Studies in the Theory of International Trade

Jacob Viner
Viner, Jacob
(1892-1970)
CEE
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Editor/Trans.
First Pub. Date
1937
Publisher/Edition
New York: Harper and Brothers Publishers
Pub. Date
1937
Comments

1. [1] A. Dubois, Précis de l'histoire des doctrines économiques, 1903, and Br. Suviranta, Theory of the balance of trade in England, 1923, were helpful, although I cannot accept many of the latter writer's interpretations and appraisals. Except for a few special studies to which reference is made at appropriate points no other secondary studies were of much help to me. E. Lipson, Economic history of England (3 vols., 1929-1931, and especially vol. III [1931], Ch. IV, "The mercantile system"), appeared after this study had been published in its original form. It contains a great mass of valuable material and relates the doctrines to the historical conditions much more completely and authoritatively than I could do. Lipson in the main presents a defense of the mercantilist doctrines against their modern critics, although more moderately than is usual for economic historians. To me most of his defense appears insubstantial, or unsubstantiated by the evidence, or irrelevant, and I have not felt obliged to modify my appraisal because of what he has written. It seems to me especially that he relies too strongly on citations from a few contemporary critics of the prevailing views, such as Davenant, Barbon and North, and from writers after 1690, as evidence of what was prevailing doctrine from say 1550 to 1750. E. Heckscher has recently published in Swedish a two-volume account of the mercantilist doctrines on the Continent as well as in England (Merkantilismen, Stockholm, 1931, 2 vols.) whose English translation (Mercantilism, 1935, 2 vols.) became available too late to permit of my profiting extensively from it in the revision of my original study. It is a work of the highest quality on both the historical and the theoretical sides, and I am happy to find that where we are dealing with the same topics there is no substantial conflict of interpretation or appraisal. I have reviewed Heckscher's book in The economic history review, VI (1935), 99-101.

2. [2] Cf. Oncken, article on Quesnay, Handwörterbuch der Staatswissenschaft, 2d ed., 1901, VI, 280.

3. [3] If Adam Smith intended the name to be used as a contrast to the physiocratic system, he had considerable justification. Just as the physiocrats claimed that agriculture alone (or extractive industry alone) was productive, so many of the English mercantilists claimed that foreign trade was the only source of wealth, and many of them, while not taking so extreme a position, arranged activities in the order of their contribution to the wealth of the country with foreign trade in the first rank.

4. [4] In his Introduction to his reprint of Thomas Wilson, A discourse upon usury [1572], 1925, pp. 60-86; 134-69. Cf. also E.R.A. Seligman, article on the Bullionists, Encyclopaedia of social sciences, III (1930), 60-64.

5. [5] Cf. also Jacob Viner, article, "Balance of trade," Encyclopaedia of the social sciences, II (1930), 399-406; F. W. Fetter, "The term 'favorable balance of trade,'" Quarterly journal of economics, XLIX (1935), 621-30.

6. [6] Bland, Brown, and Tawney, English economic history, select documents, 1914, pp. 219-20. The concept here clearly implied of a national balance ("the land spends too much in merchandise") and the emphasis on increase, and not merely on prevention of reduction, of England's stock of money, support the contention made above that there has been exaggeration of the differences in doctrine between the so-called "bullionist" and "mercantilist" periods. Other officials, Aylesbury and Cranten, at the same time offered the same explanation of the loss of bullion. For Aylesbury, see ibid., p. 222. For Cranten, see the original source, Rotuli parliamentorum [1381], III (1767), 127: "Quant a primr article: Ne soit pluis despendu deinz le Roialme des Marchandies estranges en value q les Marchandies de la cresceance du Roialme issant hors de mesme le Roialme ne sont en value."

7. [7] [Clement Armstrong?] "A treatise concerning the staple and the commodities of this realme" [ms. ca. 1530], first printed in Reinhold Pauli, Drei volkswirthschaftliche Denkschriften ans der Zeit Heinricks VIII von England, 1878, p. 32. Cf. also "Clement Armestrong's sermons and declaracions agaynst popish ceremonies" [ms. ca. 1530], ibid., pp. 46-47; "How to reforme the realme in settyng them to worke and to restore tillage" [ms. ca. 1535], ibid., pp. 60 ff., 76.

8. [8] "Polices to reduce this realme of Englande unto a prosperous wealthe and estate" [ms., 1549], Tawney and Power, Tudor economic documents, III (1924), 318, 321. This collection will henceforth be cited as T.E.D.

9. [9] "Considerations for the restraynte of transportinge gould out of the realme" [reign of Elizabeth], printed in Georg Schanz, Englische Handelspolitik gegen Ende des Mittelalters, 1881, II, 649.

10. [10] [John Hales] A discourse of the common weal of this realm of England [written, ca. 1550, first printed, 1581], Elizabeth Lamond ed., 1893, pp. 62-63.

11. [11] "A discourse of corporations" [ca. 1587], T.E.D., III, 267. For additional statements of the balance-of-trade doctrine during the sixteenth century, see: William Cholmeley, "The request and suite of a true-hearted Englishman" [ms., 1553], The Camden miscellany, II (1853), 11-12; "Memorandum prepared for the royal commission on the exchanges" [1564], ibid., III, 353; "Memorandum by Cecil on the export trade in cloth and wool" [1564?], ibid., II, 451; "D'Ewes' journal" (for 1593) [1693], ibid., II, 242; "An apologie of the cittie of London," in John Stow, A survey of London, C. L. Kingsford ed., 1908, II, 210.

12. [12] I owe some of the following references to the excellent account by W.H. Price, "The origin of the phrase 'balance of trade,'"Quarterly journal of economics, XX (1905), 157 ff.

13. [13] Astrid Friis, Alderman Cockayne's project and the cloth trade, 1927, p. 207, and W. H. Price, loc. cit. There were no value statistics of imports and exports at that time, but the customs rates on all goods were 5 per cent of the official values of the goods. The balance was computed, therefore, by multiplying the customs revenues by twenty.

14. [14] Works, 1852, II, 385. (The essay was written in 1616, but first published in 1661.)

15. [15] "Polices to reduce this realme" [1549], T.E.D., III, 324.

16. [16] "Considerations for the restraynte of transportinge goulde" [time of Elizabeth], Schanz, op. cit., II, 649.

17. [17] "Memorandum prepared for the royal commission on the exchanges" [1564], T.E.D., III, 353.

18. [18] Gerard Malynes, A treatise of the canker of England's commonwealth [1601], T.E.D., III, 386.

19. [19] Sir Robert Cotton, "The manner and meanes" [1609], in Cottoni Posthuma, 1672, p. 196.

20. [20] "Memorandum by Cecil on the export trade in cloth and wool," T.E.D., II, 45.

21. [21] "Apologie of the cittie of London" [1598], in Stow, A survey of London, Kingsford ed., 1908, II, 210.

22. [22] The circle of commerce, 1623, p. 117. Misselden cites from an alleged manuscript an attempt made during the reign of Edward III to estimate the English balance of trade.—Ibid., p. 118.

23. [23] The center of the circle of commerce, 1623, pp. 68-69.

24. [24] Ibid., pp. 58-59.

25. [25] An inquiry into the principles of political economy, 1767, II, 422: "when one nation is growing richer, others must be growing poorer; this is an example of a favorable balance of trade." Cf. also ibid., II. 425-26. Steuart also used the terms "passive" and "active" for import and export surpluses, respectively. (Ibid., II, 207.)

26. [26] John Cary, An essay on the state of England in relation to its trade, 1695, pp. 131-32; ibid., An essay on the coyn and credit of England, 1696, p. 20.

27. [27] [John Pollexfen] A discourse of trade, coyn, and paper credit, 1697, p. 40.

28. [28] Sir Humphrey Mackworth, A proposal for payment of the publick debts, 2d ed., ca. 1720, p. 9.

29. [29] F. W. Fetter nevertheless considers it an anachronism to attribute the use of the terms "favorable" or "unfavorable" to the mercantilists. "The term 'favorable balance of trade,'" Quarterly journal of economics, XLIX (1935), 629.

30. [30] "Primitive political economy of England" [1847], in Literary remains, Whewell ed., 1859, p. 295.

31. [31] The argument was made by many who were not personally interested in the fortunes of the East India Company, and was accepted, in theory, by the critics of the company. The following citations are only to spokesmen for the company: Thomas Mun, A discourse of trade, from England unto the East Indies [1621], Facsimile Text Society reprint, 1930, pp. 9 ff.; ibid., England's treasure by forraign trade [first published 1664, written about 1630], Ashley ed., 1895, pp. 19 ff.; [Sir Thomas Papillon] A treatise concerning the East-India trade being a most profitable trade to the kingdom [1677], 1696 reprint, pp. 12 ff.; [Sir Josiah Child] A treatise wherein is demonstrated that the East-India trade is the most national of all foreign trades, 1681, pp. 6 ff.; [Child] A discourse about trade, 1690, p. 142; Charles Davenant, An essay on the East-India trade [1696], in Works, Charles Whitworth ed., I, 97; Some considerations on the nature and importance of the East-India trade, 1728, pp. 30 ff. As representative instances of the acceptance of the argument by critics of the company who denied, however, that the company could meet the test even if indirect effects were taken into consideration, there may be cited: [William Petyt?] Britannia languens [1680], McCulloch ed., Early English tracts on commerce, 1856, pp. 342 ff.; [John Pollexfen] England and East-India inconsistent in their manufactures, 1697, p. 52.

32. [32] Cf. Charles Davenant, Discourses on publick revenues [1698], in Works, I, 388: "It is hard to trace all the circuits of trade, to find its hidden recesses, to discover its original springs and motions, and to shew what mutual dependence all traffics have one upon the other. And yet, whoever will categorically pronounce that we get or lose by any business, must know all this, and besides, have a very deep insight into many other things." Cf. Sir Leslie Stephen, History of English thought in the eighteenth century, 3d ed., 1902, II, 294, with reference to Davenant's position: "Merchants easily assumed their own balances to be a sufficient test of the national prosperity, but when the theories thus framed were applied to limit their own dealings and to prevent them from importing the most advantageous articles of commerce, they naturally found more or less ingenious modes of meeting the awkward inference. It was better, they admitted, to import gold than silk; but by some dexterous manipulation it must be shown that the importation of silk would enable them to get more gold."

33. [33] Cf. Nicholas Barbon, A discourse concerning coining the new money lighter, 1696, p. 36: "And yet there is nothing so difficult, as to find out the balance of trade in any nation; or to know whether there ever was, or can be such a thing as the making up the balance of trade betwixt one nation and another; or to prove, if it could be found out, that there is anything got or lost by the balance." Ibid., p. 40: "But if there could be an account taken of the balance of trade, I can't see where the advantage of it could be. For the reason that's given for it, that the overplus is paid in bullion, and the nation grows so much the richer, because the balance is made up in bullion, is altogether a mistake: for gold and silver are but commodities; and one sort of commodity is as good as another, so it be of the same value."

34. [34] Cf., for example, C. F. Bastable, The theory of international trade, 4th ed., 1903, p. 73; Paul Leroy-Beaulieu, Traité théorique et pratique déconomie politique, 2d ed., 1896, IV, 175.

35. [35] Bland, Brown, and Tawney, English economic history, pp. 221, 222.

36. [36] [Clement Armstrong] "How to reform the realme" [ca. 1535], Pauli ed., op. cit., p. 67.

37. [37] The circle of commerce, 1623, p. 124.

38. [38] The center of the circle of commerce, 1623, p. 59.

39. [39] Henry Robinson, England's safety; in trades encrease, 1641, pp. 50 ff.

40. [40] Englands treasure by forraign trade [1664], Ashley ed., 1895, p. II, and chap. xx.

41. [41] A discourse about trade, 1690, pp. 138, 140.

42. [42] Dr. Hugh Chamberlain, A collection of some papers writ upon several occasions, 1696, pp. 2-3.

43. [43] A discourse of trade, coyn, and paper credits, 1697, p. 40. Pollexfen also spoke of "debts and credits" in connection with international transactions of all sorts.—Ibid., pp. 4, 10.

44. [44] A. J. [Alexander Justice] A general treatise of monies and exchanges, 1707, p. 74.

45. [45] [Joseph Harris] An essay upon money and coins, part I (1757), 119.

46. [46] An inquiry into the principles of political æconomy, 1767, II, 316.

47. [47] Ibid., II, 453, note.

48. [48] [Arthur Young] Political essays concerning the present state of the British Empire, 1772, p. 534.

49. [49] Wealth of nations [1776], Cannan ed., I, 440.

50. [50] Cf. A. Oncken,Geschichte der Nationalökonomie, 1902, pp. 154 ff.; William Cunningham, "Adam Smith und die Mercantilisten," Zeitschrift für die gesammte Staatswissenschaft, XL (1884), 44 ff.

51. [51] An amusing conflict of interpretation pervades the apologetic literature. Some defend the balance-of-trade theory against its modern critics on the ground that the mercantilists knew that the favorable balance brought in money, and that when they spoke of wealth, treasure, or riches being increased as the result of a favorable balance, they meant money by these terms. Others defend the mercantilists against the charge of overemphasis on money, claiming that what they wanted was an increase of real wealth, or capital, and not merely of money. How a favorable balance of trade can constitute an increase in the total amount of capital or wealth within a country if money and capital or wealth are not the same thing they do not explain. These two lines of defense of mercantilist doctrine are, of course, mutually contradictory, and reflect the persistence into modern times of the confusion from which the original mercantilists suffered.

52. [52] [Jocelyn] An essay on money & bullion, 1718, p. 15.

53. [53] Steuart is the only mercantilist I have found who even cites the desirability of investment abroad as one of the reasons for desiring a favorable balance, and he does so only incidentally and obscurely.—Principles of political æconomy, 1767, II, 425-26: "...a balance may be extremely favorable without augmenting the mass of the precious metals...by constituting all other nations debtors to it,..."

54. [54] These arguments must be carefully distinguished from the milder forms, as, for example, that foreign trade will be more profitable if it produces an export surplus than if it does not, or that foreign trade is the best source of wealth. What is said above does not necessarily apply to the milder forms, which are open, however, to other objections. See infra, pp. 22 ff.

55. [55] Malynes, A treatise of the canker [1601], T.E.D., III, 387.

56. [56] E Misselden, The circle of commerce, 1623, p. 117.

57. [57] Mun, England's treasure [1664], Ashley ed., p. 7.

58. [58] Samuel Fortrey, Englands interest and improvement [1663], Hollander ed., 1907, p. 29

59. [59] Roger Coke, A discourse of trade, 1670, pp. 4, 6.

60. [60] Carew Reynel, The true English interest, 1679, p. 10.

61. [61] [John Pollexfen] England and East-India inconsistent in their manufactures, 1697, pp. 18-19. A vindication of some assertions relating to coin and trade, 1699, undoubtedly also the work of Pollexfen, is an elaborate defense of Pollexfen's argument cited above against Davenant's attack on it in his Discourse of Publick Revenues [1698]. Pollexfen's argument is also effectively criticized in [Gardner] Some reflections on a pamphlet, intituled, England and East India inconsistent in their manufactures, 1696, pp. 6-7. (This tract, in spite of the date (1696) on its title page, cannot have been written before 1697.)

62. [62] The British merchant [1713/4], 3d ed., 1748, I, 28.

63. [63] Joshua Gee, The trade and navigation of Great-Britain considered [1729], 1767 ed., p. 205.

64. [64] W. Horsley, A treatise on maritime affairs, 1744, p. 37.

65. [65] [Matthew Decker] An essay on the causes of the decline of the foreign trade [1744], 1756, pp. 1-2.

66. [66] Utopia [1516], A. W. Reed ed., 1929, p. 78.

67. [67] Roger Bieston, The bayte and snayre of fortune [ca. 1550], 1894 reprint, p. 21.

68. [68] Mun, A discourse of trade from England [1621], 1930 reprint, p. 49.

69. [69] Papillon, A treatise concerning the East India trade [1677], 1696 reprint, p. 4.

70. [70] Barbon, A discourse concerning coining the new money lighter, 1696, p. 2.

71. [71] Davenant, Discourses on the publick revenues [1698], Works, I, 381.

72. [72] [Jocelyn] An essay on money & bullion, 1718, p. 11.

73. [73] [Robert Wallace] A view of the internal policy of Great Britain, 1764, p. 2. Similar definitions of wealth are to be found in: Gardner, Some reflections, 1696, pp. 6-7; Petty, Political Arithmetick [1690],The economic writings of Sir William Petty, C. H. Hull ed., 1899, I, 259; ibid., The political anatomy of Ireland [1691], Economic writings, I, 192; Bernard Mandeville, Fable of the bees [1714], F.B. Kaye ed., 1924, I, 197, 301. (See also Mandeville's own index, ibid., I, 376, under "Nations: What the wealth of all nations consists in"); Berkeley, The querist [1735-37], in Works, Fraser ed., 1871, III, 357, 402; John Bellers, An essay for imploying the poor to profit, 1723, p. 6; [Robert Wallace] Characteristics of the present political state of Great Britain, 1758, pp. 113 ff.

74. [74] E.g., Lewes Roberts, The treasure of traffike [1641], McCulloch ed., A select collection of early English tracts on commerce, pp. 60-65; John Cary, An essay on the state of England in relation to its trade, 1695, p. 10; Erasmus Philips, An appeal to common sense, 1720, p. 18; ibid., The state of the nation, 1725, p. 37; John London, Some considerations on the importance of the woollen manufactures, 1740, preface: "It requires no deep knowledge in trade to comprehend, that the riches of a nation must arise from the labor of its inhabitants in working up such goods as it can vend to other nations for specie."

75. [75] E.g., Thomas Manley, Usury at six per cent. examined, 1669, p. 8; [William Petyt] Britannia languens [1680], McCulloch ed., Early English tracts on commerce, pp. 455-56.

76. [76] Utopia [2d ed., 1556], A.W. Reed ed., 1929, p.44.

77. [77] "How to reform the realme" [ca. 1535], in Pauli, Drei volkswirthschaftliche Denkschriften, p. 61.

78. [78] England's treasure by forraign trade [1664], Ashley ed., chaps. xvii, xviii.

79. [79] [John Hales] A discourse of the common weal [1581], Elizabeth Lamond ed., p. 113; Petty, A treatise of taxes [1662], Economic writings, I, 36; [Henry Lloyd] An essay on the theory of money, 1771, p. 14 (where it is condemned as hoarding and therefore injurious to industry and trade).

80. [80] John Houghton, A collection of letters, 1681-83, II, 115.

81. [81] Henry Home, Lord Kames, Sketches of the history of man, 1774, I, 82 ff.

82. [82] Such is explicitly the argument in "Polices to reduce this realme" [1549],T.E.D., III, 324; [J.Briscoe] A discourse of money, 1696, pp. 27-29; and Henry Home, loc cit.

83. [83] As representative passages, the following may be cited

...it is his [the king of Spain's] Indian gold that endangereth and disturbeth all the nations of Europe; it purchaseth intelligence, creepeth into counsels, and setteth bound loyalty at liberty in the greatest monarchies of Europe—Sir Walter Raleigh, A Voyage for the discovery of Guiana [1596], in Works, 1751, II, 149.

[Restriction of the export of bullion] concerns the safety and well-being of the army, the keeping of treasure within the nation, for they and the army are like a ship at sea, which must be well-provided with anchors and cables, and victuals; money is to them all this, nay, everything—Thomas Violet, Mysteries and secrets of trade and mint-affairs, 1653, p. 35.

... since the wealth of the Indies came to be discovered and dispersed more and more, wars are managed by much treasure and little fighting, and therefore with little hazard to the richer nation—William Petyt, Britannia languens [1680], in McCulloch ed., Early English tracts on commerce, p 293.

For, since the introduction of the new artillery of powder guns, &c., and the discovery of the wealth of the Indies, &c, war is become rather an expense of money than men, and success attends those that can most and longest spend money: whence it is that princes' armies in Europe are become more proportionable to their purses than to the number of their people, so that it uncontrollably follows that a foreign trade managed to the best advantage will make our nation so strong and rich, that we may command the trade of the world, the riches of it, and consequently the world itself...—James Whiston. A discourse of the decay of trade, 1693, pp. 2-3.

84. [84] Observations upon the United Provinces of the Netherlands [1668], Works, 1754, I, 131.

85. [85] Political Arithmetick [1690], Economic writings, I, 254. The etymological affinity of "superlucration," which means, of course, saving, to the piling-up of money, has bearing on the argument which I make here that for many of the mercantilists that was what saving meant. The etymological relationships between the terms connected with saving and those signifying money are much closer in French than in English. See Charles Rist, "Quelques définitions de l'épargne," Revue d'économie politique, XXXV (1921), 734 ff.

86. [86] [Thomas Sheridan] A discourse on the rise and power of parliaments [1677], reprint by Saxe Bannister, in Some revelations in Irish history, 1870, pp. 182-83.

87. [87] Richard Lawrence, The interest of Ireland in its trade and wealth stated, 1682, Part I, p. 28.

88. [88] Davenant, "An essay on the East-India trade" [1696], Works, I, 102.

89. [89] The libelle of Englyshe polyce [ms. 1436] Sir George Warner ed., 1926, p. 21. "Waffore"=predatory wasp; "minceth our commodity"=diminishes our resources. This passage is cited here as apparently an instance of the identification of thrift with the accumulation of the precious metals.

90. [90] Thomas Houghton, The alteration of the coyn, with a feasible method to do it, 1695, pp. 5, 15.

91. [91] Petty, Political arithmetick [1690], in Economic writings, I, 259-60. In a recently published Petty manuscript, accumulation of gold, silver, and precious stones is stated to be the best mode of saving, because they are durable and are not dependent on time and place for their value, but are "morally speaking perpetual and universal wealth."—The Petty papers, Marquis of Lansdowne ed., 1927, I, 214.

92. [92] Hugh Chamberlain, A collection of some papers, 1696, p. 9. The store of wealth and the circulation functions of money are here brought into combination. Chamberlain remarked that money was more than tenfold as important as other commodities, presumably of the same exchange value. (Ibid.)

93. [93] Joseph Harris, An essay upon money and coins, Part I (1757), 99.

94. [94] An inquiry concerning the trade, commerce, and policy of Jamaica, 1759, pp. 2-3.

95. [95] [Pollexfen] England and East-India inconsistent in their manufactures, 1697, p. 49.

96. [96] Ibid., p. 7.

97. [97] [William Hay] Remarks on the laws relating to the poor [1735], 2d (?) ed., 1751, pp. 20, 21.

98. [98] Thomas Starkey, England in the reign of King Henry the Eighth [ins. ca. 1538], Early English Text Society print, 1871, pp. 80, 81. Cf. also "Memorandum...on the exchanges" [1564], T.E.D., III 353; "Memorandum by Cecil on the export trade in cloth and wool" [1564?], T.E.D., II, 45.

99. [99] See infra, p. 89.

100. [100] John Gilbert, a mint official, in 1625, quoted by W. A. Shaw, Select tracts...illustrative of English monetary history, 1896, p. 7.

101. [101] [William Paterson] A brief account of the intended Bank of England [1694], reprinted in Saxe Bannister, The writings of William Paterson, 2d ed., 1859, III, 85.

102. [102] John Locke, Some considerations [1691], in Works, 1823 ed., V. 9-10.

For additional statements to the same effect, see: Interest of money mistaken, 1668, pp. 14, 18; John Asgill, on Several assertions proved [1696], Hollander ed., 1906, pp. 29 ff.; [J. Briscoe] A discourse of money, 1696, p. 21; James Hodges, The present state of England, as to coin and publick charges, 1697, p. 18; William Wood, A survey of trade, 1718, p. 335; A letter to the... Commissioners of Trade and Plantations, wherein the grand concern of trade is asserted, 1747, pp. 76, 86.

103. [103] [Hales] A discourse of the common weal [1581], Elizabeth Lamond ed., p. 63.

104. [104] Thomas Mun, England's treasure by forraign trade [1664], Ashley ed., pp. 7-8. For additional instances of the use of this analogy, see "Considerations for the restraynte of transportinge gould out of the realme" [ms. reign of Elizabeth], in Schanz, op. cit., II, 649; "Debate in House of Commons on subsidies" [1593], T.E.D., II, 242; Misselden, Free trade, 2d ed., 1622, pp. 12-13; ibid., The circle of commerce, 1623, p. 130; Samuel Lamb, Seasonal observations [1659], in Somer's tracts, 2d ed., VI, 465; Temple, Observations upon the United Provinces [1668], in Works, I, 130; Locke, Some considerations [1691], in Works, V, 19 ff., 72; Davenant, An essay upon ways and means [1695], in Works, I, 13; [S. Clement] A discourse of the general notions of money, trade and exchanges, 1695, p. 11; Pollexfen, A discourse of trade, coyn, and paper credit, 1697, pp. 80 ff.; Steuart, Principles of political œconomy, 1767, I, 421.

105. [105] Papillon, A treatise concerning the East India trade [1677], 1696 ed., p. 4.

106. [106] A discourse of trade [1690], Hollander ed., p. 11. Cf. also, by the same author, A discourse concerning coining the new money lighter, 1696, pp. 47-48.

107. [107] The fable of the bees [1714], Kaye ed., I, 182.

108. [108] Political discourses [1752], in Essays, moral, political, and literary, 1875 ed., I, 337.

109. [109] See infra, pp. 40 ff.

110. [110] "Polices to reduce this realme of Englande" [1549], T.E.D., III, 315.

111. [111] Decay of Trade. A treatise against the abating of interest, 1641, p. 9. For further references to high prices as an evil, see "How to reforme the realme" [ca. 1535], in Pauli, op. cit., p. 64; Henry Brinklow, The complaynt of Roderyck Mors [ms. ca. 1542], Early English Text Society, 1874, pp. 49-50; Thomas Wilson, A discourse upon usury [1572], Tawney ed., pp. 258, 284, 312, 356; Thomas Milles, The customers replie, 1604, p. 13; Malynes, The center of the circle of commerce, 1623, preface; Mun, England's treasure by forraign trade [1664], Ashley ed., p. 24; A. V[ickaris], An essay for regulating of the coyn, 1696, pp. 23-24; An essay towards carrying on the present war against France [ca. 1697], in The Harleian miscellany, X (1810), 380; Vanderlint, Money answers all things[1734], Hollander ed., 1914, pp. 16, 95; Steuart, Principles of political œconomy, 1767, I, 423.

Rice Vaughan, in A discourse of coin and coinage, 1675, pp. 68 ff. and chap. xi, concedes that prices had risen in England, but wants more money nevertheless, because the quantity of money had not increased in as great a proportion as prices and the rise in prices had therefore caused scarcity of money. Vanderlint (op. cit., pp. 15 ff.), who complained about scarcity of money, spoke of an increase in the supply of money or a lowering of prices as alternative remedies.

112. [112] E.g., Malynes, A treatise of the canker, [1601], T.E.D., III, 389; Locke, Some considerations [1691], Works, 10th ed., V. 50; Thomas Houghton, The alteration of the coyn, 1695, p. 44.

113. [113] Fortrey, Englands interest and improvement [1663], Hollander ed., 1907, p. 29: "...for what the price of any thing is amongst our selves, whether dear or cheap it matters not; for as we pay, so we receive, and the country is nothing damnified by it; but the art is when we deal with strangers, to sell dear and to buy cheap; and this will increase our wealth."

114. [114] E.g., Robinson, Englands safety; in trades encrease, 1641, pp. 55-56; Samuel Lamb, Seasonal observations [1659], in Somer's tracts, 2d ed., VI, 464; [John Browne] An essay on trade in general, 1728, p. 31; [Mildmay] The laws and policy of England relating to trade, 1765, p. 62.

115. [115] [Petyt] Britannia languens [1680], McCulloch ed., pp. 283, 290; Thomas Houghton, The alteration of the coyn, 1695, p. 43; Browne, An essay on trade in general, 1728, p. 18; Robert Wallace, Characteristics of the present political state of Great Britain, 1758, p. 35; Arthur Young, Political Arithmetic, 1774, pp. 55 ff.

116. [116] Free trade, 1622, pp. 106-07. Misselden advocated that landlords and creditors should be protected from loss by a provision that contracts made before the raising of the currency should be paid at the value of the money current when the contracts were made. (Ibid.) Thomas Manley (Usury at six per cent., 1669, p. 67) borrows some of the above, without acknowledgment. Heckscher (Mercantilism, 1935, II, 224 ff.) finds a much wider prevalence of the desire for higher prices among the English mercantilists than I have found. The specific evidence which he presents is not sufficient to convince me that I am wrong, but does weaken my conviction that I am right.

117. [117] "By the means of which measures [i.e., the reduction, by "concoction" of all commodities which are not immediately consumed, to money], all commodities, moveable and immoveable, are made to accompany a man, to all places of his resort, within and without the place of his ordinary residence; and the same passeth from man to man, within the commonwealth; and goes round about, nourishing (as it passeth) every part thereof; in so much as this concoction is as it were the sanguification of the commonwealth; for natural blood is in like manner made of the fruits of the earth; and circulating, nourisheth by the way, every member of the body of man."—Thomas Hobbes, Leviathan [1651], Everyman's Library ed., p. 133.

"And as money is the sinew of war, so doth it appear to be the life of trade, all commodities being valued by it, and in both as useful in the body politic as blood in the veins of the body natural, dispersing itself, and giving life and motion to every part thereof...." (Samuel Lamb, Seasonal Observations [1659], in Somer's tracts, 2d ed., VI, 463.)

Cf. also Bernardo Davanzati, A discourse upon coins [1588], translated by John Toland, 1696, pp. 18-19; Omnia comesta a bello, 1667, p. II; R. Haines, England's weal and prosperity proposed, 1681, p. 12; Taxes no charge, 1690, p. 11; Berkeley, The querist [1735-37], in Works, Fraser ed., 1871, III, 395.

118. [118] Cf. Sir Thomas More, Utopia [1516], A. W. Reed ed., 1929, p. 44.

119. [119] The key of wealth, 1650.

120. [120] Money and trade considered [1705], 1750.

121. [121] Cf. Berkeley, The querist, Works, III, 395: "Whether the public is not more benefited by a shilling that circulates than a pound that lies dead?"; John Smith, Chronicon rusticum-commerciale, or memoirs of wool, 1747, I, 414: "And money itself is not properly riches, i.e., it is not serviceable to a community, but as it is circulated."

122. [122] Key of wealth, pp. 1-20.

123. [123] Ibid., p. 7. Potter later makes his proposition even stronger: increase money and "both trading and riches will increase amongst them, much more than proportionable to such increase of money, and that without increasing the price of commodity, as I shall prove in place convenient" (ibid., p. 10, incorrectly paged 6). This, he explains, is due to the fact that when men have little money they tend to keep it, but when they have much, they make it "revolve" much more rapidly (ibid., p. 11).

124. [124] Money and trade considered [1705], 1750, pp. 20 ff.

125. [125] William Potter, Key of wealth, p. 69.

126. [126] Englands interest or the great benefit to trade by banks or offices of credit, 1682, pp. 1-2.

127. [127] Several objections sometimes made against the office of credit, fully answered, ca. 1682, p. 9.

128. [128] [William Paterson] A brief account of the intended bank of England [1694], Bannister ed., The writings of William Paterson, III, 85.

129. [129] Robert Wallace, Characteristics of the present political state of Great Britain, 1758, p. 37. Wallace, however, relapses at times into concern about the state of the national stock of bullion.

130. [130] E.g., Samuel Lamb, Seasonal observations [1659], Somers' tracts, 2d ed., VI, 455; Edward Forde, Experimented proposals [1666], in The Harlsion miscellany, VII, 343; M. Lewis, Proposals to the King and Parliament, or a large model of a bank, 1678, p. 20; Richard Lawrence, The interest of Ireland, 1682, Part II, p. 11; An essay towards carrying on the present war against France [ca. 1697], in The Harleian miscellany, X, 380; Proposals for restoring credit: for making the Bank of England more useful and profitable, 1721, p. 17; Robert Wallace, Characteristics of the present political state of Great Britain, 1758, p. 30. See also pp. 44-45, infra, with respect to the views of Potter and Law.

A number of writers, however, disapproved of paper money, on the ground that it made the balance of trade unfavorable and drove metallic money out of the country; e.g., Vanderlint, Money answers all things [1734], Hollander ed., p. 15; Patrick Murray (Lord Elibank), Essays, I. on the public debt, II. On paper-money, banking, &c., III. on frugality, 1755, pp. 20-25; and surprisingly enough, David Hume, Political discourses [1752], in Essays, moral, political, and literary, 1875 ed., I, 311, 377 ff.

131. [131] See also the discussion of the theory of the "self-regulating mechanism," pp. 74 ff., infra.

132. [132] J.W. Angell, The theory of international prices, 1926, pp. 13, 15, 18, etc., denies specifically to Malynes and Mun, and generally to all the English mercantilists before Locke (1691) possession of any form of the quantity theory. A. E. Monroe, Monetory theory before Adam Smith, 1923, gives the same impression. For purposes of the theory of international trade, differences in the mode of formulation of the quantity theory have as a rule little qualitative significance, but as is shown in the text, several variants of the quantity theory were presented by English writers prior to Locke.

133. [133] Malynes, A treatise of the canker [1601], T.E.D., III, 387.

134. [134] Malynes, The center of the circle of commerce, 1623, p. 14.

135. [135] Mun, England's treasure [1664—written about 1630], Ashley ed., p. 28. See also p. 24.

136. [136] Sir Robert Cotton, "A speech touching the alteration of coyne" [1626], in Cottoni posthuma, 1672, p. 303.

137. [137] Henry Robinson, Englands safety; in trades encrease, 1641, p. 60. If interpreted literally, this appears to be the quantity theory reversed, but the context shows it is not intended to be so interpreted.

138. [138] Decay of trade, 1641, p. 2. See also, A discourse...for the enlargement and freedome of trade, 1645, p. 23. For the period after 1650 the following may be cited, in addition to the writers discussed in the text: Ralph Maddison, Great Britains remembrancer [1640], 1655, p. 7; [William Paterson] A brief account of the intended Bank of England [1694], in Bannister ed., Writings of William Paterson, III, 85; John Briscoe, A discourse of money, 1696, pp. 47-58: (stock of money/number of persons = rate of money wages = prices × average real income); Vanderlint, Money answers all things [1734], Hollander ed., pp. 13, 44; [Erasmus Philips] The state of the nation in respect to her commerce, 1725, pp. 40 ff. After Hume (1752) the quantity theory was a commonplace.

139. [139] Cf. however, Angell, op. cit., p. 211: "In England no effort was ever made to reconcile the two conflicting doctrines."

140. [140] Neither Dubois, Précis de l'histoire des doctrines économiques, 1903, I, 258 ff., who of all the commentators on mercantilism deals most acutely with the difficulties created for the doctrine by the development of the quantity theory of money, nor Angell (op. cit.) who follows Dubois, mentions Potter. Dubois attaches great importance in this connection to Law and Verri, who were anticipated on the points relevant here by Potter.

141. [141] Supra, pp. 37-38.

142. [142] Key of wealth, 1650, p. 13.

143. [143] Ibid., p. 13. Cf. also p. 15.

144. [144] Ibid., pp. 17-20

145. [145] Several assertions proved [1696] Hollander ed., p. 20. This is, of course, an unusually clear instance of the confusion between loanable capital and money.

146. [146] Money and trade considered [1705] (Glasgow, 1750), pp. 141-42. Cf. also, Englands interest or the great benefit to trade by banks, 1682, p. 7: if a bank were established, "All sorts of wares will be afforded at cheaper rates, without prejudice to those that make and sell them, because trading will be greater and quicker."

147. [147] John Law, op. cit., pp. 166-73, 221. This argument is an anticipation of the doctrine of the nineteenth-century "banking school," which applied it, however, only to convertible, and denied its applicability to inconvertible paper money.

148. [148] Ibid., pp. 142-43. Law's reasoning is reproduced at length and largely verbatim, without any acknowledgment, by Sir Humphrey Mackworth, A proposal for payment of the publick debts, 2d ed. (ca. 1720), pp. 9-16. The quantity theory is also attacked, in an obscure and ineffective way, by B.I.M.D. [William Temple of Trowbridge], A vindication of commerce and the arts [1758], McCulloch ed., Select collection of scarce and valuable tracts on commerce, 1859, pp. 517 ff.

149. [149] The present state of England, 1697, pp. 27 ff., 122 ff., 230 ff., 333.

150. [150] Key of wealth, p. 12.

151. [151] Ibid., pp. 68 ff.

152. [152] Money and trade considered [1705], 1750, p. 217.

153. [153] Ibid., pp. 23-24. Sir Humphrey Mackworth plagiarized Law here as else where.—A proposal for payment of the publick debts, ca. 1720, p. 9.

154. [154] Cf. A discourse of the nature, use and advantages of trade, 1693, p. 20:

It may likewise be considered, whether the advancement of trade is not greatly prevented by the unaccountable humor of having so much plate in every family, which if turned into coin would infinitely promote the general trade, but while it remains in plate is of no more public benefit than if it were buried in the bowels of the earth, while so many other manufactures are neglected that would otherwise be employed to supply the use and ornament of plate.

155. [155] Rice Vaughan, A discourse of coin and coinage, 1675, p. 66.

156. [156] Omnia comesta a bello, 1667, p. 10.

157. [157] Et á dracone: Or, some reflections upon a discourse called Omnia á belo comesta, 1668, pp. 5 ff. Cf. Taxes no charge, 1690, pp. 13 ff.

158. [158] Thomas Manley, Usury at six per cent, examined, 1669, p. 53. Manley borrowed the analogy from Francis Bacon: "Money is like muck, not good except it be spread."—"Of seditions and troubles" [1625], in works, 1852, I, 23. But the context shows that Bacon meant more equal distribution of wealth and not monetary circulation.

159. [159] Taxes no charge, 1690, p. 17.

160. [160] Some considerations [1691], Works, 1623 ed., V, 12.

161. [161] Political arithmetick [1690], Economic writings, I, 243.

162. [162] A collection of some papers, 1696, p. 4.

163. [163] Supra, p. 44.

164. [164] The circumstances of Scotland consider'd, 1705, p. 25.

165. [165] The vindication and advancement of our national constitution and credit, 1710, p. 84.

166. [166] Malachy Postlethwayt, Great-Britain's true system, 1757, pp. 337-42.

167. [167] A discourse about trade, 1690, author's preface. Cf. also: Reasons offer'd against the continuance of the Bank, 1707; A short view of the apparent dangers and mischiefs from the Bank of England. 1707, p. 12; Some queries, humbly offer'd...relating to the Bank of England, 1707, p. 1; An enquiry into the melancholy circumstances of Great Britain (n.d., ca. 1730), p.36.

168. [168] The universal dictionary of trade and commerce, 4th ed. 1774, Art. "Banking." What some of the critics of the Bank really had in mind was the danger that a great bank controlling a substantial proportion of the available loan funds would be able to exercise a monopolistic control over credit, to charge excessive interest rates, and to discriminate between borrowers. Cf. Remarks upon the Bank of England, with regard more especially to our trade and government, 1705; A short view of the apparent dangers, 1707, pp. 10 ff.

