On the Doctrine of the Balance of Trade.

12. The doctrine of the Balance of Trade exercised such a powerful influence over legislation and national fortunes for two centuries, and as its overthrow, together with the catastrophe of Law's System of Paper money, or the Mississippi Scheme, were the causes out of which the science of Political Economy originated in modern times, we must explain the phrase.

The expression Balance of Trade is a pregnant example of Bacon's aphorism, that the fallacies of language are the most troublesome of all, and of the extreme difficulty of eradicating those with some portion of truth in them. It is also a conclusive reply to those persons who think that attention to the meaning of words is of no consequence in Economics.

As this error, however extensively it prevailed in its own. time, and however fatal its consequences were, is now completely exploded, we do not care to decide where it arose. England, France, and Italy, all contend for the honor of the cap and bells; nor is it worth while to settle the priority of folly. Though Spain may probably be really entitled to it. In the conquest of the New World, gold was the chief object of their ambition, and their new acquisitions were estimated chiefly as they were capable of producing the precious metals. The object of all trade was to acquire the precious metals, and the profits of commerce were estimated just as they brought in gold and silver.

As gold and silver only were reckoned as wealth, and other commodities as nothing, the idea very naturally grew up that what one side gained the other must lose. Montaigne was one of the first to formulate this unfortunate doctrine.

Having thus adopted the opinion that gold and silver were the only species of wealth, and that what one side gained the other lost, they then began to estimate how much the gain or the loss was, and they did it in this way. They said that if the exports of a country exceeded the imports in value, that the balance must be received in money, and that if the imports exceeded the exports in value, the balance must be paid in money. The difference in value between the exports and the imports was called the Balance of Trade, which it was assumed

must be paid in money, and the trade of a country was considered favorable or adverse according as the balance was for or against it. That is to say, the profit was held to consist in the quantity by which the value of the exports exceeded the value of the imports, and the loss was held to consist in the quantity by which the value of the imports exceeded the value of the exports.

13. Now let us take a very simple example of the rudest description of trading, which will illustrate the point as well as the most elaborate.

When our ships first traded to the South Sea Islands, they took out with them axes, beads and other trifles which were of very little value in this country, and bartered them for all sorts of curiosities, shells, &c., which were very valuable in England. A pair of fine shells from the South Seas in many cases is worth ten guineas in England, which perhaps an English sailor obtained in exchange for an axe which cost 2/6. The English sailors thought the natives very simple to give away so many valuable curiosities for such common things. We cannot doubt that the natives had exactly the same opinion of the English sailors; they thought them great simpletons to give away such valuable things as axes, beads, &c., for so common things as a few shells. Each party, however, exchanged what was common and cheap in his own country for what was scarce and valuable. The axes were many times more valuable in Feejee than the shells; the shells were many times more valuable than the axes in London. Thus an English sailor by giving away perhaps 2/6 gained in exchange what was worth ten guineas, and the difference was his profit. And thus both parties gained by the commerce. The shells were worth many axes in London; the axes were worth many shells in Feejee; and this is the genuine spirit of commerce. This simple transaction is a type of all commerce. The value of the shells in London arises from the desire of the people in London to possess them, and their scarcity. The value of the axe in Feejee arises from the great desire of the Feejeeans to possess it, and the scarcity of axes there. The coloured beads were just as valuable to the poor untutored savages as diamonds are to civilized Europeans. The commerce of all nations is exactly similar in principle to that between the sailors and the savages. It all consists in exchanging

things which are comparatively cheap and common in two countries for what is dear and scarce in them reciprocally, and of course both parties must gain by the very nature of the transaction. But according to the old doctrine of the Balance of Trade England having given an axe worth 2/6, and having received a pair of shells worth ten guineas, still owed the balance which required to be paid in gold!

14. We observe from this simple example that the profit is measured by the excess of the value of the import above that of the export, as the import is the payment for the export. And as all the expenses of conveying the export to the foreign country, and of bringing the import from the foreign country must come out of this difference, and, as there must in addition to that be the merchant's profit, it must be a dead loss unless the value of the import very considerably exceeds the value of the export.

The supporters of the Mercantile System quite overlooked the fact that the imports were in general the payment for the exports, and therefore profits were greater by just so much as the value of the import exceeded that of the export.

15. We have observed also that both sides gained in this commerce, because a shell was worth many axes in England, and an axe was worth many shells in Feejee. But it is evident that this process would not go on indefinitely, because if too many shells were imported into England, their value would diminish so much, that it would cease to defray the cost of the trade. So if too many axes were imported into Feejee, their value would fall so as not to be able to buy shells enough to defray the cost of the traffic, and then of course the commerce would cease.

As a general rule therefore, both sides must gain in commerce. For why should any one voluntarily make an exchange to his own loss? No doubt there may be individual cases where traders are unfortunate and make losses. But as a general rule while commerce goes on, the necessary inference clearly is that it is mutually profitable, and directly profit ceases, commerce must cease.

16. Nevertheless the merchants and statesmen of that time, having laid down that gold and silver were the only species of wealth, held that that side only which received a payment

in money gained, and the other side lost. Whereas it was quite clear, unless the sum received exceeded a certain amount, the trade must be a loss, just as unless a tradesman receives a certain amount in money for his goods he must lose. They also held that the profit was estimated by the excess of the value of the export above that of the import; whereas it is clear that the real truth was the exact reverse of the doctrine of the Balance of Trade.

For more than two hundred years, this extraordinary delusion kept possession of the minds of nations, and all commerce between them was reduced to a general scramble to obtain possession of the greatest amount possible of the gold and silver in circulation. Every effort was made by war and legislation to obtain money, and nothing but money. Everything was sacrificed to endeavour to force foreign trade. Exportation was encouraged in every way, and importation discouraged and prevented. Each nation was supposed to be benefited by and interested in the destruction of its neighbours. Montaigne and Bacon repeated the doctrine that the gain of one must be the loss of another. Even Voltaire repeated this fatal dogma.

J. B. Say says that in the space of two hundred years during which Statesmen were blinded with this strong delusion, no less than fifty years were spent in commercial wars, arising directly out of this stupendous folly. Fifty years of war with all its horrors waged for a chimera—a fiction-a thing which had absolutely no existence at all. Do we not say that true views in Economics are of the utmost importance to mankind. True Economics turned the light of science on a single expression, and the result has been to destroy for ever a fallacy which let loose upon the earth the démon of war for fifty years!

17. As this system is now absolutely exploded, it would occupy too much space in this work to describe fully its fatal effects. The first eight chapters of the Fourth book of Smith's Wealth of Nations contain the most elaborate exposition of it in the English language, and we must refer those who care to inquire further into it to that work.

18. It is true that during this period a few sagacious men perceived the gross fallacy of the whole system, but they were solitary lights shining in darkness, and the darkness comprehended them not. Their isolated efforts were unheeded and

forgotten, and it was not until a powerful sect arose that any permanent effect was produced upon the opinions of mankind. And that honour is unquestionably due to Quesnay and his followers. These men first proclaimed the doctrine that every nation is interested in the prosperity of its neighbours, and not in their destruction, with a power and an authority, which has gone on increasing from their day to this, and having been developed by a long series of illustrious writers, has produced an entire revolution in the opinions of mankind, and in the policy of the most enlightened nations.