wealth ; but when exported as commodities, they pro-
cure in return other commodities that add to the aggregate of
that wealth." So J. B. Say argues.

Under this reasoning lies the notion of the passivity of
money, — that it plays no part in production, but only in
exchange ; that any increase of the amount of it in circulation,
only increases in that proportion the money price of other com-
modities ; that any decrease in that amount only diminishes the
price. This notion runs counter to the observed facts in the
history of money, as recorded by Humboldt and Arthur Young,
for the last four centuries, and by Thomas Tooke {History of
Prices), for the present century. A tendency to decline in the
purchasing power of money with the increase of its amount, is
indeed a very natural supposition ; no doubt, in an unprogressive
society, such would be and has been the effect, as has been shown
by the vast decline in the purchasing power of silver in India,
since the English began to trade with her people. But a pro-
gressive society is one that resists such natural tendencies ; an
influx of the instrument of association into such a country, tends
to stimulate all sorts of productive industry. It finds — except
in periods of financial depression — a host of persons waiting for


this very instrument, to begin new lines of production, and it
sets many new wheels moving. " Hence new uses will be found
for it when it is abundant, new avenues of commerce will be
opened, new branches of industry will be essayed, until in-
creased production finds employment for the increase of money.
If money has increased, industry and trade are increased; and
thus the tendency to depreciation is met and strongly counter-

See Stephen Colwell's Ways and Means of Payment (Phila. 1859),
p. 556.

§ 217. The drain of the precious metals from a country,
though its effects are alleviated by the creation of the credit
fund for domestic payments, is therefore decidedly injurious to
its general interests. " It is not exactly true to say, as has too
often been said over and over again, since Turgot first said it,
that money is a commodity like any other. That proposition is
untrue, except as it regards the metal of which money is made;
but in so far as it is the means of exchange, it has peculiarities
of its own, which clearly distinguish it from other commodities.
If iron and cotton are scarce, those who need them suffer by
the scarcity, but it has no effect upon the prices of other ma-
terials. If, on the other hand, money is scarce, the price of
everything else is affected. Every one must make exchanges,
must buy and sell ; if, therefore, there is a tendency to a defi-
ciency or a scarcity of the means of exchange, every one is
straiteued, and all transactions become difficult. Just as
when the water falls in its rivers, traffic is interrupted because
the vessels are aground ; so, when money is diminished or dis-
appears from the channels of circulation, articles pass from one
owner to another with great difficulty. We have got to the
point of dispensing, in the commercial transactions of advanced
countries, with a great quantity of money by replacing it by
credit in all its forms ; but, given the quantity of money that is
still necessary, its rarity produces an embarrassment, and some-
times even a general crisis."

See Le Marche Monetaire el ses Crises dejmis Cinquante Ans ; by Emile
de Laveleye (1865).


The possession of a large quantity of money is, within limits
that no progressive country has reached, a great advantage. It
enables any country to organize its industry upon such a scale,
and to carry its division of labor to such perfection, as will bring
down the price of all the products of industry, while affording a
large return to both the capitalist and the laborer. It therefore
makes such a country a cheap place to buy in, mainly because
of that accumulation of money, which was to make everything
dear. And if any country have got the lead in this respect, an
unrestricted trade with those that are not so well off for money
will not correct but only increase the inequality. It will con-
tinually drain the precious metals out of those countries to
increase its own store, because it will steadily keep the balance
of trade in its own favor. It will sell others what it pleases,
and buy of them what it must. If there are exceptions to this
rule, they are to be found in those unprogressive countries, in
which the wants of the people are so few that it is impossible,
after selling them everything that they will buy, to balance the
purchases of raw materials from them. Such countries are
India and China.

This truth is the germ of the theories of the Mercantile
school ; it is a doctrine " combated by the great majority of

QOmists," who travesty the principles of that school as if men
like Colbert, Locke and Steuart held that one could eat or wear
money. But these same economists, proclaiming the passivity
or barrenness of money, save when given in exchange for
foreign goods, would have us believe that those countries which
receive it in that exchange are so grandly generous, or so blind
to their own interests, as to give commodities of the highest
utility for one that has no utility, or that only possesses it when
it can again be sent abroad.