169. [169] England's treasure [1664], Ashley ed., p.28.

170. [170] Free trade, 2d ed., 1622, p. 11.

171. [171] "Policies to reduce this realme" [1549],T.E.D., III, 323-24.

172. [172] J. Briscoe, A discourse of money, 1696, pp. 27-29. Cf. also Henry Robinson, Englands safety; in trades encrease, 1641, p. 9.

173. [173] A collection of letters, 1681-83, II, 115.

174. [174] The political anatomy of Ireland [1691], Economic writings, I, 193.

175. [175] The circumstances of Scotland consider'd, 1705, p.9.

176. [176] Money answers all things [1734], Hollander ed., pp. 94 ff.

177. [177] Joseph Harris, An essay upon money and coins, Part I (1757), 89.

178. [178] Ibid., pp. 99-100.

179. [179] Political discourses [1752], in Essays, moral, political, and literary, 1875, I, 340.

180. [180] Sketches of the history of man, 1774, I, 82. See also Postlethwayt, Great-Britain's true system, 1757, p. 357.

181. [181] E.g. [Starkey], England in the reign of King Henry the Eighth [ca. 1538], 1871 reprint, p. 94; "How the comen people may be set to worke" [ca. 1530], Pauli ed., Drei volkswirthschaftliche Denkschriften, p. 56; "How to reforme the realme" [ca. 1535], ibid., p. 76; "Polices to reduce this realme of England" [1549], T.E.D., III, 333; [John Hales] A discourse of the common weal [1581], Elizabeth Lamond ed., pp. 63 ff.; Malynes, Treatise of the canker [1601], T.E.D., III, 399; Misselden, The circle of commerce, 1623, p. 35. Mun is one of the few early writers who dealt with trade matters extensively who makes no use of the employment argument. Reliance upon Mun as adequately representative of the earlier literature may have been responsible for the conclusion that the argument first appeared in the later period.

182. [182] Petty, Treatise of taxes [1662], in Economic writings, Hull ed., I, 60; [Sheridan] A discourse on the rise and power of parliaments [1677], Bannister ed., p. 200; Taxes no charge, 1690, p. 16.

183. [183] Nicholas Barbon, A discourse of trade [1690], Hollander reprint, pp. 23, 37; ibid., A discourse concerning coining the new money lighter, 1696, pp. 50-51.

184. [184] Josiah Tucker, A brief essay on the advantages and disadvantages which respectively attend France and Great Britain, with regard to trade [3d ed. 1753], McCulloch ed., Select collection of...tracts on commerce, p. 315. This passage first appeared in the third edition. See also Tucker, Reflections on the expediency of a law for the naturalization of foreign protestants, 1751, Part II, p. 21.

185. [185] [Joseph Harris] An essay upon money and coins, Part I (1757), 89. See also p. 24.

186. [186] Sir James Steuart, Principles of political economy, 1767, II, 336. (Italics in original text.)

187. [187] Arthur Young, Political essays concerning the present state of the British Empire, 1772, p. 538.

188. [188] Ibid., p. 533. Although they both stress employment, this "balance-of-labor" argument differs from the earlier argument that an excess of the value of exports over the value of imports results in an inflow of bullion, which increases trade and therefore employment. (Cf. Malynes, Treatise of the canker [1601], T.E.D., III, 399: "the more ready money...that our merchants should make their return by,...the more employment would they make upon our home commodities, advancing the price thereof, which price would augment the quantity by setting more people on work;...") In the balance-of-labor doctrine it is the direct effect of the exports on employment which is stressed, and not the indirect effect consequent upon the inflow or outflow of specie.

189. [189] "The mercantilist concept of 'art' and 'ingenious labour,'" Economic History, II (1931), 251-52. The sentence placed here in brackets is a footnote in the original text.

190. [190] E. S. Furniss, The position of the laborer in a system of nationalism, 1920; T. E. Gregory, "The economics of employment in England, 1660-1713," Economica, I (1921), 37-51.

191. [191] An inquiry into the principles of political economy, 1767, I, 502. Cf. ibid.,: "It is therefore a principle, to encourage competition universally until it has had the effect to reduce people of industry to the physical-necessary, and to prevent it ever from bringing them lower...."

192. [192] Cf. the citations in Lujo Brentano, Hours and wages in relation to production (translated from the German), 1894, pp. 2-5, to which many additions should be made.

193. [193] An enquiry into the melancholy circumstances of Great Britain, ca. 1730, pp. 19-20.

194. [194] Political discourses [1752], in Essays, moral, political and literary, 1875 ed., I, 297.

195. [195] [Robert Wallace] Characteristics of the present political state of Great Britain, 1758, p. 46.

Chapter II

1. [1] Bland, Brown, and Tawney, English economic history, select documents, 1914, p. 222.

2. [2] "Polices to reduce this realme of England" [1549], T.E.D., III, 321: "The only means to cause much bullion to be brought out of other realms unto the king's mints is to provide that a great quantity of our wares may be carried yearly into beyond the seas and less quantity of their wares be brought hither again...."

3. [3] "Memorandum on the reasons moving Queen Elizabeth to reform the coinage" [1559], T.E.D., II, 195. Cf. also [John Hales] A discourse of the common weal [1581], Elizabeth Lamond, ed., p. 79.

4. [4] Pauli, Drei volkswirthschaftliche Denkschriften, pp. 12, 32, 56, 64, 66, 71, 76.

5. [5] A discourse of the common weal, pp. 66, 87-88.

6. [6] A treatise of the canker [1601], T.E.D., III, 398 ff.; The center of the circle of commerce, 1623, pp. 70 ff., 121 ff.

7. [7] The customers replie, 1604, passim.

8. [8] Great Britains remembrancer [1640], 1655, pp. 16 ff.

9. [9] Certain proposals in order to the peoples freedome, 1652, p. 14.

10. [10] Sir Thomas Rowe, The cause of the decay of coin and trade in this land [1641], Harleian miscellany, 1809 ed., IV, 457.

11. [11] A discourse of trade, from England unto the East-Indies [1621], 1930 reprint, p. 54.

12. [12] In England's treasure by forraign trade, chaps. VIII-XIV, Mun presents a detailed and able criticism of the whole gamut of bullionist devices, including the Statutes of Employment.

13. [13] Op. cit. p. 458.

14. [14] An humble declaration...touching the transportation of gold and silver, 1643, p. 27 (advocates revival of 14 Ed. III, c. 21, requiring exporters to bring into England a proportion of their receipts in gold); A true discoverie to the commons of England, how they have been cheated of almost all the gold and silver coin of this nation [1651], 1653 reprint, p. 83 (advocates revival of 3 Hy. VII, c. 8, one of the Statutes of Employment proper, applying to merchant-strangers and requiring them to employ the money they receive through the sale of foreign goods in the purchase of English merchandise). Cf. the article on Violet in Palgrave's Dictionary of political economy.

15. [15] E.g., Violet, An humble declaration..., 1643, pp. 30 ff.; ibid., A true discoverie..., 1653, passim; ibid., Mysteries and secrets..., 1653, pp. 35. 39, etc.; Et & dracone, 1668, p. 4; [Petyt] Britannia Languens [1680], in McCulloch ed., Early English tracts on commerce, pp. 307 ff.; Hodges, The present state of England, as to coin and publick charges, 1697, p. 105; [Pollexfen] England and East-India inconsistent in their manufactures, 1697, p. 48.

16. [16] Principles of political œconomy 1767, II, 329: "But when the balance turns against them in the regular course of business, not from a temporary cause, then he [i.e., 'the statesman'] may lay restraints upon the exportation of specie, as a concomitant restriction, together with others, in order to diminish the general mass of importations, and thereby to set the balance even." Cf. also [George Blewitt] An enquiry whether a general practice of virtue tends to the wealth or poverty of a people? 1725, p. 60.

17. [17] Cf. Thomas Violet, Mysteries and secrets, 1653, pp. 8-9: "But there are governments which are for the private advantage of a few men, procuring prohibition of importation of several commodities but only by particular men, and exportation of our native commodities, but only by particular men, and only for some ports, and at some seasons of the year." Violet is not objecting here to the restrictions, but to the special exemptions therefrom.

18. [18] E.g., Petty, Treatise of taxes [1662], Economic Writings, Hull ed., I, 60. Petty recommended that the duties be high enough to make foreign finished commodities dearer than competing domestic commodities, and if the imports much exceeded the exports he would support absolute prohibitions.

19. [19] E.g., "Polices to reduce this realme of Englande" [1549], T.E.D., III, 332; Fortrey, Englands interest and improvement [1663], Hollander ed., p. 28; [Sheridan] A discourse on the rise and power of parliaments [1677], Bannister ed., pp. 210-11; Barbon, A discourse of trade [1690], Hollander ed., p. 37; Arthur Dobbs, An essay on the trade and improvement of Ireland, 1729, p. 30.

20. [20] See infra, p. 69.

21. [21] Principles of political œconomy, 1767, I, 338.

22. [22] E.g., Robinson, Englands safety; in trades encrease, 1641, p. 9; Barbon, A discourse of trade [1690], Hollander ed., p. 37.

23. [23] [Hales] A discourse of the common weal [1581], Elizabeth Lamond ed., p. 67; anon., The present state of Ireland consider'd, 1730, p. 29 (the reference here is to Ireland, however, and not England).

24. [24] [David Bindon] A letter from a merchant who has left off trade, 1738, p. 47. Mildmay, in another connection, claimed that countries carried out their obligations under most-favored-nation treaties only when it suited their convenience. (The laws and policy of England, 1765, p. 78.)

25. [25] "On the neglect of trade and manufactures," Scots magazine, II. (1740), 476. Cf. also [Simon Clement] The interest of England, as it stands with relation to the trade of Ireland, considered, 1698, pp. 13-14: "And though this caution [i.e., the danger of foreign retaliation] hath been often urged in discourses of trade, yet I never knew one instance of any nations being piqued at another to such a degree as to break off their commerce; though I have known several instances of such occasions given. Some prevailing regard, either to the benefit of the customs, the profit of the merchants, or the like, is always had; so that governments seem to be steered by this principle, that if they cannot vend in trade as much as they would, they will yet continue to sell what they can, and acquiesce with the shopkeeper's rule, that custom is no inheritance; if they lose one chapman, they get another...."

26. [26] E.g., The British merchant [1713], 3d ed., 1748, II, 3.

27. [27] E.g., Joseph Massie, Ways and means for raising the extraordinary supplies, 1757, p. 27 (cited from Br. Suviranta, Theory of the balance of trade in England, 1923, p. 30, note 1).

28. [28] The export of wool was first prohibited in 1647. Other commodities whose export was prohibited were fuller's earth, pipe clay, hides, lead, and knitting machinery.

29. [29] Instructions for travellers, 1757, pp. 38-39.

30. [30] Cf., Reasons for a limited exportation of wool, 1677, p. 4; Davenant, An essay on the East-India trade, [1697], Works, I, 98 ff.; and John Smith, Chronicon rusticum-commerciale, 1747, passim.

31. [31] A discourse on the rise and power of parliaments [1677], Bannister ed., pp. 198-99.

32. [32] Treatise of taxes [1662], Economic Writings, Hull ed., I, 59. Cf. also similarly moderate views with respect to leather, but a much more extreme attitude with respect to the export of wool, John Cary, An essay on the state of England, in relation to its trade, 1695, pp. 21, 37-40.

33. [33] New essays, 1702, p. 9.

34. [34] Sketches of the history of man, 1774, I, 494 ff.

35. [35] Ibid., I, 493. Home apparently failed to see that increased production for export would not, of itself, lead to lower English prices.

36. [36] "Memorandum by Cecil on the export trade in cloth and wool" [1564?], T.E.D., II, 45 ff.

37. [37] The ancient trades decayed, repaired again, 1678, pp. 26-27.

38. [38] The linen and woollen manufactory discoursed...[1691], in John Smith, Chronicon rusticum-commerciale, I, 383-88.

39. [39] A brief state of the question between the printed and painted callicoes, and the woollen and silk manufacture, 2d ed. 1719, introduction, p. 4. This pamphlet was directed against the calico industry. In answer to it, Asgill replied that neither silks nor calicoes were "staple commodities," that calicoes competed with silks rather than with woolens, and that there was therefore as strong a case for restriction of the silk as of the calico industry.—Asgill, A brief answer to a brief state of the question, 1719.

40. [40] [Daniel Defoe] An humble proposal to the people of England [1729], The novels and miscellaneous works, 1841 ed., XVIII, 50.

41. [41] [Arthur Young] The farmer's letters to the people of England, 2d ed., 1768, p. 42.

42. [42] Cf. An act prohibiting the planting of tobacco in England, 1652: "Whereas divers great quantities of tobacco have been of late years and now are planted in divers parts of this nation, tending to the decay of husbandry and tillage, the prejudice and hindrance of the English Plantations abroad, and of the trading, commerce, navigation, and shipping of this nation.... Be it enacted and ordained that no person or persons whatsoever...plant, set, grow, make, or cure any tobacco in any field, place or places within this nation...."

43. [43] Mun, England's treasure by forraign trade [1668], Ashley ed., p. 16, advocated specially favorable customs treatment of the reexport trade. The establishment of free ports was specifically recommended by B. W., Free ports, 1652 (not available for examination); Maddison, Great Britains remembrancer [1640], 1655, pp. 37 ff.; Violet, Mysteries and secrets, 1653, pp. 22 ff.; [Sheridan] A discourse on the rise and power of parliaments [1677], Bannister ed., p. 214; [Petyt] Britannia languens [1680], McCulloch ed., Early English tracts on commerce, p. 359; Gee, The trade and navigation of Great Britain considered [1729], 1767, pp. 180 ff. Petty apparently opposed free ports, because they would facilitate evasion of duties on imports for consumption—A treatise of taxes [1662], in Economic Writings, Hull ed., I, 61. Some steps toward the establishment of a drawback and bonded-warehouse system were taken in the seventeenth century (e.g., 16 Car. I, cs. 25, 29, 31; 14 Car. II, cs. II, 25, 27) and further extensions were introduced in the eighteenth century, but England has never had any free ports.

44. [44] E.g. Mildmay, The laws and policy of England, 1765, p. 70.

45. [45] E.g. [Petyt], Britannia languens [1680], McCulloch ed., Early English tracts on commerce, pp. 317, 497; Davenant, Reports to the commissioners [1712/13], Works, V, 379; Dobbs, An essay on the trade and improvement of Ireland, 1729, Part II, pp. 30, 31: "Since all duties inwards, besides being disadvantageous to trade, are found to lie at last upon the consumer; and the landed interest, the rich and luxurious pay the greatest part; the prudentest and best method of raising taxes, and least expensive in trading countries that have many ports to guard, and of securing the payment of the duties, and preventing the frauds in running them clandestinely, would be to take off all port duties and place the taxes upon land, moveables and inland excises.... Where the intention is to discourage the importation of foreign goods prejudicial to the public, there to put high licenses and excises upon them in the retailers' or consumers' hands; and if they are entirely prohibited, then to lay the penalty upon the consumer or wherever found." Cf. also John Collins, A plea for the bringing in of Irish cattel, 1680, p. 21, where the Dutch use of excises not levied until the goods were sold for consumption is credited with being "the prime cause of the greatness of the Dutch trade, wealth, and power at sea."

46. [46] The mercantilists complained repeatedly against the duties laid on English exports for fiscal reasons, and Misselden, in 1623, cited the Dutch as a model to follow in this respect because in Holland "their own commodities [were] eased of charge, the foreign imposed."—The circle of commerce, p. 135. Cf. also Robinson, Englands safety; in trades encrease, 1641, pp. 8-9; Violet, Mysteries and secrets, 1653, p. 14; Reynel, The true English interest, 1679, pp. 10-11; "No customs, or very small, should be paid for exportation of our own manufactures. It were better to advance the king's revenue any other way than by gaining custom on our own commodities, which hinders exportation, or to encourage foreign commodities that we can make here, to advance the customs"; Mildmay, The laws and policy of England, 1765, p. 73: "It must give us the utmost concern to find several duties at our ports imposed to satisfy rather the public exigency of our government, than to regulate the interest of our foreign commerce."

47. [47] [Robert Walpole] A letter from a member of parliament to his friends in the country, concerning the duties on wine and tobacco, 1733, pp. 21 ff.

48. [48] On the history of the export bounties on corn, see D. G. Barnes, A history of the English corn laws, from 1660-1846, 1930. See also Jacob Viner's review of this book, Journal of political economy, XXXVIII (1930), 710-12.

49. [49] A collection of letters, 1681-83, II, 182.

50. [50] E.g., Gee, The trade and navigation of Great Britain considered [1729], 1767 ed., p. 245; [Charles Smith] Three tracts on the corn trade and corn laws, 2d ed., 1766, passim; [Mildmay] The laws and policy of England, 1765, pp. 56 ff.; [Arthur Young] The farmer's letters, 2d ed., 1768, pp. 44 ff., and Political arithmetic, 1774, pp. 29 ff. Cf. also The manufacturer's plea for the bounty on corn at exportation, 1754, p. 6: "It cannot, I think, be denied that the real proceeds of every quarter of corn, I mean so many at least as the exporter would be disabled from carrying to market without the aid of this bounty, add to the public at least the exceeds of this bounty." Also, ibid., p. 8.

51. [51] Sketches of the history of man, 1774, I, 491 ff.

52. [52] Cf. Brewster, New essays on trade, 1702, p. 54; Dobbs, An essay on the trade and improvement of Ireland, 1729, Part II, p. 64; Decker, An essay on the causes of the decline of the foreign trade [1744], 1756, pp. 65 ff.; [Josiah Tucker] The causes of the dearness of provisions assigned, 1766, p. 24, and Considerations on the policy, commerce and circumstances of the kingdom, 1771, p. 124.

53. [53] Malachy Postlethwayt, The universal dictionary of trade and commerce, 4th ed., 1774, Art. "Corn," gives a good statement of the arguments used on both sides.

54. [54] A discourse...for the enlargement and freedome of trade, 1645, p. 22.

55. [55] Andrew Yarranton, England's improvement by sea and land [1677], as cited by Patrick Dove, "Account of Andrew Yarranton," appended to his The elements of political science, 1854, pp. 450-51.

56. [56] William Wood, A survey of trade, 1718, pp. 224-25.

57. [57] Arthur Dobbs, An essay on the trade and improvement of Ireland, 1729, Part II, p. 65. See also ibid., pp. 62 ff.

58. [58] David Bindon, A letter from a merchant who has left off trade, 1738, p. 24.

59. [59] Ibid., p. 60.

60. [60] "On the neglect of trade and manufacture," Scots magazine, II (1740), 477. The infant-industry argument is to be found also in Steuart, Principles of political æconomy, 1767, I, 302 ff., 381, and in Josiah Tucker, Instructions for travellers, 1757, p. 33. Adam Smith deals with the argument somewhat overcritically (Wealth of nations, Cannan ed., I, 422 ff.).

61. [61] The first use of the term "protection" in the modern sense that I have noticed is in Asgill's A brief answer to a brief state of the question, 1719, pp. 10 ff.

62. [62] A. N.,England's advocate, Europe's monitor, 1699, p. 20.

63. [63] On this section cf. Angell,The theory of international prices, 1926, chap. ii.

64. [64] In Richard Cantillon, Essai sur la nature du commerce en général, written ca. 1730, but not published until 1755, the self-regulating mechanism is clearly and ably expounded. See especially pp. 159-99 in the 1931 reprint, edited by Henry Higgs. Although material from Cantillon's manuscript had been used by French and English writers before its publication, I have found no evidence that any part of his exposition of the self-regulating mechanism appeared in print before 1752, or that Hume was influenced, directly or indirectly, by Cantillon.

65. [65] One very early instance may be quoted: "But I say confidently you need not fear this penury or scarceness of money; the intercourse of things being so established throughout the whole world, that there is a perpetual circulation of all that can be necessary to mankind. Thus your commodities will ever find out money."—Sir Thomas More in the House of Commons, 1523, cited in White Kennet, A complete history of England, 1706, II, 55. Cf. also the quotation from John Houghton (1681), p. 49, supra.

66. [66] A treatise of the canker [1601], T.E.D., III, 392-93.

67. [67] A passage cited by Angell (Theory of international prices, p. 14) as quoted by Malynes in 1622 from an unidentified contemporary author, does appear to state with adequate clearness the dependence of specie movements on the relative value of money at home and abroad, and the dependence of the value of money on its quantity. But the quotation is from the unenlightened Edward Misselden (Free trade, 2d ed., 1622, p. 104) who by a low value of money means a high mint price of bullion rather than low purchasing power over commodities.

68. [68] Some considerations of the lowering of interest [1691], Works, 1823 ed., V, 49.

69. [69] In modern terminology, the "terms of trade" would be less favorable. Ibid., pp. 49-50.

70. [70] Angell (op. cit., pp. 19-20) gives a much more favorable interpretation of Locke, and credits him with "the first outline that I have discovered of a theory of international prices." But he does so only by reading in effect "what will be" where Locke outlines what is desirable but will not necessarily be realized. He appears to find Locke inconsistent, because he did not think "that money, despite its distribution in a definite proportion to trade, keeps a uniform value throughout the world" and quotes, to reveal the inconsistency, a passage which shows clearly what I here contend, namely, that Locke did not believe that money is actually distributed in a definite proportion to trade: "Money...is of most worth in that country where there is the least money in proportion to its trade."—Locke, op. cit., p. 50, italics mine.

71. [71] Ibid., pp. 50-51. Locke explains both (1) the specie-import point (mint par minus insurance between Holland and England minus additional cost of shipment because of an assumed penalty on the exportation of bullion from Holland) and (2) the point at which an English merchant having funds in one country will decide to transfer them to another, which will be determined by the relative opportunities for profitable use in the two countries, the cost of transmission, and the risk connected with investment in a foreign country.

Angell (op. cit., p. 21) finds the first clear statement of the specie-point mechanism in Clement (1696). The specie points must be clear to merchants as soon as they actually engage in bullion and exchange transactions, and Gresham gives an adequate statement of the specie-import point in 1558. Cf. J. W. Burgon, The life and times of Sir Thomas Gresham, 1839, I, 485. Cf. also Petty, Treatise of taxes [1662], Economic writings, Hull ed., I, 48: "As for the natural measures of exchange, I say, that in times of peace, the greatest exchange can be but the labor of carrying the money in specie, but where are hazards [and] emergent uses for money more in one place than another, etc., or opinions of these true or false, the exchange will be governed by them." Cf. also, ibid., The political anatomy of Ireland [1691], in Economic writings, Hull ed., I, 185-86: "Exchange can never be naturally more than the land and water-carriage of money between the two kingdoms, and the insurance of the same upon the way, if the money be alike in both places."

72. [72] Discourses upon trade [1691], Hollander ed., pp. 35-36.

73. [73] Cf. Angell (op. cit., p. 17) for a slightly more favorable interpretation.

74. [74] Heckscher regards this as too favorable an interpretation, on the ground that Pratt was referring to the cheapness of silver solely in terms of other coins, not of commodities in general. (Mercantilism, 1935, II, 251, note.)

75. [75] [Samuel Pratt] The regulating silver coin, made practicable and easie. 1696, p. 103. See also ibid., p. 104. Cf. also Hugh Chamberlain, A collection of some papers, 1696, p. 13: "when more can be got by our English commodities than by money, none will export money."

76. [76] A survey of trade, 1718, pp. 335 ff.

77. [77] Isaac Gervaise, The system or theory of the trade of the world, 1720. Gervaise was of French Huguenot birth, and was taken by his parents to Ireland as a child, upon the revocation of the Edict of Nantes. He became an Anglican clergyman and a friend of Bishop Berkeley. Cf. A. C. Fraser, Life and letters of George Berkeley, D.D., 1871, 259, note.

78. [78] Op. cit., pp. 3-4. Cf. also pp. 24-25, where it is made clear that this is a correct interpretation of his reasoning.

79. [79] Ibid., p. 5.

80. [80] Ibid., pp. 7-8.

81. [81] Pp. 8-9, 12.

82. [82] Ibid., p. 13.

83. [83] Ibid., pp. 15-17.

84. [84] He also later (pp. 32-34) qualifies his conclusions with respect to the proportions in which specie can be distributed in the case where there is international lending or tribute.

85. [85] [Thomas Prior] Observations on coin in general, 1730, p. 13.

86. [86] Money answers all things [1734], Hollander ed., pp. 48-49.

87. [87] Ibid., pp. 93-95. See supra, p. 50.

88. [88] Political discourses [1752], in Essays, moral, political, and literary,1875 ed., I, 330 ff.

89. [89] Ibid., p. 333, note.

90. [90] Ibid., I, 334-35.

91. [91] Ibid., I, 337 ff.; I, 311 ff. Cf., however, ibid., I, 339 ff.

92. [92] Ibid., I, 337. Adam Smith found fault with Hume for having "gone a little into the notion that public opulence consists in money," presumably with these passages in mind.—Lectures on justice, police, revenue, and arms (given about 1763), Cannan ed., 1896, p. 197. To Hume's objection to paper money that it drove out bullion, Henry Lloyd replied that "money cannot go out of a kingdom without receiving an equivalent, which is either consumed at home, or resold with advantage." An essay on the theory of money, 1771, p. 16.

93. [93] In this, as in some of his other economic essays, Hume was apparently replying to arguments in Montesquieu's L'esprit des lois which he could not accept. Hume had already stated the doctrine of the self-regulating mechanism in much the same terms in a letter to Montesquieu, April 10, 1749, cited in J. Y. T. Greig,The letters of David Hume, 1932, I, 136-37. In a letter of Nov. 1, 1750, to James Oswald, who had apparently already seen a manuscript of the essay and had raised objections against its thesis, Hume made a concession along the Potter-John Law lines: "I agree with you, that the increase of money, if not too sudden, naturally increases people and industry, and by that means may retain itself; but if it do not produce such an increase, nothing will retain it except hoarding." (Ibid., I, 143.)

94. [94] Essays, I. on the public debt; II. on paper-money, banking, &c., 1755, p. 21.

95. [95] An essay upon money and coins, Part I (1757), 90-93. Harris does not mention Hume, but in his preface he states that the main part of his essay had been written many years before.

96. [96] Ibid., Part I, pp. 99, 100.

97. [97] [George Whatley] Principles of Trade, 2d ed., 1774, note, pp. 15-16. Benjamin Franklin helped in the preparation of this book, and the notes, which are generally superior to the text, have especially been attributed to him. See Jared Sparks, The works of Benjamin Franklin, 1840, X, 148.

An interesting and able discussion of the effect on exchange rates and specie flows of the credit operations of banks is to be found in "Considerations relating to the late order of the two banks," Scots magazine, XXIV (1762), 39-41, 89-94. Its general argument is that the existing adverse exchange on London was due to temporary circumstances and should be corrected by borrowing in London rather than by contraction of bank credit in Scotland.

98. [98] [Robert Wallace] Characteristics of the present political state of Great Britain, 1758, pp. 31-32.

99. [99] Principles of political æconomy, 1767, I, 405 ff., 515-16.

100. [100] Ibid., I. 422.

101. [101] Ibid., II, 115.

102. [102] Four tracts on political and commercial subjects, 2d ed., 1774, pp. 34 ff.

103. [103] In a letter of March 4, 1758, to Lord Kames:The letters of David Hume, J. Y. T. Greig ed., 1932, I, 143 ff.

104. [104] Wealth of nations [1776], Cannan ed., II, 277.

105. [105] Lectures on justice, police, revenue and arms [given about 1763], Cannan ed., 1896, p. 197.

106. [106] See supra, p. 75.

107. [107] Thomas Starkey, England in the reign of King Henry the Eighth [ca. 1538], 1871, pp. 88-90.

108. [108] T[homas] M[un], A discourse of trade, from England unto the East-Indies [1621], 1930 reprint, p. 46.

109. [109] Josiah Child, Discourse about trade, 1690, p. 152.

110. [110] Ibid., preface. See also North, Discourses upon trade [1691], Hollander ed., p. 36; Harris, An essay upon money and coins, Part I (1757), 93-94. Another writer, in 1710, said that explanation of the decline in trade as due to scarcity of money was "a vulgar error," and that the real cause was not a decrease in its quantity but a decrease in its circulation owing to unfavorable prospects. (A vindication of the faults on both sides [1710] in Somers' tracts, 2d ed., XIII (1815), 6-7.)

111. [111] North, op. cit., pp. 24 ff.

112. [112] Early English tracts on commerce [1701], McCulloch ed., p. 558.

113. [113] Barbon, A discourse of trade [1690], Hollander ed., p. 20; Joseph Massie, An essay on the governing causes of the natural rate of interest [1750], Hollander ed., 1912, passim; Hume, Political discourses [1752], in Essays moral, political, and literary, 1875, I, 320 ff. Cf. also Davenant, Discourses on publick revenues [1698], Works, II, 106.

The following quotation illustrates an intermediate stage in the evolution of the theory of the formation of capital, where recognition of the possibility of accumulation through productive investment has come but without leading to the complete abandonment of the notion of saving as consisting of the piling-up of the precious metals:

The primary design, and proper end of silver and gold, is treasure, and 'tis from thence that they acquire their universal value and esteem, so that men will part with all other commodities in exchange for them, with this view, that besides that they will enable them to purchase whatsoever they stand in need of, what they can save to lay up will always be ready to serve their future occasions. 'Tis true that men soon found out ways of improving and increasing their treasure by purchasing lands, lending at interest, and employing it in trade, but how oft soever these ways of cultivation are iterated, still the acquiring of treasure is proposed as the ultimate end. (A vindication of the faults on both sides.....[1710] in Somers' Tracts, 2d ed., 1815, XIII, 5-6.)

Locke had argued that it was only the existence of money which created any incentive for the accumulation of physical capital, since without the possibility of exchanging physical goods for something not perishable and which could be hoarded men would have no motive to acquire possession of land, cattle, etc., in greater amount than they could themselves consume its product. (Two treatises of civil government [1690], in Works, 1823 ed., V, 365-66.)

114. [114] Cf., on this section, E. A. J. Johnson, "Unemployment and consumption: the mercantilist view," Quarterly journal of economics, XLVI (1932), 708-19.

115. [115] E.g. [Starkey], England in the reign of King Henry the Eighth [ca. 1538], 1878, p. 81; Potter, Key of wealth, 1650, p. 17: "To have a plentiful share of outward comforts, though dear, is an advantage above that of enjoying a less proportion thereof, though never so cheap, as much every whit as the end is more excellent than that means, which without such end serveth to no purpose at all"; Barbon, A discourse of trade [1690], Hollander ed., p. 22; Jocelyn, An essay on money & bullion, 1718, pp. 17-18: the East India Company, in return for bullion, brings in commodities "both to adorn and entertain our ladies. Are not these riches?...The produce of the East-Indies enriches Europe...more than all the bullion, which comes from the West"; Some considerations on the nature and importance of the East-India trade, 1728, p. 71: "Providence in its infinite goodness designed to make life as easy and as pleasurable to mankind as possible, and gave us reason to find out arts, and to make them subservient to our delight and happiness"; Lindsay, The interest of Scotland considered, 1733, p. 63; Vanderlint, Money answers all things [1734], Hollander ed., p. 134: "For trade terminates ultimately in the consumption of things, to which end alone trade is carried on." Cf.Thomas Fuller, The holy state, and the profane state [1642], Nicholas ed., 1841, p. 109: "God is not so hard a Master, but that He alloweth His servants sauce (besides hunger) to eat with their meat." Cf., however, Steuart, Principles of political œconomy,, 1767, I, 25: "The duty and business of man is not to feed; he is fed in order to do his duty, and to become useful."

116. [116] E.g., Houghton, Collection of letters, 1681-83, I, 52; Barbon, A discourse of trade [1690], Hollander ed., p. 32; Child, A discourse about trade, 1690, pp. 72 ff.; Taxes no charge, 1690, pp. 11 ff.; Vanderlint, Money answers all things [1734], Hollander ed., p. 29. Sir William Temple claimed that the argument that extravagance was advantageous was erroneous, even when the spending was confined to domestic goods, because it reduced the amount of goods available for export, and cited the frugality of the Dutch as a model for the English to follow.—Observations upon the United Provinces of the Netherlands [1668], Works, 1754, I, 132. But Davenant, Discourses on publick revenues [1698], Works, I, 390-91, and Mandeville, Fable of the bees [1714], Kaye ed., I, 186, later claimed that the Dutch were frugal through necessity rather than choice.

117. [117] North, Discourses upon trade [1691], Hollander ed., p. 27; Davenant, loc. cit.; Mandeville, loc. Cit.; Vanderlint, loc. cit.; "Impartial essay concerning the nature and use of specie and paper-credit in any country," Scots magazine, XXIV (1762), 134; Harris, An essay upon money and coins, Part I (1757), 30: "The word luxury hath usually annexed to it a kind of opprobrious idea; but so far as it encourages the arts, whets the inventions of men, and finds employments for more of our own people, its influence is benign, and beneficial to the whole society." Cf. also B-I-, M.D. [William Temple of Trowbridge], A vindication of commerce and the arts [1758], in McCulloch ed., Scarce and valuable tracts on commerce, 1859, pp. 551 ff. Arthur Young, Political arithmetic, 1774, pp. 46 ff., defends luxury, because it creates a market for agricultural goods.

118. [118] Perhaps also Jocelyn, who would lay "as few taxes and prohibitions as possibly can be upon any export or import in trade." (An essay on money & bullion,1718, p. 30.)

119. [119] [Clement Armstrong] A treatise concerning the staple [ca. 1530], in Pauli, op. cit., p. 42.

120. [120] John Hales, "On the unwisdom of a new imposition on cloth" [1559], T.E.D., II, 224.

121. [121] "Polices to reduce this realme..." [1549], T.E.D., III, 317.

122. [122] Fleming, J., "The case of impositions" [1606], in Howell ed., A complete collection of state trials, II (1809), 390.

123. [123] Robert Keale, The trade's increase [1615], in Harleian miscellany, III (1809), 307.

124. [124] [Defoe?] An essay upon loans, 1710, p. 14.

125. [125] David Bindon, A letter from a merchant who has left off trade, 1738, p. 12.

126. [126] See pp. 51, 139, of this tract.

127. [127] Cf. the scathing indictment of the merchant by James I, in the course of an exposition of the duties of a monarch:

The merchants think the whole commonweal ordained for making them up; and accounting it their lawful gain and trade, to enrich themselves upon the loss of all the rest of the people, they transport from us things necessary, bringing back sometimes unnecessary things, and at other times nothing at all. They buy for us the worst wares, and sell them at the dearest prices; and albeit the victuals fall or rise of their prices according to the abundance or scantiness thereof, yet the prices of their wares ever rise, but never fall, being as constant in that their evil custom as if it were a settled law for them. They are also the special cause of the corruption of the coin, transporting all our own, and bringing in foreign, upon what price they please to set on it....(Basilikon doron, in The workes of...James, 1616, p. 163.)

128. [128] Englands interest and improvement [1663], Hollander ed., p. 13.

129. [129] North, Discourses upon trade [1691], Hollander ed., p. 12.

130. [130] Davenant, Discourses on publick revenues [1698], Works, I, 146.

131. [131] Pollexfen, A discourse of trade, coyn, and paper credit, 1697, p. 149.

132. [132] William Paterson, "A proposal to plant a colony in Darien" [ms. 1701], in Bannister ed., The writings of William Paterson, I, 133-34.

133. [133] [George Whatley] Principles of trade, 2d ed., 1774, p. 33, note.

134. [134] E.g., Lewes Roberts, Treasure of traffike [1641], McCulloch ed., Early English tracts on commerce, p. 58: "So when a country is properly seated for traffic, and the sovereign willing by foreign commerce to enrich his kingdom, the merchant's advice is questionless best able to propagate the same."

135. [135] Cited by John Smith, Chronicon rusticum-commerciale, 1747, preface, I, v.

136. [136] Cited by McCulloch, A dictionary...of commerce, American ed., 1845,I, 620, on the authority of Hamilton's New account of the East Indies, I, 232.

137. [137] As early as 1550, Sir John Mason had objected to an ordinance limiting the price of cheese and butter, on the ground that it was attempting the impossible: "Nature will have her course, etiam si furca expellatur; and never shall you drive her to consent that a penny-worth of new shall be sold for a farthing."—T.E.D., II, 188.

138. [138] "Advice of His Majesty's Council of Trade, concerning the exportation of gold and silver..." [1660], in McCulloch ed., Tracts on money, pp. 148-49. The argument is made here to support a recommendation that the exportation of bullion and foreign coin be permitted without restriction.

139. [139] Interest of money mistaken,1668, p. 10.

140. [140] [Defoe] An essay upon loans, 1710, pp. 15-17. This is in answer to a threat that if the government did not revise its policy the moneyed interests would, on party grounds, refuse to lend to it.

141. [141] Davenant, Report to the commissioners for stating the publick accounts [1712], Works, V, 452.

142. [142] Lindsay, The interest of Scotland considered, 1733, preface, p. iii.

143. [143] Cf. Vanderlint, Money answers all things [1734], Hollander ed., p. 58:

"...I am entirely for preventing the importation of all foreign commodities, as much as possible; but not by acts of parliament, which never can do any good to trade; but by raising such goods ourselves, so cheap as to make it impossible for other nations to find their account in bringing them to us...."

144. [144] Few traces are to be found in the literature of the period of the intermediate doctrine, which concedes that self-interest is a powerful force for good, and should not be reviled or crushed, but maintains that it is also capable of doing harm to the commonwealth, and therefore needs to be watched and regulated. It is perhaps implied in the arguments of some of the moderate mercantilists, and may be what Petty had in mind in the following passage: "We must consider in general, that as wiser physicians tamper not excessively with their patients, rather observing and complying with the motions of nature than contradicting it with vehement administrations of their own, so in politics and economics the same must be used, for Naturam expellas furcd licet usque recurrit." (Treatise of taxes [1662], Economic writings, I, 60.) Tucker gives expression to it at one point, although elsewhere he expounds contradictory doctrine. In his Elements of commerce, 1755, he asserts that self-love is an important stimulus. "Consequently, the main point to be aimed at, is neither to extinguish nor enfeeble self-love, but to give it such a direction, that it may promote the public interest by pursuing its own" (p. 7). But the only clear and elaborate exposition of this intermediate position I have found is in [Nathaniel Forster] An enquiry into the causes of the present high price of provisions, 1767, pp. 17-22. The relevant passages are too long for quotation, but they deserve the attention of those interested in the history of the laissez-faire idea.

145. [145] The circle of commerce, 1623, p. 17.

146. [146] Discourses upon trade [1691], Hollander ed., p. 13. Cf. also ibid., p. 37:

"...no people ever yet grew rich by policies; but it is peace, industry, and freedom that brings trade and wealth, and nothing else."

147. [147] The humble answer of the Governor...of the East-India Company [1692] in Somers' tracts, 2d ed., X, 622. Child is here objecting to a proposal, directed against himself, to limit the amount of stock in the company which could be held by any one person.

