The Manufacturing Power and the Instrument of CirculationIf the experience of the last twenty-five years has confirmed,as being partly correct, the principles which have been set up bythe prevailing theory in contradiction to the ideas of theso-called 'mercantile' system on the circulation of the preciousmetals and on the balance of trade, it has, on the other hand,brought to light important weak points in that theory respectingthose subjects.
Experience has proved repeatedly (and especially in Russia andNorth America) that in agricultural nations, whose manufacturingmarket is exposed to the free competition of a nation which hasattained manufacturing supremacy, the value of the importation ofmanufactured goods exceeds frequently to an enormous extent thevalue of the agricultural products which are exported, and thatthereby at times suddenly an extraordinary exportation of preciousmetals is occasioned, whereby the economy of the agriculturalnation, especially if its internal interchange is chiefly based onpaper circulation, falls into confusion, and national calamitiesare the result.
The popular theory maintains that if we provide ourselves withthe precious metals in the same manner as every other article, itis in the main indifferent whether large or small quantities ofprecious metals are in circulation, as it merely depends on therelation of the price of any article in exchange whether thatarticle shall be cheap or dear; a derangement in the rate ofexchange acts simply like a premium on a larger exportation ofgoods from that country, in favour of which it oscillates from timeto time: consequently the stock of metallic money and the balancebetween the imports and exports, as well as all the othereconomical circumstances of the nation, would regulate themselvesin the safest and best manner by the operation of the naturalcourse of things.
This argument is perfectly correct as respects the internalinterchange of a nation; it is demonstrated in the commercialintercourse between town and town, between town and countrydistricts, between province and province, as in the union betweenState and State.Any political economist would be deserving of pitywho believed that the balance of the mutual imports and exportsbetween the various states of the American Union or the GermanZollverein, or between England, Scotland, and Ireland, can beregulated better through State regulations and laws than throughfree interchange.On the hypothesis that a similar union existedbetween the various states and nations of the earth, the argumentof the theory of trusting to the natural course of things would bequite consistent.Nothing, however, is more contrary to experiencethan to suppose under the existing conditions of the world that ininternational exchange things act with similar effect.
The imports and exports of independent nations are regulatedand controlled at present not by what the popular theory calls thenatural course of things, but mostly by the commercial policy andthe power of the nation, by the influence of these on theconditions of the world and on foreign countries and peoples, bycolonial possessions and internal credit establishments, or by warand peace.Here, accordingly, all conditions shape themselves in anentirely different manner than between societies which are unitedby political, legal, and administrative bonds in a state ofunbroken peace and of perfect unity of interests.
Let us take into consideration as an example the conditionsbetween England and North America.If England from time to timethrows large masses of manufactured goods on to the North Americanmarket; if the Bank of England stimulates or restricts, in anextraordinary degree, the exports to North America and the creditgranted to her by its raising or lowering its discount rates; if,in addition to and as a consequence of this extraordinary glut ofthe American market for manufactured goods, it happens that theEnglish manufactured goods can be obtained cheaper in North Americathan in England, nay, sometimes much below the cost price ofproduction; if thus North America gets into a state of perpetualindebtedness and of an unfavourable condition of exchange towardsEngland, yet would this disorganised state of things readilyrectify itself under a state of perfectly unrestricted exchangebetween the two countries.North America produces tobacco, timber,corn, and all sorts of means of subsistence very much cheaper thanEngland does.The more English manufactured goods go to NorthAmerica, the greater are the means and inducements to the Americanplanter to produce commodities of value sufficient to exchange forthem; the more credit is given to him the greater is the impulse toprocure for himself the means of discharging his liabilities; themore the rate of exchange on England is to the disadvantage ofNorth America, the greater is the inducement to export Americanagricultural products, and hence the more successful will be thecompetition of the American agriculturist in the English producemarket.
In consequence of these exportations the adverse rate ofexchange would speedily rectify itself; indeed, it could not evenreach any very unfavourable point, because the certain anticipationin North America that the indebtedness which had been contractedthrough the large importation of manufactured goods in the courseof the present year, would equalise itself through the surplusproduction and increased exports of the coming year, would befollowed by easier accommodation in the money market and in credit.