it stands in precisely this relation to all the Private banks and the Joint-Stock banks in the city of London, all of which have Deposits in the Bank of England, which is thus enabled to make further loans on the strength of these Deposits, without depriving the depositing banks of the full use of their funds. Our proposed Bank, or Association of depositors, however, would be peculiar in another respect, in that it would require neither charter nor capital, would issue no bills, and would perform no function but that of making loans and circulating Deposits. It would not withdraw any funds or Deposits from the present banks, but would circulate and equalize these Deposits, keeping the share of each bank as strictly proportioned as it now is to its amount of business. Its functions would be very similar to those of the Clearing-House, and might perhaps be profitably added to the present operations of the Clearing-House, being conducted under the oversight of the same committee, or of one chosen by the associated depositors.

It appears from this explanation, that there is no good reason why merchants of undoubted solvency should find it any more difficult to pay their notes at one time than another. The fund which affords the means of paying them-i. e. the total amount of the Deposits - remains without material fluctuation throughout all conditions of the money-market; or rather, as we have seen, it is a little increased in a time of pressure. And the aggregate of this fund is not diminished by making payments out of it to any amount whatever; for though all commercial debts are paid out of it, they are by the same act paid into it, the operation of payment only shifting the names of the persons to whose credit a given portion of the fund is entered. But so long as the fund is owned and held (say) by a thousand different depositors, any one owner fears to lend during a crisis, lest the loan should diminish his share of the deposits, though it would thereby certainly increase the share of some other owner. But throw all the Deposits into one fund, intrusted to the management of one person or one institution, and, while each depositor may still retain the entire use and direction of his own deposits, the manager of the whole may make loans to any extent without subtracting a dollar from the aggregate. To obtain a loan, and therewith to pay a debt, is not to take away anything

from the total amount of the Deposits, but only to shift the distribution of them on the books, where they are entered to the credit of different persons.

CHAPTER XX.

THE DOCTRINE OF INTERNATIONAL EXCHANGES: THE LIMITS OF FREE TRADE AND THE PROTECTIVE SYSTEM.

Ir has now been shown that prices are determined by the relation of the Demand to the Supply, and that an extension of the market, or an increase of the Demand, can be obtained only by submitting to a fall of prices, so as to bring the article within the reach of a greater number of consumers. In any market, only a certain quantity of goods at a given Price can be consumed; if more goods are forced upon the market than it naturally requires, the Price must fall, and then the consumption may be very much increased.

It has also been proved, that we really purchase commodities with commodities; that we pay for our whole imports with our whole exports; that if, in our traffic with any one country, our imports much exceed our exports, then we pay the balance, not in money, but by transferring to that country the debt due to us from another country, with which our trade is such that our exports exceed our imports. It is only the balance of the immensely long "account-current" of our trade with all foreign countries whatsoever which is struck in money; and this cash balance cannot be more than an insignificant fraction of either side of the account.

The advocates for free trade have always insisted, that we must buy merchandise of England, not only to induce, but even to enable, England to buy merchandise of us; that we must buy of any country in order to sell to her, and must buy as much as we sell. But it is not so. It is not necessary that we should take enough of English manufactured goods to pay us for all the cotton, tobacco, and wheat which we sell to England. England is able, though of course she is not very willing, to pay us the balance in

tea from China, coffee from Brazil, hemp from Russia, or whatever other article, from whatever other country, we see fit to require. We can compel her to pay us in whatever commodities we may select; for the articles which we sell to England, cotton, tobacco, and wheat, are of prime necessity to her, and most of them she cannot obtain elsewhere. As our exports must pay for our imports, the only point to be considered is, how we can dispose of the exports to most advantage, or obtain for them the largest return of the imports.

The cost to us of our domestic products is, the labor that is expended upon their production. But the cost to us of foreign products is, not the labor which has been expended upon their production, but the labor which we must expend upon the articles that are given in exchange for those products.

"The advantage of an interchange of commodities between nations," says Mr. Mill, "consists simply and solely in this, that it enables each to obtain, with a given amount of labor and capital, a greater quantity of all commodities taken together. This it accomplishes by enabling each, with a quantity of one commodity which has cost it so much labor and capital, to purchase a quantity of another commodity, which, if produced at home, would have required labor and capital to a greater amount. To render the importation of an article more advantageous than its production, it is not necessary that the foreign country should be able to produce it with less labor and capital than ourselves. We may even have a positive advantage in its production; but if we are so far favored by circumstances as to have a still greater positive advantage in the production of some other article which is in demand in the foreign country, we may be able to obtain a greater return to our labor and capital by employing none of it in producing the article in which our advantage is least, but devoting it all to the production of that in which our advantage is greatest, and giving this to the foreign country in exchange for the other. It is not a difference in the absolute cost of production, which determines the interchange, but a difference in the comparative cost."

The inhabitants of Barbadoes, for instance, 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 quarter 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 cost 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 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. This is a striking example to show the benefit of foreign trade to both the countries which are parties to it. 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.

Now let us apply these principles to the trade between England and the United States. To simplify the matter, we will take but one article, flour, as representing all the commodities that America sells to England; and but one article, cloth, as representing all the goods which England sells to America. Suppose, on account of the respective advantages possessed by the two countries, that the production of one barrel of flour in England costs as much labor and capital as would suffice for the manufacture of ten yards of cloth; while in America, one barrel of flour can be produced for three fifths of its cost in England, that is, for as much labor and capital as would, in England, manufacture only six yards of cloth.

Now, if a system of Free Trade between the two countries be established, the two commodities will be exchanged for each other

at the same rate both in England and America. The price will be equalized between the two countries; but at what point will it be equalized? Shall the English price be established in America, or shall the American price be established in England? Or shall

a price intermediate between the two be established? Either of these three suppositions is possible. The Englishman can afford to give ten yards, for it will cost him that amount of labor and capital to produce the flour in his own country, or for himself. On the other hand, the American can afford to sell the flour for six yards, because this quantity of cloth, if produced in his own country, would cost him more than the flour. Suppose that, by the higgling of the market, the price in both countries is fixed at seven yards. The advantage of the trade is then shared between the two countries, but it is shared unequally. America gains one yard on each barrel, as she now receives seven yards of cloth for the labor which formerly produced but six; England gains three yards on each barrel, for the flour now costs her but seven yards a barrel, while it formerly cost her ten. We will suppose that, at these rates, America sells 100,000 barrels of flour to England, and receives in exchange, of course, 700,000 yards of cloth. The Demand on each side must be just sufficient to carry off the Supply received on the other. So long as England wants only this amount of flour, and the United States only this quantity of cloth, the interchange will continue at this rate, giving three fourths of the profit to Great Britain, and only one fourth to this country.

But suppose the Demand to vary in one of the two countries; suppose that England, on account of the increase of her population, now needs 150,000 barrels of flour, which America is perfectly able and willing to furnish. But England can pay for this larger purchase only by sending over more cloth; the United States, however, by the supposition, are fully supplied with the 700,000 yards which they received before; they cannot buy any more at the old rate of seven yards for one barrel. How, then, is England to obtain the additional quantity of flour that she needs? She has but one course to pursue; she must offer her cloth at a reduced price, knowing that this reduced price will bring it within the reach of a larger class of consumers. Instead of seven, she will now offer nine yards of cloth for a barrel of flour. At this