148. [148] An essay on the East-India trade [1697], Works, I, 98. Cf. also ibid., p. 104: "Wisdom is most commonly in the wrong, when it pretends to direct nature."

149. [149] Fable of the bees, passim. Mandeville deliberately stated his conclusions in such manner as to make them offensive to moralists, but Smith accepted them in substance while finding a more palatable form for their expression.

150. [150] Instructions for travellers, 1757, pp. 31-32.

151. [151] Principles of trade, 2d ed., 1774, p. 10.

152. [152] Ibid., note, pp. 33-34. This note may have been a contribution by Benjamin Franklin. It mentions with approval the demand reputed to have been made of Colbert by the French merchants, "Laissez nons faire (Let us alone)"—perhaps the first appearance of the term in the English literature.

153. [153] Cf. Heinrich Dietzel, Weltwirtschaft and Volkswirthschaft, 1900, p. 6.

154. [154] [Cf. Clement Armstrong] A treatise concerning the staple [ca. 1530], in Pauli, op. cit., p. 25: "So as all special gift of rich commodities that God first gave unto the earth in every realm to one realm, that another hath not, to the intent, that every realm should be able to live of God's gift, one to be help to another to be an occasion one to live by another." Cf. also R. H. Tawney, "Religious thought on social and economic questions in the sixteenth and seventeenth centuries," Journal of political economy, XXXI (1923), 478.

155. [155] William Cholmeley, The request and suite of a true-hearted Englishman [ms. 1553], W. J. Thomas, editor, Camden miscellany, II (1853), 1.

156. [156] Ibid., p. 2.

157. [157] Edward Misselden, Free trade, 2d ed., 1622, pp. 25-26. Misselden cites from Aristotle and Seneca in this connection.

158. [158] The linen and woollen manufactory discoursed... [1691], in John Smith, Chronicon rusticum-commerciale, I, 384:

Divine Providence, that appoints to every nation and country a particular portion, seems to allot that to England, which was the first acceptable sacrifice to his Omnipotency, that of the flock.... Now to decline this, and set up another manufacture, looks like an extravagant mechanic, who by his improvidence hath lost his own art, and thinks to retrieve his misfortune by taking up that of another man's. This is condemned in particular persons, and to be feared in a community.

159. [159] A treatise of wool and cattel, 1677, p. 3.

160. [160] Davenant, An essay on the East-India trade [1697], in Works, I. 104.

161. [161] Harris, An essay upon money and coins, Part I (1757), 14. Cf. also Charles Molloy,A treatise of affairs maritime, and of commerce [1676], 9th ed., 1769, I, preface, p. iv.

162. [162] Sketches of the history of man, 1774, I, 81-82.

163. [163] John Houghton, England's great happiness [1677], in McCulloch ed., Early English tracts on commerce, p. 261. In his A collection of letters, 1681-83, I, 60, Houghton claims its authorship, quotes from it, adds to it, and argues along identical lines on a number of points. Houghton adheres to the monetary phases of the mercantilist doctrine, however, and elsewhere expounds doctrine inconsistent with free-trade reasoning.

164. [164] A discourse of trade, 1690, p. 35. Barbon proceeds, however, to argue that the production of the exports would not necessarily be displaced by the production of domestic goods, since the latter might not satisfy the buyers, who would consequently not spend their money. Barbon in any case was far from being a free trader. Mandeville, Fable of the bees [1714], Kaye ed., I, iii, also claimed that reducing imports involved a reduction of exports as well.

165. [165] Essay on the East-India trade [1697],works, I, 95.

166. [166] Ibid., I, 105-10. Cf. also, Gardner, Some reflections on a pamphlet, intituled, England and East India inconsistent in their manufactures, 1696, pp. 9 ff., for ideas closely resembling those of Davenant, and in part also those of the author of Considerations on the East-India trade.

167. [167] In McCulloch ed., Early English tracts on commerce, pp. 556-59, 578-85. (Citation from p. 583.) The original tract is extremely rare, and does not appear to have exerted any influence on contemporary writers. Halkett and Laing attribute its authorship to Dudley North, and they have been followed by a number of economists. This seems, however, clearly to be a mistake. North died in 1691, whereas this tract was not published until 1701. Chapter iii of the tract discusses the effects of the competition of the two companies then privileged to trade with India, which definitely locates its time of writing as not earlier than 1698.

168. [168] The system or theory of the trade of the world, 1720, pp. 22-23.

169. [169] The interest of Scotland considered, 1733, pp. 111-12. Cf. also for similar reasoning, Vanderlint, Money answers all things [1734], Hollander ed., pp. 96-98; anon., Reflections and considerations occasioned by the petition...for taking off the drawback on foreign linens, &c., 1738, p. 26; Nicholas Magens, Farther explanations of some particular subjects, 1756, p.6.

170. [170] England's great happiness, 1677; Collection of letters, 1681-83.

171. [171] See supra, pp. 83-84, 98.

172. [172] But Decker, after advocating the removal of all restrictions on trade except the Navigation acts, in somewhat of an anticlimax, concedes that if duties were taken off some sort of regulation would be necessary for some goods, lest they interfere with home manufactures.—Serious considerations on the several high duties, 3d ed., 1744, p. 31. Massie pointed out the inconsistency between Decker's general argument for free trade and this concession to protection.—Joseph Massie, The proposal, commonly called Sir Matthew Decker's scheme, for one general tax upon houses, laid open, 1757, p. 3.

173. [173] A discourse of trade, 1670; A treatise wherein is demonstrated, that the Church and State of England, are in equal danger with the trade of it, 1671; Reflections upon the East-Indy and Royal African companies, 1695; A treatise concerning the regulation of the coyn of England, 1696.

174. [174] See, e.g., the eulogy of the merchant in Lillo's play, The London merchant, 2d ed., 1731, Act I, scene i, and Act III, scene i.

175. [175] Cf., e.g., John Smith, Advertisements for the inexperienced planters of New England [1631], in Works, Edward Arber ed., 1884, pp. 961-62; anon., A discourse concerning the East-India trade [ca. 1692], in Somers' tracts, 2d ed., X, 642: "The more goods are exported and imported,...the nation in general will have the advantage, though the traders may not..."; William Wood, A letter...shewing the justice of a more equal and impartial assessment on land, 1717, p. 19; anon., Considerations occasioned by the bill for enabling the South-Sea Company to increase their capital stock, 1720, p. 14: "Whether upon the whole, if more of our own product and manufactures are exported, and of foreign commodities imported, more of our ships and seamen, our manufactures and people of all trades will not be employed; consequently, if the customs and excises will not be greatly advanced?"

176. [176] A spokesman for the agricultural interests objected that in this general glorification of trade the interests of the farmer were being overlooked, and that even petty domestic traders were including their own trades as entitled to the special consideration which was being claimed for "trade": "The notion of encouraging trade has of late years prevailed very much, and very rightly where we speak of foreign trade; and the first promoters of the notion meant no others, but from thence we are descended to all trade, domestic as well as foreign, and the cry of it is so common, even amongst the vulgar, that I have heard my landlord, who keeps a petty ale-house in a country village, harangue it with great eloquence; and with a grave air complain, that trade was not sufficiently encouraged, when he meant the trade of ale-draping and smoking tobacco."—Some thoughts on the interest of money in general (ca. 1720), pp.65-66.

177. [177] Mysteries and secrets, 1653, p. 24.

178. [178] Cf. Political discourses [1752], in Essays moral, political, and literary, 1875 ed., I, 343-44: "All taxes, however, upon foreign commodities, are not to be regarded as prejudicial or useless, but those only which are founded on the jealousy above-mentioned. A tax on German linen encourages home manufactures, and thereby multiplies our people and industry. A tax on brandy increases the sale of rum, and supports our southern colonies."

179. [179] Cf. e.g., Lectures, p. 209: "If I purchase a thousand pounds' worth of French wines, and drink them all when they come home, the country is two thousand pounds poorer, because both the goods and money are gone; if I spend a thousand pounds' worth of goods at home upon myself the country is only deprived of one thousand pounds, as the money still remains; but in maintaining an army in a distant war it is the same thing whether we pay them in goods or money, because the consumption is the same at any rate." For the history of a late American version of this fallacy, see F. W. Taussig, "Abraham Lincoln on the tariff; a myth," in Free trade, the tariff and reciprocity, 1920, pp. 34-47. For an earlier English version, see Richard Haines, The prevention of poverty, 1674, p. 11.

180. [180] The only exceptions of any importance that I have noticed are [David Bindon] A letter from a merchant who has left off trade, 1738, pp. 31-32, where a number of presumably current arguments against restrictions on imports are stated and controverted, and Gee, The trade and navigation of Great Britain considered [1729], 1767 ed., pp. 183 ff.

181. [181] Cf. also, James Whiston, A discourse of the decay of trade, 1693, p. 3:

Neither will the pursuing these proposals, augment the nation's wealth and power only, but that wealth and power will also preserve our trade and religion, they mutually working for the preservation of each other....

182. [182] A striking instance is the following passage from a tract which is clearly the product of a writer not familiar with, nor really interested in, commercial matters, but who sensed the need for an appeal to economic considerations if his plea for the continuance of the war with France then under way was to have weight with its readers: "To proceed now to the second head I proposed, namely, that this war has produced great and lasting advantages to the people over and above liberty, and a security of our properties. The advantages I propound to speak to shall be confined to the article of wealth, as being that which most generally affects; for to talk to the common people of the great honor our nation will gain by a happy issue of this war, is to speak to little purpose."—The taxes not grievous and therefore not a reason for an unsafe peace, 1712, p. 15. The views of the mercantilists as to the efficacy of war as an instrument to procure economic advantages would be an interesting topic for investigation. It would be wrong to attribute to them without exception the view that trade wars, even if successfully prosecuted, promoted the national wealth, and some of them anticipated the modern argument that even a victorious war costs more than it returns in economic benefits. Others, however, looked upon trade wars as so essential to commercial prosperity that the Turkey Company tried to exclude a Quaker from its councils in 1759 as professing opinions hostile to the waging of such wars. See G. B. Hertz, The old colonial system, 1905, p. 10.

183. [183] Cf. Montesquieu, De l'esprit des lois [1748], Bk. xx, chap. vii: "D'autres nations ont fait céder des intérêts du commerce à des intérêts politiques: celle-ci [i.e., England] a toujours fait céder ses intérêts politiques aux intérêts de son commerce."—Œuvres complètes, Paris, 1877, IV, 371.

Cf. also Quesnay, "Remarques sur l'opinion de l'auteur de l'esprit des lois concernant les colonies" [Journal de l'agriculture, January, 1766], in Oncken ed., Œuvres de...F. Quesnay, 1888, p. 429: "...en Angleterre...oł les lois du commerce maritime ne se prêtent point aux lois de la politique; oł les intérêts de la glèbe et de l'Êtat sont subordonnés aux intérêts des négociants; oł le commerce des productions de l'agriculture, la propriété du territoire et l'Êtat même ne sont regardés que comme des accessoires de la métropole, et la métropole comme formée de négociants."

184. [184] Violet had himself been convicted of, and punished for, violation of the laws against the export of bullion, and one of his arguments in support of his reinstatement was that "an old deer-stealer is the best keeper of a park."—A true discoverie to the commons of England [1651], 1653, p. 79.

185. [185] This interpretation of the literature of the period as consisting mainly of briefs for special interests is intended to apply to the writings of the moderate as well as of the extreme mercantilists. Child, infact, presents one of the most glaring instances of special pleading. See Sven Helander, "Sir Josiah Child," Weltwirtschaftliches Archiv, XIX (1923), 233-49, and for closely similar exposure of Child by contemporaries, A discourse concerning the East-India trade [ca. 1692], in Somers' tracts, 2d ed., X, 634-47; The interest of England considered: in an essay upon wooll, 1694.

186. [186] Cf. the excellent account in Jehan Maintrieu, Le traité d'Utrecht et les polémiques du commerce anglois, 1909.

187. [187] By the Whigs, willingness to trade with France was accepted as proof of hostility to trade. Cf. the interesting pamphlet, Torism and trade can never agree (ca. 1713), which accused the Tories of having always been hostile to trade, and attacked Mercator as being anti-trade, because it supported open trade with France.

188. [188] "'Merchants' in the eighteenth century meant business men, and the term was as wide as 'trade' is even now; bankers and manufacturers were included in it." L. B. Namier, The structure of politics at the accession of George III, 1929, I, 61, note.

189. [189] It is of interest that the French government, on sober second thought of the mercantilist variety, had also lost its seal for the treaty, and felt relieved when the English Parliament rejected it. See E. Levasseur, "Les traités de commerce entre la France et l'Angleterre sous l'ancien régime," Revue d'économie politique, XV (1901), 971.

Chapter III

1. [1] The participants were distinguished as bullionists or anti-bullionists according as they accepted or rejected the appearance of a premium on bullion as a demonstration of depreciation of bank notes and mismanagement of the currency. There is, of course, no relationship between the "bullionists" of this period and the sixteenth century "bullionists" whose doctrines were examined in chap. I.

2. [2] N. S. Silberling, "Financial and monetary policy of Great Britain during the Napoleonic wars," Quarterly journal of economics, XXXVIII (1924), 214-33; 397-439; ibid., "British prices and business cycles, 1779-1850," Review of economic statistics, prel. vol. V, suppl. 2 (1923), 219-62; R. G. Hawtrey, Currency and credit, 3d ed., 1928, chap. xviii: J. H. Hollander, "The development of the theory of money from Adam Smith to David Ricardo," Quarterly journal of economics, XXV (1911), 429-70; J. W. Angell, The theory of international prices, 1926, pp. 40-79, 477-503; E. Cannan, the paper pound of 1797-1821, 1919; H. S. Foxwell, preface to A. Andréadès, History of the Bank of England, 2d. ed., 1924.

3. [3] Walter Boyd, A Letter to...Pitt, 1801; 2d ed., with additions, 1801. The edition of 1811, often referred to as the second edition, is merely a reprint of the first, and lacks the important additions made in the true second edition.

4. [4] Lord King, Thoughts on the effects of the Bank restrictions [1st ed., 1803], 2d ed., 1804.

5. [5] Henry Thornton, An enquiry into the nature and effects of the paper credit of Great Britain, 1802.

6. [6] John Wheatley, Remarks on currency and commerce, 1803.

7. [7] Francis Horner, review of Thornton, Edinburgh review, I (1802), 172-201; review of Lord King, ibid., II (1803), 402-21; review of Wheatley, ibid., III (1803), 231-52.

8. [8] Report...from the Committee on the circulating paper, the specie, and the current coin of Ireland [1804], 1826 reprint.

9. [9] An essay on the principle of commercial exchanges, 1804.

10. [10] Observations upon the state of currency in Ireland, 1804.

11. [11] Thoughts on the alarming state of the circulation, 1805.

12. [12] Three letters to the Morning Chronicle, August-November, 1809, reprinted by Hollander as Three letters on the price of gold, 1903; High price of bullion, a proof of the depreciation of bank notes [1st ed., 1810], 4th ed. with appendix [1811], reprinted in J. R. McCulloch ed., The works of David Ricardo, 1852; Reply to Mr. Bosanquet's practical observations [1811], reprinted in Works; and three additional letters to the Morning Chronicle, September, 1810, reprinted by Hollander, in Minor papers on the currency question 1809-1823 by David Ricardo, 1932.

13. [13] "Depreciation of paper currency," Edinburgh review, XVII (1811); "Review of the controversy respecting the high price of bullion," ibid., XVIII (1811).

14. [14] An inquiry into the effects produced on the national currency...by the Bank restriction bill, 3d ed., 1811.

15. [15] The question concerning the depreciation of our currency stated and examined, 1810.

16. [16] Substance of two speeches, 1811.

17. [17] Substance of speech...on the report of the bullion committee, 1811.

18. [18] A letter...in defence of the conduct of the directors, 1804.

19. [19] Practical observations on the report of the bullion committee, 2d ed., 1810.

20. [20] The principles of currency and exchanges, applied to the report, 2d ed., 1810.

21. [21] A review of the controversy respecting the high price of bullion, 1811.

22. [22] This is also the conclusion of Hollander: op. cit., Quarterly journal of economics, XXV (1911), 469.

23. [23] A good account is given by R. G. Hawtrey, Currency and credit, 3d ed., 1928, pp. 320-32.

24. [24] See table I, p. 144, infra.

25. [25] Report from the Committee of secrecy on the Bank of England charter, 1832, appendix No. 32, p. 41.

26. [26] Vincent Stuckey, a country banker, testified in 1819 that in his bank the deposits were about one-third in amount of the note issues, although this proportion fluctuated. (Report from the [Commons] Committee on the expediency of the Bank resuming cash payments, 1819, p. 245.) James Pennington, writing as late as 1861, stated that "The deposits with country bankers are generally converted into notes or coin, or into a bill upon London, before ultimate payment is accomplished." ("Letter from Mr. Pennington on the London banking system," in John Cazenove, Supplement to thoughts on a few subjects of political economy, 1861, p. 50, note.) Cf., however, the statement of another writer, for which I can find no independent confirmation:

"A country bank was a kind of clearing-house, where, without any actual interchange of notes or money, the greater part of all payments between man and man was effectuated by mere transfers in the books of their bankers.... It was merely the smaller payments for wages and weekly bills which required notes." Samuel Turner, Considerations upon the agriculture, commerce and manufactures of the British Empire, 1822, pp. 54-55.

27. [27] Sir Philip Francis, Reflections on the abundance of paper in circulation, 2d ed., 1810, p. 10. Cf. also, for a similar view, Mathias Attwood, A letter to Lord Archibald Hamilton, on alterations in the value of money, 1823, p. 8.

28. [28] Op. cit., Quarterly journal of economics, XXV, 436-37.

29. [29] Wealth of nations, Cannan ed., I, 402.

30. [30] Letter to Pitt, 2d ed., 1801, preface, p. xxxi. Ricardo, by exception, sometimes put it more strongly, and referred to the existence of a premium on bullion as not merely evidence, but as proof of the existence of depreciation and excess issue. Cf. the title of his tract, The high price of bullion, a proof of the depreciation of bank notes.

31. [31] This reasoning bears a superficial relationship to Cassel's so-called purchasing-power parity theory, but as will be explained subsequently (see pp. 382 ff., infra), Ricardo's stress on the particular prices of identical transportable commodities makes this part of his reasoning a truism if transportation costs and tariffs are abstracted from, whereas Cassel's doctrine, even if it be restricted, as Cassel does not restrict it, to internationally traded commodities only, instead of being a truism, is untrue. Cassel's doctrine, moreover, makes qualifications for the effect of foreign remittances which Wheatley and Ricardo expressly refused to make, and which they would have regarded—mistakenly—as fatal to their whole position if made.

32. [32] Francis Horner, however, did suggest that the relative prices in England and abroad could be used as a test of the existence of depreciation of the English currency. See his review of Thornton's Paper credit, Edinburgh review, I (1802), 201.

33. [33] Remarks on currency and commerce, 1803, chap. vi.

34. [34] As did also at least one anti-bullionist. Cf. The substance of a speech by Castlereagh in the House of Commons, July 15, 1811, 1811, p. 15: "With the exception of the precious metals, bank notes have the same powers of purchasing all other commodities, which they would have had at this day, if no necessity for shutting up the guineas in the Bank, or for sending gold abroad in unusual quantities, had ever occurred.... Such I wish to be understood...is the sense, in which I deny that bank notes are now depreciated."

35. [35] Most of the bullionists did not seriously concern themselves with the problem of how to measure the extent of depreciation but were content when they had demonstrated its existence. Cf. King, Thoughts on the effects of the Bank restrictions, 2d ed., 1804, p. 40, note: "nor will the most careful reference to the two tests of the price of bullion and the state of the exchanges enable us to ascertain in what precise degree a currency is depreciated: though the general fact of a depreciation may be proved beyond dispute." (Italics in original.)

36. [36] Ricardo, it is true, maintained that the foreign exchanges could fall under the mint parities even under a fully convertible currency only if the currency was "redundant" (i.e., was in excess of what could circulate consistently with the maintenance of the exchanges at mint parity), but he apparently meant by "excess" of currency under inconvertibility only the extra excess over and above that "redundancy" which was possible under convertibility.

37. [37] Reply to Mr. Bosanquet's observations, Works, pp. 321-22.

38. [38] According to Mushet, a mint test of the weight of the gold coin still in circulation, made in 1807, showed on the average slightly under 1.5 per cent of underweight. (An inquiry into the effects produced on the national currency... by the Bank restriction bill, 3d ed., 1811, p. 30.) Since the lighter coins would tend to remain longest in circulation, this would indicate that little allowance on this account would be called for prior to 1797.

39. [39] The Bullion Committee estimated the maximum premium on gold bullion over paper and coin which could prevail before 1797 at about 5½ per cent. Report, pp. 14-15.

40. [40] Cf. Wheatley, Remarks on currency and commerce, 1803, p. 187; Ricardo, High price of bullion, Works, p. 266, note.

41. [41] Cf. James Mill, Review of Thomas Smith's Essay on the theory of money and exchange, 1807, in Edinburgh review, XIII (1808), 54. But while James Mill was critical of the Restriction, at this stage he accepted many of the anti-bullionist arguments, and cannot be considered as an unqualified bullionist.

42. [42] Cf. the Bullion Report, pp. 63-64.

43. [43] Cf. Walter Hall, A view of our late and of our future currency, 1819, p. 70:

It is now discovered, that the activity of the circulation multiplies its actual amount, and that it is a point of more importance to ascertain the velocity of the motion than the size of the wheel; but it is probable that this also depends, in some degree, on the nature of the currency, and that were specie again to form the medium here, a larger amount of it would be required for the same operations than of the paper which it replaced.

44. [44] "Financial and Monetary Policy of Great Britain," Quarterly journal of economics, XXXVIII, 425, 436.

45. [45] Theory of international prices, pp. 45, 59, 60. Angell comments that "an understanding of this chain of reasoning is important because it provides the only satisfactory key to the contradictory pronouncements upon monetary theory of the later writers, even those of Ricardo." (Ibid., p. 45.)

46. [46] Walter Boyd, A letter to Pitt, 1st ed., 1801, pp. 64-65. (Italics in original.)

47. [47] Report of the Lords Committee, 1797, pp. 72-73.

48. [48] Paper credit, 1802, pp. 65-67.

49. [49] Ibid., p. 65.

50. [50] King, Thoughts on the effects of the Bank Restrictions, 2d ed., 1804, pp. 5-6. King also conceded that no loss of confidence in the English currency had as yet occurred. Ibid., p. 24.

51. [51] George Woods, Observations on the present price of bullion, 1811, p. 46. (Cf. also p. 184, infra.) For other instances of similar recognition of the possible contribution of speculative factors, or "discredit," to the discount on paper, see Henry Parnell, Observations upon the state of the currency in Ireland, 1804, p. 55; Bullion Report, 1810, pp. 22, 39; David Buchanan, Observations on the subjects treated of in Dr. Smith's...The wealth of nations, 1814, p. 88: "The value of a paper currency will...vary from its standard, by reason either of discredit or of excess. Where the security is defective, the value will fluctuate with the risk of ultimate loss, which may at length be such as entirely to stop its circulation...." These writers also refrained from making the positive charge that the paper currency was "discredited" in this sense. Cf. also Wheatley, Theory of money, I (1807), 97: "It is to the aggregate quantity of the currency of a country that we are to look, and not to the state and quality of its coin, for the real cause of the fluctuation in the market price of its money."

52. [52] Reply to Mr. Bosanquet's observations, Works, p. 363.

53. [53] See infra, pp. 201-02.

54. [54] Reply to Mr. Bosanquet's observations, Works, pp. 349-50.

55. [55] Cf. Henry Boase, A letter...in defence of the conduct of the directors, 1804, pp. 22-23; Substance of two speeches made by the Right Hon. N. Vansittart, 1811, p. 15; The Speech of Randle Jackson, Esq.,...respecting the report of the Bullion Committee, 1810, pp. 9 ff.

56. [56] Even non-exportable bullion commanded a premium over paper and there was open trade in underweight guineas, which could legally be melted down for internal use, at a premium over paper and even over full-weight guineas. See the evidence of S. T. Binns and of W. Merle, bullion merchants, before the Bullion Committee, Report, Minutes of evidence, pp. 18, 40.

57. [57] High price of bullion, Works, p. 280.

58. [58] Ibid., p. 265.

59. [59] Cf. Boase, A letter, 1804, pp. 22-23: "the rate of exchange is governed by the balance of exchange operations, and (great political convulsions apart) by no other principle whatever...."

60. [60] There was, therefore, substantial justification for the comment of William Blake, with reference to this doctrine of Wheatley and Ricardo, that "the opinions of these gentlemen are peculiar to themselves." (Observations on the effects produced by the expenditure of government, 1823, p. 26.) Cf., however, the following from the Minutes of evidence of the Committee on the Irish circulation, 1804, p. 22, cited with apparent approval by Lauderdale (Thoughts on the alarming state of the circulation, 1805, p. 20, note):

From August, 1801, to the present time, no remittances of consequence have...been made to London in specie. Bank [of Ireland] notes, however, have never ceased, whether the specie was coming into Ireland or going out of it, whether the exchange was under par or above par, whether the balance of debt was favorable or unfavorable, to be depreciated; and the depreciation appears to have been higher when the balance of debt was more favorable, and lower when it was less so; and, upon the whole, it is evident, that the depreciation has not been influenced by the balance of debt.

61. [61] See infra, pp. 140-41.

62. [62] Cf. Remarks on currency and commerce, 1803, pp. 52-57; An essay on the theory of money and principles of commerce, I (1807), 64-71; II (1822), 134-35; Report on the reports of the Bank committees, 1819, pp. 20-21.

63. [63] Bullion Report, p. 45.

64. [64] Cf. Ricardo to Malthus, Jan. 24, 1817, in Letters of Ricardo to Malthus, 1887, p. 127.

65. [65] Reply to Mr. Bosanquet's practical observations, Works, p. 360.

66. [66] Ibid., Works, p. 364. He here concedes, with the Bullion Committee, that "a considerable time" may be necessary for the effects fully to show themselves, but remarks that "we should once have thought a year a considerable time, when speaking of a discount on bank notes." Ibid., p. 363, note. (Italics in original.)

67. [67] High price of bullion, appendix to 4th ed., Works, p. 293.

68. [68] Cf. especially his testimony before the Parliamentary Committees of 1819:

Q. Assuming that the balance of payments should be against this country, must the payment not necessarily be made either in specie or in bullion?

A. (Ricardo) It appears to me, that the balance of payments is frequently the effect of the situation of our currency, and not the cause. (Report from the [Commons] Committee, 1819, p. 141. Italics mine.)

Q. Can you therefore conclude, from the degree to which the exchange is at any moment against any country, that the whole percentage of that unfavorable exchange is owing to the amount of its circulating medium?

A. (Ricardo) A part may be owing to other causes. (Report of [Lords] Committee on resumption of cash payments, 1819, p. 200.)

69. [69] Cf. Thornton, The paper credit of Great Britain, 1802, pp. 277-78:

It thus appears, that "the coming and going of gold" does not (as Mr. Locke expresses it,...) "depend wholly on the balance of trade." It depends on the quantity of circulating medium issued; or it depends, as I will allow, on the balance of trade, if that balance is admitted to depend on the quantity of circulating medium issued.

Silberling takes Hawtrey to task for characterizing the anti-bullionist position in this connection as erroneous. "Financial and monetary policy of Great Britain," loc. cit., p. 434, note. His statement that the extraordinary remittances were a "hitherto virtually ignored element in Great Britain's balance of indebtedness during the period involved" (Ibid., p. 226) is without basis, since their significance was a matter of endless debate, then and later.

70. [70] "Depreciation of the currency," Edinburgh review, XVII (1811), 360.

71. [71] See chap. vii, infra.

72. [72] Similar results were obtained by similar methods by an anonymous contemporary writer. From a chart presenting the foreign expenditures of the government, the amounts paid for imported grain, and the rates of the exchange on Hamburg, this writer derived the following conclusions:

The exchanges are affected by two great principles of political economy, namely, by the foreign expenditure, and by the amount paid for grain imported. When, therefore, the importation of grain, and the foreign expenditure have been great, the exchange has become unfavorable, and the latter has, vice versa, increased nearly in the same ratio as the two former have diminished. In the accompanying table it will be seen, that each protruding line of demarcation, specifying the variation of the exchange, has, with very trifling exceptions, a corresponding sinus in the two lines which designate the increase or diminution of the foreign expenditure and the amount paid for imported grain.—"Two tables...illustrative of the speeches of the...Earl of Liverpool and the...Chancellor of the Exchequer," in Pamphleteer, XV (1819), 286.

73. [73] Under a metallic currency the contraction of the currency takes the form, in part, of an actual export of specie, and this specie exercises a direct liquidating effect on foreign obligations which is absent in the case of a paper standard currency. To this extent, a greater currency contraction will be necessary under a paper than under a metallic standard to prevent exchange depreciation when foreign remittances of a given amount are to be made. See pp. 135-36, supra.

74. [74] Reply to Mr. Bosanquet's observations, Works, pp. 334-35.

75. [75] John Hill, An inquiry into the causes of the present high price of gold bullion in England, 1810, pp. 8-9.

76. [76] J. C. Herries, A review of the controversy respecting the high price of bullion, 1811, pp. 43-44.

77. [77] Cf. "Financial and monetary policy of Great Britain," Quarterly journal of economics, XXXVIII, p. 229, note: "We may conclude, however, that the adverse balance of military payments of itself caused no important readjustments in the volume of foreign commerce which might have compensated the rise of the exchange rates against England"; Ibid., pp. 433-34: "In the absence of data, the Committee resorted to hypothesis: if the foreign payments of the State had created marked deviations from exchange parities, this could be only a very temporary matter, since foreigners, attracted by low prices of sterling, would forthwith begin to buy British commodities and thus immediately expand British exports, with the result of readjusting the balance of payments. It happened that many erstwhile foreign buyers had other preoccupations at the moment."

78. [78] "Angell's theory of international prices," Journal of political economy, XXXIV (1926), pp. 603-06.

79. [79] Silberling, "Financial and monetary policy," Quarterly journal of economics, XXXVIII, 226; Angell, Theory of international prices, p. 478.

80. [80] Cf. on this point, the excellent analysis of the Argentine experience in J. H. Williams, Argentine international trade under inconvertible paper money, 1880-1900, 1920.

81. [81] Cf. e.g., Bosanquet, Practical observations, 2d ed., 1810, pp. 49-64; John Hill, An inquiry into the causes of the present high price of gold bullion, 1810, p. 36; Coutts Trotter, The principles of currency and exchanges, 2d ed., 1810, pp. 10 ff. In view of his subsequent prominence as an advocate of the "currency principle," it is of interest that Torrens at this period should have subscribed to the doctrine that it was impossible to issue even inconvertible paper money to excess if it were issued only upon discount of good mercantile bills. (R. Torrens, An essay on money and paper currency, 1812, p. 127.) James Mill also subscribed to this doctrine: see his review of Thomas Smith's, Essay on the theory of money, 1807, Edinburgh review, XIII (1808), 57-60.

82. [82] Cf. Wealth of nations, Cannan ed., II, 287.

83. [83] Report of the Lords Committee, 1797, p. 83.

84. [84] The paper credit of Great Britain, 1802, pp. 287-90.

85. [85] Thoughts on the effects of the Bank Restrictions, 2d ed., 1804, p. 22.

86. [86] E.g., J. L. Foster, Essay on the principle of commercial exchanges, 1804, p. 113; Report of the Bullion Committee, 1810, pp. 56-57; Dugald Stewart, in a memorandum to Lord Lauderdale, 1811, first published in his Collected Works, 1855, VIII, 444; McCulloch, review of Ricardo's Proposal for an economical and secure currency, Edinburgh review, XXXI (1818), 62.

The Bank of Ireland was compelled by law to discount at one per cent below the legal maximum rate of interest. Lauderdale in 1805 commented that: "By the restriction,..., unattended with the repeal of the clause compelling discount below the legal interest, the Bank [of Ireland] was obviously exposed to all the ordor of solicitation which must naturally attend the practice of discounting at an inferior rate of interest, whilst the check on the extent to which the indulgence might be carried was completely annihilated." (Thoughts on the alarming state of the circulation, 1805, pp. 23-24.)

87. [87] Substance of two speeches of Henry Thornton, Esq. On the Bullion Report, 1811, pp. 19-37.

88. [88] Ibid., pp. 20 ff. This contains the essence of Irving Fisher's theory of the influence of changing price levels on interest rates. Cf. his Appreciation and interest, Publications of the American Economic Association, XI (1896, No. 4).

89. [89] Cf. Reply to Mr. Bosanquet's practical observations, Works, p. 341.

90. [90] Three letters on the price of gold [1809], p. 11.

91. [91] Hansard, Parliamentary debates, Ist series, XL (May 24, 1819), 744. The doctrine of Hume and Smith to which he refers is apparently their denial that there is a close connection between the volume of money and the rate of interest (see supra, p. 89), a doctrine requiring qualification for the short run.

92. [92] Principles of political economy and taxation, 3d ed. [1821], in works, p. 220. This passage is unchanged from the first edition, 1817.

Earlier in the same paragraph Ricardo had argued that the market rate of interest was determined, not by the Bank rate of discount, but by the rate of profits which could be made by the employment of capital, which was totally independent of the quantity or of the value of money. "Whether a bank lent one million, ten million, or a hundred millions, they would not permanently after the market rate of interest; they would alter only the value of the money which they thus issued." (Italics not in original.)

93. [93] Cf., however, W. T. Comber, A view of the nature and operation of bank currency, 1817, p. 16: "These advances [of the Bank of England] did not depend, as many suppose, on the caprice of the Bank, but were regulated by the amount of cash payments on transactions, which would afford a profit to the borrower after paying an interest of five per cent to the Bank."

94. [94] Report of the Bullion Committee, 1810, Minutes of evidence, p. 129. Cf. also the testimony of Dorrien, Governor of the Bank, in 1819: "The demand for discount always proceeds from the wants of the public, and if the bank were to discount at a lower rate of interest than five per cent, in my opinion there would be no greater application than if it were to discount at the present rate." Report of [Commons] Committee, 1819, p. 145.

95. [95] Cf. Thomas Tooke, A history of prices, I (1838), 159: "...the market rate of interest for bills of the description which were alone discountable at the Bank ["good mercantile bills, not exceeding sixty-one days' date"], did not materially, or for any length of time together, exceed the rate of five per cent per annum."

Silberling, "British prices and business cycle," Review of economic statistics, preliminary volume V (1923), supplement 2, p. 241: "The Usury Laws fixed the maximum rate of interest and discount at five per cent, and contemporary literature indicates that this rate was, at least from 1790 to 1822, the prevailing and unvarying rate of discount throughout the country. Instead of varying their rates, the banks either granted or refused loans."

In evidence given in 1857 before a Parliamentary Committee, John Twells, a member of a London banking firm who had operated as a banker in London since 1801, stated that 5 per cent was the only rate charged by bankers during the Restriction and that no one ever thought of any other rate. (Evidence of John Twells...before the select committee, 1857, pp. 13-15.)

96. [96] Report from the select committee on the usury laws, 1818, p. 3. Cf. also Ricardo, On protection to agriculture [1822], Works, p. 474: "During the last war the market rate of interest for money was, for years together, fluctuating between 7 and 10 per cent; yet the Bank never lent at a rate above 5 per cent."

97. [97] Substance of two speeches, 1811, p. 20.

98. [98] David Prentice, Thoughts on the repeal of the Bank restriction law, 1811, p. 14. A later writer states that: "During the war it was very customary to make loans which were to be repaid by the transfer of a sum of stock, instead of money. This was done to secure to the capitalist the market rate of interest, which was then higher than he could have legally reserved in the deed." (James Maclaren, The effect of a small fall in the value of gold upon money, 1853, p. 12.)

99. [99] Report of Bullion Committee, 1810, p. 26.

100. [100] Ibid., pp. 22, 24; Minutes of evidence, p. 89. Cf. also Thornton, Paper credit. 1802, pp. 179, 294; A. W. Acworth, Financial reconstruction in England, 1815-1822, 1925, p. 146.

101. [101] There was some discussion as to the comparative susceptibilities to excess of issue through commercial discount and through loans to government. Some writers contended that there was no difference between the two, but most writers agreed that the latter was more susceptible to excess. Mathias Attwood presents an ingenious a priori argument in support of the greater tendency of advances to government to raise prices than of the same amount of commercial discounts, resting in effect on the greater velocity of circulation of the former (Letter to Lord Hamilton, 1823, pp. 50-56). But there are grounds for believing that during the Restriction period the advances to the government of the Bank of England had an unusually low velocity of circulation, because of the practice of the government of holding exceptionally large idle balances at the Bank of England. See infra, p. 169.

102. [102] Remarks on currency and commerce, 1803, pp. 209 ff.; Essay on the theory of money and principles of commerce, I (1807), 336 ff.

103. [103] Letter to Pitt, 1st ed., 1801, p. 20.

104. [104] Ibid.: "The circulation of country bank notes must necessarily be proportioned to the sums, in specie or Bank of England notes, requisite to discharge such of them as may be presented for payment; but the paper of the Bank of England has no such limitation."

105. [105] Letter to Pitt, 2d ed., pp. 19-20, note. Boyd seems to have thought that an increase in holdings of cash by individuals in the country was the only way in which pressure on the country bank reserves could occur. In an appendix to the second edition (pp. 42-43), Boyd prints a letter from an unnamed correspondent taking him to task for attaching insufficient weight to the country-bank notes, which, according to this letter, had probably increased in greater proportion than Bank of England notes.

106. [106] Hume had noted incidentally the applicability of his analysis to the relations between the different provinces of a single country. See supra, p. 84.

107. [107] Paper credit, 1802, pp. 216 ff. Thornton also argues here that if bank credit became more easily available in the country while remaining restricted in London, mercantile houses with banking connections both in the country and in London would shift some of their borrowing from London banks to country banks, would demand Bank of England notes in exchange for the country bank notes thus obtained, and would thereby impair the reserves of the country banks and force them to contract their issues.

108. [108] Ibid., p. 228.

109. [109] Review of Thornton, Paper credit, Edinburgh review, I (1802), p. 191.

110. [110] Thoughts on the effects of the Bank restrictions, 2d ed., 1804, pp. 101-11. King stated the argument, later to be stressed by the banking school, that country banks could not issue to excess because competition among the banks to issue their own notes would prevent any individual bank from expanding. See infra, pp. 238 ff.

111. [111] High price of bullion. 1810, Works, pp. 282 ff.

112. [112] Report, 1810, pp. 46, 67. The Bullion Committee nevertheless cited evidence tending to show that the reserve ratios of the country banks had fallen and that their note issues had therefore risen in greater proportion than the issues of the Bank of England, even after allowance for changes in the areas of hand-to-hand circulation of the two currencies. (Ibid., pp. 68-71.) They also reached the erroneous conclusion that if country banks increased their note issues proportionately with the increase in Bank of England notes, "the excess of Bank of England paper will produce its effect upon prices not merely in the ratio of its own increase, but in a much higher proportion." (Ibid., p. 68.)

