Director of the Mint. Annual Report on the Production of the Precious

Metals.

JONES, E. D. Economic Crises.

MAYO-SMITH, Statistics and Economics.

United States Geological Survey, annual volume on the Mineral Industry.

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CHAPTER XVII

INTERNATIONAL TRADE

THE subject of international trade brings us to an examination of exchange from a new viewpoint. In principle, international trade does not differ essentially from other kinds of trade. In the last analysis it amounts to an aggregate of exchanges between pairs of traders. But in discussing international trade we lay the emphasis upon the aggregate rather than the specific exchange, take a larger view of commercial relations, try to determine how great districts of the world combine to supply one another's wants, and analyze the machinery by which commerce overcomes the obstacles of trade restrictions and the difficulties growing out of the use of different monetary units in different parts of the world. Much of the confusion met with in this branch of economic thought is due to mere forgetfulness of the elementary axioms of exchange, and for this reason it is desirable, even at the cost of some repetition, to reexamine briefly the nature and function of trade.

Nature and Advantage of International Trade. The function of trade is to create the utilities of time and place. Industry itself, "production" in the narrow sense of the word, is likewise confined to the creation of utilities-form utilities, principally. Trade, therefore, is as beneficial, as truly productive, as agriculture or manufactures. The American people are just as truly engaged in production when they buy books from Germany as when they cut down their own spruce trees and manufacture them into paper for the "yellow journals."

Trade is not only productive in the sense that it creates utilities, but it is also an indispensable part or process of the division of labor. Upon this self-evident fact it is unnecessary to dwell. It is, however, desirable to recall the fact that specialization of func

tion is profitable even to those individuals or classes which are plainly superior in general productive efficiency. A successful lawyer does not write his own letters, even though he is an expert operator on the typewriter. He specializes in that occupation in which he has the greatest advantage, and hires some one to write his letters for him.

This rule - frequently referred to as the law of comparative costs -holds for communities and nations, as well as for individuals. If, in Holland, it costs ten times as much to produce a barrel of flour as a yard of cloth, while in America it costs only six times as much, it will be profitable for the Dutch to confine themselves to the production of cloth, and for the Americans to confine themselves to the production of flour; even though both flour and cloth could be produced more cheaply in America than in Holland.1

If this conclusion is true, it follows that so long as the comparative costs of producing goods vary among the different nations of the world, so long there will be some international trade. And, furthermore, since it is impossible to conceive that the costs of producing all kinds of transportable goods will ever be exactly proportional in the several countries of the world, it is evident that international trading is bound to continue. It can be permanently suppressed only by raising freight charges to a prohibitive level, or by deliberately manipulating customs tariffs so as to suppress every new international trade connection as soon as it springs up, or by the complete destruction of industry in other parts of the world; and none of these possibilities is ever likely to be realized. The ideal of an exclusive home market is a delusion. The last thirty years have witnessed a remarkable increase of protection throughout the civilized world, but international trade has increased by leaps and bounds.

International trade, then, is productive, profitable, and for practical purposes irrepressible. The tariff controversy can never be settled until these elementary truths are thoroughly appreciated. On the other hand, it is equally plain that these facts do not settle the tariff controversy. Ordinarily, trade is mutually advantageous

1 Assuming, as Mill points out, that capital and labor will not emigrate en masse from Holland to America, and that freight charges are small.

to both parties; and in one sense it is always so. If Smith trades x to Jones for y, Smith must have wanted y more than x, and Jones must have wanted x more than y, so that the temporary happiness of both is increased by the transaction. But this is not, as has sometimes been intimated, sufficient reason for permitting all kinds of trade and condemning all kinds of trade restrictions. If Smith is an ignorant Indian, x a blue fox pelt, Jones an unscrupulous trader, and y a pint bottle of adulterated whisky, the "sense" in which this trade is adjudged "mutually profitable" is scarcely distinguishable from nonsense. The logic which approves unrestricted trading of this sort would also sanction unrestricted child labor and the contemptible extortion of the "loan shark" who charges a desperate widow 200 per cent a year on a small loan which the woman in her ignorance and necessity must secure. Trade restrictions have existed as long as international trade itself, and the real problem is not whether there should be any restriction, but when and where particular varieties of restraint are justifiable.

Restriction of International Trade. In ancient times among many nations, such as the Hebrews and Chinese, contact with other peoples was feared and foreign trade was practically prohibited. In Greece and Rome the greatest thinkers entertained a profound contempt for trade, based in part upon the belief that in exchange one party is usually cheated; and this prejudice was partially justified by the character of the primitive trader who was part sailor, part pirate, part merchant, and took all the profit he could possibly extort in every transaction as insurance against the great risks of his calling.

At a later date, in the middle ages, when commerce between the semi-independent cities of western Europe increased, trade came to be highly prized by the average citizen, although it was still condemned by the philosophic schoolmen; and it was regulated in the most exclusive spirit.

"Every effort was made to keep trade as much as possible in the hands of native citizens. For example, the Venetians forbade the Germans from engaging in trade with the East by way of Venice, and the citizens of Lübeck strove to keep the Baltic trade from the Dutch. . . . Foreigners were mistrusted

and partnerships with them were forbidden. Foreign visitors were restricted in many ways in their commercial dealings with native citizens. 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 skilled artizans 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. In a large historical sense mercantilism was merely a cry elicited by one of the sharpest of the world's great growing pains. It was a symptom more than a cause or an explanation. It marked the establishment of the division of labor on a territorial basis, and recorded the replacement of the independent economy of the middle ages by the modern economy of exchange. For the latter, money was indispensable, and had to be secured at any cost.

1 Professor G. M. Fisk, International Commercial Policies, pp. 15-16.