218. The theory of foreign exchanges now maintained by the
English school, and first enunciated by Torrens (1808) and
Ricardo (1817), is given in a very forcible form by Mr. J. S.
Mill. It bases the advantage of the foreign trade exclusively
upon the comparative productiveness of labor, or of different


kinds of labor, in different countries. Each country exchanges
with others goods that cost it less labor than those that it re-
ceives would have cost it if produced at home. Each saves
labor by the bargain, and therefore each derives benefit from the
exchange, even though it might have produced the same articles
at home for less labor than they cost the other. For even if it
be as easy to make iron in Pennsylvania as in England, yet if it
pay better to raise wheat for exportation because England's need
of wheat compels her to give more iron for our wheat than the
labor spent in raising wheat would have produced, we are gainers
by the exchange. Each country, therefore, should manage its
economy not on the lines indicated by its natural resources, but
on those that are indicated by the exchangeable value of its
products in the markets of the world. Every nation, therefore,
Mill says, instead of adopting a national policy that looks to the
development of any species of industry, should allow things to
take their natural course, being assured that to do the things
that are easiest, and to buy in the cheapest market and sell iu
the dearest, are the most remunerative ways of procedure.

§ 219. We have already given some reasons why commerce
between distant points is an undesirable thing, as open to the
exercise of tyrannizing power by traders and their combinations.
The next chapter will be chiefly devoted to showing that while
individuals may find it to their account to buy in the cheapest
market and sell in the dearest of those that already exist, com-
munities will frequently find it more to their account to create
new markets by cherishing a varied industry at home. At this
point, therefore, we shall only remark :

(1) That exchanges are not, as this theory assumes, effected
on the basis of labor expended, but of money price, which is
quite another matter. We might be able to produce iron at a
far less expenditure of labor in Pennsylvania than in England,
and yet not be able to sell it so cheaply in the world's markets
as England does. Some of the manufactures of iron, such as
cutlery, axes and saws, are actually so produced through the
possession of better machinery, but they have not yet driven


English wares of the same sort out of the market. A recent
report to the British government asserts the same of many forms
of American dry goods, yet they do not sell in Europe. " What
makes the difference in money cost ?" ■ Many things, — the ex-
tent and the method of taxation, the cost of capital, the rate
of wages, the difference. in the purchasing power of money, and
the like.

Now, in view of domestic commerce, these elements of differ-
ence have no existence. It makes no difference to a country
what is paid for an article of home production, provided there is
no waste of labor in producing it, and provided there is a fair
exchange of labor for labor. If booter and hatter make an
exchange of goods, whether they call the price a thousand
dollars or one, is of no importance if only the values exchanged
arc equal. The standard of money payment, be it high or low,
is the same for both.

§ 220. (2) The theory assumes that the chief end of national
as of individual economy is to save labor, whereas the great
problem is how to employ it productively. If buying in the
cheapest market reduce the amount of employment, it will be
for the nation that does it the dearest of all buying. A farmer
who spends his idle hours in making a sled might have' got one
at the factory for the price of wheat that cost him less labor;
but he may have been wiser in making than in buying, because
those idle hours would otherwise have been wasted. The nation
that spends its surplus labor, — and every nation has a surplus
of it, — in working up its raw material into goods is gaining by
the business, even though it may employ that labor less effect-
ively than another that has more experience and capital. The
people of Denmark spend their long and bleak winters in spin-
ning and weaving home-made goods that England would furnish
them more cheaply than they make them. The nation says, with
one consent, through its national government, " we will not buy
of you what we can make ourselves, for if we did our time would
be lost." England herself is an illustration of what we mean.
" If every man and woman and child returned as a worker in


the census had full employment, at full wages, for forty-eight
weeks out of the fifty-two, England would be a perfect Paradise
for workingmen. We should be in the Millennium ! Far other
is the real state of affairs. Taking all the facts into account, I
come to the conclusion that for loss of work from every cause,
and for the non-effectives up to sixty-five years of age, who are
included in the census, we ought to deduct fully twenty per
cent, from the nominal full-time wages" of the lower classes as
a whole.