113. [113] "Review of the controversy respecting the high price of bullion," Edinburgh review, XVIII (1811), 457-58.

114. [114] Cf. Coutts Trotter, Principles of currency and exchanges, 2d ed., 1810, pp. 22-23.

115. [115] Cf. Bosanquet, Practical observations, pp. 76 ff; Vansittart, Substance of two speeches, 1811, pp. 52-55. Bosanquet claimed that if prices rose in London as the result of increased issues by the Bank of England and its notes therefore flowed to the country, this might result in a contraction, but could never cause an augmentation, of the country bank note circulation, presumably on the ground that the Bank of England notes would necessarily displace country bank notes rather than supplement them.

116. [116] "Financial and monetary policy, " loc. Cit., p. 419. Cf. Henry Burgess, A letter to the Right Hon. George Canning, 1826, p. 28: "The theory of the [Bullion] Committee...about an excess of country bank notes causing a local rise in prices and sending all people to London, to buy cheap commodities, seems to me equally luminous...Who that had a correct notion of the working of the currency, would think of sending people from a distance in the country to London, to buy corn, cattle, cheese, wool, bacon, coal, lead, iron, etc. by an excess of country bank notes, as compared with Bank of England notes." Cf. also John Ashton Yates, Essays on currency and circulation, 1827, p. 37: "The local rise of prices in consequence of an increased issue of country bank notes must be enormous in order to bring corn or iron from London to Glamorganshire or Staffordshire..."

117. [117] Cf. also the answer of George Woods: "For as commodities are cheaper where the excess has not taken place than where it has, so will they be taken to that part where a higher price can be obtained. If it be said that many goods, such as those from the East Indies, can be purchased only in London, I reply: the price of luxuries is dependent upon that of necessaries." (Observations on the present price of bullion, 1811, p. 21.)

118. [118] Silberling, "financial and monetary policy," p. 408; Angell, Theory of international prices, p. 46

119. [119] Thornton was not unaware of the issue, but he failed to meet it satisfactorily. Cf. Paper credit, 1802, pp. 219 ff.

120. [120] See supra, p. 154.

121. [121] Reply to Mr. Bosanquet's observations, Works, p. 352.

122. [122] T. Joplin, Outlines of a system of political economy, 1823, p. 259.

123. [123] "Financial and monetary policy," loc. cit., p. 399.

124. [124] Cf. Joseph Lowe, The present state of England in regard to agriculture, trade, and finance, 2d ed., 1823, appendix, p. 20.

125. [125] Bullion Report: Minutes of evidence, pp. 171-72.

126. [126] "Financial and monetary policy," loc. cit., p. 426.

127. [127] Cf. Daniel Beaumont Payne, An address to the proprietors of bank stock [1816], in pamphleteer, VII (1816), 381: "Mr. Allardyce appears to have accurately understood, that 'it is the first and almost only duty of the court of directors, to promote the interest of the proprietors by all lawful ways and means.'"

128. [128] The Bank of England did not ordinarily report its profits even to its shareholders. But in 1797 the Bank was paying a dividend of 7 per cent on its capital stock. This was maintained until 1807, when it was increased to 10 per cent. In addition, six extra dividends or "bonuses" in government stocks or cash averaging over 5½ per cent were paid from 1799 to 1806, a stock dividend of 25 per cent was paid in 1816, and the Bank's premises were enlarged out of profits during the Restriction period. The average price of bank stock rose from 133½ in 1777 and 127½ in the crisis year, 1797, to 280 in 1809. (Mushet, Effects produced on the national currency, 3d ed., 1811, pp. 68-69; J. R. McCulloch, Historical sketch of the Bank of England, 1831, p. 75.)

129. [129] To the extent that there was competition for issue between the country banks and the Bank of England, it was mainly regional competition. The two currencies circulated side by side only to a very limited extent, and when a note-issuing country bank was established in a new district, Bank of England notes would ordinarily not continue to circulate freely there. If as country banks extended the area of circulation of their notes the Bank of England maintained its issue, there would tend to result an increase of Bank of England note circulation within the area of circulation remaining to it. Cf. Lord King, Thoughts on the effects of the Bank restrictions, 2d ed., 1804, pp. 102-5.

130. [130] "Financial and monetary policy," loc. cit., p. 420, note; "British prices and business cycles," loc. cit., p. 243. If bank notes are rejected as a suitable measure of the "accommodation" granted by the Bank of England, they should be rejected also for the country banks.

131. [131] Theory of international prices, p. 486.

132. [132] The country banks would always have to keep on hand some of their notes as till money or awaiting the possibility of their issue. The notes of banks which failed or suspended payments or for other reasons ceased to issue would be withdrawn before three years from the date of their original issue had elapsed. There were still other obstacles to making reliable estimates of the country bank note circulation from the statistics of stamp sales. Cf. the testimony of J. Sedgwick, Chairman of the Board of Stamps, Report by the Lords Committee [on] resumption of cash payments, 1819, appendix F, 7, pp. 408-15.

133. [133] The following data for quarters chosen at random show adequately the nature of Silberling's series:

(1)
First quarter
(2)
Number of £1 notes stamped during quartera
(3)
Number of £5 notes stamped during quartera
(4)
Total value of £1 and £5 notes stamped during quarterb
(5)
Silberling's series, millions of £c
1811... 472,075 122,399 £1,084,070 10.8
1814... 946,174 137,712   1,634,734 16.4
1818... 954,268 217,383   2,041,183 20.4
a Report of [Commons] Committes on resumption of cash payments, 1819, appendix 32, p. 330.
b Column 2 + (5 × column 3).
c Silberling, "British prices and business cycles," loc. cit., p. 258.

134. [134] "British prices and business cycles," loc. cit., pp. 242-43.

135. [135] Cf. Tooke, A history of prices, II (1838), 130-31.

136. [136] Silberling, "Financial and monetary policy," loc. cit., p. 420, note.

137. [137] Officers of the Bank testified before the Commons Committee of 1819 that when the advances to the government were large, the demand for commercial discounts was generally small. (Reports from the Secret Committee on the expediency of the Bank resuming cash payments, 1819, pp. 27, 143.)

138. [138] "Financial and monetary policy," loc. cit., pp. 425-27.

139. [139] Cf. Chancellor of the Exchequer Vansittart, Hansard, Parliamentary debates, 1st series, XXIV (Dec. 8, 1812), 230: "the enormous profits of the Bank had also been dwelt upon: to this he would bear testimony, that the Bank was an unwilling party to those measures whence the profits accrued, and which were forced upon it by the government of the country."

140. [140] Theory of international prices, p. 486.

141. [141] Some of the increase in "commercial discounts" may have been in rediscounts for London bankers, and some of it consisted undoubtedly of advances to subscribers to new issues of government stock, rather than of commercial discounts proper.

142. [142] Cf. Angell, Theory of international prices, p. 498, col. 15. Angell comments that "these percentages are on the whole surprisingly low" (Ibid., p. 502) but does not indicate what his criterion of "lowness" is.

143. [143] Cf. the statistics of public and private securities held by the Bank, given in the Report on the Bank of England charter, 1832, appendix no. 5, pp. 13-25.

144. [144] Cf. ibid., appendix no. 24, p. 35; appendix no. 5, pp. 13 ff.

145. [145] Ibid., appendix no. 32, p. 41; appendix no. 5, pp. 13 ff.

146. [146] Theory of international prices, p. 484. Angell says, in this connection, that "contrary to the opinion of most contemporary writers, neither the specie premium nor the rise in the foreign exchanges were correct measures of the depreciation, if this last be measured by commodity prices. Both were much too low." Since the bullionists did not in fact measure depreciation by the trend of English commodity prices, and the anti-bullionists either denied its existence or claimed that the premium on bullion and the fall in the exchanges exaggerated the extent of the depreciation, this passage is not easy to understand.

147. [147] Although Silberling's index number is a valuable contribution, it would not be satisfactory for this purpose even if a comparable Continental index number were available. Of the 35 commodities from whose prices the index is computed, only 11 are classed by Silberling as British commodities—including copper plates (or cakes or sheets) and tin blocks, essentially import commodities?—and none of these is a substantially fabricated commodity. ("British prices and business cycles," loc. cit., p. 299.) For such comparisons, it is the relative trends of the prices of "domestic commodities" which are most significant. See infra, p. 385.

148. [148] Silberling's emphasis on the desirability of inflation under the then existing circumstances makes it hard to explain his anxiety to free the Bank of England from the charge that it was mainly responsible for bringing it about.

Chapter IV

1. [1] The government had used this expedient to alleviate a credit stringency at least twice before, in 1782 and 1792.

2. [2] For more detailed accounts, see A. E. Feavearyear, The pound sterling: a history of English money, 1931, chap. ix; A. W. Acworth, Financial reconstruction in England 1815-1822, 1925, chap. vi.

3. [3] Thomas Attwood in particular protested vigorously against the casual manner in which what he regarded as the main question, i.e., whether there should be a metallic standard, and if so at what par, was answered by the Committees, and he predicted that the deflation necessary if return was made to the old par would not be as easily borne as the Committees supposed. "It is extraordinary," he exclaimed, "...to observe the coolness with which the Committees speak about the Bank of England, and country bankers, having sufficient time 'to call in their accommodations.'...'To call in accommodations,' may be sport to them, and to the bankers, but it is death to the public. I wish that the Committees were to spend twelve months in a banking house, during the period of a general 'calling in of accommodations.' They would get more knowledge of human life, and of its ways and means, in that short period, than is to be learnt in all the books that ever were written from the beginning of the world." He pointed out that general liquidation was a much more serious proposition than liquidation by a single bank. (A letter to the Earl of Liverpool, on the reports of the committees, 1819, pp. 34 ff. Cf. also ibid., A second letter...on the bank reports, 1819.)

4. [4] In testimony before the Commons Committee, March 4, 1819, 5 to 6 per cent (Reports from the Secret Committee on the expediency of the Bank resuming cash payments, 1819, p. 137; in testimony before the Lords Committee, March 26, 1819, 8 per cent (Reports respecting the Bank of England resuming cash payments, 1819, p. 202); in the House of Commons, May 24, 1819, 3 per cent (Hansard, Parliamentary debates, 1st series, XI., 743).

5. [5] Hansard, Parliamentary debates, 2d series, VII (June 12, 1822), 939 ff.

6. [6] On protection to agriculture [1822], Works, p. 470.

7. [7] Cf. Ricardo to Malthus, July 9, 1821: "Almost the whole of the pressure has arisen from the increased value which their [i.e., the Bank's] operations have given to the standard itself." Letters of Ricardo to Malthus, p. 185.

8. [8] Feavearyear's statement that "all the best-known writers of the nineteenth century praised the settlement of 1819 by which, after the currency inflation of the Napoleonic period, the old standard was restored" (The pound sterling, p. (137), if true at all, is true only for the second half of the century.

9. [9] Cf. Mathias Attwood, Letter to Lord Hamilton on alterations in the value of money, 1823, p. 26: "The discussion of 1811 turned wholly on the question, whether any depreciation of money did or did not exist? The discussion of the present day is as to what was the extent of that depreciation."

10. [10] Cf. e.g., William Ward, Remarks on the commercial legislation of 1846, as cited in The currency question, 2d ed. (1847?), p. 20: "Now Mr. Ricardo lived to change this opinion, and shortly before he died expressed that he had done so; the late Sir W. Heygate was with him, and he said, 'Ay, Heygate, you and the few others who opposed us on the cash payments have proved right. I said that the difference at most would be only five per cent, and you said that at the least it would be twentyfive per cent.'" Cf. also Sir James Graham, Corn and currency, 4th ed., 1827, p. 39.

11. [11] It appears, therefore, that in the following passage, Porter goes too far in his denial of any change in Ricardo's opinion as to the effect of the resumption on prices: "...Mr. David Ricardo has been repeatedly held up as having recanted the opinion expressed by him, that the fall in prices to be brought about by returning to a metallic standard would be no more than the difference between the market and the mint prices of gold, which at the passing of Mr. Peel's Bill did not exceed 4 per cent. There is, in truth, no warrant whatever for this assertion, which, like many other figments, has been repeated until it has acquired the authority of truth." (George R. Porter, Progress of the nation, 1851 ed., p. 418.)

12. [12] Cf. Ricardo, in Hansard, Parliamentary debates, 2d series, VII (June 12, 1822), 944: "...his plan had not been adopted, and yet to it was referred the consequences which were distinct from it..."

13. [13] Cf. ibid., 945: "...to Mr. Peel's bill could only be imputed the alteration which had taken place in the currency between 1819 and the present period."

14. [14] Cf. Ricardo, On protection to agriculture [1822], Works, p. 467: "I believe it will be found, that many of those who contended, during the war, that our money was not depreciated at all, now endeavor to show that the depreciation was then enormous, and that all the distresses which we are now suffering have arisen from restoring our currency from a depreciated state to par." Cf. also Huskisson, in the House of Commons, Feb. 15, 1822 (Hansard, Parliamentary debates, 2d series, VI, 428): "...it is rather curious that the new converts, those who stoutly denied depreciation when it most glaringly existed, should now be the most strenuous to exaggerate the extent to which it was then carried."

15. [15] Ricardo's first suggestion of this plan was made in 1811. (High price of bullion, appendix to 4th ed., 1811, Works, pp. 300-01.) He developed it further in Proposals for an economical and secure currency, 1816, and advocated it before the Parliamentary Committees of 1819. On the history of the plan, see James Bonar, "Ricardo's Ingot Plan," Economic journal, XXXIII (1923), 281-304, and A. W. Acworth, Financial reconstruction in England 1815-1822, 1925, chap. vii.

16. [16] On protection to agriculture [1822], Works, p. 468. In February, 1819, the Bank held £4,200,000 of bullion; in August, 1819, £3,600,000. By February, 1821, the Bank had increased its bullion holdings to £11,900,000. (Report...on the Bank of England charter, 1832, appendix no. 5, pp. 13 ff.) In August, 1822, the bullion holdings of the Bank had fallen to £10,100,000. The Bank had meanwhile been using the permission granted to it in 1821 to pay out coin instead of bullion for notes, and had been actively withdrawing its small notes from circulation. Of the gold so paid out a large part, therefore, must have gone into English circulation in substitution for the canceled paper, and was thus withdrawn from the world supply. Ricardo in 1819 had advised the Bank not to buy bullion, but boldly to sell.—Hansard, Parliamentary debates, 2d series, VII (1822), 939.

17. [17] Cf. Ricardo to Malthus, July 9, 1821: "I very much regret that in the great change we have made from an unregulated currency to one regulated by a fixed standard we had not more able men to manage it than the present Bank directors. If their object had been to make the revulsion as oppressive as possible, they could not have pursued measures more calculated to make it so than those which they have actually pursued....They are indeed a very ignorant set." Letters of Ricardo to M, pp.184-85.

18. [18] Cf. the testimony of William Ward, Report...on the Bank of England charter, 1832, Minutes of evidence, p. 143.

19. [19] Cf. the comment of "A country banker" in a letter printed in James Wilson, Capital, currency, and banking, 1845, p. 276:

When the ingot plan was put in practice, it became a dead letter, and for this plain and wholesome reason: the Bank of England had by contraction of her issues, raised the value of her paper to a par with gold, and the balance of trade being in our favor with foreign countries, not an ounce of gold was called for. Such, no doubt, would be the action of the ingot plan, were it now adopted; a dead letter when the exchanges were in our favor, and an effectual means of supplying gold when they came against us.

20. [20] Cf. Erick Bollmann, A letter to Thomas Brand, Esq., on the practicability and propriety of a resumption of specie payments, 1819: "A specie bank, in a country destitute of a specie capital, seems to me a glaring misconception, falling little short of a downright absurdity" (p. 54). "To render the resumption of specie payments practicable and safe, the country must first be replaced in the situation in which it was previously to 1797; that is, it must be re-stocked with specie..." (p. 57). Cf. also, anon., Observations on the reports of the committees, 1819, pp. 49-50.

21. [21] Samuel Turner, Considerations upon the agriculture, commerce, and manufactures of the British Empire, 1822, p. 51. Cf. also, to the same effect, Thomas Tooke, History of prices, II (1838), 108. In an earlier publication, Turner had argued that there was no way in which the Bank could replenish its then depleted gold reserves except by purchase of gold at the market price with new issues of paper, thus further raising the premium on gold. (Samuel Turner, A letter...with reference to the expediency of the resumption of cash payments, 2d ed., 1819. p. 76.)

22. [22] Early in 1822 the Bank resisted pressure from the government to reduce its discount rate. Turner denied that the Bank in refusing to lower its discount rate below its traditional level of 5 per cent was promoting deflation. The fact that the market rate at the time was only 4 per cent proved, he thought, that there was no shortage of circulating medium. (Considerations, p. 52) Ricardo also held that the Bank was not to be criticized for not lowering its discount rate. Ricardo apparently thought that open market operations in public securities were the proper means of regulating the amount of the Bank's note circulation. (See infra, p. 258.) The Bank rate of discount, he claimed, should always be kept equal with the market rate, and he apparently did not believe that a deviation of the Bank rate from the market rate, or of the Bank of England rate from that of the Banque de France, could affect the volume of circulation, the price level, or the international movement of gold. (Protection to agriculture [1822], Works, p. 474.) On June 20, 1822, however, the Bank finally gave way to parliamentary pressure and lowered its rate to 4 per cent, the first change in its rate since 1773.

23. [23] Letter to Lord Hamilton, 1823, p. 41.

24. [24] Cf. Hansard, Parliamentary debates, Ist series, XL (May 24, 1819), 687 ff.

25. [25] This was temporarily repealed in 1822, and finally reenacted in 1826, to take full effect in 1829.

26. [26] Cf. T. Joplin, An analysis and history of the currency question, 1832, p. 65: "Its existence had been forgotten, and was as unknown to the Ministers as to any other party. This is the only interpretation of the transaction...that can be given to it."

27. [27] Cf. the memorandum of Huskisson to Lord Liverpool, Feb. 4, 1819, in C. D. Yonge, The life and administration of Robert Banks, second carl of Liverpool, 1868, II, 382-83.

28. [28] Letter to Lord Hamilton, 1823, p. 36.

29. [29] Cf. Tooke, History of prices, II (1838), 131-43; McCulloch, Historical sketch of the Bank of England, 1831, pp. 26-27.

30. [30] George Woods, Observations on the present price of bullion, 1811, p. 9. Cf. also, David Prentice, Thoughts on the repeal of the Bank restriction law, 1811, p. 50.

31. [31] Thomas Paget, A letter...to David Ricardo...on the true principle of estimating the extent of the late depreciation in the currency, 1822, p. 12.

32. [32] Cf.Malthus, The measure of value stated and illustrated, 1823, pp. 67-68:

This rise...in the value of the currency has been by no means so considerable as those are inclined to make it, who would measure it by the fall of agricultural produce; nor is it so inconsiderable as those imagine who would measure it solely by the difference between paper and gold. But whether this difference is the whole of what can be fairly attributed to the Bank Restriction and the return to cash payments, or not, it may by no means be the whole change which has taken place in the value of he currency, when compared with an object which has not changed.

33. [33] "The Bank having the power to issue paper unchecked could certainly mitigate the inconvenience resulting from a sudden fall [of prices].... When the Bank was unchecked, they had the power of arresting that reduction [of prices]; an advantage counterbalanced by other disadvantages." (Lords Committee, Report, 1819, p. 204.)

34. [34] Prosperity Restored, 1817, pp. 78-79. Italics in the original.

35. [35] Thomas Attwood, Observations on currency, population, and panperism, 1818, p. 10.

36. [36] John Wheatley, A Letter...on the distress of the country, 1816, p. 16. Cf. also: C.C. Western, A letter...on the cause of our present embarrasment [sic] and distress, and the remedy, in Pamphleteer, XXVII (1826), 228-229; G. Poulett Scrope, The currency question freed from mystery, 1830, p. 2; ibid., On credit-currency, and its superiority to coin, 1830, pp. 20 ff. Malthus (Principles of political economy, 1820, pp. 446-47) appears also to attribute the decline of production resulting from a fall in prices to the lag of wages behind prices and the consequent destruction of the incentive to investment, but his analysis is much inferior to Thomas Attwood's.

37. [37] An elaborate exposition of the doctrine of forced saving is to be found in a book published in 1786 by one of the minor French physiocrats, Saint Peravy. Unlike most of the English writers, Saint Peravy expounds the doctrine in terms of an expansion of a metallic currency. When an increased amount of money first enters into the circulation, it raises the prices of products without immediately raising contract rents, wages, etc. Producers, therefore, have an extra profit, which they invest in an increase in production, but the general public suffers temporarily a corresponding diminution of real income. Saint Peravy regards the increased investment as a desirable phenomenon, but he asserts that unless other countries experience an equal increase in their stock of currency, their competition will prevent a rise in prices, which must be equal in all countries. Guérineau de Saint Peravy, Principes du commerce opposé au trafic, Ire partie, 1786, pp. 80-83.

38. [38] Cf. supra, pp. 37-38.

39. [39] F. A. von Hayek, "A note on the development of the doctrine of 'forced saving,'" Quarterly journal of economics, XLVII (1932), 123-33.

40. [40] Paper credit, 1802, p. 263.

41. [41] An abstract of his forced-saving doctrine is presented in Bentham, The rationale of reward, 1825, pp. 312-13.

42. [42] Manual of political economy, in The works of Jeremy Bentham, John Bowring ed., 1843, III, 44 ff. Bentham here surely exaggerates the importance of the identity of the hands into which the money first flows.

43. [43] Hayek's citations are: Malthus, "Depreciation of paper currency," Edinburgh review, XVII (1811), 363 ff. Stewart, in a memorandum on the Bullion Report sent to Lord Lauderdale in 1811, but first published in The collected works of Dugald Stewart, 1856, VIII, 440 ff.; Lauderdale, in a letter to Dugald Stewart which is quoted in the preceding reference; Torrens, An essay on the production of wealth, 1821, pp. 326 ff.; Ricardo, High price of bullion, appendix to 4th ed. [1811], Works, p. 299, and ibid., Principles of political economy, 3d ed., Works, p. 160.

44. [44] Torrens, Essay on money and paper currency, 1812, pp. 34 ff.; Malthus, review of Tooke, Quarterly review, XXIX (1823), 239; Lauderdale, Further considerations on the state of the currency, 1813, pp. 96-97; Ricardo, see infra, pp. 195 ff.

45. [45] John Rooke, A supplement to the remarks on the nature and operation of money, 1819, pp. 68-69; Tooke, Considerations on the state of the currency, 2d ed., 1826, pp. 23-24; Joplin, see infra, pp. 190 ff.

46. [46] Cf. T. P. Thompson, "On the instrument of exchange," Westminster review, I (1824), 200; Henry Burgess, A letter to the Right Honorable George Canning, 1826, pp. 79-82; G.Poulett Scrope, On credit-currency and its superiority to coin, 1830, p. 31. Wheatley, in 1803, had denied that an increase in the quantity of money could bring about an increase in production, since this could occur only if it took more time to increase commodity prices than to increase production, which was not the case. (Remarks on currency and commerce, 1803, pp. 19 ff.) The answer, of course, is that it takes, or may take, more time for prices to increase sufficiently to absorb all of the increase in the quantity of money than for some increase of production to be initiated.

47. [47] Prices and production, 1931, p. 20.

48. [48] Ibid., pp. 15-16.

49. [49] An illustration of Mr. Joplin's views on currency, 1825, p.28. Joplin reprints this passage from a letter to the Courier of Aug. 23, 1823. He restates the doctrine in his Views on the subject of corn and currency, 1826, pp. 35. ff., and again in his Views on the currency, 1828, p. 146, where he expressly distinguishes between "forted economy" and "voluntary economy."

50. [50] Views on the subject of corn and currency, 1826, pp. 36-37. Cf also An illustration of Mr. Joplin's views, 1825, pp. 28-29, 37. Bentham had also treated forced saving as an undesirable result of changes in the quantity of money: "national wealth is increased at the expense of national comfort and national justice." (Works, III, 45.) Cf. also the citation from Thornton, supra, p.188.

51. [51] Views on the subject of corn and currency, 1826, p.35.

52. [52] An illustration of Mr. Japlin's views, 1825, pp. 28-29, 37.

53. [53] Views on the subject of corn and currency, 1826, p. 37.

54. [54] Ibid., pp. 63 ff.

The objection to forced saving which in his own discussions of the phenomenon Hayek emphasizes so strongly, namely, that it results in a distortion of the capital structure of the country and thus in an eventual loss of the added investment, was not raised in the early literature, although somewhat later James Wilson seems to have in part anticipated Hayek's doctrine to some extent. (Capital, currency, and banking, 1847, pp. 147 ff.) But the early writers were dealing with a deflation-depression, marked by unemployed resources and by underinvestment rather than overinvestment, and under such circumstances there is no a priori reason for expecting the added investment resulting from forced saving to prove wasteful in the long run. There seems to underlie the contrary doctrine the tacit assumption that while much which goes on during a boom is highly irrational even from the individualistic point of view, all that individuals do of their own accord during a depression is sensible and proper. But if one accepts instead what seems to be the sufficiently plausible assumption that the behavior of mankind is as likely to be irrational during depression as during prosperity, and that overinvestment is the outstanding manifestation of this irrationality during the boom and underinvestment during the depression, then forced saving (in so far as the manner of bringing it about does not induce voluntary savers to retrain from investment) is as much indicated as a corrective measure during a depression as would be currency contraction, or its equivalent, forced hoarding, during a boom.

55. [55] Manual of political economy, Works, III, 44.

56. [56] Lord Lauderdale, Sketch of a petition to the Commons House of Parliament, 1822, pp. 5-7. Lauderdale was afraid of underconsumption. Writing in 1798, he had already attacked the sinking-fund on similar grounds. If the government financed its military expenses by borrowing from the Bank of England, this resulted in an increase of circulation. Taxes on income to liquidate these loans reduced the demand for bank notes by cutting down private expenditures. Since "all encouragement to reproduction depends on demand" and "demand can alone be created by expenditure," he concluded that "funding is the best and most prudent means of defraying the extended expenses of modern warfare." (A letter on the present measures of finance, 1798, pp. 18-24.)

57. [57] Cf. his "Protest," Journals of the House of Lords, LII (Dec. 17, 1819), pp. 961-62.

58. [58] Observations on the effects produced by the expenditure of government, 1823, pp. 60-67, 88.

59. [59] Remarks on the nature and operation of money, 1819, pp. 37-38. Cf. also pp. 58-59: "There is never any fear that the people will not have any inclination to save; the greatest difficulty is to get men to spend unnecessarily."

60. [60] Review of Blake's Observations, Westminster review, II (1824), 39.

This identification of saving with investment by the saver, involving a denial either of the possibility or of the possible importance of hoarding, was common among the classical economists. Cf. Ricardo, Notes on Malthus [1820], p. 231: "I know no other way of saving, but saving from unproductive expenditure to add to productive expenditure"; ibid., p. 245; "Mr. Malthus never appears to remember that to save is to spend, as surely, as what he exclusively calls spending." Cf. also "Mr. Owen's plans for relieving the national distress," Edinburgh review, XXXII (1819), 473: "With the exception of a few insane misers who hoard their treasures, all persons are desirous of consuming whatever wealth they can command, either productively with a view to improving their condition, or else unproductively with a view to immediate enjoyment." (Ricardo believed that Torrens was the author of this article—cf. Letters of Ricardo to...Trower, p. 108—but it was more probably written by McCulloch). Cf. also John Craig's objection to Lauderdale's argument that the postwar depression was due to a decrease in demand resulting from the cessation of government spending in excess of its revenue: "...circulating capital is annually consumed as regularly as income, though by a different set of people; capital by hired workmen, the produce of whose labor restores it, with a profit, to its proprietor; income by the proprietor himself, without any kind of reproduction, for his own gratification. No new demand therefore arises from changing capital into income, but merely an alternation of the persons by whom it is consumed, together with this material difference, that there is no longer any new production in consequence of that consumption." (Remarks on some fundamental doctrines in political economy, 1821, p. 214.) "...our own profuse expenditure during the war,...never, in any possible circumstances, can be the parent of even a temporary semblance of national prosperity." (Ibid., p. 219)

Malthus attributed the depression, apparently, to an increase in saving unaccompanied by a corresponding increase in investment, and thought that, given the absence of sufficient incentive for investment under prevailing conditions, the remedy was to be found in increased private expenditures on consumption. (Principles of political economy, 1820, 463 ff.) It seems much more probable, however, that the amount of saving was less—rather than greater—during the depression than during the prosperous war years, but that the decline in ability to save in the post-war years was associated with an even greater decline in willingness to invest such savings as were made.

The only member of the Ricardian school I have found who gave any attention to the fact that saving might have other motives than securing interest on current investment, and who showed some recognition that the "transmutation of savings into capital" was not an automatic and certain process was William Ellis.—"Employment of machinery," Westminster review, V (1826), 106 ff.

61. [61] Cf. John Ashton Yates, Essays on currency and circulation, 1827, p. 28: "...the bankers who issue the paper not only lend the real capitals which are deposited with them, but they lend their own credit...."

62. [62] Mill, Westminster review, II (1824), 43.

63. [63] Cf. Thomas Attwood, A letter...on the creation of money, 1817, p. 13:

"The contractive action then [i.e., 1810] commenced, and ever since then, until the present period, in a greater or less degree, there has been a greater profit in locking up money in a chest, than in any possible way in which human knowledge, care, and industry could have employed it." Cf. also C. C. Western, A letter...on the cause of our present embarrassment [sic] and distress, in Pamphleteer, XXVII (1826), 228-29.

64. [64] Ricardo appears to have seen, and taken issue with, Bentham's Manual of political economy before it reached the printed stage. Cf. the statement of the Due de Broglie to Senior: "I remember a conversation at Coppet, which lasted for one or two days, between Ricardo and Dumoht, as to Bentham's political economy. Dumont produced many manuscripts of Bentham's on that subject. There were few of his doctrines to which Ricardo did not object, and, as it seemed to me, victoriously." (N. W. Senior, Conversations with M. Thiers, 1878, II, 176.)

65. [65] High price of bullion, appendix to 4th ed. [1811], Works, p. 299. Cf. also, ibid., Notes on Malthus [1820], pp. 212-16. To the extent that this occurred, there would be no net increase in investment as the result of currency expansion. This argument, however, could scarcely be applied to wage earners, who could be assumed to spend the bulk of their earnings whatever their level might be.

66. [66] Lords Committee, Report, 1819, pp. 192-93.

67. [67] The first Earl of Liverpool had applied this term merely to signify paper money in his Treatise on the coins of the realm [1805], 1880 reprint, p. 255, and Huskisson had quoted him in this sense, substituting "factitious," however, for "fictitious," in 1811. (Hansard, Parliamentary debates, 1st series, XIX, 731.) But Lauderdale had used the term in his letter to Dugald Stewart in 1811, and again in his Further considerations on the state of the currency, 1813, with reference to the phenomenon of forced saving: "It has been argued, and hitherto the reasoning has remained incontroverted, that an excess of paper produces its injurious effects on the exchange with foreign countries and in increasing the value of commodities, not by its operation of circulating medium, but by creating a mass of fictitious capital." (Further considerations, p. 96.) Since Lauderdale was a member of the Lords Committee of 1819, he may have been the person who put the question to Ricardo.

68. [68] Lords Committee, Report, 1819, pp. 198-99.

69. [69] Cf. John Rooke, A supplement, 1819, p. 15: "Neither Mr. Wheatley, nor Mr. Ricardo, appears to have had any conception of the effects produced upon public wealth by an expending, or a contracting currency." Wheatley's later writings must have been unknown to Rooke.

70. [70] Ricardo, Principles of political economy, 3d ed., Works, p. 160. Malthus asked Ricardo to specify the industries offering unused opportunities for the profitable investment of capital. (Malthus, Principles of political economy, 1800, pp.333-34.)

71. [71] Review of Tooke, Quarterly review, XXIX (1823), 232, note.

72. [72] J. M. Keynes, however, finds Malthus's doctrines on these matters entitled to less qualified praise. Cf. "Commemoration of Thomas Robert Malthus," Economic journal, XLV (1935), 233: "A hundred years were to pass before there would be anyone to read with even a shadow of sympathy and understanding his powerful and unanswerable attacks on the great Ricardo. So Malthus' name has been immortalized by his Principle of Population, and the brilliant intuitions of his more far-reaching Principle of Effective Demand have been forgotten."

73. [73] Mathias Attwood, Letter to Lord Archibald Hamilton, 1803, pp. 48-49. Attwood clearly means, by scarcity of goods, scarcity relative to demand at the hitherto prevailing price; not reduction of output. He has been arguing that an increase in the quantity of money will increase output, not decrease it.

74. [74] Thomas Attwood, The Scotch banker, 2d ed., 1832, pp. 70-71. (Except for a different title-page, the second edition is identical with the first edition of 1828.) Cf. also ibid., A letter...on the creation of money, 1817, pp. 18 ff., where he incidentally makes the modern distinction between transaction velocity and income velocity of money, estimating roughly the former at 50 and the latter at 4 per annum. For a sympathetic account of Thomas Attwood's doctrines, see R. G. Hawtrey, Trade and credit, 1928, pp. 65-71.

75. [75] Cf. Proposals for an economical and secure currency [1816], Works, p. 400.

76. [76] Cf. Reply to Mr. Bosanquet's observations [1811], Works, p. 326; Proposals for an economical and secure currency [1816], Works, p. 403.

To the argument that departure from the metallic standard involved injustice to bondholders, Thomas Attwood later replied that when bondholders lent their money, they knew that their debts were in terms of pounds sterling, whose metallic content had been altered in the past and was liable to alteration in the future. If they wanted to make certain that they would be repaid the same amount of bullion as they had lent, they should have stipulated "in a special contract, that their debts and dividends should be paid in so many ounces of silver or of gold, and not in the variable medium of the pound sterling. They never thought of such a contract as this, but were content to advance their money in the usual way, taking a large interest, and generally a large premium, as a consideration for the depreciation of money which they naturally saw was in progress." (Observations on currency, population, and pauperism, 1818, pp. 178-79.) This is, of course, specious reasoning. The absence of such stipulations in contracts was due, not to a consious assumption of risk of alteration of the standard, but to the absence of recognition that there was any risk of such an alteration. In earlier centuries, when the risk had been apparent, such stipulations, akin to the modern "gold clauses," had been at least occasionally introduced into contracts.

77. [77] "Financial and monetary policy," Quarterly journal of economics, XXXVIII, 424.

78. [78] High price of bullion, Works, p. 270, note.

79. [79] Cf. Ricardo to Horner, Feb. 5, 1810, Minor papers on currency, p. 40;Ricardo to McCulloch, March 25, 1823, Letters of Ricardo to McCulloch, p.146. Ricardo thought that "whether in point of fact gold really rose or paper really fell, there is no criterion by which this can positively be ascertained." (Ibid) Cf. also Hansard, Parliamentary debates, new series, VII (June 12, 1822), 947.

80. [80] "This admission only proves that gold and silver are not so good a standard as they have been hitherto supposed,—that they are themselves subject to greater variations than it is desirable a standard should be subject to. They are, however, the best with which we are acquainted." (Proposals for an economical and secure currency [1816], Works, p. 402.)

"The bullionists, and I among the number, considered gold and silver as less variable commodities than they really are, and the effect of war on the prices of these metals were [sic] certainly very much underrated by them. The fall in the price of bullion on the peace in 1814, and its rise again on the renewal of the war on Bonaparte's entry into Paris are remarkable facts, and should never be neglected in any future discussion on this subject. But granting all this it does not affect the theory of the bullionists." Ricardo to Trower, Dec. 25, 1815, Letters of David Ricardo to Hutches Trower and others, 1899, p. 12 Cf. similarly, Francis Horner, in a speech in the House of Commons on May 1, 1816 (Hansard, Parliamentary debates, 1st series, XXXIV, 145): "The opinions which he had formerly given had received a strong and unexpected confirmation by late events; but he had already modified the opinion which he had formerly given as to the price of gold. When by the depreciation of the currency, gold was permanently separated from paper, it was subject to all the variations in price of any other article of merchandise."

81. [81] "Review of the controversy respecting the high price of bullion," Edinburgh review, XVIII (1811), 451. Cf. Substance of two speeches of Henry Thornton, Esq., 1811, p. 72: "It was said that gold itself had risen; but even if it had, gold being the standard, we were bound to hold to it; we had held to it in the general fall, and we ought to abide by it in its general rise also."

82. [82] Review of Blake's Observations, 1823, Westminster review, II (1824), 47. Blake, in 1823, had recanted some of his previously published views, and now claimed that it had been gold which had risen in value, and not paper which had fallen. (Observations on the effects produced by the expenditure of government, 1823, pp. 17, 79.) As Mathias Attwood pointed out (Letter to Lord Hamilton, 1823, pp. 68-69), Blake was hopelessly confused. Blake insisted that gold had risen in value and that paper had not fallen, although he conceded that there had been a rise in commodity prices in terms of paper, and that this rise was greater than the rise of gold in terms of paper.

83. [83] Bullion Report, p. 74.

84. [84] Huskisson, The question concerning the depreciation of our currency stated, 1810, p. 18.

85. [85] "The hint thrown out of altering the mint price to the market price of gold, or, in other words, declaring that 3 1. 17 s. 10½ d. in coin, shall pass for 4 1. 13 s., besides its shocking injustice would only aggravate the evil of which I complain. This violent remedy would raise the market price of gold 20 per cent above the new mint price, and would further lower the value of bank notes in the same proportion." Three letters on the price of gold [1809], J. H. Hollander, ed., 1903, p. 18.

86. [86] Cf., however, Silberling, "Financial and monetary policy," loc. cit., p. 437; Angell, Theory of international prices, p. 56, note.

87. [87] "At the time when that discussion took place, he certainly would rather have been inclined to have altered the standard than to have recurred to the old standard. But while the Committee was sitting, a reduction took place in the price of gold, which fell to 4 1. 2 s. and it then became a question whether we should sacrifice a great principle in establishing a new standard, or incur a small degree of embarrassment and difficulty in recurring to the old." Hansard, Parliamentary debates, 2d series, I (May 8, 1820), 191.

88. [88] Ricardo to Wheatley, Sept. 18, 1821, in Letters of David Ricardo to Hutches Trower and others, p. 160; On protection to agriculture [1822], Works,p.468.

89. [89] Cf. Ricardo, in the House of Commons, June 12, 1822 (Hansard, Parliamentary debates, 2d series, VII, 946, italics not in original):

If, in the year 1819, the value of the currency had stood at 14 s. for the pound note, which was the case in the year 1813, he should have thought that upon a balance of all the advantages and disadvantages of the case, it would have been as well to fix the currency at the then value, according to which most of the existing contracts had been made...

