the vaults of American bankers, interest rates would fall, possibly to rise again later, and eventually, if the process continued long enough, the prices of American commodities would ascend to such a level that foreign nations would be unable to continue buying in this country. At this point, evidently, our hypothesis breaks down, and we are forced to conclude that the original supposition was an impossible one.

This hypothetical case and its reductio ad absurdum are sufficient to establish certain important pratical conclusions. The first is that a country cannot permanently sell goods for money alone. If it produces large quantities of the money metals, it will regularly sell those metals for the goods and services of other nations. If it produces no gold or silver itself, it will secure them through exchange; although, even in this case, gold and silver are likely to constitute only a minor part of its imports. Perhaps the gravest error one can commit in studying an international trade balance is to treat it as an exchange of goods for money. It is not even an exchange of goods for goods. The true international balance is one of claims against obligations, of credits against debits. The complete statement is that the goods, moneys, and services rendered by one country to other countries, plus its claims and credits of all kinds, will be balanced by the goods, moneys, and services received by the same country plus its debts and obligations of all kinds. Or, to put the matter concretely, we must include, along with the exports and imports. of merchandise and bullion, the invisible exchanges, loans which the country makes or receives, annual interest payments on loans and capital invested abroad, repayment of loans or the purchase of securities, earnings of ships, insurance premiums, and commissions of all kinds for international services, governmental expenditures in foreign countries for diplomatic service, payment of subsidies and war indemnities, remittances of immigrants, expenditures of travelers, and a thousand and one other items, all tending, according as they depress or raise the price of foreign exchange, to bring about the importation or exportation of gold for the occasional balancing of the account.

A mere glance at this list of items entering into foreign trade is

sufficient to puncture the old mercantilist idea that a "favorable balance of trade" or an excess of merchandise exports brings about an increase of the money supply. This idea is as fully refuted by commercial statistics as by economic analysis. In the thirty-three years, 1874-1906, for instance, we had a large excess of merchandise exports in all except four years, but there was an excess of gold imports in only sixteen years. So, similarly, there was probably little truth in the statement heard so frequently when the previous edition of this work was published (1908), that our then "favorable balance" indicated that the United States was settling its indebtedness to foreign capitalists, repurchasing American securities owned abroad, and thus bringing the control of American enterprises more completely into the hands of Americans. It may have meant this, to be sure, but it more probably meant that we were paying England in goods for carrying and insuring our exports, or that foreign. owners of American securities were taking in this form the annual interest or profits due to them. That excess of exports represented the continuance of indebtedness rather than its liquidation.

For the same reasons an "unfavorable balance of trade" or an excess of merchandise imports is open to a variety of different interpretations. It may mean that foreign capital is investing more heavily in the country under discussion, or that the latter country is taking, in the form of consumable commodities, interest and profits on investments which it has previously made abroad, or that it is selling its holdings in foreign enterprises and taking the proceeds in the form of consumable goods. An "unfavorable balance" of trade may thus be, in reality, highly encouraging; and a "favorable balance "indicative of national waste and extravagance. The precise meaning of any particular balance can be determined only after the most careful study, and no dependence should be placed upon the offhand interpretations of casual investigators. The great truth is that there must be some sort of balance between the credits and liabilities of any country, and that in practice a nation must be willing to buy if it is anxious to sell.

A scholarly analysis of the foreign trade of the United States, with a careful interpretation of the meaning of the trade balance at various periods, may be found in the North American Review for July, 1901, from the pen of Professor C. J. Bullock. Professor Bullock's explanation of the balance in two or three periods may be given, in order to illustrate the variety of factors which must be taken into account when dealing with this subject. In the period 1789-1820 the imports of merchandise and specie exceeded the corresponding exports by $511,000,000, and our obligations were further increased by interest on foreign capital invested in the United States to the amount of $200,000,000 approximately. This total indebtedness of something over $700,000,000 was offset by the earnings of the American merchant marine, estimated at about $800,000,000 for the period in question. "So far, then, from the country being drained of its money in payment for the balance of imported merchandise, the banks held not less than $20,000,ooo of specie in the year 1820; while Gallatin and Crawford estimated that there had never been more hard cash in circulation."

In the decade 1831-1840, owing to the high prices current in this country, imports exceeded exports by $159,700,000; the imports of specie also exceeded the exports by $50,650,000; and the earnings of our merchant marine, $90,000,000, sufficed only to reduce this "unfavorable balance" to about $120,000,000. This remaining balance is accounted for by new foreign investments in the United States, in particular by foreign purchases of state bonds. "Our large imports of merchandise and specie had been made necessary by the movement of foreign capital toward the United States."

In the decade 1851-1860 the merchandise imports again exceeded the exports by $355,800,000; the net amount due to foreign creditors was somewhere between $100,000,000 and $130,000,000; and to offset these adverse balances our merchant marine earned in this period only $158,000,000. The remaining balance in this case was covered by our large excess of specie exports, which amounted to $417,608,000, and was due to the discovery of gold in California. "The United States had become one of the leading goldproducing regions, and the course of the exchanges was inevitably altered."

In the periods briefly described above, the striking factors in our international trade were, respectively, the earnings of our merchant marine, new investments of foreign capital in the United States, and large specie exports following the discovery of gold in California. In the last period, from 1874 to 1896, our exports both of merchandise and specie greatly exceeded our imports. "This meant simply," concludes Professor Bullock, "that the country had assumed its normal position as a debtor nation on the various items of invisible exchanges, and was paying annually something like $122,500,000 on such accounts."

The movement just preceding the European War was marked by features of unusual interest. From 1910 to 1914 this country had a normal excess of exports. In April, 1914, however, an "adverse" balance showed itself,

zens.

Many occupations were closed to them; the length of their sojourn and the number of their visits were limited; they could not pass a town without exposing their wares for sale and paying the required market dues. The wants of the consumer took precedence over those of the producer or merchant. At the weekly markets consumers could supply their needs before the baker or merchant was allowed to make purchases. There was a community interest in the supplies of necessities, and often their exportation was prohibited. The trade of neighboring peasants was restricted to the home city, and laws regulating price, weight, measure, and quality were common. This restrictive municipal policy was very much relaxed at the great fairs which were held periodically in various parts of Europe." 1

In the early modern period Mercantilism became dominant. Commercial policies were controlled by the desire to get and keep the precious metals. At first the exportation of specie was prohibited; merchants trading abroad were compelled to bring home cash for the goods they had taken out with them; foreign merchants trading within the home country were compelled to exchange their cash for domestic goods before they departed; exportation except the exportation of raw materials needed in the manufacturing industries - was encouraged; and importation - except in the case of the precious metals and the skilled artisans who were encouraged to immigrate was discouraged or prohibited. When it became apparent that the supply of money had to be secured through international trading, the greatest emphasis came to be laid upon the "favorable balance of trade"; and means, ranging all the way from bounties to war, were vigorously employed to secure the carrying trade for native ships.

Much mercantilistic legislation was immoderate, some of it barbarous, most of it marked by short-sighted national jealousy. Adam Smith has held it up to scorn. Some later writers have defended it as in the main necessary. No verdict on the subject needs to be given here. It accompanied the welding of the great modern states; and the consolidation of the smaller autonomies probably removed more restriction and more petty mercantilism than the new consolidation called into being.

1 G. M. Fisk, Int,

!! Commercial Policies, pp. 15, 16.