See R. Dudley Baxter's National Income of the United Kingdom. (Lon-
don 1868.)

The problem thus presented is not an insoluble one for any
country. It is the problem of the due balance of the three great
elements of the industrial state. England has missed its solution
chiefly through the rending the people away from the land, the
establishment of a system of agriculture that lacks aggressive-
ness and full productive power, and her consequent dependence
upon foreign harvests. Millions of the English people who
should be living by the land and owning it, sit prisoners in Eng-
lish workhouses, or crowd the lanes and back streets of her
manufacturing towns. Our danger is in the other direction —
an undue development of agriculture and foreign trade to the
neglect of varied industry.

§ 221. (3) In adopting, therefore, a purely passive policy, we
should not be accepting the natural order of things, but accom-
modating ourselves to a thoroughly artificial order. The false
position in which England finds herself compels her to wage war
upon the industries of other countries ; for us to sit idle and
passive while she does so by means of the vast masses of capital
concentrated in the hands of a few capitalists, would be as weak
as to sit idle and passive while her fleet bombarded Boston or
New York. The English ideal — forced upon them by their posi-
tion — is that their country should be "the workshop of the
world" and all other countries her dependencies. She is, in their
view, "like a vast city to which the less peopled parts of the
civilized world are an agricultural country, which is glad to send

England's ideal of commerce. 225

its overplus of provisions [of raw materials] in exchange for the
luxuries and conveniences of a manufacturing region" (Thorold
Rogers). " England's position is not that of a great landed pro-
prietor, with au assured revenue, and only subject to occasional
loss of crops or hostile depredations. It is that of a great mer-
chant, who by immense skill and capital has gained the front
rank and developed an enormous commerce, but has to support
an ever-increasing host of dependants. He has to encounter
the risks of trade and to face jealous rivals. . . . England is
more favorably situated than any country, except the United
States, for manufactures and commerce. . . . The future rise
of the United States into a great manufacturing and naval
power, appears the most probable and certain cause which will
place a limit to our national increased prosperity" (Dudley
Baxter). The United States and British colonies "are young
and rising countries; industries, as yet nascent, are thoroughly
suited to the natural capacity of the region and of the people,
the latter being of the same stock as the mother country, whose
manufactures they prohibit or discourage. There is no reason,
apparently, except priority in the market, why the industry of
the old country should not be transplanted to the new" (Tho-
rold Rogers).

In other words, England having by a bad national economy
destroyed the equilibrium of agriculture and manufactures at
In 'inc. and thereby made herself dependent upon other peoples for
the supply of food and a market for her wares, must now do her best
to prevent these new countries from attaining that equilibrium.
If they attain it, that will " place a limit to her increase and
prosperity," and unless emigration surpass everything that the
world has seen, will produce first wide-spread misery and then
domestic chaos. She must, therefore, use all her powers of
capital and persuasion to keep off the evil day. Although she
professes to believe, and persuades herself that she believes, iu
the solidarity of interests, and exhorts men

From growing commerce loose the latest chain,

. . . Till each man finds his own in all men's good,

And all men work in noble brotherhood ;



yet she cannot but see in this national growth of the industry
of these new peoples an injury to her own well-being All
English arguments and exhortations to passivity, however sin-
cere, lie, therefore, under a just suspicion, as special pleadings.
Facile homines credunt, id quod volunt.

§ 222. (4) The commerce proposed by this theory is the
exchange of the raw materials of some countries for the manu-
factured productions of others. It is therefore an unfair ex-
change, [1] one side pays for the transportation of bulky and
costly articles over great distances; the other pays for the
transfer of goods of the same value but condensed in form.
The burden of transportation, the chief tax upon production,
falls therefore heavily upon the producer of raw material,

Online LibraryRobert Ellis ThompsonSocial science and national economy → online text (page 20 of 38)