90. [90] Cf. Hansard, Parliamentary debates, 2d series, VII (June 12, 1822), 939 (Ricardo speaking):

His hon. friend had said, that whilst the Bank was obliged to pay its notes in gold, the public had no interest in interfering with the Bank respecting the amount of the paper circulation, for if it were too low, the deficiency would be supplied by the importation of gold, and if it were too high, it would be reduced by the exchange of paper for gold. In this opinion he did not entirely concur, because there might be an interval during which the country might sustain great inconvenience from an undue reduction of the Bank circulation.

91. [91] Proposals for an economical and secure currency [1816], Works, pp. 410-11.

92. [92] Hansard, Parliamentary debates, 1st series, XL (May 24, 1819), 744; Plan for the establishment of a national bank [1824], Works, p. 512.

93. [93] Walter Hall, A view of our late and of our future currency, 1819, pp. 48 ff,

94. [94] See infra, pp. 208-09.

95. [95] An inquiry into the principles of national wealth, 1824, pp.214-15.

96. [96] A comparative estimate of the effects which a continuance and a removal of the restriction upon cash payments are respectively calculated to produce, 1819, pp. 36 ff.

97. [97] An essay on money and paper currency, 1812, pp. 56 ff., 295.

98. [98] Anthony Dunlop, "Sketches on political economy," Pamphletter, XI (1818), 424.

99. [99] In response to a question sent to the Bank by the 1819 Lords Committee, the directors replied: "The attainment of bullion by purchase in the market at £3. 17s. 6d, is, in the estimation of the Court, so uncertain, that the Directors, in duty to their Proprietors, do not feel themselves competent to engage to issue bullion at the price of £3. 17s. 10½d.; but the Court beg leave to suggest, as an alternative, the expediency of its furnishing bullion of a fixed weight to the extent stated, at the market price, as taken on the preceding foreign post day, in exchange for its notes; provided a reasonable time be allowed for the Bank to prepare itself to try the effect of such a measure." Lords Committee, Report, 1819, appendix a.8, p. 314.

100. [100] On protection to agriculture [1822], Works, p. 470.

101. [101] George Booth, Observations on paper currency, 1815, pp. 22 ff., 36 ff.

102. [102] An inquiry into the principles of national wealth, 1824, pp. 216-17, 226-27, 460 ff. Irving Fisher has acknowledged Rooke as an anticipator of his own "compensated dollar" plan.

103. [103] Ibid., p. 462. In 1819, Rooke had advocated a continually depreciating currency: "A system which secures a constant depreciation in the real value of money, is alone calculated to accelerate national wealth." (Remarks on the nature and operation of money, 1819, p. 57.) But later in the same year he withdrew his support of a depreciating currency, because it "carries along with it in its train, evils and irregularities that, ultimately, may more than counterbalance the good to be derived from its adoption." (A supplement to the remarks, 1819, p. 4.) He advocated instead a stable monetary system "conforming to the prices of the last 16 years," and presented in outline the proposals which in his later work he developed in greater detail. As in his later work, he proposed that stabilization be accomplished in terms of the wages of farm labor, but because of the delay in the adjustment of farm wages to changes in prices of commodities and also because of the problem created by fluctuations in harvests, he suggested that wages in export industries be followed as a guide; presumably for short-term fluctuations. (Ibid., pp. 88 ff.)

104. [104] Considerations on the policy or impolicy of the further continuance of the Bank Restriction Act, 1818.

105. [105] Essays on money, exchanges, and political economy, 1820, p. 203. In a later work, he advocated raising the price of silver in paper currency as prices fell, and in the same proportion, thus approaching closely to Rooke's proposal.(State of the nation, 1835, p.173.)

106. [106] Views on the subject of corn and currency, 1826, p. 76.

107. [107] "For these reasons, I am inclined to think, that the wants of men, and the ingenuity exercised in remedying them as they occur, have in this, as in most other instances, formed, upon the whole, a better system of currency for this country at present, and better adapted to the circumstances of the time, than any statesman, or political economist, however able and well informed, could have devised in his closet.... The thing is done first; the reason why it should be so done, is found out afterwards.... Where currencies of paper have failed in other countries, it is generally where speculative men have formed the plans for establishing them." (The Earl of Rosse, Observations on the present state of the currency of England, 1811, pp. 87-88.)

108. [108] Cf. the similar arguments of seventeenth-century writers, supra, p. 39.

109. [109] J. C. Herries, A review of the controversy respecting the high price of bullion, 1811, p. 96.

110. [110] E.g., Thomas Smith, An essay on the theory of money and exchange [1807], 2d ed., 1811; Glocester Wilson, A defence of abstract currencies, 1811; ibid., A further defence of abstract currencies, 1812.

111. [111] E.g., Sir John Sinclair, Observations on the Report of the Bullion Committee, 3d ed., 1810; ibid., Remarks on a pamphlet by William Huskisson, 2d ed., 1810.

112. [112] E.g., John Raithby, The law and principle of money considered, 1811, p.111: "The currency of a country ought to be of a nature, the perpetual and necessary tendency of which is to rest at home"; Lord Stanhope, in a Resolution presented to the House of Lords: Not only gold and silver, "but likewise every one of the other articles of merchandise by means of which British debts to foreign nations can be discharged, is...an improper and an unfit legal standard to serve as a fixed, invariable, and permanent measure of the relative value of different commodities and things within the country itself, which is the grand and essential end and object of an internal circulating medium...." Hansard, Parliamentary debates, 1st series, XX (July 12, 1811), 911.

113. [113] The iniquity of banking, part II, 1797, pp. 42 ff., 59 ff., 62.

114. [114] For his advocacy, in 1807, of the voluntary use of a tabular standard for long-term contracts, see infra, pp. 282-83.

115. [115] John Wheatley, A letter...on the distress of the country, 1816, pp. 14-25, 43-44.

116. [116] Ibid., Report on the reports of the Bank committees, 1819, pp. 4, 45, 50-51.

117. [117] An essay on the theory of money and principles of commerce, vol. II, 1822, pp. 121 ff., 131 ff.

118. [118] He asks the question: why not issue money ad infinitum? and replies: "Whenever...the money of a country is sufficient to call every laborer into action, upon the system and trade best suited to his habits and his powers, the benefits of an increased circulation can go no farther...." Beyond that point, further stimulus is "nugatory or injurious." (A letter...on the creation of money, 1817, p. 68.)

119. [119] Prosperity restored, 1817, pp. 129-130; Observations on currency, population, and pauperism, 1818, pp. 164-67; The late prosperity, and the present adversity of the country, explained, 1826, pp. 34-35.

120. [120] Prosperity restored, pp. 129-30, 135.

121. [121] Ibid., p. 136.

122. [122] Ibid., p. 183.

123. [123] Ibid., pp. 184, 193-94; Observations on currency, pp. 166-67.

124. [124] Prosperity restored, pp. 163 ff.

125. [125] Observations on currency, pp. 204-05.

126. [126] The Scotch banker, 2d ed., 1832, p. 101.

127. [127] Ricardo, in 1819, asserted that a currency less variable than a metallic standard one could not be attained by any system "that I have ever even imagined." (Commons Committee, Report, 1819, p. 138.)

128. [128] Samuel Read, An inquiry concerning the nature and use of money, 1816, p. 83.

129. [129] T. P. Thompson, "On the instrument of exchange," Westminster review, I (1824), 197.

130. [130] Malthus is the only exception I have found. He stated that it was desirable to have an internationally common standard, even if it meant falling prices, but did not give any reasons. "Review of the controversy respecting the high price of bullion," Edinburgh review, XVIII (1811), 450-51.

131. [131] George Woods, Observations on the present price of bullion, 1811, p. 53: "The only other disadvantageous consequence of the present system appears to be the unsteady par of exchange, and the unsettled relative value of currency, constantly at the mercy of a small body of men."(Italics not in original.)

132. [132] Erick Bollmann, A second letter...on the practicability of the new system of bullion-payments, 1819, p. 25, note.

133. [133] Walter Hall, A view of our late and of our future currency, 1819, p. 56.

134. [134] Ibid., p. 59. For claims by other anti-bullionists that an "unfavorable" exchange was desirable as a bounty to exports and a check on imports, see Daniel Wakefield, An investigation of Mr. Morgan's comparative view of the public finances, 1801, pp. 51-52; anon., Reply to the author of a letter...on the pernicious effects of a variable standard of value, 1819, pp. 34-35: "While the exchange is adverse it operates as a bounty on the export of all our manufactures; and stimulates, by additional profits, the industry and skill of the nation; and though this adverse exchange has its disadvantages, yet, as it has its benefits also, let us not throw the latter away...."

135. [135] Walter Hall, op. cit., pp. 53, 60.

136. [136] Ibid., p. 16.

Chapter V

1. [1] By far the most helpful surveys of the English currency controversies of the period that I have found are T. E. Gregory's introduction to the 1928 reprint of Tooke and Newmarch's History of Prices and his introduction to his Select statutes, documents and reports relating to British banking, 1832-1928, 1929.

2. [2] Report from Select Committee on banks of issue, 1840, p. 39.

3. [3] The Bank had on its own initiative made such a separation in its accounts in 1840.

4. [4] William Ward, a member of the currency school group, referred to its main doctrine in 1832 as "the principle of the currency." Samuel Jones Loyd, in testimony before the Committee on Banks of Issue in 1840, referred to the doctrines of the two groups as the "currency principle" and the "banking principle," respectively. After 1840, the groups holding these views were commonly distinguished by the labels "currency school" and "banking school."

5. [5] Cf., however, Sir Charles Wood: "The real question to be solved is, how to regulate the quantity of the paper circulation, so as to keep its value identical with what the value of the metallic currency would be. It is not necessary, perhaps, that a paper circulation should be of precisely the same quantity as the metallic currency which would be required if the paper did not exist, because the greater convenience of paper money may reader it possible that the same functions shall be performed by a less quantity of paper as easily as by a greater quantity of gold or silver." (Hansard, Parliamentary debates, 3d series, LXXIV (May 20, 1844), 1356.

6. [6] For reasons why such identity need not exist, see supra, p. 131.

7. [7] Cf. Fullarton, On the regulation of currencies, 2d ed., 1845, p. 140: "[The currency school] never even allude to the existence of such a thing as a great hoard of the metals, though upon the action of the hoards depends the whole economy of international payments between specie-circulating communities, while any operation of the money collected in hoards upon prices must, even according to the currency hypothesis, be wholly impossible."

8. [8] Cf., however, Ricardo, supra, p. 205. The currency school were not aware that on this point they could derive support from Ricardo.

9. [9] A clear statement of the grounds on which they held that a paper currency could be issued to excess if inconvertible but not if convertible is not to be found in the writings of the banking school. Their reasoning seems to have been, however, that under convertibility the national price level, and therefore the quantity of money, was even in the short run internationally determined, whereas under inconvertibility this external limitation would not be operative.

10. [10] Thomas Joplin, Outlines of a system of political economy, 1823, p. 276.

11. [11] Henry Drummond, Elementary propositions on the currency, 4th ed., 1826, p. 47.

12. [12] James Pennington, Memorandum (privately printed), 1827, p. 8. The memorandum is reprinted in Pennington, A letter...on the importation of foreign corn, 1840, pp. 82 ff.

13. [13] Memorandum, p. 14.

14. [14] Cf. the testimony of Mr. Palmer, Report from the [Commons] Committee of Secrecy on the Bank of England charter, 1832, p. 11.

15. [15] G. W. Norman later claimed that the Bank authorities were aware, when they adopted the Palmer rule, that it would allow an external drain of gold to be met by a diminution of deposits instead of by a contraction of note circulation, but thought it nevertheless the best principle available and practicable. (Remarks upon some prevalent errors, with respect to currency and banking. 1838, pp. 79 ff.)

16. [16] Letter...on the importation of foreign corn, 1840, pp. 89-90.

17. [17] Ibid., p. 100.

18. [18] Cf. ibid., pp. 98-99.

Pennington later claimed that there was no danger that the reserves of the Bank of England could be seriously depleted through withdrawal of deposits, while the amount of note circulation remained undiminished:

This...could only happen to a very small extent, for a large portion of those deposits consists of the reserves of the private banks, which they are obliged to keep in hand, and which, in times of pressure and alarm, they find it expedient to increase rather than diminish. If, instead of leaving these reserves in the hands of the Bank, they withdrew them in the shape of bank notes, in order to keep them in their own tills, the operation would obviously be altogether a nugatory one. It would be holding their reserves in one shape, instead of in another. ("Letter from Mr. Pennington on the London banking system," in John Cazenove, Supplement to thoughts on a few subjects of political economy, 1861, p. 53, note.)

19. [19] Palmer later defended the violations of the rule by the claim that they were all due to deliberate adjustment to exceptional circumstances. (J. Horsley Palmer, The causes and consequences of the pressure upon the money-market, 1837; ibid., Reply to the reflections,...of Mr. Samuel Jones Loyd, 1837; also, his testimony before the Committee on banks of issue, 1840, Report, pp. 103 ff.) But circumstances which the Bank regarded as exceptional appeared to recur with surprising frequency. It is not clear what the motives of the Bank were in its departures from its own rule. Longfield pointed out that in case of an external drain: "The securities [under the Palmer rule] were to be kept even [i.e. not increased] for the convenience of the public, not the safety of the bank. The bank would be still more secure if it were active, and reduced its securities whenever an adverse state of the exchanges, or any other circumstance, leads to a demand for gold." ("Banking and currency, IV," Dublin University magazine, XVI (1840), 619.) On the same principle, expansion of its security holdings would under these circumstances serve the "convenience" of the public even better. But the income of the Bank would also profit from maintenance or expansion of its security holdings. As Samson Ricardo queried, "May not a slight consideration for the Bank Stock proprietors sometimes interfere with a strict adherence to the principle laid down?" (Observations on the recent pamphlet of J. Horsley Palmer, 1837, p. 27.) In justice to the Bank directors, however, it should be noted that it was a rule of the Bank that no director should hold more than £2000 of the Bank's stock, the minimum qualifying amount.

20. [20] Cf. Torrens, A letter to...Lord Melbourne, on the causes of the recent derangement in the money market, 2d ed., 1837, p. 29; Overstone, Reflections suggested by...Mr. J. Horsley Palmer's pamphlet [1837], reprinted in Overstone, Tracts and other publications on metallic and paper currency, J. R. McCulloch ed., 1857, p. 29.

21. [21] Torrens, Supplement to a letter...on the derangement in the money market, 1837, p. 6, and appendix, pp. 4, 5; Overstone, Reflections, 1837, in Tracts, pp. 7-9.

22. [22] Torrens, A letter to Thomas Tooks, Esq., in reply to his objections, 1840, pp. 5 ff.; Overstone, Reflections [1837], in Overstone, Tracts, pp. 38-39.

23. [23] Cf. G. W. Norman, Letter to Charles Wood, Esq., M. P. on money, 1841, p. 95: "I advisedly pass over the question, should the treasure in the Bank of England increase and decrease in equal proportion with its own notes or in equal proportion with the whole paper-money of the country?"

24. [24] Palmer testified before the Lords Committee on the Commercial Distress in 1848 that the Bank had lowered its discount rate to 2½ per cent in September, 1844, "from the circumstance of its being supposed to be the proper course for the Bank to take to employ a given portion of the reserve in the banking department for the benefit of the proprietors." Report, p. 108.

25. [25] Subject to this condition, it did provide an absolute guarantee of convertibility, if in case of default by the Bank in meeting the liabilities of the banking department the holders of Bank notes would legally have a prior claim on the gold remaining in the issue department, a disputed question.

26. [26] The evidence, given by Lord Overstone, before the Select Committee of the House of Commerce of 1857, on bank acts, 1858, pp. 119 ff.

27. [27] Hansard, Parliamentary debates, third series, LXXIV (May 6, 1844), 742.

28. [28] "I say, then, that the bill of 1844 had a triple object. Its first object was that in which I admit it has failed, namely, to prevent by early and gradual, severe and sudden contraction, and the panic and confusion inseparable from it, but the bill had two other objects of at least equal importance; the one to maintain and guarantee the convertibility of the paper currency into gold—the other to prevent the difficulties which arise at all times from undue speculation being aggravated by the abuse of paper credit in the form of promissory notes. In these two objects my belief is, that the bill has completely succeeded." Hansard, Parliamentary debates, 3d series, XCV (Dec. 3, 1847), 657.

29. [29] Cf. Torrens, A letter to Thomas Tooke, 1840, pp. 10-11: "The difference between us is this: you contend that the proposed separation of the business of the Bank into two distinct departments, would check over-trading in the department of issue but would not check over-trading in the department of deposit; while I maintain, on the contrary, that the proposed separation would check over-trading in both departments." Cf. also Overstone, Thoughts on the separation of the departments of the Bank of England [1844], Tracts, pp. 263 ff.; ibid., Evidence...before the...Committee of the House of Commons, 1858, pp. 163-64; Sir William Clay, Remarks on the expediency of restricting the issue of promissory notes, 1844, p. 71.

30. [30] [Overstone], Letters of Mercator on the Bank charter act of 1844, 1855-1857, pp. 57-58.

31. [31] Correspondence between the Right Hon. Lord Overstone, and Henry Brookes, Esq., 1862, p. 36.

32. [32] See infra, p. 250.

33. [33] Cf. Sir William Clay, Remarks, 1844, p. 26.

34. [34] Thoughts on the separation of the departments, 1844 (written in 1840), Tracts, pp. 282-84.

35. [35] Correspondence between...Lord Overstone, and Henry Brookes, Esq., 1862, p. 23. The public, in fact, soon became convinced that in case of need the statutory limitation of the uncovered note issue of the Bank would not be permitted to stand in the way of the Bank's extending credit when it was urgently needed to prevent a panic, but would be suspended. Cf. Governor Weguelin of the Bank of England, in Report from the Select Committee on Bank acts, 1857, part II, p. 3: "This power [of suspension] having been once exercised already, there is no cause to apprehend a panic, such as occurred in 1847. The public believe that it would be exercised again under similar circumstances"

36. [36] Samuel Bailey, A defence of joint-stock banks, 1840, pp. 85-86, cited, with approval, by Tooke, An inquiry into the currency principle, 2d ed., 1844, p. 93.

37. [37] Fullarton, On the regulation of currencies, 2d ed., 1845, p. 195. Cf. also J. W. Gilbart, A practical treatise on banking, Ist American (=5th English) ed., 1851, p. 92.

38. [38] James Wilson, Capital, currency, and banking, 1847, pp. 22 ff.

39. [39] Cf. J. W. Gilbart, A practical treatise on banking, 1851, p. 94.

40. [40] J. S. Mill, Principles of political economy, bk. iii, chap. xxiv. Cf. also his testimony in Report from the Select Committee on the Bank acts, part I, 1857, pp. 180 ff.

41. [41] A letter to...Lord Melbourne, 2d ed., 1837, p. 48. He conceded a qualifying circumstance: if the adverse balance of payments of the provinces with London was met by shipments to London of Bank of England notes which had been in circulation in the country, the circulation and prices would rise in London as well as in the country, and the country banks would find themselves able to maintain for a time their increased circulation without losing all their reserves. To assure control of the circulation, therefore, it was necessary that the Bank of England should supply either all of the country circulation or none of it.

42. [42] Remarks upon some prevalent errors, 1838, p. 53.

43. [43] As we have seen, Torrens conceded that this assumption might not accord with the facts.

44. [44] Remarks on the management of the circulation [1840], Tracts, pp. 96 ff.

45. [45] The principles and practical operation of Sir Robert Peel's bill, 1848, p. 49.

46. [46] John Fullarton, On the regulation of currencies, 2d ed., 1845, p. 64 (italics in original). See also Tooke, History of prices, IV (1848), 185. Tooke denied only that banks could issue notes to excess and agreed that they could lend to excess in the form of deposits and bills of exchange. (An inquiry into the currency principle, 2d ed., 1844, p. 158, note.)

47. [47] The principles and practical operation of Sir Robert Peel's bill of 1844, 1848, pp. 106 ff.

48. [48] On the regulation of currencies, 2d ed., 1845, p. 96.

49. [49] Cf. T. P. Thompson, "On the instrument of exchange," Westminster review, I (1824), 197: "...the confining either a private or public bank to discounting bills at dates however short, will be no limitation. For it amounts to a permission to issue in perpetuity as much paper as men can be persuaded to borrow, under the formality of from time to time renewing the contract."

50. [50] Views on the subject of corn and currency, 1826, pp. 45-46. Joplin is arguing that there are limitations on the power of issue of individual banks, and that the bankers perceive this, but that they do not perceive that these limitations do not apply to the banking system as a whole.

51. [51] Adam Dickson, An essay on the causes of the present high price of provisions, 1773, pp. 46-47.

52. [52] Thoughts on the effects of the Bank restrictions, 2d ed., 1804, p. 100

53. [53] According to C. A. Phillips, writing as late as 1920 (Bank Credit, 1920, p. 32): "the accepted statements of banking theory, with scarcely an exception, have made no such distinction [i.e., between the power of issue of a single bank and of a banking system acting in harmony], with the result that confusion, obscurity, and error prevail with reference to the most fundamental principles of the subject."

54. [54] Cf. Report on Joint-Stock Banks, 1826, p. 269: "Q. Do you think that this is a sufficient check against the possibility of an overissue by any particular bank? A. I think no particular bank can overissue. Q. Do you think that, if all the banks were to combine, they could, by any means, force more notes permanently into circulation than the transactions of the country required? A. I think it quite impossible; the notes which are not required for the use of the country would instantly be returned to the banks." Cf. also, ibid., pp. 59, 213.

55. [55] Cf. J. R. McCulloch, "Fluctuations in the supply and value of money," Edinburgh review, XLIII (1826), 283:

...the mutual exchanges that are made, twice a week, by the Scotch bankers, of each other's notes in their possession...though in many respects an useful and convenient regulation, is quite ineffectual, either to prevent the excessive issue of the notes of any one banking company, in which the public has confidence, or to prevent a general over-issue. If the different banks were to increase their issues in the same, or nearly the same proportion, the whole currency of the country might be doubled, were that otherwise practicable, in the course of twelve months, without the notes of any one company becoming excessive in relation to the others; for, as the increased amount of notes that might be payable by a particular company would, under such circumstances, be met by the equally increased amount that would be receivable by it, the balance to be paid in cash or bills on London, would not really be greater than it had been before the augmentation.

Cf. also Henry Burgess, A letter to...George Canning, 1826, pp. 45-46; Thomas Joplin, Views on the subject of corn and currency, 1826, pp. 44-45; Thomas Doubleday, Remarks on some points of the currency question, 1826, pp. 30-31.

56. [56] Cf. e.g., Sir Henry Parnell, Observations on paper money, banking, and overtrading, 2d ed., 1829, pp. 88-89; A merchant, Observations on the crisis, 1836-37, 1837, p. 19

57. [57] Cf. Sir Henry Parnell, Observations on paper money, 2d ed., 1829, p. 90; Overstone, Reflections, suggested by...Mr....Palmer's pamphlet [1837], in Tracts, p. 32; Sir William Clay, Remarks on the expediency of restricting the issue of promissory notes. 1844, pp. 34 ff. Cf. also, "The Bank of England and the country banks," Edinburgh review, XLV (1837), 76:

The radical defect, in fact, in the constitution of the Bank, consists in its participation too much in the feelings and views of the mercantile class. It is managed by merchants, and we need not wonder that it should sympathize with them. It may, however, be inferred, with almost unerring certainty, that the Bank is acting on erroneous principles, when its conduct is warmly approved by the merchants, and conversely. Whenever the city articles of the metropolitan papers teem with eulogies on the conduct of the Bank, we may be quite certain that mischief is abroad.

58. [58] J. R. McCulloch, Historical sketch of the Bank of England, 1831, pp. 48-50. Cf. also Henry Burgess, A letter to...George Canning, 1826, pp. 45-46.

59. [59] G. Poulett Scrope, A plain statement of the causes of and remedies for, the prevailing distress, 1832, pp. 13 ff. These risks, presumably, were of losses through bad debts, not of impairment of cash reserves.

60. [60] M. Longfield, "Banking and currency, II," Dublin University magazine, XV (1840), 218-19. Cf. Overstone, Remarks on the management of the circulation [1840], Tracts, pp. 98-99: "The desire to extend his own issue is the motive of each issuer; this motive will lead each party to meet an expansion of issue on the part of others by a corresponding expansion on his own part; but it will also lead him to look upon contraction in any quarter as a favorable opportunity, not for contracting, but for expanding his own issues, with the view and in the hope of possessing himself of the ground from which his rival has receded."

61. [61] "Paper communicated by Mr. Pennington," printed as appendix no. I in Thomas Tooke, A letter to Lord Grenville, 1829, pp. 117-27.

62. [62] Pennington repeated his argument in a paper sent to Torrens, which the latter published as appendix no. ii to his A letter to...Melbourne on the causes of the recent derangement in the money market, 2d ed., 1837, pp. 76-80. Torrens, under Pennington's influence, finally accepted most of the banking school doctrine with respect to the role of bank deposits.

63. [63] Cf. A discourse concerning banks, 1697, p. 6; A vindication of the faults on both sides [1710], in Somers' Tracts, 2d ed., 1815, XIII, 5.

64. [64] Letter to Pitt, 2d ed., 1801, p. 22, and appendix, p. 9. In testimony before the Lords Committee of 1797 Boyd had denied that discounts by private bankers were an addition to the circulating medium; they were only one of the many ways in which "the circulating medium really existing may be employed." (Report of the Lords Committee of Secrecy, 1797, p. 54.)

65. [65] Paper credit, 1802, p. 55.

66. [66] Review of Smith, "Essay on the theory of money and exchange," Edinburgh review, XIII (1808), 52.

67. [67] Hansard, Parliamentary debates, 1st series, XX (July 12, 1912), 908 ff.

68. [68] An Essay on money and paper currency, 1812, p. 289, note.

69. [69] Considerations upon the agriculture, commerce and manufactures of the British Empire, 1822, p. 54.

70. [70] N. W. Senior, Three lectures on the transmission of the precious metals, 2d ed., 1830, pp. 21-22.

71. [71] Cf. the Bullion Report, 1810, p. 63.

72. [72] Report of the Lords Committee of Secrecy, 1797, p. 71.

73. [73] Of the utility of country banks, 1802, p. 3.

74. [74] Piercy Ravenstone, A few doubts as to the correctness of some opinions generally entertained on the subjects of population and political economy, 1821, p. 376.

75. [75] Henry Burgess, A letter to...George Canning, 1826, p. 21.

76. [76] Sir Henry Parnell, Observations on paper money, 2d ed., 1829, p. 73.

77. [77] Fullarton, per contra, maintained that only coin with an intrinsic value equal to its face value was "money," and that all other instruments of exchange, including bank notes, bank deposits, and bills of exchange, were "credit." (On the regulation of currencies, 2d ed., 1845, pp. 35 ff.)

78. [78] J. S. Mill, review of Tooke and Torrens, Westminster review, XLI (1844), 590-91.

79. [79] Edwin Hill, Principles of currency, 1856, pp. 105-06. R. H. Walsh later improved on this analysis by pointing out: (1) that credit instruments reduce the number of transactions for which "money" is needed only when they are exchanged for goods or services and increase the number when they are exchanged for money: (2) but that even when the use of credit instruments increases the number of transactions in which money must be used, as when to make a payment in another locality a person buys with money a bill of exchange which the recipient cashes for money, the amount of time during which money is employed to effect the transfer may be less than if no bills of exchange were used.—"Observations on the gold crisis," Journal of the Dublin Statistical Society, I (1856), 186.

80. [80] E. Hill, Principles of currency, 1856, p. 107 (italics in original).

81. [81] "The currency: banking," Westminster review, XXXV (1841), 99-100.

82. [82] "Banking and currency, IV," Dublin University magazine, XVI (1840), 613.

83. [83] [J. W. Lubbock] On currency, 1840, pp. 29 ff.

Lubbock's formula is ∑aχ + E = A + mB + nC,

where ∑aχ = the sum of transactions (a) at prices (χ) during a given interval of time;
            E = the sum of transactions not involving prices (gifts, tax payments, payment of acceptances, etc.);
            B = the total amount of bills of exchange in existence during the given interval of time;
          mB = the total amount of use of these bills during the given time interval in the settlement of transactions;
            A = the total amount of check transactions;
            C = the total amount of cash;
          nC = the total use of cash during the given time interval.

The terms m and n are thus velocity coefficients. There had been earlier algebraic (or arithmetic) formulations of the equation of exchange in which the velocity of circulation of the means of payment had been expressly provided for. (Cf. Henry Lloyd, An essay on the theory of money, 1771, p. 84; The theory of money; or, a practical inquiry into the present state of the circulating medium, 1811, pp. 42 ff.; Samuel Turner, A letter...with reference to the expediency of the resumption of cash payments, 2d ed., 1819, pp. 12-13.) But Lubbock was, it seems, the first to provide separate terms for, and expressly to provide for, different rates of velocity of the different items in the circulating medium. Lubbock also makes some penetrating comments on the relations between the variables in his equation and on the need for and difficulty of finding the quantitative values for all of these terms.

The alternative "cash-balance" approach to the problem of money goes back, as Marshall pointed out, to Petty and Adam Smith. It was expounded elaborately by Postlethwayt (The universal dictionary of trade and commerce, 4th ed., 1774, article "Cash"). It makes an occasional appearance in the literature of the period under examination. Senior makes incidental use of it. It is developed at some length by Richard Page in testimony before the Committee on Banks of Issue, 1840 (Report, pp. 64-65), and Longfield comments on Page's discussion in his "Banking and currency," Dublin University magazine, 1840 (XVI), 613.

84. [84] Cf. Report from [Commons] Select Committee on banks of issue, 1840: evidence of Lord Overstone (Loyd), pp. 212, 281 ff.; Norman, p. 143; Sir Charles Wood, pp. 50 ff. On one point they were in agreement. The holder of a bank note was more entitled to protection against loss than the holder of a check. Bank notes were a common medium of hand-to-hand circulation, used by all classes, including persons who were in no position to inform themselves as to their quality or to bear a loss. Checks, on the other hand, were used mainly by businessmen and the well-to-do, who could better protect themselves against loss.

85. [85] Even if the proportion of payments in specie and notes to payments by check remained constant, this would be valid only if the relative velocities of circulation of deposits and notes also remained constant.

86. [86] Reply to the objections of the Westminster review, 1844, pp. 16-17. To this argument the banking school replied by citing statistical data purporting to show marked short-run divergencies between the fluctuations in deposits, in note circulation, and in volume of bills of exchange outstanding. Cf. Wm. Newmarch, "An attempt to ascertain the magnitude and fluctuations of the amount of bills of exchange...in...circulation," Journal of Statistical Society of London, XIV (1851), 154 ff., and, for an attempt by an adherent of the currency school to meet this argument, cf. G. Arbuthnot, Sir Robert Peel's Act of 1844...vindicated, 1857, p. 30.

87. [87] Remarks on the expediency of restricting the issue of promissory notes, 1844, pp. 14 ff.

88. [88] "Notes, indeed, may be considered as ancillary to deposits, their functions commencing where those of deposits end; they are required only because banking is not universal, and will always diminish in quantity as the practice of banking is more widely diffused. The same considerations of economy and convenience, which have led to the substitution of notes for metallic money, tend evidently, although no doubt with inferior force, towards the further substitution of deposits transferable by cheques for a note circulation." (Ibid., p. 19.)

89. [89] Ibid., pp. 26-27.

90. [90] Cf. his evidence, Report from Select Committee on banks of issue, 1840, p.205:

The banking deposits of the United Kingdom may be estimated at the very least to exceed 100 millions sterling; and I confess, the notion that that amount of banking deposits would perform the same quantity of monetary functions as would be performed by an equal amount of bank notes and coin (which is the true test of these being really money), seems to me to be a supposition completely inadmissible; and if I was not convinced upon general grounds, would induce me to be persuaded that it is an incorrect hypothesis to consider banking deposits as so much money, and as performing an equal quantity of monetary functions, as the same amount of coin or bank notes.

91. [91] Letter to Charles Wood, Esq., on money, and the means of economizing the use of it, 1841, pp. 42 ff., 82 ff.

92. [92] Ibid., p. 74.

93. [93] Ibid.

94. [94] Overstone, Reflections suggested by a perusal of Mr....Palmer's pamphlet [1837], Tracts, p.36.

95. [95] Ibid., Second letter to J. B. Smith, Esq. [1840], Tracts, p.201.

96. [96] J. S. Mill claimed that the restriction of note issues would be nugatory, because to the ordinary man whether credit assumed the form of bank notes or not was a mere matter of convenience. "Is it supposed that having credit, and intending to buy goods by means of it, he will be disabled from doing so because a banker is prohibited from one particular mode of giving him credit?" This would make it appear that the restriction of note issues would have no important consequences. But he nevertheless predicted that it would cause the interest rate to fluctuate more, and during crises would accentuate the shortage of credit.—Review of Tooke and Torrens, Westminster review, XLI (1844), 591 ff.—It is not evident how these views can be reconciled. But the possibility that strict limitations on the volume of particular types of means of payment may fail to accomplish their purpose because of resort in greater degree to the use of the unrestricted types, the invention of new types, or more rapid rate of use of the restricted types, appears sufficiently real to warrant more consideration than is ordinarily given to it. Conversely, artificial stimuli to the use of one type of means of payment may result in offsetting declines in the use of other types.

97. [97] Cf. J. M. Keynes, A treatise on money, 1930, II, 264:

To regulate the volume of bank-notes is a very clumsy, slow, indirect and inefficient method of regulating the volume of bank-money. For while it may be true that the volume of the bank-notes bears, at any time, a more or less determined relationship to the volume of bank-money, the relationship has been steadily changing, quantitatively speaking, over long periods as a result of changes of monetary habits and customs; whilst over short periods there is a serious time-lag, the volume of bank-money generally changing first, so that a control over the volume of notes operates too late—after the evil has been done by a change in the volume of bank-money which may have taken place some months earlier.

98. [98] Cf. William Ward, On monetary derangements, 1840, pp. II ff., and his evidence in Report...on the Bank of England charter, 1832, p. 143.

99. [99] On monetary derangements, p. 13.

100. [100] Two doctrines expounded in 1867 by Thomson Hankey, a former governor of the Bank of England, are of interest as revealing what views could still be held in Bank circles at that late date. First, he denied that the Bank of England had any responsibility to come to the assistance of the market in times of monetary pressure: "The more the conduct of the affairs of the Bank is made to assimilate to the conduct of every other well-managed bank in the United Kingdom, the better for the Bank and the better for the community at large." (The principles of banking, 1867, pp. 18 ff.) This was, in effect, a denial that the Bank of England was a "central bank." Second, he held "that the amount of ready money, or even to use the larger expression, of floating capital, in the country at any one moment is a fixed quantity; whatever part is taken or appropriated to the use of any one class, is so much abstracted from all others, or at least from some one of the others...." (Ibid., p.30.) This was in effect a denial of the power of the banking system to create or destroy means of payment. Not much could rightly be expected in the way of effective credit control from a central bank in which such views prevailed.

It is possible also that the poor record of the Bank during this period was in part the result of a failure of its governors adequately to distinguish between their responsibilities as central bank officials and their interests as private business men. The roll of governors during this period was not a distinguished one. A contemporary writer noted that of the nine governors of the Bank of England during the period 1830-1847, six became insolvent in 1847 or earlier. (Jonathan Duncan, The mystery of money explained, 2d ed., 1863, p. 147. Cf. also T. H. Williams, "Observations on money, credit, and panics," Transactions Manchester Statistical Society, 1857, p. 60.)

101. [101] In at least one instance of credit pressure, it resorted to formal and systematic rationing. Cf. the Resolution of the Court of Directors, Dec. 31, 1795:

"That in future, whenever the bills sent in for discount, shall on any day amount to a larger sum than it shall be resolved to discount on that day, a pro rata proportion of such bills in each parcel as are not otherwise objectionable, will be returned to the person sending in the same, without regard to the respectability of the party sending in the bills, or the solidity of the bills themselves. The same regulation will be observed as to [promissory?] notes." Cited from The life of Abraham Newland, Esq., 1808, p. 39.

102. [102] Cf. Henry Thornton, Paper credit, 1802, p. 287: Francis Horner, review of Thornton, Edinburgh review, I (1802), 195.)

103. [103] Cf. Report from the Committee of Secrecy on the Bank of England charter, 1832, evidence of Mr. Palmer, pp. 16 ff.; Mr. Norman, p. 170.

104. [104] Cf. the criticism of the Bank in this respect by the Lords Committee on commercial distress, 1848, Report, pp. xxxv-xxxviii.

105. [105] Cf. the evidence of G. W. Norman, Report from the Select Committee on Bank acts, 1857, part I, p. 319: "We have found, contrary to what would have been anticipated, that the power we possess, and which we exercise, of raising the rate of discount leeps the demand upon us within manageable dimensions. There are other restrictions which are less important. The rate we charge for our discounts, we find, in general, is a sufficient check."

106. [106] Cf. the letter of T. M. Weguelin, Governor of the Bank of England, in Report from the Select Committee on Bank acts, 1857, part II, p.3

107. [107] Cf. e.g., J.M. Keynes, A Treatise on Money, 1930, II, 170: "Those days [i.e., 1893-94] when 'open-market' policy had not been heard of."

108. [108] Cf. the testimony of Samuel Thornton, Report from the Secret [Commons] Committee on the expediency of the Bank resuming cash payments, 1819, p. 152.

109. [109] Hansard, Parliamentary debates, Ist series, XL (May 24, 1819), 744.

110. [110] "If the funds of the Commissioners become so ample as to leave them a surplus which might be advantageously disposed of, let them go into the market and purchase publicly Government securities with it. If, on the contrary, it should become necessary for them to contract their issues, without diminishing their stock of gold, let them sell their securities, in the same way, in the open market." (Plan for the establishment of a national bank [1824], Works, p. 507.) "If the circulation of London should be redundant,...the remedy is also the same as that now in operation, viz. a reduction of circulation, which is brought about by a reduction of the paper circulation. That reduction may take place two ways; either by the sale of exchequer bills in the market, and the cancelling of the paper money which is obtained for them,—or by giving gold in exchange for the paper, cancelling the paper as before, and exporting the gold. The exporting of the gold will not be done by the Commissioners; that will be effected by the commercial operation of the merchants, who never fail to find gold the most profitable remittance when the paper money is redundant and excessive. If, on the contrary, the circulation of London were too low, there would be two ways of increasing it,—by the purchase of government securities in the market, and the creation of new paper money for the purpose; or by the importation and purchase, by the Commissioners, of gold bullion, for the purchase of which new paper money would be created. The importation would take place through commercial operations, as gold never fails to be a profitable article of import when the amount of currency is deficient." (Ibid., p. 512. Italics not in original.)

111. [111] The banking school tended to deny that purchase or sale of securities would have any effect on the volume of note circulation, on the ground that it would affect solely or mainly the volume of deposits. Cf. Fullarton, On the regulation of currencies, 2d ed., 1845; pp.96 ff.; James Ward, The true action of a purely metallic currency, 1848, p. 43.

