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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 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 remittance, 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 sup

position 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.

CHAPTER XXII.

INFLUENCE OF THE CURRENCY ON THE EXCHANGES AND ON FOREIGN TRADE.

§ 1. 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 propor

tions among the different countries of the world, as to allow the very sanie 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 whichí 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 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 fulness.

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flowed would spread itseif 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 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.

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 connexion with any causes affecting its permanent value. This is a subject of importance, on account of its bearing upon the practical problem which has excited so much discussion for sixty years past, the regulation of the currency.

§ 2. 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 same effects which would thus The natural effect would be a rise of arise from the discovery of a treasure, prices. This would check exports, and accompany the process by which bank encourage imports; the imports would notes, or any of the other substitutes exceed the exports, the exchanges for money, take the place of the prewould become unfavourable, and the cious metals. Suppose that England newly-acquired stock of money would possessed a currency wholly metallic, diffuse itself over all countries with of twenty millions sterling, and that which the supposed country carried on suddenly twenty millions of bank notes trade, and from them, progressively, were sent into circulation. If these were through all parts of the commercial issued by bankers, they would be emworld. The money which thus over-ployed in loans, or in the purchase of

securities, and would therefore create | twenty millions were absorbed ;* after

which absorption, the currencies of all countries would be, in quantity and in value, nearly at their original level. I say nearly, for in strict accuracy there would be a slight difference. A somewhat smaller annual supply of the precious metals would now be requird, there being in the world twenty millions less of metallic money undergoing waste. The equilibrium of payments, consequently, between the mining countries and the rest of the world, would thenceforth require that the mining countries should either export rather more of something else, or import rather less of foreign com modities; which implies a somewhat lower range of prices than previously in the mining countries, and a somewhat higher in all others; a scantier currency in the former, and rather fuller currencies in the latter. This effect, which would be too trifling to require notice except for the illustra tion of a principle, is the only permanent change which would be produced on international trade, or on the value or quantity of the currency of any country.

a sudden fall in the rate of interest, which would probably send a great part of the twenty millions 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 purchase of materials, or by the government 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 stimulated. A great balance of payments would become due; the exchanges would turn against England, 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, geogra phically and commercially, to England. 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 twenty millions, 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 manent branch of industry, carried on under 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

Effects of another kind, however, will have been produced. Twenty millions which formerly existed in the unproductive form of metallic money, have been converted into what is, or is capable of becoming, productive capital. This gain is at first made by England 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 inflnx from the mines, and finally the world has gained a virtual addition of twenty millions to its productive resources. Adam Smith's illustration, though so well known, deserves for its extreme

* I am here supposing a state of thing in which gold and silver mining are a pers

known conditions; and not the present state of uncertainty, in which gold-gathering is a game of chance, prosecuted (for the present) in the spirit of an adventure, not in that of a regular industrial pursuit.

aptness to be once more repeated. | simple extension of his ordinary occuHe compares the substitution of paper pation. He lends the amount to in the room of the precious metals, to farmers, manufacturers, or dealers, who the construction of a highway through employ it in their several businesses. the air, by which the ground now So employed, it yields, like any other occupied by roads would become avail- capital, wages of labour and profits of able for agriculture. As in that case stock. The profit is shared between a portion of the soil, so in this a part the banker, who receives interest, and of the accumulated wealth of the a succession of borrowers, mostly for country, would be relieved from a short periods, who after paying the function in which it was only em- interest, gain a profit in addition, or a ployed in rendering other soils and convenience equivalent to profit. The capitals productive, and would itself capital itself in the long run becomes become applicable to production; the entirely wages, and when replaced by office it previously fulfilled being equally the sale of the produce, becomes wages well discharged by a medium which again; thus affording a perpetual fund, costs nothing. of the value of twenty millions, for the maintenance of productive labour, 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 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 twenty millions 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 taxpayers at large, who either add it to their capital or spend it as income. When paper currency is supplied, as in our own country, by bankers and banking companies, the amount is almost wholly turned into productive capital: for the issuers, being at all times liable to be called apon 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

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. A country with the extensive commercial relations of England, is liable to be suddenly called upon for large foreign payments, sometimes in loans, or other investments of capital abroad, sometimes as the price of some unusual importation of goods, the most frequent case being that of large importations of food consequent on a bad harvest. To meet such demands it is necessary that there should be, either in circulation or in the coffers of the banks, coin or bullion to a very considerable amount, and that this, when drawn out by any emergency, should be allowed to return after the emergency is past. 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