112. [112] "I certainly think that if the issues were to be regulated in one way or the other, I should much prefer exchequer bills. Under present circumstances, I consider it quite impossible, without at times doing immense mercantile mischief, to attempt to regulate them by discounts. The usury laws alone are quite decisive upon that point." (Report...on the Bank of England charter, 1832, p. 170)

113. [113] Ibid., pp.16-17.

114. [114] Cf. the evidence of Overstone, ibid., p. 249; Richard Page, Banks and bankers, 1842, p. 231. Cf. also E. S. Cayley, Agricultural distress—silver standard, 1835, p. 42 (a reprint of a speech in the House of Commons): "Whenever the Bank (it is well known) wishes to enlarge its circulation, it buys up exchequer bills, sending out its notes in their place. On the other hand, when it wishes suddenly to diminish its circulation, it sells exchequer bills." Cf. however, Henry Parnell, A plain statement of the power of the Bank of England, 2d ed., 1833, pp. 57-58: "When circumstances arise to make it necessary to lessen the amount of paper in circulation, the process by which it must be effected, is by issuing a less amount in accommodating trade; for when the price of the funds is greatly depressed, as is always the case when a large contraction of paper is indispensable, the Directors cannot sell exchequer bills, or other securities, without incurring an increase of loss..."

115. [115] Cf. A.H. Gibson, Bank rate; the banker's vade mecum, 1910, pp. 56-57. Palmer, however, had testified in 1832 that the Bank charged only 3 per cent to country banks for the discount of their bills (Report...on the Bank of England charter, 1832, p. 33.), and it seems clear that a substantial fraction of the Bank's discounting was done at less than the regular rate whenever this exceeded the market rate. The Bank, on the other hand, had a number of ways of evading the legal maximum of 5 per cent. (Cf. The evidence, given by Lord Overstone before the...committee...of 1857, on Bank acts, 1858, pp. 104-05.)

116. [116] Testifying in 1848, Governor James Morris of the Bank of England gave the following explanation of the reasons for the more extensive resort by the Bank after 1844 to variations in the discount rate:

Previous to September, 1844, the minimum rate of discount charged by the Bank of England was for a long period not less than 4 per cent; the consequence was, that when money was abundant, and the current rate of interest below 4 per cent, the only means the Bank had of getting out its notes was by the purchase of securities; when the current rate of interest was high, a demand naturally arose for discount at the Bank, and the Bank was then obliged to resort to the sale of securities for the purpose of obtaining notes from the public to meet the demand. This practice of buying securities when money was abundant and the price high, and of selling securities when money was scarce and the price low, caused a loss to the Bank and incon[venience] in the money-market which it was desirable to avoid; it was also considered advantageous that a portion of the Bank's deposits should be constantly employed in the discount of bills, and constantly, therefore, under control. (Report from the [Commons] Secret Committee on commercial distress, 1848, Minutes of evidence, pp. 199-200.)

117. [117] R. Cockburn, Remarks on prevailing errors respecting currency and banking, 1842, p. 16.

118. [118] James Ward, The true action of a purely metallic currency, 1848, p. 39. David Salomons thought that the Bank made a mistake in ordinarily using exchequer bills instead of government stock in its open-market operations, as the latter would depreciate less under forced sale. He suggested, therefore, that the Bank arrange to borrow stock from the Savings Bank Commissioners when needed for open-market sales. (A defence of the joint-stock banks, 2d ed., 1837, pp. 34-35.) He fails to make clear why he thought that short-term securities would depreciate more during a crisis than long-term bonds, but apparently he believed that exchequer bills had a thinner market and that short-term rates rose more during a crisis than did long-term rates.

119. [119] See R. G. Hawtrey, The art of central banking, 1932, p. 151, and the testimony of James Morris, Governor of the Bank, in Report from the Secret Committee [of the House of Commons] on the commercial distress, 1848, pp. 199-200.

120. [120] In 1857, the Governor of the Bank, Weguelin, criticized the Act of 1844 on the same grounds. See his letter in Report from the Select Committee on bank acts, 1857, part II, pp. 1, 2.

121. [121] Report from Select Committee on banks of issue, 1840, p. 138.

122. [122] Principles of political economy [1848], Ashley ed., p. 665; ibid., in Report from the Select Committee on bank acts, part I, 1857, p. 182. James Ward (The Bank of England justified in their present course, 1847, pp. 24 ff.) also claimed that the rule of contracting the circulation when a drain of gold occurred was properly applicable only when the drain was external and was due to international price disequilibrium. Fullarton in an elaborate discussion of drains containing much which is valuable argued that all drains were ultimately self-correcting, and that in the main the Bank of England had power to check a drain only after most of the damage had been done and the drain would in. any case soon have ceased. (On the regulation of currencies, 2d ed., 1845, pp. 136-73.)

123. [123] Cf. also Lord Ashburton (Alexander Baring), The financial and commercial crisis considered, 4th ed., 1847, p. 15: External drains arise from different causes and therefore call for different treatment; "nothing can be more absurdly presumptuous than to substitute machinery in such a case for human intelligence." Also John G. Hubbard (Baron Addington), The currency and the country, 1843, p. 19.

124. [124] Report from the Select Committee on bank acts, part I, 1857, p. 189. Cf. Mill's memorandum to the French Enquéte, 1867, V, 591:

Une banque dirigé par des hommes capables, dès que sa réserve commence à s'en aller, trouvera dans sa connaissance des antécédents commerciaux le moyen de reconnaitre les causes particuliers qui ont produit l'écoulement;elle saura si le numéraire tend à sortir en quantité indéfinie ou seulement en quantité définie.

125. [125] Cf. William Fowler, The crisis of 1866: A financial essay, 1867, p. 44:

The directors of the Bank, and other men of practical experience, do not agree with Mr. Mill as to the facility of distinguishing the causes of a drain of bullion.

126. [126] Cf. I. C. Wright, Thoughts on the currency, 1841, p.11: "under our present system, a foreign drain is always likely to produce a domestic one." Cf. Overstone, Letters of Mercator on the Bank charter act, 1855-57, pp. 54-55: "A drain of bullion may arise from the joint operation of several causes; indeed it is seldom otherwise. Who is to say how much of the drain arises from one cause, and how much from another cause? Such a distinction is utterly impracticable....A drain of bullion, whatever the cause of it, would produce a contraction of metallic money; it ought, therefore, to be met by a corresponding contraction of the paper money" [apparently because such was the purpose of the Act of 1844].

127. [127] Principles, Ashley ed., p. 665.

128. [128] William Hooley, "On the bullion reserve of the Bank of England," Transactions Manchester Statistical Society, 1859-60, p. 85.

129. [129] Principles, Ashley ed., p. 674. The relevant passage was not in the first edition, and Ashley omits to indicate the date of its first appearance.

130. [130] Cf. Burgess, A letter to...George Canning, 1826, pp. 110, 123; Tooke, History of prices, II (1838), 330-31, and his evidence in Report from Select Committee on banks of issue, 1840, pp. 355 ff.

131. [131] R. Cockburn, Remarks on prevailing errors respecting currency and banking, 1842, pp. 57 ff.

132. [132] Banks and bankers, 1842, p. 221.

133. [133] Ibid., p. 308.

134. [134] Ibid., p 400. Cf. also, Lord Ashburton (Alexander Baring), The financial and commercial crisis considered, 4th ed., 1847, p. 39, for a warning to the supporters of the gold standard to "consider whether the desire to refine too much on the absolute perfection of the standard may not endanger their having no standard at all, and leave them to lapse into the Birmingham mire of inconvertible rags."

135. [135] Cf. Richard Webster, Principles of monetary legislation, 1874, p. 123:

An ample reserve of bullion is as necessary to the nation as is an ample storage of water to a city, but both should be provided, not simply to be looked at, but for use whenever the necessity arises....The very essence of the utility of a reserve lies in its being available; to lock it up is to completely ignore the very reason for its maintenance. Vary the conditions on which it may be used by putting up the rate of interest, if necessary, but do not practically prohibit its use, or you at once attack the confidence which it alone can preserve.

136. [136] Cf. "Tristram Trye," The incubus on commerce, 1847, pp. 8-9 (if necessary, the country should bear a portion of the cost of procuring and maintaining the needed increase in the stock of bullion); Adam Hodgson, Letter...on the currency, 1848, pp. 14 ff. (there should be an extra reserve for emergencies, maintained at the public expense, to render unnecessary violent credit contractions); J. E. Cairnes, An examination into the principles of currency, 1854, pp. 73 ff.; J. S. Mill, in Report from the Committee on bank acts, 1857, part I, p. 178.

T. H. Milner, after canvassing the possibilities as to the maximum external drain to which England was liable, concluded that £10,000,000 was an ample gold reserve for external purposes, in addition to a bullion reserve for internal purposes of one-third of the note issue. (On the regulation of floating capital, 1848, p. 90.) This would have required total reserves in 1848 of about £16,000,000 compared to actual reserves of under £14,000,000.

Hamer Stansfeld proposed, as a substitute for Tooke's scheme of an emergency reserve maintained at the expense of the country, that a national bank be set up with authority to issue on loan at 4 per cent £1 notes to serve as substitutes for sovereigns whenever the rate of discount exceeded 5 per cent. When gold returned to the country and caused the rate of discount to fall, these notes would be presented and canceled, as it would no longer pay to hold them. (A plan for a national bank of issue, 1860, pp. 5-6.)

137. [137] N. W., "The recent financial panic," reprint from British quarterly review, July, 1866, pp. 15-16. For earlier suggestions that the discount rate should be made to vary with the amount of bullion reserves in accordance with a more-or-less definite plan, see Suggestions for the regulation of discount by the Bank of England, 1847, and Tooke's proposals of 1848, summarized in T. E. Gregory, An introduction to Tooke and Newmarch's A history of prices, 1928, pp. 102-03.

138. [138] Adam Hodgson, Letter...on the currency, 1848, p. 13.

139. [139] Report from Select Committee on banks of issue, 1840, p. 136.

140. [140] Letter to Charles Wood, Esq., M. P. on money, 1841, pp. 92 ff. Norman later stated that during the 1850's the excess of bankers' balances with the Bank of England above what they thought necessary plus the excess above these bankers' balances of the bullion reserves of the Bank of England over what it thought necessary together rarely exceeded £4,000,000, so that a comparatively small external drain of gold was sufficient to force a rise in the interest rate. (Papers on various subjects, 1869, pp. 105-07.) He now welcomed, however, the suggestion that the joint-stock banks should share with the Bank of England the burden of maintaining adequate gold reserves. (Ibid., p. 138.)

141. [141] "A Merchant," Observations on the crisis, 1836-37, 1837, pp. 5 ff.

142. [142] Ibid., p. 13.

143. [143] John Hall, A letter...containing a new principle of currency, 1837, pp. 10 ff. I am indebted to Mrs. Marion J. Wadleigh for this reference.

144. [144] Report from Select Committee on banks of issue, 1840, pp. 136, 159, 241.

145. [145] James Ward, The true action of a purely metallic currency, 1848, p. 74. note. Cf. also J. W. Gilbart, "The Currency: Banking," Westminster review, XXXV (1841), 126.

146. [146] The errors of the banking acts of 1844-5, 1857, pp. 18-19.

147. [147] Lord Ashburton (Alexander Baring), The financial and commercial crisis considered, 1847, p. 38.

148. [148] Cf. Report from the [Lords] committee [on] the causes of the distress...among the commercial classes, 1848, pp. xli ff.

149. [149] See J. H. Clapham, An economic history of modern Britain, 1926, I, 282, and the sources there cited.

150. [150] The financial and commercial crisis considered, p. 38.

151. [151] Cf. The bullion business of the Bank of England, 1869, p. 20; Sir Felix Schuster, The Bank of England and the State (a lecture delivered in 1905), 1923, p. 34; Economist, XVIII (1860), 1301, 1357.

152. [152] For these transactions see: A. Andréadès, History of the Bank of England, 2d ed., 1924, p. 268; Report from...Committee on banks of issue, 1840, testimony of Mr. Horsley Palmer, pp. 130, 138; David Buchanan, Inquiry into the taxation and commercial policy of Great Britain, 1844, p. 295. During October, 1839, after £2,900,000 had thus been acquired abroad, the bullion holdings of the Bank amounted at one time to only £2,525,000.

153. [153] The banker's circular for Nov. 19, 1841, as cited by William Leatham, Letters...on the currency, 2d series, 1841, p. 12.

154. [154] See The currency question, 2d ed., 1847(?), pp. 35-38, where the Russian decrees are reprinted in translation.

155. [155] Cf. Horace Say, "La crise financière et la Banque de France," Journal des économistes, XVI (1847), 200. It would be interesting to know whether the Banque de France consulted the Bank of England before engaging in this transaction, as it came at a most embarrassing time for the latter.

In addition to the 1826, 1836, 1839, and 1847 instances referred to in the text, the Bank of England appears to have received aid from the Banque de France or from other Paris banks in 1832, 1890, 1896, and 1897. The 1890 transaction resulted in a hostile interpellation in the French Chambre des Députés, but was defended by the French Minister of Finance on the ground that it was necessary to prevent harmful repercussions on France from the financial crisis in London. (Journal officiel, débats parlementaires, 5e leg., sess. ord., 1891, I, 16 ff.) The Bank of England in 1696, or shortly after its foundation, borrowed in Holland. (Andréadès, History of the Bank of England, 2d ed., 1924, p. 109.) In 1898 the Bank of England appears to have cooperated with the Banque de France in coming to the assistance of German banks. (Cf. Revue d'économic politique, XIII (1899), 165.) The first earmarking of gold by the Bank of England on behalf of a foreign central bank appears to have been in 1906, for the National Bank of Egypt, but it had earmarked gold for India on earlier occasions.

156. [156] Cf. R. H. Patterson, "On the rate of interest... during commercial and monetary crises," Journal of the Royal Statistical Society, XXXIV (1871), 343. Cf. also Robert Somers, The errors of the banking acts of 1844-5, 1857, p. 95: "The manner in which the various commercial nations deal with the great mediums of exchange seems dictated by caprice rather than by any intelligent principle, and so far from adopting some general system in the interests of all, their monetary policy is conceived in hostility one to another." Somers, however, had in mind the monetary standards, rather than the day-to-day monetary practices, of the different countries. Cf. also the later comment of Luzzati: "Aujourd'hui,... les banque d'émission restent presque inaccessibles dans leur majesté solitaire, et ne communiquent qu'exceptionellement entre elles." "Une conférence internationale pour la paix monétaire," (Séances et traveaux de l'académie des sciences morales et politiques, new series LXIX (1908), 363-64.)

157. [157] The currency question, 1830, pp. 32-33.

158. [158] The evils inseparable from a mixed currency [Ist ed., 1839], 3d ed., 1847, pp. 128-29.

159. [159] T. H. Williams, "Observations on money, credit, and panics," Transactions of the Manchester Statistical Society, 1857-58, pp. 58-59.

160. [160] In the absence for England of a term corresponding to the American "member bank," I use "private bank" to designate banks and bankers of all kinds other than the Bank of England. The joint-stock banks, of course, normally did not borrow directly from the Bank of England, but they did borrow indirectly through bill brokers, and there were exceptional instances of their borrowing directly from the Bank of England.

161. [161] Cf. T. H. Milner, Some remarks on the Bank of England, 1849, p. 21: "there is never any spare capital out of the Bank." Cf. also "N" (Newmarch) in London Times, April 27, 1863, as cited in W. J. Duncan, Notes on the rate of discount in London, 1867, pp. 69-70.

162. [162] See supra, pp. 259-60.

163. [163] Cf. Overstone, Thoughts on the separation of the departments of the Bank of England [1844], in Tracts, p. 264:

...a rise in the rate of interest...tends to produce a contractive effect upon the country circulation, and still more on the state of confidence and of the auxiliary currency [i.e., bank deposits and bills of exchange] which rests upon that confidence.

Cf. also Norman's evidence, Report from Select Committee on banks of issue, 1840, p. 158:

...I do not look at a rise in the rate of discount merely as it affects the securities and the circulation of the Bank; it produces a much greater and more important effect than that in its general influence upon credit; it limits all banking expedients; I have no doubt that it increases the reserves of bankers; it diminishes the efficiency, therefore, of a given amount of currency; it renders persons less willing to discount bills; and it makes merchants less disposed to buy, and more disposed to sell.

164. [164] See especially Hamer Stansfeld, The currency act of 1844, 1854, pp. 17-19, for an account of the business cycle emphasizing the status of the interest rate, the balance of trade, and the balance of payments at each stage of the cycle. Cf. also William Miller, A plan for a national currency, 1866, pp. 16 ff.

165. [165] Overstone gives the following account of the sequence of events resulting from an increase in the interest rate:

Contraction of circulation acts—first upon the rate of interest—then upon the price of securities—then upon the market for shares, &c.—then upon the negotiation of foreign securities—at a later period, upon the tendency to enter into speculation in commodities—and lastly, upon prices generally. These effects may be retarded or accelerated by other circumstances; possibly they may not occur precisely in the manner here stated; but this is something like the order of succession in which the effects of contraction of the circulation are gradually developed. (Thoughts on the separation of the departments [1844], in Tracts, 1857, p. 253.)

See also the substantially similar accounts in R. K. Douglas, Brief considerations on the income tax and tariff reform, in connection with the present state of the currency, 1842, p. 28, and Robert Somers, The errors of the banking acts of 1844-5, 1857, p. 10. Cf. also J. S. Mill, Principles of political economy [1848], Ashley ed., p. 497: "...it is a fact now beginning to be recognized, that the passage of the precious metals from country to country is determined much more than was formerly supposed, by the state of the loan market in different countries, and much less by the state of prices."

166. [166] Cf. T. H. Milner, Some remarks on the Bank of England, 1849, p. 16: "One per cent may make all the difference, whether capital be invested at home or in another country." See also, infra, pp. 403 ff.

167. [167] Cf. e.g., Tooke's evidence, Report from Select Committee on banks of issue, 1840, p. 359:

...the effect upon the exchanges of a rise in the rate of interest would be that of inducing foreign capitalists to abstain from calling for their funds from this country, to the same extent as they otherwise might do, and it would operate at the same time in diminishing the inducements to capitalists in this country to invest in foreign securities, in order to make investments in British stocks or shares. It would likewise operate in restraining credits from the merchants in this country by advances on shipments outwards, and it would have the effect of causing a larger proportion of the importations into this country to be carried on upon foreign capital.

168. [168] Cf. R. H. Patterson, "On the rate of interest...during commercial and monetary crises," Journal of the Statistical Society of London, XXXIV (1871), 343; Robert Somers, The Scotch banks and system of issue, 1873, pp. 177 ff.; Richard Webster, Principles of monetary legislation, 1874, p. 113.

169. [169] "History and exposition of the currency question," ll'estminster and foreign quarterly review. XLVIII (1848), 468, note; R. H. Patterson, loc. cit.

170. [170] William Hooley, "On the bullion reserve of the Bank of England," Transactions of the Manchester Statistical Society, 1859-60, p. 89:

One of the least satisfactory features of the present mode of effecting this object [the correction of the exchanges], by increasing the rate of interest and lessening the amount of accommodation, is, that its effect on imports cannot be felt until after the lapse of months, whilst its effect on exports is immediate, and unfortunately in the wrong direction, viz., restriction.

171. [171] Cf. Robert Somers, The errors of the banking acts of 1844-5, 1857, p. 78:

The time has come when the theory of regulating foreign trade by the Bank screw must be discarded. It is no longer suited to the state and circumstances of commerce. Free trade has introduced a new and more natural regulator into the transactions of nations. We do not now speculate in foreign trade so much as simply barter the produce and manufactures of the United Kingdom for the goods of our neighbours. Our import and export trade have thus received a simplicity, an adaptation, and equality, which could not possibly be realized under a system of prohibition and protection. The connection of the most distant countries by railways and telegraphs, securing the utmost rapidity of motion and intelligence, and the cosmopolitan attributes of capital, creating one money market and keeping trade equally active throughout the world, all cooperate with the principle of free commerce in harmonizing the exchanges and preventing those oscillations and inequalities in imports and exports which were formerly the frequent cause of monetary and commercial derangement.

Somers further objects to the discount rate-mechanism, that specie does not necessarily flow to the high-rate market and may flow in the opposite direction (p. 18); that when imports are discouraged by a rise in the discount rate, exports are correspondingly checked by the resultant fall in purchasing power of the countries which are the source of the imports (p. 77); that the increase in the interest rate, by increasing capital costs, instead of increasing, impairs the ability of English exporters to meet foreign competition (p. 78); and that in general, more attention should be paid, in credit policy, to the needs of the internal market than to specie flows.

172. [172] Letter of Hamer Stansfeld, in Money market review, Dec. 21, 1861, cited by Brookes in Correspondence between...Lord Overstone, and Henry Brookes, Esq., 1862, p. 65. Cf. also the similar views in: J. W. Gilbart, "The currency: banking," Westminster review, XXXV (1841), 98; "The Bank charter act Currency principles," ibid., XLVII (1847), 432; J. S. Mill, Principles of political economy, Ashley ed., p. 670; ibid., Report from the Select Committee on the bank acts, part I, 1857, p. 204; John Haslam, The paper currency of England, 1856, p. 34.

173. [173] Cf. Jonathan Duncan, The national anti-gold law league. The principles of the league explained, 1847, p. 9: "We have in circulation about 220 millions of provisionary notes and bills of exchange; these repose on the narrow basis of an inverted pyramid of gold; shake the basis, the whole superstructure tumbles to the ground."

174. [174] Cf. ibid., p. 11: "In this national money wages and prices would rise to their taxation level, and competition would prevent them exceeding that level."

175. [175] Essay on the theory of money, I (1807), 328-29.

176. [176] The present state of England, 2d ed., 1823, pp. 331-46, appendix, pp. 85-101. On Lowe's proposals, see Correa M. Walsh, The fundamental problem in monetary science, 1903, p. 171.

177. [177] Principles of political economy, 1833, pp. 406-07; An examination of the Bank charter question, 1833, pp. 25 ff. Scrope acknowledged Lowe's priority. (An examination, p. 29, note.) Cf. also the reference to a similar proposal made by Charles Jones in 1840 in R. K. Douglas, Brief considerations on the income tax and tariff reform, 1842, pp. 22-23.

178. [178] Samuel Bailey expressed doubt as to the practicability of the proposals made by Lowe and Scrope. As was still common at the time, he was skeptical of the possibility of measuring changes in the purchasing power of the monetary unit by means of index numbers, and he pointed out other more genuine obstacles to a widespread adoption of the tabular standard even on a voluntary basis. (Money and its vicissitudes in value, 1837, pp. 165 ff.)

179. [179] "History and exposition of the currency question," Westminster review, XLVIII (1848), 480-81.

180. [180] For other proposals for regulation of the quantity of an inconvertible currency by variations in the interest rate, cf. the 1797 pamphlet referred to, supra, p. 211, and the proposals of Thomas Attwood, supra, p. 213, and Norton, Pell, Bosanquet, and Blacker, infra, pp. 285 ff. John Taylor, in 1833, had proposed an inconvertible paper currency so regulated in its quantity as to maintain constant value in terms of coin, but did not specify the mode of regulation. (Currency fallacies refuted, 1833, p. 29) One writer proposed a paper currency so regulated in its quantity as to stabilize the interest rate, thus putting the cart before the horse: "when a rising rate of interest proves that money is becoming dear, and that the legitimate profits of producers are sacrificed to the gains of the monied classes, paper substitutes for metallic money should be issued in sufficient abundance to bring down the value of money to its former standard" i.e., in terms of the interest rate. "The Bank charter act—currency principles," Westminster review, XLVII (1847), 452.

181. [181] An efficient remedy for the distress of nations, 1842, p. 18:

"A debt, then, is justly paid, and only justly paid, when it is compensated in money, of whatever kind, which gives back to the creditor as great a command over the necessaries, comforts, and luxuries of life, as the money, or other value, which created the obligation, gave to the borrower; provided always that the creditor get the benefit of all the public improvements and useful inventions that may have come into existence during the interval subsisting between the period of contracting the debt and that of extinguishing it."

182. [182] Ibid., pp. 33-35, 84.

183. [183] A standard pound versus the pound sterling, 1856, pp. 13 ff.

184. [184] Ibid., p. 30.

185. [185] Edward Norton, The Bank charter act of 1844, 3d ed., 1857, especially p. 52. Norton repeats these proposals in his National finance & currency, 3d ed., 1873, pp. 91-92. W. T. Thomson, in 1866, advocated a paper currency convertible into gold at the market price of gold, and issued only by the government, with a fixed maximum amount of issue. (The Bank of England, the Bank acts & the currency, by Cosmopolite, 1866.) Proposals for the convertibility of paper money into gold at the market price of gold instead of at a fixed rate, but without concrete suggestions as to the manner of regulation of the quantity of such currency or express recognition of the need for such regulation, had been common since the bullion controversy.

186. [186] Report from Select Committee on banks of issue, 1840, p. 90. This proposal is supported by I. C. Wright, Thoughts on the currency, 1841, pp. 35 ff. Wright suggests a supplementary currency for foreign trade, consisting of "bullion notes" issued in exchange for gold, and reconvertible into gold at the market price of bullion.

187. [187] George H. Pell, Outline of a plan of a national currency, not liable to fluctuations in value, 1840, pp. 5 ff.

188. [188] An examination of the Bank charter question, 1833, pp. 41-42.

189. [189] Ibid., p. 63. For a more detailed account of Scrope's monetary doctrines, see Redvers Opie, "A neglected English economist, George Poulett Scrope," Quarterly journal of economics, XLIV (1929), 101-37.

190. [190] The evils inseparable from a mixed currency [Ist ed., 1839], 3d ed., 1847, pp. 51, 65, 93-94.

191. [191] Metallic, paper, and credit currency, 1842, pp. 14 ff., 144 ff.

192. [192] Cf. Thomas Attwood, testifying before the Committee on the Bank of England charter, 1832:

"Do you think the amount of circulation in the country ought to be always exactly the same?—No, I think it ought to possess an expansive character, but rarely a contractive one." (Report, p. 468.) Attwood, however, may have had in mind the secular trend upward of the physical volume of trade.

193. [193] Cf. The money bag, 1858, pp. 113-14. (The money bag was an ephemeral magazine, established to promote the cause of an inconvertible paper currency. It printed some interesting cartoons relating to the currency question.)

Chapter VI

1. [1] In Political discourses [1752], in Essays, moral, political, and literary, 1875 ed., I, 330-345, and especially 333-335.

2. [2] This much must be regarded as implicit even in the Hume-Thornton-Taussig type of formulation, since otherwise the changes in prices which they postulate would have no immediate explanation. What is in issue is not, therefore, whether a relative shift in demands occurs, but whether this shift in demands, of itself and aside from its effect on relative prices, exercises an equilibrating influence.

3. [3] These writers, however, had been anticipated by an eighteenth-century Frenchman, Isaac de Bacalan in a memoir written in 1764, although not published until 1903, after its discovery by Sauvaire-Jourdan:

Supposerons-nous qu'un seul État fournisse aux autres plus de marchandises qu'il n'en retire et que toutes les nations soldent avec cet État en argent?... Croit-on de bonne foi que cette situation serait durable, et que cet État absorberait peu à peu tout l'argent qui existe dans le mond? Non, sans doute. L'augmentation de la quantité d'argent en diminuerait le prix; le luxe croitrait et avec lui la consommation des denrées soit nationales, soit étrangères. Il enrésulterait donc que cet État transporterait aux autres une moindre quantité. Ainsi il swerait obligé à sort tour de payer en argent et la circulation ae rétablirait. ("Paradoxes philosophiques sur la liberaté du commerce entre les nations" [ms. 1764], first printed in F. Sauvaire-Jourdan, Isaac de Bacalen et les idées libre-échangistes en France, 1903, p. 43.)

Cf. also Issac Gervaise in 1720, supra, pp. 80-81.

4. [4] Paper credit of Great Britain, 1802, pp. 131 ff.

5. [5] Ibid., pp. 242-43.

6. [6] High price of bullion, Works, pp. 268-69, and appendix to 4th ed., ibid., pp. 291 ff. For a detailed analysis of Ricardo's argument and of Malthus's reply thereto, and for some later qualification to his argument made by Ricardo in his reply to Malthus, see Jacob Viner, Canada's balance, pp. 193-201.

7. [7] Ricardo, High price of bullion, appendix, Works, p. 292. Cf. also Wheatley, Report on the reports, 1819, pp.20-21, for a similar argument.

8. [8] Ricardo apparently thought that the fact that specie movements created more serious problems of adjustment for the country as a whole than would equivalent movement of other commodities would in some manner result in the liquidation of new foreign obligations in goods instead of in specie, but he did not indicate the mechanism whereby this would be brought about. Cf. Ricardo, op. cit., p. 293: "Any of these commodities [i.e., other than gold] might be exported without producing much inconvenience from their enhanced price; whereas money, which circulates all other commodities, and the increase or diminution of which, even in a moderate proportion, raises or falls prices in an extravagant degree, could not be exported without the most serious consequences." But these consequences, if serious, would be serious not for the individual exporters of the specie, but for the community as a whole.

9. [9] An essay on the theory of money, vol. 1, 1807, p. 238.

10. [10] Ibid., pp. 180-81; Report on the reports, 1819, pp. 21-29.

11. [11] "Banking and currency, Part I," Dublin University magazine, XV (1840), 10.

12. [12] R. Torrens, The budget, a series of letters on financial, commercial, and colonial policy, 1841-44, Letter II.

13. [13] Thomas Joplin, Currency reform: improvement not depreciation, 1844, pp. 14-15.

14. [14] Principles of political economy [1848], Ashley ed., bk. iii, chap. 21.

15. [15] Ibid., p. 620. (Italics not in original.) There is an unfortunate ambiguity here, since it is impossible to say with certainty whether Mill meant that prices will necessarily operate alone to restore equilibrium, or merely that price changes were necessary.

16. [16] Ibid., pp. 623-24. (Italics not in original text.) Mill notes also that foreign consumers "have had their money incomes probably diminished by the same cause" (ibid., p. 624) but does not expressly point out that this will be an additional factor operating to reduce English exports and thus to restore equilibrium. Breaciani-Turroni (Inductive verification of the theory of international payments (1932, p. 91, note) points out the significance of the passage cited in the text.

17. [17] Essays on some unsettled questions, 1844, Essay 1.

18. [18] Cf. ibid., p. 16: "As the money prices of all her other commodities [= her own products] have risen, the money incomes of all her producers have increased."

19. [19] Cf. ibid., pp. 26-27 (Mill is discussing the effect on the gains from trade of an import duty imposed by England on German linen):

The equilibrium of trade would be disturbed if the imposition of the tax diminished in the slightest degree the quantity of linen consumed...the balance therefore must be paid in money. Prices will fall in Germany, and rise in England; linen will fall in the German market; cloth will rise in the English. The Germans will pay a higher price for cloth, and will have smaller money incomes to buy it with; while the English will obtain linen cheaper, that is, its price will exceed what it previously was by less than the amount of the duty, while their means of purchasing it will be increased by the increase of their money incomes.

20. [20] Some leading principles of political economy newly expounded, 1874, pp. 360 ff.; Essays in political economy, 1873, pp. 24 ff.

21. [21] An examination into the principles of currency, 1854, pp. 34-36. The words italicized by me involve a falfacy, since a relative decrease in mometary circulation in the paying country is necessary, even when relative price changes are not. See infra, p. 366.

22. [22] C. F. Bastable, "On some applications of the theory of international trade," Quarterly journal of economics, IV (1889), p. 16. (Italics in original.) Ricardo, in his later correspondence with Malthus, while continuing to deny that a crop failure or a unilateral remittance would result in relative price changes, conceded that it would result in a movement of specie from the debtor to the creditor country sufficient to restore the normal relationships in each country between quantity of goods and quantity of money. (See my Canada's balance, pp. 195-96.)

23. [23] J. S. Nicholson, Principles of political economy, II (1897), 287-93. In the preface, Nicholson made an acknowledgment to Bastable "for his careful revision and criticism of the chapters on the theory of foreign trade."

24. [24] It may be significant, as indicating possible indebtedness, that of these writers Longfield, Cairnes, and Bastable had all been associated with Trinity College, Dublin, as students, or professors, or both, and Nicholson had received help from Bastable.

25. [25] F. W. Taussig, "International trade under depreciated paper," Quarterly journal of economics, XXXI (1917).

26. [26] Knut Wicksell, "International freights and prices," ibid., XXXII (1918), 404-10. Wicksell is here following Ricardo. Cf. supra, p. 303, note 21.

27. [27] Quarterly journal of economics, XXXII (1918), 410-12.

28. [28] Ibid. Even if there were no "domestic" commodities, and if the prices of all commodities were necessarily uniform throughout the world, relative price changes could still be an equilibrating factor, since it is the relative changes in prices of different commodities in the same market, not the relative changes in prices of the some commodity in different markets, which is the important price factor in the mechanism. See infra, p. 319.

29. [29] I cannot now find an explicit statement of this argument by Wicksell. Nicholson, however, had presented it in 1897.—See his Principles, II (1897), 289.

30. [30] Canada's balance of international indebtedness, 1924, pp. 204-06.

31. [31] In the analysis, later in the same book, of the influence on its export trade of Canada's import of capital, I did point out the equilibrating influence of this additional factor:

It is difficult to explain the decline in the percentage of exports to total [Canadian] commodity production, without reference to the capital borrowings from abroad.... The expansion of manufacturing not only absorbed an increased proportion of the Canadian production of raw materials, but it withdrew labor, from the production of raw materials which otherwise would have been exported, to the construction of plant and equipment and the fabrication, from imported raw materials, of manufactured commodities for domestic consumption. The development of roads, towns, and railroads, made possible by the borrowings abroad, absorbed a large part of the immigration of labor, and these consumed considerable quantities of Canadian commodities which would otherwise have been available for export. Changes in relative price levels resulting from the capital borrowings were also an important factor in restricting exports, operating coordinately with the factors explained above (ibid., pp. 262-63).

32. [32] "The reparations problem," Index, April, 1928.

33. [33] Ibid., p. 9: "There is no direct reason why A's export articles should go up in price or B's go down. In both it is a question of A's increased demand balancing B's reduced demand. In any case an increase in the total demand may just as well apply to B's as to A's international goods. Without a knowledge of the circumstances in each particular case we must presume that no such shifting of prices takes place."

34. [34] Ibid., p. 10.

35. [35] Economic journal, XXXIX (1929): J. M. Keynes, "The German transfer problem," 1-7; B. Ohlin, "The reparation problem: a discussion," 172-78; Keynes, "The reparation problem, a rejoinder," 179-82; Ohlin, "Mr. Keynes' views on the transfer problem: II, a rejoinder," 400-04; Keynes, "Views on the transfer problem: III, a reply," 404-08.

36. [36] Ibid., p. 4.

37. [37] Ibid., pp. 407 ff.

38. [38] Ibid., p. 405. Pigou has expounded the same doctrine. Cf. "The effect of reparations on the ratio of international interchange," Economic journal, XLII (1932), 533:

Thus suppose that Germany is normally sending so much of her exports abroad and buying with them so much imports; and that, on the top of this situation, she is subjected to an indemnity whose amount is expressed in English goods. If the indemnity exceeds the previous sum of English exports sent to her by us, so that it cannot be paid by Germany's dispensing with these exports, and if also the English demand for German goods in respect of enlarged quantities has an elasticity less than unity, Germany cannot, however much she increases her exports to us, provide the means of paying the indemnity.

Whether Pigou uses "demand" here in the simple monetary sense or in the reciprocal demand sense, this would not necessarily be true since in either case the English demand for German goods might shift in a direction favorable to Germany as the result of the receipt by England of reparations payments.

39. [39] Ohiln later pointed this out (Interregional and international trade, 1933, p. 62).

In his later Treatise on money (1930, 1, 340-42), Keynes returns to the problem briefly, but without much addition to his earlier argument. He here stresses the difficulty of surrender of gold by Germany; appears to interpret Ohlin's argument, perhaps rightly, as resting on the assumption that neither relative price changes nor specie movements are necessary for transfer of reparations if the proper credit policies are adopted in paying and receiving countries; and takes it for granted that a loss of gold by Germany, in the absence of a change in credit policy, means a lowering of money wages in out relative price changes, without changes in the usual gold reserve ratios in either country, without a fall in money wages in the paying country or a rise in the receiving country, through the mediation of an initial transfer of specie and its effects on relative demands for commodities in terms of money. See infra, pp. 338 ff., 366 ff.

40. [40] Economic journal, XXXIX, 181. (Italics in original.)

41. [41] ibid., p. 402.

42. [42] This definition, of course, would fit only either a static world in which the world stock of monetary gold was subject neither to accretion from mines nor to depletion by wear and tear or industrial use, or else a world in which each country produces the gold it needs for industrial consumption or to replace monetary wear and tear.

43. [43] Essays, 1875 ed., I, 335-36, note.

44. [44] Sir George Shuckburgh Evelyn, "An account of some endeavours to ascertain a standard of weight and measure," Philosophical transactions of the Royal Society of London, 1798, part 1, pp. 175-76.

45. [45] Cf., e.g.: Ricardo, Proposals for an economical and secure currency [1816], Works, p. 400:

It has indeed been said that we might judge of its value [i.e., the value of money] by its relation, not to one, but to the mass of commodities. If it should be conceded, which it cannot be, that the issuers of paper money would be willing to regulate the amount of their circulation by such a test, they would have no means of so doing; for when we consider that commodities are continually varying in value, as compared with each other; and that when such variation takes place, it is impossible to ascertain which commodity has increased, which diminished in value, it must be allowed that such a test would be of no use whatever.

Cf. also, Malthus, review of Tooke, Quarterly review, XXIX (1823), pp. 234-35: ibid., Principles of political economy, 1st ed., 1820, p. 126; William Jacob, An historical inquiry into the production and consumption of the precious metals, 1831, II, 375-76; Arthur Young, An inquiry into the progressive value of money in England, 1812, p. 134; Tooke, in Report from Select Committee on banks of issue, 1840, p. 337.

46. [46] Wheatley was sharply rebuked by Francis Horner for his reliance on Evelyn's index number, with which Horner found fault on the basis both of genuine shortcomings in its mode of construction and of objections, weighty and otherwise, to the index number logic.—"Wheatley on currency and commerce," Edinburgh review, III (1803), 246 ff.

47. [47] Essay on the theory of money, I (1807), 2-3. The inconsistency is not apparent. The equality of level which Hume posited was not between absolute quantities of money but between the proportions of quantities of money to quantities of commodities, i.e., prices and he conceded the possibility of differences in these proportions only if money was hoarded, or, for metallic money, if paper money was also used, or where equality of proportions was disturbed by differences in transportation costs as between export and import.

48. [48] E.g., Letters to Malthus, pp. 16, 34, 57, 196.

49. [49] Principles, Works, p. 228.

50. [50] Inquiry into the nature and progress of rent, 1815, p. 46, note.

51. [51] The uniformity posited, it must be noted, is between sale or market prices in the two areas, not between cost prices.

52. [52] Essays, 1875 ed, I, 336, note.

53. [53] Principles, Works, p. 81.

54. [54] Cl. ibid., pp. 81 ff. Cf. also High price of bullion, appendix to 4th ed. (1811), Works, p. 293.

55. [55] Letters of Ricardo to Malthus (May 3, 1823), p. 151.

56. [56] Essay on the theory of money, II (1822), 103.

57. [57] Torrens (The budget, 1844 ed., Introduction, pp. liii ff.) shows that an attempt by Lawson to refute his argument based on the Cuban illustration rests on the "absurd assumption" that there could prevail great differences in price for identical commodities in Cuba and England, whereas his conclusions "had been deduced from the assumption, that (carriage and merchant's profit being excluded from the calculation, for the sake of simplicity and brevity) when the price of cloth fell to 20 s. per bale in England, it would be sold for 20 s. per bale in the markets of Cuba; and that, when the price of sugar in Cuba rose to 40 s. per cwt., it would be sold in the markets of England for 40 s. per cwt."

Whewell, in 1856, in what was presented as mainly an uncritical mathematical exposition of J. S. Mill's doctrines on international trade, formulated what he called the "principle of uniformity of international prices," to the effect that, transportation costs being abstracted from, "when the international trade has been established, the relative value of all commodities which are exported and imported is the same in the two countries."—"Mathematical exposition of some doctrines of political economy. Second memoir," Transactions of the Cambridge Philosophical Society, IX, part I (1856), 137-39.

See also, for similar reasoning: Longfield, Three lectures on commerce, 1835, p. a5; Cairnes, Essays in political economy, 1873, pp. 70 ff.; ibid., Some leading principles, 1874, p. 409; Marshall, Money credit & commerce, 1923, p. 228; Taussig, "International freights and prices," Quarterly journal of economics, XXXII (1918), 411-12.

58. [58] E.g., Laughlin, Principles of money, 1903, p. 379: "Evidently, the classical theory counted on a change of all prices in England in such a manner that the whole English level would be, for a time, higher or lower than the general level in the United States, and would, in this manner, occation new exports or new imports." Cf. also: Nicholson, Principles of political economy, II (1897), 288; Wicksell, "International freights and prices," Quarterly journal of economics, XXXII (1918), 405.

59. [59] Cf. A. C. Whitaker, "The Ricardian theory of gold movements," Quarterly journal of economics, XVIII (1904), 236 ff., and my comments thereon in Canada's balance, pp. 206 ff.

60. [60] Convinced apparently that a reversal in the direction of movement of a commodity is practically inconceivable, one writer has found something absurd in my statement of these elementary propositions in my Canada's balance.—See L. B. Zapoleon, "International and domestic commodities and the theory of prices," Quarterly journal of economics, XLV (1931), 425, note.—But such instances have occurred in the past, and it was the case of butter in Canada before 1913, which shifted from the export to the import class, which brought their possibility to my attention.

To my argument that a substantial range of fluctuation of the relative prices of the same commodity in two different markets is possible if the commodities are bulky or are subject to import duty, Bresciani-Turroni has replied: "Experience however shows that in many cases even for commodities for which transportation costs or import duties are very high there exists an equilibrium between prices in different countries and that goods move from one country to another as soon as the equilibrium is disturbed." (Inductive verification of the theory of international payments, 1932, p. 97. note.) He claims that for international commodities there is a "normal difference" in their prices in two markets, corresponding to the costs of transportation and of duties, and that "When the actual agread in prices is not equal to this 'normal difference,' the disturbed 'parity' will soon be reestablished through movements of goods" (ibid). What he says is, indispetable, and has not been, disputed for commodities which do commodity move in international trade and always move only in one particular direction. But it does not cover adequately the full range of possibilities, and takes no account, in particular, of two possibilities, for, let us say, a commodity, wheat, which has been moving from country A to country B. First, the departure from "parity" in the price of wheat in country B may be such as to stop raffer than to stimulate the movement of wheat, i.e., the price of wheat in B may fall below its import parity, with the result that import ceases, perhaps permanently. Secondly, the fall in the price of wheat in country B relative to its price in country A may be so great as to carry the price in B from import parity with respect to country A to export parity with respect to country A, i.e., may reverse the direction of movement of the wheat.

61. [61] See infra, pp. 555 ff., for a detailed discussion of the terms of trade as an index of gain or loss from trade.

62. [62] Cf. his evidence before (Lords) Committee on resumption of cash payments. 1819, p. 192:

"Q. Do you mean that you doubt whether an increase of foreign demand has not always a tendency to increase the production and wealth of a nation?

A. In no other way than by procuring for us a greater quantity of the commodities we desire in exchange for a given quantity of our own commodities, or rather for a given quantity of the produce of our land an labor."

63. [63] Report from the Committee on the circulating paper of Ireland, 1804, p. 20. Cf. also, to the same effect: Lord King, Thoughts on the effects of the Bank restrictions, 2d ed., 1804, pp. 85-86; J. R. McCulloch, "Essay showing the erroneousness of the prevailing opinions in regard to absenteeism," reprinted from Edinburgh review, November, 1825, in his Treatises and essays, 2d ed., 1859, pp. 223-49 (in a new introduction, McCulloch says of this essay that "It helped to stem the torrent of abuse, and has yet to be answered," p. 224); N. W. Senior, Political economy, 4th ed., 1858, pp. 155 ff.; J. Tozer, "On the effect of the non-residence of landlords, &c. on the wealth of a community," Transactions of the Cambridge Philosophical Society, VII (1842), 189-96 (a mathematical study which begs the crucial question: "When the proprietor becomes non-resident the capital C2 + C2' will be disengaged, because his absence destroys the demand on which its employment depended; but a new demand for such commodities as can be exported with advantage will be created by the absence, because the rent of the proprietor must now be exported"); J. L. Shadwell, A system of political economy, 1877, pp. 395-96.

64. [64] M. Longfield, Three lectures on commerce and one on absenteeism, 1835, pp. 82, 88 ff., 107 ff. He discusses along similar lines the effect of an import duty on the terms of trade. Ibid., pp. 70, 105.

65. [65] This claim is made for Longfield by Isaac Butt, Protection to home industry, 1846, p. 93. Cf., however, J. S. Mill, Some unsettled questions in political economy [written 1829-30], 1844, p. 43: "Ireland pays dearer for her imports in consequence of her absentees; a circumstance which the assailants of Mr. M'Culloch, whether political economists or not, have not, we believe, hitherto thought of producing against him."

66. [66] Three lectures on commerce, p. 82.

67. [67] The budget, 1841-1844, passim. See supra, pp. 298-99.

68. [68] A request by Torrens in 1835 to discuss some question—probably the one here under discussion—was rejected unanimously by the Political Economy Club on the ground, according to Mallet, that it turned "upon an impossible case" and "did not go to establish but to disturb a principle, that of free trade, upon grounds altogether hypothetical."—Political Economy Club, Minutes of proceedings, VI (1921), 270. Cf. also ibid., pp. 54, 284.

69. [69] Herman Merivale, Lectures on colonisation and colonies, 1842, II, 308 ff.

70. [70] XXIV (1844), 721-24.

71. [71] Cf.supra, p. 315.

72. [72] Cf. R. H. Mills, Principles of currency and banking, 2d ed., 1857, p. 38: "there is, besides, a large proportion of every man's income expended on subjects which do not admit of exportation, as house-rent, many articles of diet, attendance, and various other matters. Of all these the prices vary considerably in different countries, and the general level of price is much higher in some than it is in others."

Cf. also J. E. Cairnes, Leading principles, 1874, p. 409.

73. [73] F. W. Taussig, "International trade under depreciated paper," Quarterly journal of economics, XXXI (1917); cf. also ibid., "Germany's reparation payments," American economic review, supplement, X (1920), 39.

Graham used a similar classification of commodities in the analysis of the mechanism under depreciated paper.—"International trade under depreciated paper. The United States, 1860-1879," Quarterly journal of economics, XXXVI (1922), 290-73.

74. [74] Canada's balance, pp. 205-06.

75. [75] Roland Wilson, Capital imports and the terms of trade, 1931, p. 80. Wilson continues: "Professor. Viner himself has since abandoned it, preferring to regard such a distribution of the added purchasing power derived from the loan as merely one of an infinite number of possible distributions." (Italics mine.) This does not correctly state my position at present, or at any other time.

76. [76] Harry D. White, The French international accounts, 1880-1913, 1933, p. 20. Cf. also Carl Iversca, International capital movements, 1935, pp. 230 ff.

77. [77] Cf. J. S. Mill's treatment of the division of the gain in international trade, where the same problem of the a priori probabilities arises: "The advantage will probably be divided equally, oftener than in any one unequal ratio that can be named; though the division will be much oftener, on the whole, unequal than equal." (On some unsettled questions, 1844, p. 14.)

78. [78] Edgeworth, Papers relating to political economy, II, 363.

79. [79] I use "native" to include both "domestic" and "exportable" commodities.

80. [80] For large countries, a commodity may be an international commodity near the frontier, but a domestic commodity in the interior, and some commodities may for practical purposes be hard to classify. The distinction, nevertheless, is both theoretically and practically valid. Commodities which are transportable can for our purposes be identified as domestic commodities of a particular country if their prices within that country remain as a general rule within their import and export points. Cf. the penetrating discussion by Theodore J. Kreps, "Export, import, and domestic prices in the United States, 1926-1930," Quarterly journal of economics, XLVI (1932), 195-207.

81. [81] L. B. Zapoleon, "International and domestic commodities and the theory of prices," Quarterly journal of economics, XLV (1931).

82. [82] A useful account of the more recent literature, with special emphasis on the terms-of-trade issue, is given by Carl Iversen, in his Aspects of the theory of international capital movements, 1935, pp. 243-99. His own position is in all essentials identical with Ohlin's, and his survey of the literature is presented in terms of two sharply contrasting bodies of doctrine, the wrong or "classical" doctrine, on the one hand, and the correct or "modern" doctrine, on the other. The inclusion in the "classical" doctrine of special treatment of the prices of domestic commodities he seems to regard as a peculiar aberration, accidentally in the right direction, of the "classical" writers.

83. [83] Roland Wilson, Capital imports and the terms of trade, 1931, chap. iv.

84. [84] Ibid., pp. 75-76. That this proposition is incorrect can be sufficiently shown by the reductio ad absurdum to which it would lead if there were no domestic commodities.

85. [85] Ibid., pp. 70, 72.

86. [86] [H. K. Salvesen] "The theory of international trade in the U.S.A.," Oxford magazine, May 19, 1927, p. 498.

87. [87] Ibid., pp. 73-74. (Italics in original.)

88. [88] I suspect that I am supposed to be the guilty person.

89. [89] Ibid., pp. 76-77.

90. [90] If I correctly interpret him, R. F. Harrod, in his review of Wilson's book, attempts to meet Wilson's example IV by just this argument. Economic journal, XLII (1932), 428 ff.

91. [91] T. O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, especially chap. v.

92. [92] Which Yntema calls the "resources terms of trade." See ibid., pp. 19-21.

93. [93] Bertil Ohlin, Interregional and international trade, 1933, especially pp. 417-33.

94. [94] Ibid., pp. 417-20 (chap. xx, §5).

95. [95] Cf. ibid., p. 418: "the assumption, which has been tacitly made above, that the combined demand of A and B for the export goods from either is in the first place unchanged by the borrowings."

96. [96] Ibid.

97. [97] Ibid., p. 425, note. Cf. also Carl Iversen, International capital movements, 1935, p. 289:

Expressing costs in terms of "units of productive power" and similar concepts, one cannot, of course, push the analysis beyond a demonstration that this unit, i.e., productive factors as a whole, becomes more scarce in the capital-importing country, less scarce in the capital-exporting country.

And on this premise it is inevitable that the terms of trade will move against the latter country.

98. [98] I.e., if in each country "domestic" goods are, with respect to export and import goods, "inferior commodities."

99. [99] Ibid., pp. 420 ff.

100. [100] "The effect of reparations on the ratio of international interchange," Economic journal, XLII (1932), 532-43.

101. [101] Pigou says that these implications are very simple (ibid., p. 534) and does not trouble to demonstrate them. A demonstration may not be superfluous for some readers:

From (iii)

and

102. [102] I have benefited from the criticism of Professor G. A. Elliott, of the University of Alberta, of the diagrams here presented, and chart V, in particular, incorporates a modification made as the result of his criticism. He has since published a treatment of the problem along lines similar to those adopted here, but it unfortunately became available to me too late to permit its use as a check on my results. Cf. G. A. Elliott, "Transfer of means-of-payment and the terms of international trade," Canadian journal of economics and political science, II (Nov. 1936), 481-92.

103. [103] In this illustration, the reasonable assumption has been made that in the duty-levying country the imposition of the duty will result in the price of the imported commodity rising relative to the price of the native commodity by less than the amount of the duty. This assumption, that the terms of trade move in favor of the duty-levying country as the result of the duty, affects the degree, but not the direction, of change in the terms of trade to be expected from reparations payments. If the duty caused no change in the terms of trade, there would be no change in a1c1 as the result of the duty, but ac would move further toward the horizontal than indicated in chart V, i.e., there would be no change in F', but the numerical reduction of ø' would be greater than there indicated.

104. [104] The duty has these results only if d'f', d'1f'1, are above the intersections of ac and a'c'and a1c1 and a'1c'1, respectively. It should be explained that d'f', which represents the new income of the Englishman measured in units of English goods or their (new) value equivalent in German goods, must be drawn so as to be equal to df+1/3 e'f'. On d'f', d'e' represents the number of English goods and e'f' the number of German goods (in their new units) which would be purchased by the representative Englishman with his new income. Measured in units of English goods alone, the new income would be the same as the old, or df. But since on all purchases of German goods the government collects one-third of the duty-paid price (=one-half of the price before duty), which is presumably not lost to the representative Englishman but returns to him as remission of other taxes or in some other form, d'f' must equal df + 1/3 e'f'. In the German section of the diagram d'1f'1 must be drawn so as to be equal to d1f1.

105. [105] Cf. infra, pp. 448 ff.

106. [106] Pigou, Economic journal, XLII (1932), 535.

107. [107] Le., unless in chart VI, the deviations in the two countries from the proportions in which they originally distributed their expenditures between German and English goods would, in the absence of price changes, be sufficiently favorable to Germany to make lj > d1k1 and gh < l1f1.

108. [108] In this case, in terms of chart VI, although gj > df, and g1j1 < d1f1, in each instance by the amount of reparations payments, nevertheless gh < de, and g1h1 > d1e1.

109. [109] Cf. infra, pp. 582 ff.

110. [110] Cf. D. H. Robertson, "The Transfer Problem," in Pigou and Robertson, Economic essays and addresses, 1931, p. 171: "they [i.e., Keynes, Pigou, Taussig] have nowhere, so far as I know, explained clearly the reactions of a reparation payment on the shape and position of the Marshall [reciprocal-demand] curves."

Marshall, nevertheless, offers a solution by means of his reciprocal-demand curves of what is, for present purposes, a problem identical with that of the effect of reparations payments, namely, the effect of the transfer of interest payments. His solution, must, however, be rejected, as wholly arbitrary. He leaves the receiving country's curve unaltered, and shifts the paying country's curve to the right by an amount, equal at all points of the curve, to the amount of interest payments. Cf. Marshall, Money, credit & commerce, 1923, p. 349, fig. 19.

111. [111] Cf. T. O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, chap. v, especially pp. 61-62, 71-72.

112. [112] Cf. infra, pp. 541-42.

113. [113] "The German transfer problem," Economic Journal, XXXIX (1929), 6.

114. [114] Cf. International trade, 1927, pp. 312-13. Cf. also Carl Iversen, Aspects of the theory of international capital movements, 1935, pp. 181 ff.

115. [115] High price of bullion, appendix, Works, p. 293.

116. [116] Such doctrine has actually been applied by Pigou, by Haberler, and by others following them, to the reparations transfer problem. In Pigou's analysis there is failure to notice that even if prices rise in Germany and fall in England as the result of reparations payments by Germany to England, there must nevertheless be a reduction in Germany and an increase in England in the relative amount of money income available for final expenditure and therefore in the amount of money work to be done. (Pigou, "The effect of reparations on the ratio of international exchange," Economic journal, XLII (1932), 542-43.) Haberler seems to reach his conclusion that if reparations result in a relative rise in prices in the paying country the movement of specie will be to instead of from the paying country on the basis of a tacit assumption that price level and quantity of money must vary in the same direction regardless of other circumstances. In his treatment of the reparations transfer problem, Haberler writes:

It is theoretically possible for the terms of trade to change in favor of Germany so that the prices of German exports rise and the prices of German imports fall. This leads to the rather paradoxical result that gold flows into Germany, and the transfer mechanism thus cases the situation of the country paying reparations. This is not a very probable case, but it would arise if the increase of foreign demand were for German exports, and the fall in Germany's demand related to imports. (Theory of international trade, 1936, pp. 75-76.)

117. [117] An essentially similar concept is used for the same purposes by Ohlin (Interregional and international trade, 1933, pp. 378, 407, note).

118. [118] Cf. Rueff's "principle of the conservation of purchasing power," according to which the transfer of a given amount of "purchasing power" (i.e., specie?) between two countries cannot result in a change in the aggregate power to purchase, measured in money, of the two countries.—Jacques Rueff, "Mr. Keynes' views on the transfer problem," Economic journal, XXXIX (1929), 388-99.

119. [119] Theoretically, other things being equal, and especially the "transactions velocity" of money remaining constant in each country, the final purchase velocity of money should be expected to fall slightly in the paying country and to rise slightly in the receiving country as the result of reparations, since in the paying country there will be production involving the use of money but not resulting in "final purchases," and in the receiving country there will be final purchases not involving, directly or indirectly, domestic production, and therefore absorbing less than the normal amount of means of payment for their mediation.

120. [120] The results presented in these cases are not arbitrary, nor merely possible, but follow necessarily from the assumptions explicitly made in connection therewith. In case C, for example, the results as to the apportionment of expenditures and the distribution of money between the two countries after adjustment has been made to the payments are obtained as follows. Write:

ir for the amount available for expenditure in the receiving country before transfer (=3000).
ip for the amount available for expenditure in the paying country before transfer (=1500).
Ir for the amount available for expenditure in the receiving country after transfer.
Ip for the amount available for expenditure in the paying country after transfer.
x for the ratio of the weighted average velocity after transfer to the weighted average velocity before transfer, for the two countries combined.

Then

2Ir + Ip = 2ir + ip = 7500
Ir = xir + 600
Ip = xip - 600

Solving for x, Ir and Ip

x = 69/75 ;Ir = 3360; Ip = 780

Allocation of Ir and Ip to the different classes of commodities in the proportions in which it is assumed each country would distribute its expenditures in the absence of relative price changes yields the remainder of the data necessary to determine whether relative changes in prices are necessary for the new equilibrium, and, if so, in what direction.

121. [121] "The transfer problem," in Pigou and Robertson, Economic essays and addresses, 1931, pp. 170-81.

122. [122] In a review of my Canada's balance, American economic review, XV (1925), 108. I had suggested, as an explanation of a tendency which seemed to be apparent in the Canadian experience for the relative rise in prices in the borrowing country to diminish in extent as borrowings continued at an even rate, that the longer the interval between a relative price change and the actual trade transactions the fuller would be the response to such price change, and, therefore, that the degree of relative price change required to bring about adjustment of the trade balance in the first year of a period of borrowings at an even rate would tend to be more than was required in later years. Graham offered his argument as a better explanation of the shrinkage in the relative change in prices.

123. [123] "International trade under depreciated paper. The United States, 1862-79," Quarterly journal of economics, XXXVI (1922), 223.

124. [124] Feis, "The mechanism of adjustment of international trade balances," American economic review, XVI (1926), 602 ff. (at p. 603).

125. [125] In Graham's exposition, this is suggested by his failure to discuss the determinants of the size of the specie flow and by his reference to his analysis of the depreciated paper case, where he had arbitrarily assumed that the quantities of money in each country would be held constant, an assumption which makes any analogy from the mechanism under depreciated paper a fallacious one in this connection for the mechanism under the gold standard.

126. [126] Cf. ibid., p. 605: "The classical account of the process of adjustment both in its original sources and as presented in the preceding pages, rests upon the implicit assumption that income and price levels are the passive result of other influences. They are commonly said to be determined by the relationship between the volume of goods (trade) and the volume of purchasing power (and its velocity) within a country...."

127. [127] Cf. G. W. Norman, Letter to Charles Wood, Esq., M.P. on money, 1841, p. 20:

There is one circumstance worth attention on account of its tendency to increase the transmission of specie under an adverse exchange. The articles of export which might replace gold and silver are usually few in number, speaking practically, and the increased quantity of such goods received by the creditor country lowers their price in it to an extent which, partially at least, lessens the effect produced by the enlargement of its currency.

If Norman means by this passage that a sufficient large flow of specie must occur to offset any otherwise disequilibrating influence on prices of the flow of commodities, then the position taken here corresponds with his.

128. [128] Hume, Political discourses (1752), in Essays moral, political, and literary, 1875 ed., I, 333, note. Cf. W. Whewell, "Mathematical Exposition of certain doctrines of political economy. Third memoir," Transactions of the Cambridge Philosophical Society, IX, part II (1856), 7: "The rate of exchange may be looked upon as an instrument which measures the force of that current [i.e., gold movements], and does not add anything to that force, or produce any effect of its own, except, it may be, to regulate and reduce to steadiness the casual and transient impulses."

129. [129] I at one time interpreted J. H. Hollander, as did also Taussig, as holding that exchange rate fluctuations within the limits of the specie points were the effective factor in bringing about a transfer of international borrowings in the form of commodities instead of specie. (See Hollander, "International trade under depreciated paper," Quarterly journal of economics, XXXII [1918], 678, and my Canada's balance, 1924, p. 150.) But upon a rereading I am now inclined to interpret him as holding that the adjustment takes place automatically, without any moving factor, as in Ricardo's version, or perhaps with an automatic and precisely adequate relative shift in demand implied as the moving factor, with the variations in the exchange rates just happening, and serving no function in the mechanism.

130. [130] See supra, pp. 206-07.

131. [131] The only instance I have noticed in the literature of explicit correction of this error is in Harry D. White, The French international accounts, 1880-1913, 1933, 156, note, where the perpetration of this error in my Canada's balance is properly rebuked. I was in excellent company, however. Ricardo, J. S. Mill, Bastable, Marshall, Taussig, have all, at one time or another, made the same error.

132. [132] The criticism presented here corresponds in most respects to that to be found in the following, among other, sources: G. W. Terborgh, "The purchasing-power parity theory," Journal of political economy, XXXIV (1926), 197-208; T. O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, pp 18-19; C. Bresciani-Turroni, "The 'purchasing power parity' doctrine," L'Égypte contemporaine, XXV (1934), 433-64; Howard Ellis, German monetary theory, 1905-1933, 1934, part III. Cf. also Jacob Viner, "Die Theorie des auswärtigen Handels," in Die Wirtschaftstheorie der Gegenwart (Wieser Festschrift), IV (1928) 117-18.

133. [133] Gustav Cassel, "Memorandum on the world's monetary problems," International Financial Conference, Brussels, 1920, Documents of the Conference, V, 44-45. (Italics in the original.)

If a and b represent two countries, E represents the number of units of b's money which exchanges for one unit of a's money, P represents the index number of prices, and o and r the base and the given years, respectively, then according to Cassel:

134. [134] I.e., using the same symbols as in note 2, supra:

135. [135] Cassel, Post-war monetary stabilisation, 1928, pp. 31-32.

136. [136] E. F. Heckscher (and others), Sweden, Norway, Denmark and Iceland in the world war, 1930, p. 151.

137. [137] Cassel, Theory of social economy, 1932, pp. 662-63. Cassel proceeds to make a concession which seems to me to involve a surrender of the one element in his theory which differentiates it from other theories, namely, his insistence that the long-run exchange value of a currency depends solely on the average level of prices in the two countries. He says: "However, the general internal purchasing power of the B currency has, of course, fallen, and to that extent one must expect a corresponding fall in the rate of exchange. Over and above that, there will perhaps take place a further fall in the rate as a consequence of a distribution of the general rise of prices which may be particularly unfavorable for the external value of the B currency." (Ibid., p. 663. Italics not in original.) Unless Cassel has in mind only a temporary effect, he is here conceding that the exchanges need not move in the same direction or degree as the relative change in general price levels.

138. [138] Cf. T. O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, pp. 18-19.

139. [139] Cf. Robert Adamson, "Some considerations on the theory of money," Transactions of the Manchester Statistical Society, 1885, p. 58:

...I cannot read the literature of this subject without seeming to feel that in the ordinary explanations of prices by reference to fluctuations in the quantity of money, and of circulation, etc., are not only curious reversals of the true theory, but practical dangers. They concentrate attention on the secondary factor, assign all importance to it, and tend toward the practical doctrine that remedies are to be sought in some artificial manipulation of the money system. I would not deny [sic] for a moment that the money system of a country is without influence on the course of its prices; no two facts can coexist in mutual dependence without some reciprocal influence being exercised, but the influence seems to me to be secondary in its action and relatively insignificant. It only acts because, through deeper lying causes, there is already a determined range of prices. The comparative efficiency of a country as one member of the great trading community is what in the long run determines the scale of prices in it, and it is to the variations in the conditions affecting its efficiency that we must turn for final explanation of the movements which on the surface appear as changes in an independent entity, money.

140. [140] Cassel, Post-war monetary stabilization, 1928, p. 29. Machlup has recently expressed similar views in the course of a review of Ellis's book:

The purchasing-power parity theorists, of course, overstated their case of unilateral causation (inflation-prices-exchange rates). But it was necessary to do so at a time when the monetary authorities tried to deny any responsibility for the depreciation by maintaining that the intense "need" for imported goods and the misbehavior of wicked speculators were to be blamed. The concession that, under dislocated currencies, certain shifts in the relative intensity of the demand for the other countries' goods may bring about a (slight) change in foreign exchange rates was entirely out of place at a time when foreign exchanges were continuously rising to some fantastic multiple of their original level. (Journal of political economy, XLIII [1935], 395 Italics mine.)

141. [141] Cf. R. G. Hawtrey, Currency and credit, 3d ed., 1928, p. 442:

But to recommend a dogma on account not of its inherent validity but of its good practical consequences is dangerous. When people discover its theoretical weaknesses they may not only reject the dogma, but neglect the practical consequences.

Chapter VII

1. [1] Overstone, Further reflections on the state of the currency, 1837, pp. 33-34.

2. [2] John Welsford Cowell, Letters...on the institution of a safe and profitable paper currency, 1843, pp. 45-46.

3. [3] Edwin Hill, Principles of currency, 1856, pp. 2-3.

4. [4] The types of secondary-operations of an offsetting character should perhaps be further subclassified, so as to distinguish partially offsetting, exactly offsetting ("neutralizing"), and over-compensating secondary fluctuations.

5. [5] Cf., however, Isaac Gervaise's treatment of "credit," in 1720, supra, p. 81.

6. [6] James Pennington, in a letter published in Tooke, A History of Prices, II (1838), 377-78.

7. [7] Torrens, Reply to the objections of the Westminster review, 1844, p. 12.

8. [8] The evidence, given by Lord Overstone, before the Select Committee...of 1857, 1858, p. 181.

9. [9] Principles, Ashley ed., p. 670.

10. [10] Cf. On the regulation of currencies, 2d ed., 1845, p. 78: "for every ounce of gold received into the Bank of England, a corresponding weight in coin, or an equivalent in bank-notes [or in deposits?], is issued to the public."

11. [11] Cf. ibid., p. 79: "The Bank meanwhile will have its notes flowing in fast, in payment of the bills of exchange previously in its hands, as they successively become due, while there will be no vent for its notes in fresh discounts; and the result of the whole will be, that, at the end perhaps of a week, the Bank will find itself with a million more of coin in its coffers, and a million less of securities." (I.e., the primary expansion of £1,000,000 would, after a week, be offset by a secondary contraction of £1,000,000.)

12. [12] Henry Sidgwick, The principles of political economy, 1st ed., 1883, p. 265. The same passage appears unchanged in the later editions.

13. [13] Angell comments on this passage: "No particular proof is offered to show why this is necessarily so. What we should now call the 'direct' effects of influxes of gold are rather passed by; that is, the effects proceeding from outlays by the gold importers themselves, other than through the mediation of the banks." (Theory of international prices, p. 118, note.) This seems to be recognition of the omission by Sidgwick of what I call the "primary expansion" phase of the mechanism. But Angell comments on the passage as a whole, apparently with reference to Sidgwick's recognition of the role of interest rate fluctuations in the mechanism, that "it is at once apparent...that we have here something quite new in English theory." (Ibid., p. 118.) As has been shown above, however, recognition of the part played by interest rate fluctuations was common during the currency controversies earlier in the century.

14. [14] J. L. Laughlin, Principles of money, 1903, p. 387.

15. [15] A. C. Whitaker, "The Ricardian theory of gold movements," Quarterly journal of economics, XVIII (1904), 241ff.

16. [16] Alfred Marshall, "Evidence before the Indian Currency Committee" [1899], reprinted in Official papers by Alfred Marshall, 1926, p. 282. ("Currency" is to be interpreted here as specie.) Cf. also ibid., Money credit & commerce, 1923, p. 229.

17. [17] Principles of economics, 1913, p. 370.

18. [18] Cf., e.g., G. J. Goschen, The theory of the foreign exchanges, 1861, pp. 129-30, and R. G. Hawtrey, The art of central banking, 1932, p. 142.

19. [19] If the gain which can be anticipated on the turn of the exchanges exceeds the loss on the interest differential, it will pay even to transfer funds from the high to the low interest rate market. The amount of differential in interest rates necessary to move short-term funds in the same direction as the gold movements will be greater than the amount of differential in interest rates necessary to move them in the opposite direction from the gold movements.

20. [20] Axel Nielsen warns against exaggerating the international mobility of short-term capital: it is only a fraction of the short-term funds that is truly "cosmopolitan,"—Bankpolitik, II (1930), 279 ff., as cited by Carl Iverson, Aspects of the theory of international capital movements, 1935, p. 239.

21. [21] Cf., e.g.: A. F. W. Plumptre, "Central banking machinery and monetary policy," The Canadian economy and its problems, 1934, p. 197; A. D. Gayer, Monetary policy and economic stabilization, 1935, pp. 10-11; W. Edwards Beach, British international gold movements and banking policy, 1881-1913, 1935, pp. 17-18.

22. [22] Cf., however, Henry Thornton, with reference to what would happen under a metallic standard and with no legal restrictions in interest rates if England's exports were curtailed by embargoes or other wartime disturbances:

Doubtless much of our gold coin would be taken from us; and, perhaps, a larger quantity of this than of other articles. The whole, however, would not leave us; a high rate of interest would arise, and this extra profit on the use of gold, which would increase as its quantity diminished, would contribute to detain it here—some foreigners, probably, transferring property which would take the shape of the precious metals, or continuing to afford to us the use of it for the sake of this high interest. (Substance of two speeches...on the bullion report, 1811, p. 10.)

23. [23] Cf. (Commons) Report...on the expediency of the Bank resuming cash payments, 1819, appendix no. 43, p. 354; Sir John Sinclair, The history of the public revenue of the British Empire, 3d ed.III [1804], appendix no. 5, pp. 160-63; John Hill, An inquiry into the causes of the present high price of gold bullion in England, 1810, p. 36; G. R. Porter, The progress of the nation, new ed., 1851, pp. 628-29.

24. [24] Cf. David Salomons, A defence of the joint-stock banks, 2d ed., 1837, p. 12:

...I...assert that their transmission [i.e., of British funds for investment abroad] has on the whole been favorable to commerce, that they have tended to regulate the exchanges, instead of having had an injurious effect on them; and many most important payments could not have been made, without the powerful assistance derived from the export of foreign stock, as the most ready means of payment. It will be, indeed, difficult to show how such descriptions of foreign funds, for which a ready market exists on the Continent as well as in London, could at all injuriously affect the exchanges. Such funds are, in truth, a universal currency, and payments either at home or abroad can be made by their transmission, and the balance of trade as readily adjusted, as by an import or export of the previous metals.

25. [25] Cf. Fullarton, On the regulation of currencies, 2d ed., 1845, p. 149:

Since the practice, however, of investing capital in foreign securities has become general in this country, a new element has been introduced into the economy of our exchanges. The capital required for the liquidation of a foreign debt may be transmitted as well in the form of a marketable security for money, as in gold or merchandise. And, as the price of such securities rises and falls with the fall and rise of the market rate of interest, and the securities themselves accordingly are in a continual course of transition from places where the rate of interest is high to places where it is low, the fluctuations of interest have become an engine of some importance in the regulation of the exchanges, and to the extent of their action, are found certainly a more manageable and safe instrument for facilitating foreign payments and correcting irrgularities in the distribution of the precious metals, than the fluctuations of price.

Cf. also, supra, pp. 278 ff.

26. [26] T. H. Milner, Some remarks on the Bank of England, 1849, pp. 17 ff., 42. He claims that "the regulation of foreign investment is...the effectual key to the regulation of the monetary affairs of the country."(Ibid., p. 18.)

27. [27] Cf. "History and exposition of the currency question," Westminster and foreign quarterly review,XLVIII (1848), 468, note: "the depression of English securities may as often induce the foreign capitalist to withdraw his gold from England, by alarming him for its safety, as to send it here for profitable investment."

28. [28] Cf. supra, p. 271, for one such warning in 1857.

29. [29] Cf., however, Thirteenth annual report of the Federal Reserve Board, 1927, p. 16:

Dollar balances in New York have been built up not only by foreign industrial corporations and commercial banks but also by European and South American central banks, which in many instances are authorized by law to keep a portion of their reserves in the form of foreign exchange in countries with stable currencies. These dollar balances of foreign central banks, whether they are invested or kept on deposit, are in liquid form and subject to immediate withdrawal at any time. If they were to be withdrawn in gold in whole or in part the demand for the gold, though it would first be felt by the commercial banks, both member and nonmember, would promptly reach the federal reserve banks as the only holders of gold in any considerable amount. These balances are, therefore, potential sources of demand upon the federal reserve banks for gold out of their reserves, the central banking reserves of the United States, which have thus become indirectly a part of the reserves against bank credit and currencies in other countries. The existence in America of these foreign balances consequently presents a condition in the banking situation to be taken into account in determining the federal reserve system's credit policy with a view to maintaining the country's banking system in a position to meet demands for gold from abroad without disturbing business and credit conditions in this country.

30. [30] In their hasty abandonment of the gold-exchange standard, the European banks of issue, according to a computation of the Banque de France, reduced their holdings of foreign short-term funds from 48,464,405,000 francs French on January 1, 1931, to 3,921,500,000 francs French on November 30, 1933, or by more than 95 per cent. The ratio of such funds to the total reserves of these banks fell during the same period from about 35 per cent to about 2½ per cent. (Cf. Federal Reserve bulletin, March, 1934, p. 164.)

31. [31] From March 31, 1931, to the middle of July, 1931, withdrawals of foreign short-term funds from Germany amounted to over 1,000,000,000 marks, or over 20 per cent of the total short-term foreign indebtedness of Germany at the earlier date—"The Wiggin report," Annex V, Economist, CXIII (Aug. 22, 1931), supplement, p. 6. From June 30, 1931, to November 30, 1931, the American dollar acceptances in Europe—mostly in Germany—were reduced from about $500,000,000 to about $300,000,000 (New York Times, Jan. 4, 1932, p. 32). These withdrawals would of course have been even greater and more rapid if the debtors had met all the demands made upon them by their creditors. During this period, money rates were substantially higher in Germany than in the creditor countries, i.e., funds were moving from a high-rate money market to low-rate money markets.

32. [32] League of Nations, Report of the Gold Delegation of the Financial Committee, 1932, p. 52.

33. [33] The validity of this interpretation depends on how the Gold Delegation would deal with a situation such as the following: country A has a favorable balance of trade with country B, and in accordance with the rule laid down lends to B the funds with which to meet that balance. Next week, B repays this debt. Is the payment on capital account, and therefore such as to justify gold shipments, or is it on income account, and therefore to be countered by country A by a new loan to country B or to some third country? If the former answer is correct, then the proposal of the Gold Delegation amounts merely to the recommendation that specie movements should never occur immediately whenever there is not an even balance of payments on income account, but should always be delayed until they can take the form of liquidation of capital liabilities. If the latter answer is correct, as seems to me to be the case, then no gold movements would ever occur except in connection with the amortization of borrowings not made to liquidate preexisting indebtedness on incomeaccount, while borrowings could be made only for the purpose of such liquidation.

34. [34] Canada's balance of international indebtedness 1900-1913, 1924, chap. VIII.

35. [35] J. W. Angell: review of Canada's balance in Political science quarterly, XL, (1925), 320-22; "The effects of international payments in the past." National Industrial Conference Board, The inter-ally debts and the United States, 1925, pp. 140-53; The theory of international prices, 1926, pp. 170-74, 505-10.

36. [36] Canada's balance, p. 177. (The italics were not in the original text.) Cf. also ibid., p. 164, and the explanation given of the constituent items in my "secondary reserves" series in chart II, pp. 166-67, as "Call loans elsewhere than in Canada, and net balances due from banks outside Canada."

37. [37] Theory of international prices, pp. 172-73. (Italics in the original text.)

38. [38] Angell's impression that there were two versions derives from the distinction which he makes between the significance for the mechanism of fluctuations in the holdings of sterling and of New York funds, respectively, a distinction I did not make.

39. [39] Angell means presumably by "credit expansion" what I here call secondary expansion, and by "direct" effect on the volume of Canadian deposits what I here call primary expansion. Angell's failure to notice the meaning and importance I attached to the fluctuations in "foreign loan deposits" is responsible not only for his own error in attributing to me the doctrine that secondary expansion was the important factor, but for a similar error on the part of a number of other writers who have obviously accepted Angell's account of my position as accurate. Cf. especially, Iversen, who takes me to task for neglecting what I did my utmost to emphasize, and, I now believe, in fact overemphasized: "Here again Viner seems to underestimate the implications of his restatement, which clearly suggests a direct connection between foreign loans and volume of purchasing power." (Aspects of the theory of international capital movements, 1935, p. 236. Italics in original.)

40. [40] That this is a correct interpretation of Angell's position is indicated by the following and other similar passages: "The crux of the explanation is the proposition that the importation of capital increases the supply of bills offered in the local exchange market for discount relative to the demand, thus increasing the bank's average holdings of such bills. A corresponding increase in the volume of bank deposits results; and if it is on a large scale produces the indicated effects on prices and the commodity balance of trade." (Theory of international prices, p. 173, note. Italics not in original text.) If the fluctuations in deposits "corresponded" with the fluctuations in holdings of foreign "bills," the fluctuations in deposits would be solely primary. Angell sometimes speaks of the bills being "discounted," and sometimes of their being "exchanged" for deposits, and treats these as identical phenomena. The latter was the usual procedure, as the bills were predominantly sight bills, frequently drawn on an outside agency of a Canadian bank. Under the former procedure, an original secondary expansion would be transformed, after a few weeks, into a primary expansion when the bills became due and their proceeds were used by their owners to liquidate their indebtedness to the Canadian banks. The volume of Canadian deposits would not change, but the offsetting bank assets would change from loans to holdings of foreign funds.

41. [41] The relationship I trace for Canada between the "outside reserves" and the "foreign loan deposits" corresponds closely to the relationship emphasized in recent years by students of Australian and New Zealand banking between the holdings of London funds by Australian banks and the variations in the excess of domestic deposits over domestic advances. Cf. e.g., A. H. Tocker, "The measurement of business conditions in New Zealand," Economic record, I (1925), 51 ff.; K. S. Isles, "Australian monetary policy," ibid., VII (1931), 1-17; Roland Wilson, "Australian monetary policy reviewed," ibid., 195-215.

42. [42] Cf. Canada's balance, p. 155.

43. [43] Cf. especially, Theory of international prices, p. 174:

But I think that Professor Viner's data warrant the inference—despite the opposite conclusion which he himself draws—that the classical theory is erroneous with respect to the role of gold flows, under modern conditions. The correction of the maladjustment in trade produced by the loans did not come from the effects of the gold flows, or of changes in the outside bank balances. It came from the effects of the original (and prior) increase in Canadian bank deposits.

44. [44] Angell seems to think that the Canadian banks converted their sterling funds into New York funds only after the increase in Canadian deposits had resulted in a rise in prices and an increase in the Canadian import surplus. (Cf. quotations from Angell, pp. 416 and 418, note 10, supra.)

45. [45] Herbert Feis, "The mechanism of adjustment of international trade balances," American economic review, XVI (1925) 597. Feis explains that he uses the term "gold reserves" to include both the specie reserves held in Canada and the "outside reserves."

46. [46] Ibid. pp. 598-99.

47. [47] Feis, however, seems to have followed Angell in excluding sterling funds from the "outside reserves," and in taking it for granted that there was a substantial lag between the accumulation by the Canadian banks of sterling funds and their conversion into New York funds, and thus may merely be repeating Angell's argument. Cf. Feis, op. cit., p. 598: "Canadian banks sell their London funds to New York banks, thereby accumulating outside reserves." Such sales would leave the outside reserves unchanged in amount and would change only their form.

48. [48] Robert M. Carr, "The role of price in the international trade mechanism," Quarterly journal of economics, XLV (1931), 711.

49. [49] Cf. supra, p. 418.

50. [50] This, I assume, is what Carr means by "extension of credit at home."

51. [51] Harry D. White, The French international accounts 1880-1913, 1933, pp. 11-12.

52. [52] Cf. Canada's balance, pp. 164-77.

53. [53] White apparently at times interprets the "orthodox" doctrine, which he accepts for himself and attributes also to me, as involving only secondary fluctuations in the amount of means of payment. Cf. White, op. cit., pp. 7-8: "A year or even more may elapse before the increased reserves in the gold receiving country result in increased demand liabilities."

54. [54] Theory of international prices, appendix B, pp. 505-10, and "The effects of international payments in the past," loc. cit., pp. 140-53.

55. [55] Theory of international prices, p. 506.

56. [56] Ibid., p. 508. (Italics are in original.)

57. [57] Ibid., p. 506.

58. [58] To get his "net capital imports" series Angell also subtracts the net interest payments by Canada from the borrowings. Since he also excludes the net interest payments from his "final means of payment" series, these operations cancel out and do not affect his "excess of net capital imports over final means of payment" series.

59. [59] Cf. Angell, Theory of international prices, p. 510, table 1, col. 2; ibid., "The effects of international payments in the past," loc. cit., p. 141, table 22, col. 13 ("net capital imports") =col. 4 (my direct estimates of Canadian borrowings abroad) plus col. 3 (interest received by Canada) minus col. 8 (my estimates of Canadian investments abroad) minus col. 9 (interest paid by Canada). For the inclusion in my estimates of Canadian investments abroad (col. 8 in Angell's table 23) of the net increases in Canadian bank holdings of outside funds, see Canada's balance, pp. 92-93, table XXIV, and p. 94, table XXV.

60. [60] "The role of price in the international trade mechanism," Quarterly journal of economics, XLV (1931), 718.

61. [61] Cf. Canada's balance, p. 30, table II, col. IX, minus col. VIII. White has pointed this out with reference to Carr's argument. (The French international accounts, p. 15, note 1.)

62. [62] Canada's balance, p. 187, chart III.

63. [63] The French international accounts, pp. 30-31.

64. [64] That this sometimes occurred appears more clearly in the monthly data.

65. [65] Cf. especially, Taussing, International trade, 1927, pp. 207-08.

66. [66] Although the data are not here presented, this was not only an absolute growth but a growth relative to the trend of bank deposits in the United States and England.

67. [67] Cf., however, Wesley Mitchell, Business cycles, 1927, p. 447:

...prosperity, with its sanguine temper and its liberal profits, encourages investments abroad as well as at home, and the export of capital to other countries gives an impetus to their trade.

68. [68] Cf. K. Wicksell, Lectures on political economy, 1935, II, 100-02; Marco Fanno, "Credit expansion, savings and gold export," Economic journal, XXXVIII (1928), 126-31; and, for gold movements, Saint-Peravy, in 1786! (Supra, p. 187.) ("Investment" is used here to mean expenditures for productive purposes.)

69. [69] Cf., for substantially similar conclusions, J. W. Angell, Theory of international prices, 1926, pp. 174, note; 396-97; 527-28; and the additional references listed in his index, p. 561, under "Cyclical movements of business."

70. [70] Cf., e.g., Folke Hilgerdt, "Foreign trade and the short business cycle," in Economic essays in honour of Gustav Cassel, 1933, pp. 273-91.

Chapter VIII

1. [1] J. E. Cairnes, Some leading principles of political economy, 1874, p. 312.

2. [2] Cf. F. Y. Edgeworth, Papers relating to political economy, 1925, II, 6: "Foreign trade would not go on unless it seemed less costly to each of the parties to it to obtain imports in exchange for exports than to produce them at home. This is the generalized statement of the principle of comparative cost, with respect to its positive part at least."

3. [3] Principles of political economy, in Works, pp. 76-77. For other instances of resort to this rule by classical economists for the purpose of establishing the existence of gain from trade, or, in some cases, measuring its extent, see R. Torrens, The economists refuted [1808], reprinted in his The principles and practical operation of Sir Robert Peel's Act of 1844, 3d ed., 1858, pp. 53-54; James Mill, Commerce defended, 1808, pp. 36-38; N. W. Senior, Political economy [1st ed., 1836], 4th ed., 1858, p. 76; J. R. McCulloch, Principles of political economy, 4th ed., 1849, p. 147; J. S. Mill, Principles of political economy [1848], Ashley ed., p. 585.

4. [4] Malthus, Principles of political economy, 1st ed., 1820, p. 428.

5. [5] Ricardo, Notes on Malthus' "Principles of political economy" [1820], Hollander and Gregory editors, 1928, p. 209.

6. [6] Principles, Works, pp. 76-77.

7. [7] "Torrens hat...eine andere grossartige Entdeckung gemacht, die aber auch nicht an seinen Namen, sondern an den des Ricardo geknüpft zu werden pflegt...Wir haben hier genau die vielbewunderte Auseinandersetzung voruns, die Ricardo...gegeben hat...." (E. Leser, Untersuchungen sur Geschichte der Nationalökonomie, I, 1881, pp. 82-83, note.)

8. [8] Torrens, An essay on the external corn trade, 1815, pp. 264-65; cf. also p. 266.

9. [9] E. R. A. Seligman, "On some neglected British economists," Economic journal, XIII (1903), 341-47; reprinted in Seligman, Essays in economics, 1925, pp. 70-77.

10. [10] J. H. Hollander, David Ricardo: a centenary estimate, 1910, pp. 92-96. Cf. also the further discussion by Seligman and Hollander, "Ricardo and Torrens," Economic journal, XXI (1911), 448 ff.

11. [11] Essay on the external corn trade, 4th ed., 1827, in a section, "Effects of free trade on the value of money," pp. 394-428, first added in this edition; Colonization of South Australia, 1835, pp. 148 ff.

12. [12] Seligman stated that: "Neither Torrens nor Ricardo uses the term 'comparative cost.' This term was introduced by Mill in his Unsettled Questions in 1844." (Economic journal, XXI (1911), 448.) Hollander points out that Torrens did use the term "comparative cost," but in a different connection, in his Essay on the external corn trade, 3d ed., 1826, p. 41, and claims that James Mill first used the word "comparative" in connection with the theory of international trade. (Economic journal, XXI (1911), 461.) But Torrens did use the term "comparative cost" correctly in the 4th edition of his Essay on the external corn trade, 1827 (p. 401), and Ricardo, in all the editions of his Principles, had used the phrases "comparative disadvantage as far as regarded competition in foreign markets" (Works, p. 101) and "comparative facility of...production" (ibid., p. 226). Terminological usage by the classical economists must have been so influenced by their oral discussions as to make the record of priority in print have little bearing on the question of priority in use.

13. [13] Cf. infra, pp. 487-88.

14. [14] Essay on the external corn trade, 4th ed., 1827, p. vii.

15. [15] Cf., e.g., Torrens, Tracts on finance and trade, no. 2 (1852), 17: "In his chapter upon foreign trade, that profound and original writer [i.e., Ricardo] propounded for the first time, the true theory of international exchange." Torrens, it is true, apparently has reference here rather to the terms of trade question than to comparative costs, but he had also claimed priority with respect to terms of trade doctrine.

16. [16] "In the view of the question presented by Mr. Ricardo, the advantages derived from foreign trade were confined to only one of these countries." (Torrens, The principles and practical operation of Sir Robert Peel's Act, 3d ed., 1858, preface to 2d ed., pp. xiii-xiv.) This same charge is repeated by J. W. Angell, The theory of international prices, 1926, pp. 54, note; 67.

17. [17] "Mr. Ricardo...unguardedly expressed himself as if each of the two countries making the exchange separately gained the whole of the difference between the comparative costs of the two commodities in one country and in the other" (J. S. Mill, Essays on some unsettled questions of political economy, 1844, pp. 5-6.)

18. [18] Ricardo, Principles, Works, pp. 76-77.

19. [19] James Mill, Elements of political economy, 1st ed., 1821, pp. 86-87; 3d ed., 1826, p. 122.

20. [20] L. Einaudi, "James Pennington or James Mill: an early correction of Ricardo," Quarterly journal of economics, XLIV (1929-30), 164-71.

21. [21] Cf. P. Sraffa, "An alleged correction of Ricardo," ibid., 539-44, and Einaudi's acceptance of Sraffa's account, ibid., 544-45. Cf. also my review of Angell's Theory of international prices in the Journal of political economy, XXXIV (1926), 609, where I had previously shows that Ricardo was not guilty of this error.

22. [22] J. S. Mill, Autobiography, 1873, pp. 121-22.

23. [23] "Exportation of machinery," Westminister review, III (1825), 388-89.

24. [24] Ricardo states that cloth and wine will exchange for each other in the ratio of I cloth for I wine. The ratio exactly halfway between the ratios of comparative costs of the two commodities in the two countries would be I cloth for 47/48 wine.

25. [25] Principles of political economy, 4th ed., 1849, p. 147 (also in earlier editions).

26. [26] Cf., however, Angell, Theory of international prices, p. 305:

He [i.e., Achille Loria] seems to hold that international values will be fixed midway between the two points of maximum and minimum gain, for the one country and the other. This can perhaps be regarded, however, as a legitimate deduction from the principle of comparative costs.

J. S. Mill held that the gains would be divided equally more often than in any other specific ratio. Cf. supra, p. 325, note 7.

27. [27] James Pennington, A letter...on the importation of foreign corn, 1840, pp. 32-41. Cf. also J. S. Mill, Essays on some unsettled questions (written 1829-30), 1844, p. 12.

28. [28] Especially in The budget, 1841-44, passim.

29. [29] Essays on some unsettled questions, 1844, Essay I. Mill claims for himself not "the original conception, but only the elaboration" of the part played by reciprocal demand. (Ibid., preface, p. v.) He says that this question was not dealt with by Ricardo, "who, having a science to create, had not time, or room, to occupy himself with much more than the leading principles." (Ibid., p. 5.)

30. [30] Principles of political economy, 1848, bk. iii, chap. xviii. Repeated in all editions.

31. [31] J. S. Nicholson, Principles of political economy, II (1897), 302.

32. [32] F. D. Graham, "The theory of international values re-examined," Quarterly journal of economics, XXXVIII (1923), 55-59, 79.

33. [33] Ibid., pp. 63-65.

34. [34] Principles, Ashley ed., p. 601, note.

35. [35] A letter...on the importation of foreign corn, 1840, p. 41.

36. [36] Graham, "The theory of international values re-examined," loc. cit., pp. 67 ff.

37. [37] Mill, Principles, Ashley ed., p. 589.

38. [38] Mill, Principles, Ashley ed., p. 601, note.

39. [39] William Whewell, "Mathematical exposition of some doctrines of political economy. Second memoir," Transactions of the Cambridge Philosophical Society, IX, part I (1856), 141. This memoir was read in 1850, and printed in the same year for private circulation. Since it was primarily a criticism of Mill's doctrines, Mill may have been acquainted with it.

40. [40] Graham, "The theory of international values re-examined," loc. cit., p. 60; Bastable, The theory of international trade, 4th ed., 1903, pp. 29, 35, 177, 178.

41. [41] Bastable, ibid., p. 43: "It therefore follows that the production of both x and y will continue to be carried on in B, while A will give its entire efforts to the production of y, and will therefore obtain almost the entire gain of the trade." (The same passage appears in the 2d ed., 1897, p. 43.) Bastable says "almost the entire" instead of the entire gain, because he is assuming that y is produced in B at different costs of production, and that it is therefore "probable that B will receive some advantage, since the production of the most costly part of y will be abandoned by it."

42. [42] Edgeworth, review of 2d ed. of Bastable, Economic journal, VII (1897), 398-400. Nicholson had also pointed out the possibility of partial specialization in the same year. (Principles, II (1897), 302.)

43. [43] Cf. Bastable, Theory of international trade, 4th ed., 1903, p. 179, note.

44. [44] Principles, Works, p. 77, note.

45. [45] V. Pareto, Manuel d'économie politique, 2d ed., 1927, pp. 507-14.

46. [46] Cf., e.g., Angell, Theory of international prices, p. 256, who says that Pareto shows that specialization does not lead to a total output which is necessarily greater in value than that secured under non-specialization, and that the principle of comparative costs is therefore "not universal in its application, and may involve a non sequitur."

47. [47] Manuel, p. 513.

48. [48] Principles, Works, p. 77, note. (Italics not in original text.) It may reasonably be objected that Ricardo was not adhering to the constant cost assumption in his reference to the possibility of partial specialization in the production of corn, but the passage, given its location in Ricardo's text, serves at least to show that he was not placing any emphasis on complete specialization as a necessary result of specialization in accordance with comparative advantage.

Wicksell, in a review of Pareto, agreed that if the commodities were not of equal importance there would be only partial specialization, but he characterized Pareto's criticism of Ricardo as captious, and commented that Ricardo was not writing fairy tales for children.—Knut Wicksell, "Vilfredo Paretos Manuel d'économie politique," Zeitschrift für Volkswirthschaft, XXII (1913), 148-49. (I am indebted to G. J. Stigler for this reference.)

49. [49] A. F. Burns, "A note on comparative costs," Quarterly journal of economics, XLII (1928), 495-500. Cf. the criticisms of his argument by G. Haberler, "The theory of comparative cost once more," ibid., XLIII (1929), 380-81, and by the present writer, "Comparative costs: a rejoinder," ibid., XLII (1928), 699.

50. [50] Cf. J. S. Mill, Principles, Ashley ed., p. 588: "Trade among any number of countries, and in any number of commodities, must take place on the same essential principles as trade between two countries and in two commodities."

51. [51] F. D. Graham, "The theory of international values re-examined," Quarterly journal of economics, XXXVIII (1923), 54-55.

52. [52] "The theory of international values," ibid., XLVI (1932), 381-616.

53. [53] M. Longfield, Three lectures on commerce, 1835, pp. 50-56.

54. [54] ibid., pp. 63-64.

55. [55] Ibid., pp. 69-70.

56. [56] N. W. Senior, Three lectures on the cost of obtaining money, 1830, pp. 11-30.

57. [57] R. Torrens, Colonisation of South Australia, 1835, pp. 148-74, and especially pp. 169-74. What is here given is to be regarded as an interpretation of the general drift of Torrens's argument rather than a close paraphrase of his actual language.

58. [58] Some leading principles of political economy, 1874, pp. 334-41. Ohlin also points this out. (Interregional and international trade, 1933, p. 281.)

59. [59] P. J. Stirling, The Australian and Californian gold discoveries, 1853, pp. 211 ff.

60. [60] H. von Mangoldt, Grundriss der Volkswirthschaftslehre, 2d ed., 1871, pp. 209-30. I follow here Edgeworth's excellent summary and commentary. Papers relating to political economy, II, 52-58.

61. [61] Edgeworth presents only chart VIII (a) as drawn above. If wages were equal in both countries, then would be zero, and o and o' would be on a level with each other.

62. [62] Cf., for another and in some respects more general method of dealing with this problem. Haberler, "The theory of comparative cost once more," Quarterly journal of economics, XLIII (1929), 378-80, and The theory of international trade, 1936, pp. 136-39, 150-52.

63. [63] Papers relating to political economy, II, 55.

64. [64] "Exportation of machinery," Westminister review, III (1825), 390.

65. [65] Cf. N. W. Senior, Three lectures on the cost of obtaining money, 1830, pp. 25-26:

Many economists have maintained that no country can be injured by the improvement of her neighbors. If the continent, they say, should be able to manufacture cottons with half the labor which they now cost in England, the consequence would be, that we should be able to import our supply of cottons from Germany or France at a less expense than it costs us to manufacture them, and might employ a portion of our industry now devoted to the manufacture of cottons, in procuring an additional supply of some other commodities.... But it must be remembered that England and the continent are competitors in the general market of the world. Such an alteration would diminish the cost of obtaining the precious metals on the continent, and increase it in England. The value of continental labor would rise, and the value of English labor would sink. They would ask more money for all those commodities, in the production of which no improvement had taken place, and we should have less to offer for them. We might and it easier to obtain cottons, but we should find it more difficult to import everything else.

66. [66] J. S. Mill, Principles, Ashley ed., pp. 591-92.

67. [67] Herman Merivale, Lectures on colonization and colonies, II (1842), 308-II.

68. [68] The budget, 1841-44, pp. 357-63.

69. [69] Some principles of political economy newly expounded, 1874, p. 354. This proposition is closely related to Graham's doctrine that where a number of countries are participating in trade, the terms of trade will be determined, within narrow limits, by the cost conditions alone. See infra, pp. 348-352.

70. [70] Some leading principles, p. 352.

71. [71] Graham, "Theory of international values re-examined," Quarterly journal of economics, XXXVIII (1923), 68-86.

72. [72] F. W. Taussig, International trade, 1927, pp. 97-107.

73. [73] O. F. von Mering, "Ist die Theorie der internationalen Werte widerlegt?" Archiv für Socialwissenschaft, LXV (1931), 257-65; ibid., Theorie des Aussenhandels, 1933, pp. 35-37.

74. [74] Cf. A. E. Cherbuliez, Précis de la science économique, 1862, I, 382 ff.; Bastable, "Economic notes," Hermathena, VII (1889), 120-21, and Theory of international trade, 4th ed., 1903, pp. 40-41.

75. [75] Cf. also C.F. Bickerdike, "International comparisons of labor conditions," Transactions of the Manchester Statistical Society, 1911-12, p. 77: "I suggest that if we consider the broad facts regarding the bulk of important mineral and agricultural products, it is open to question whether the average bushel of wheat, pound of meat, ton of coals or of steel has to incur much if any greater expenses of transport before it reaches the final consumer in the United Kingdom than in reaching the final consumer in the United States."

76. [76] Cf., e.g., Hermann Schumacher, "Location of industry," Encyclopaedia of the social sciences, IX (1933), 592: "[The theory of location] adds fulness to the general theory of division of labor, imparting a scientific character to discussions of international division of labor, so that it has even been termed the core of the theory of world economy." Cf. also Alfred Weber, "Die Standortslehre und die Handelspolitik," Archiv für Socialwissenschaft, XXXII (1911), 667-88, where the treatment of location by the theory of international trade is discussed in terms which reveal utter miscomprehension of the most elementary propositions of that theory. As to Ohlin's dictum that "The theory of international trade is nothing but internationale Standortslehre" (Interregional and international trade, 1933, p. 589), he must have in mind either a Standortslehre or a theory of international trade (or both) which has but alight resemblance to what is to be found in the existing literature bearing these labels.

77. [77] The transportation costs relevant here are not the total transportation costs, but only the excess, if any, of international over internal transportation costs, in each case from the point of production to the point of consumption. For example, Aa represents the excess of the amount of the copper which country A has to pay for the cost of transporting one unit of foreign copper as compared to the amount of copper which would be absorbed in meeting transportation costs of one unit of domestically produced copper. Where internal freight costs are higher than international freight costs, the range between the limiting terms of trade will be wider, and the volume of foreign trade will be greater, than if no freight costs, internal or international, existed. In fact, differences in freight costs may create a comparative advantage which in the absence of freight costs would not exist at all. For a fuller treatment of the influence of transportation costs on the terms of trade, it would be necessary, of course, to deal with transportation as representing two or more additional commodities produced under conditions of joint cost, namely, inward and outward freights and freights according to commodity.

78. [78] Principles, Ashley ed., p. 589.

In an obscure and patently confused argument, Sidgwick attempted to show that the existence of transportation costs of commodities provided the sole basis for a theory of international values different from the theory of domestic values. (Henry Sidgwick, The principles of political economy, 1st ed., 1883, pp. 214-30; 2d ed., 1887, pp. 202-16, in somewhat different form.) Sidgwick refuses to go behind money costs of production, and his argument, I believe, reduces itself to the proposition that the prices in any country of the products of any two (or more) countries, after allowances for transportation costs, are proportional to their money costs of production in their countries of origin, a proposition which no one would deny, and which is embodied, implicitly when not explicitly, in the classical doctrine of comparative costs instead of, as Sidgwick supposed, constituting a correction thereof. For a more extended comment, see the original version of this chapter, "The doctrine of comparative costs," Weltwirtschaftliches Archiv, XXXVI (1932, II), 373-77.

79. [79] Unless before that point is reached country A has already transferred all of its labor to the production of M or country B has already transferred all of its labor to the production of N and cannot supply country A with all of the units of N which A is prepared to take. The former may be the case if country A is much smaller, and the latter may be the case if country A is much larger, than country B. It will be assumed that neither is the case.

80. [80] Even under constant costs, there will be no gain from the marginal unit of trade, since trade will be carried to the point at which the possibility of gain is exhausted. There will still be a gain at the margin measured in terms of cost alone, however, but the value of the export commodity will have risen relative to the value of the import commodity, so that although additional units of the foreign commodity could be obtained by import for an expenditure of labor less than that at which they could be produced at home, the market value of additional imports would be less than the value of the amount of the export commodities which would have to be given in exchange for them. Even before the marginal unit is reached, while the saving in cost as compared to domestic production will be evidence that there is gain from trade, there will be no close relationship between the amount of saving in cost and the amount of gain, and the latter will never be greater and will usually be smaller than the former.

81. [81] Cf. the discussion on this point between Edgeworth, Economic journal, VII (1897), 402, note 2, and Bastable, Theory of international trade, 4th ed., 1903, pp. 196-97. Cf. also, infra, p. 547, note 24.

82. [82] R. Schüller, Schutzzoll and Freihandel, 1905. Cf. the criticism of Schüller's analysis by G. Haberler, The theory of international trade, 1936, pp. 253 ff.

83. [83] The analysis by Kemper Simpson, "A re-examination of the doctrine of comparative costs," Journal of political economy, XXXV (1927), 465-79, in this case favorable to free trade, seems to me to be similarly defective through its employment of particular expenses curves, or "bulkline" cost curves, as if they were analogous to the cost and supply curves of orthodox price theory.

84. [84] In addition to the three examined here, there may be cited Alfred Marshall, "Some aspects of competition" [1890], reprinted in Memorials of Alfred Marshall, A. C. Pigou ed., 1925, pp. 261-62; T. N. Carver, "Some theoretical possibilities of a protective tariff," Publications of the American Economic Association, 3d series, III, no. 1 (1902), 169-70.

85. [85] J. S. Nicholson, Principles of political economy, II (1897), 307-09, 317-18.

86. [86] F. Walker, "Increasing and diminishing costs in international trade," Yale review, XII (1903), 32-57.

87. [87] F. D. Graham, "Some aspects of protection further considered," Quarterly journal of economics, XXXVII (1923), 199-216.

88. [88] The figures in upper brackets represent the amounts of labor employed in each industry. They are not to be found in the original illustrations, but are added by the present writer to show more clearly the degree of specialization reached at each stage.

89. [89] It is easy to show that the illustrations are in several respects inconsistent with equilibrium unless they are so interpreted. Graham, for example, keeps the relative values of wheat and watches constant while varying their relative costs in country B. Assuming, as he does, that average costs are significant in the determination of watch values, but marginal costs in the determination of wheat values, this assumed constancy in the relative values of watches and wheat would be impossible as the ratios of average watch costs to marginal wheat costs in B varied. His illustrations are consistent, however, with maintenance of constancy in the ratios between average watch costs and marginal wheat costs in both A and B, if generously interpreted.

90. [90] Ibid., p. 204, note.

91. [91] F. H. Knight, "Some fallacies in the interpretation of social cost," Quarterly journal of economics, XXXVIII (1904), (1924),592-609.

92. [92] "Some fallacies in the interpretation of social cost," loc. cit., pp. 597-98.

93. [93] "On decreasing cost and comparative cost. A rejoinder," ibid., XXXIX (1925), 333.

94. [94] Haberler, "Die Theorie der komparativen Kosten," Weltwirtschaftliches Archiv, XXXII (1930, II), 356.

95. [95] Though I would now concede that they are a possible phenomenon even in the short run, and that the argument by which this possibility is ordinarily denied is defective.

96. [96] Cf. supra, pp. 314 ff.

97. [97] In considering the profitability of trade for a particular country, it is to be noted, its own money costs matter only as they are proportional to the real costs, whereas the real costs of the outside world matter only as they are reflected in foreign supply prices. It does not matter to an importing country why its imports are cheap, provided they can be relied upon to remain cheap. The proper basis for determining the profitability of trade to a particular country, therefore, is the comparison of its own relative real costs for different commodities with foreign relative supply prices of the same commodities.

98. [98] Cf. Ricardo, Principles, Works, p. 100: "The motive which determines us to import a commodity, is the discovery of its relative cheapness abroad: it is the comparison of its price abroad with its price at home." Ibid., p. 78: "Every transaction in commerce is an independent transaction. Whilst a merchant can buy cloth in England for £45, and sell it with the usual profit in Portugal, he will continue to export it from England."

99. [99] A letter on the true principles of advantageous exportation [1818], reprinted in Economics, XIII (1933), 40-50. Plant, in his introduction, says of it that "here is a formal, generalized statement of the main principle [of comparative cost] by an obvious master of precise theoretical exposition," and that "The anonymous author of this tract should take his place with Ricardo, J. S. Mill, Longfield, Mangoldt and Edgeworth as one of the outstanding exponents of the theory of international trade in the nineteenth century."

100. [100] Ibid., p. 45. (Italics in original text.)

101. [101] The author meets this objection by conceding that while the profit would be greater if money were exported instead of stockings, there would still be some profit in exporting the stockings in exchange for brandy. (Ibid., p. 48.) But why not export the money, which would appear less troublesome as well as more profitable? Better doctrine on this point was expounded by a contemporary writer, in the following passage:

Whoever exports an article, sells it for as high a price as he can obtain; but he must find the commodity he brings back, after paying his own expenses, at least equal in value to what he exported: if this were not the case, he would lose by the trade, and would give it up. If money is the article brought back, the money must be capable of purchasing at least an equal quantity of the commodity exported, or the trade would be abandoned. (Thomas Hopkins, Economical enquiries relative to the laws which regulate rent, profit, wages, and the value of money, 1822, p. 84.)

102. [102] Cf., e.g., W. Cockburn, Commercial economy: or the evils of a metallic currency, 2d ed., 1819, p. 5:

If a merchant were to purchase a quantity of cotton goods for £100, and send them to Petersburgh and sell them for £50, it would appear at first sight almost certain, that he had made a bad commercial experiment. But the fact might be otherwise. If with his £50 he were to purchase hemp, which hemp, on its arrival in London, sold for £200, the speculation on the whole would turn out beneficial.

103. [103] Léon Walras, Etudes d'économie politique appliquée,1898, p.236

104. [104] Principles, Works, pp. 75-76. Assuming as he presumably does here that the proportion of labor to capital is within a country uniform in all industries, and that wages are uniform in all occupations, uniformity of the interest rate in all occupations involves proportionality of prices of domestically produced commodities to labor-time or "real" costs.

105. [105] Edgeworth, later, called it the "negative clause" of the principle of comparative costs, and held it to be superfluous: "that the value of articles in the international market is not proportioned to the cost—the 'efforts and sacrifice'—incurred by the respective producers, is superfluous, if the definition here proposed is adopted. Why should there be any correspondence between cost and value in the absence of the conditions, proper to domestic trade, on which that equality depends?" Papers relating to political economy, 1925, II, 6.

106. [106] Cf. the report of his speech in the House of Commons, July 3, 1832, Hansard, Parliamentary debates, 3d series, XIV, 19:

Now the error in this case [referring to an argument that it did not matter to England whether a foreign country took goods or money in exchange for its own goods] sprang out of another of still more universal acceptation; namely, that great maxim of the Ricardo school of economists, that as the value of a commodity in the home market depended on the cost—the labor—of production, so must it be in a foreign market. He would maintain, that though this principle was true of domestic policy, yet that it was not it that regulated the exchangeable value in a foreign market. What we received in return for our goods in foreign markets did not depend on the cost of producing these foreign articles, but on the demand that existed in the foreign market for our commodities.

107. [107] Cf. Mallet's account of the discussion at the Political Economy Club, April 5, 1832, Political Economy Club, Minutes of proceedings, VI (1921), 234:

The discussion at last ran into a question of value, what constituted value in exchange—and on this rock it split, and left us all at sea. McCulloch, boldly standing by Ricardo's doctrine, that equal quantities of labor are equal in value all over the world—and Torrens and Malthus treating it as a ridiculous notion.

108. [108] In 1844 there was discussed at the Political Economy Club the question put by Torrens: "Was Ricardo correct in stating that 'the same rule which regulates the relative value of commodities in the country, does not regulate the relative value of the commodities exchanged between two or more countries'?" Torrens was not present, but McCulloch is reported as having held that Ricardo's chapter on foreign trade was faulty, and that in practice only such commodities are imported as foreign countries produce more cheaply, whether in terms of money costs or of real costs not being indicated.—Political Economy Club, Minutes of proceedings, VI (1921), 291.—It seems that McCulloch never accepted Ricardo's doctrine that comparative disadvantage in real cost could make importation profitable even though accompanied by absolute advantage in real cost, and his exposition of the doctrine appears always to have been in terms of absolute, as well as comparative, advantage. (Cf. McCulloch, Principles of political economy, 4th ed., 1849, chap. v.)

109. [109] Supra, p. 470, note 4.

110. [110] Sidgwick, Principles, and ed., 1887, pp. 205-07.

111. [111] Ibid., Principles, 2d ed., p. 207, note.

112. [112] If it be assumed that at this stage of his argument Sidgwick has unconsciously lapsed into using the term "cost" in Mill's sense of real costs, then a suggestion by Edgeworth (Papers, II, p. 30) offers a means of reconciling his main text with this note. If "determined by cost of production," be read to mean merely "affected or influenced by cost of production," then, of course, the relative values of the products of different countries can be "determined" by their real costs of production without being proportional to them. This would reconcile the note with the text, but would make Sidgwick agree wholly with Mill when he was giving the same meaning to the terms he uses.

113. [113] Cf. Senior, Three lectures on the cost of obtaining money, 1830, p. 4:"...an equal expenditure of wages and profits, or, in my nomenclature;...an equal sum of labor and abstinence...."

114. [114] Cf. Edgeworth, review of Bastable's Theory of international trade in Economic journal, VII (1897), 399, note.

115. [115] Cf. Marshall, Money credit & commerce, 1923, p. 323: "Differences in the skill required for different occupations, and in the amount of capital by which each man's labor needs to be assisted, are neglected (or else the values of the several classes of labor and stocks of capital are expressed in terms of the value of labor of a standard efficiency)."

116. [116] "Some fallacies in the interpretation of social cost," Quarterly journal of economics, XXXVIII (1924), 599, note.

117. [117] See infra, p. 509.

118. [118] Assume that as the result of an export bounty to an industry using much land but little labor, the same imports are obtained in return for commodities containing less labor services but more land services than those previously exported. I suppose that Ricardo would say in this case that the export bounty resulted in the country getting the imports at less real cost, and was therefore beneficial, and would overlook any reduction in domestically produced income resulting from the withdrawal of land from production for domestic consumption to production for export. It is conceivable, however, that Ricardo, if the point had been raised, would have made the necessary correction in his income analysis.

119. [119] Ricardo expressly recognized, with special reference to taxation, that in so far as relative prices were influenced by factors not representing real cost, the case for free trade no longer held. Cf. On protection to agriculture [1822], Works, p. 463:

It is only when commodities are altered in relative value, by the interference of government, that any tax, which shall act as a protection against the importation of a foreign commodity, can be justifiable.... It may be laid down as a principle, that any cause which operates in a country to affect equally all commodities, does not alter their relative value, and can give no advantage to foreign competitors, but that any cause which operates partially on one does alter its value to others, if not countervailed by an adequate duty; it will give advantage to the foreign competitor, and tend to deprive us of a beneficial branch of trade.

120. [120] Three lectures on commerce, 1835, pp. 56-57. Ohlin (Interregional and international trade, 1933, p. 32) cites a similar passage from Longfield's earlier Lectures on political economy, 1834, pp. 240-41, and asks the reader to note "that Longfield does not think of cheapness relative to effectiveness, as did the classical economists." The passage I have cited shows that Longfield, to his credit, did think of cheapness relative to effectiveness ("cheaper in proportion to its productiveness").

121. [121] Three lectures on commerce, pp. 60 ff. Cf. for a similar procedure, J. S. Eisdell (Treatise on the industry of nations, 1839, I, 343) who acknowledges his indebtedness to Longfield.

122. [122] Some leading principles of political economy, 1874, pp. 322-24.

123. [123] Ibid., p. 375.

124. [124] Ibid., pp. 375-406.

125. [125] International trade, 1927; pp. 43-60. Cf. also for a similar, though less complete, treatment, his earlier "Wages and prices in relation to international trade," Quarterly journal of economics, XX (1906), 497 ff. (reprinted in his Free trade, the tariff and reciprocity, 1920, pp. 89-94), and his Principles of economics, 1911, I, 485-86; II, 154-57.

126. [126] Unless the hierarchy was in each country relatively stable through time (as both Adam Smith and Ricardo believed it to be) or changed substantially only in response to world-wide forces, this would not be true. That it is substantially true in fact seems to have been the conclusion of C. F. Bickerdike from a detailed study of the wage statistics of several countries ("International comparisons of labor conditions," Transactions of the Manchester Statistical Society, 1911-12, pp. 62-63).

127. [127] International trade, 1927, p. 47.

128. [128] B. Ohlin, "Protection and non-competing groups," Weltwirtschaftliches Archiv, XXXIII (1931, I), 42-43.

If there were more than two commodities as potential articles of trade, even the commodities imported and exported by each country would not necessarily be wholly the same in the two cases.

129. [129] See especially the arithmetical illustration in Taussig, International trade, p. 51.

130. [130] If immobility of labor were tacitly assumed in his illustrations, then the specialization posited therein would be impossible.

131. [131] Cf. Taussig, Principles of economics, 1911, II, chap. 47. The analysis which follows is indebted to the article by Ohlin just cited, though there is some difference in conclusions. It is in part a restatement of the argument in my review of Manoilesco, The theory of protection and international trade, 1931, in the Journal of political economy, XL (1932), 121-25. Manoilesco had shown that if under free trade money incomes of workers were higher in manufacturing than in agriculture, and if manufactured products were imported and agricultural products exported, protection to manufactures would enable the country to get its manufactured products at lower labor-time costs by domestic production than by import.

132. [132] In my review of Manoilesco's book, in which he argued that the higher money earnings of labor in manufacturing than in agriculture justified protection for manufacturing industries which under free trade could not survive, I had contended, along the same lines as above, that if a greater labor-time cost of obtaining manufactured products by import in exchange for exports of agricultural products instead of by domestic manufacture was more than offset by the greater disutility of labor in manufacturing than in agriculture there would be no case for an import duty on the manufactured product. In a reply to this objection, Manoilesco merely repeats his demonstration that protection may result in a saving in labor-time costs, and overlooks, or perhaps denies, the necessity of weighting the labor-time costs by what Pareto called their "ophelimity coefficients" in order to get the real costs. (Mihail Manoilesco, "Arbeitsproduktivität und Aussenhandel," Weltuirtschaftliches Archiv, XLII (1935, I), 41-43.)

133. [133] Haberler has commented that it is noteworthy that I do not mention the important case of "differences in the quality of the labor supplied by the different groups." He comments that: "It falls outside the scope of the real-cost theory, to which Viner adheres—apparently from reverence for tradition; or at least it can be included only under quite definite assumptions." (Theory of international trade, 1936, p. 196, note 2.) There is no such omission, since "labor monopolies" would cover both those contrived and those due to scarcity of persons having the requisite qualities, and for the purpose in hand all that is relevant is the existence of monopoly, whatever be its cause.

134. [134] International trade, p. 61.

135. [135] Interregional and international trade, 1933, p. 590.

136. [136] Ohlin recognizes that different rates of remuneration in different industries will also be a factor in determining the nature of a country's specialization. He would grant also, I suppose, that relative differences between countries in the prices of the factors and in their effectiveness result in differences in the methods by which the same commodities are produced, as well as in differences in the commodities produced, and that the abundance and quality of "free goods" is an important element in determining the productivities of the "scarce" factors.

In his general mathematical exposition of international equilibrium, Ohlin treats as the same factor in the two regions "only factors of identical quality in the two regions" (ibid., p. 560, note), thus abstracting from the necessity of dealing expressly with the role in international trade of comparative differences in "effectiveness" of the factors as between the different industries and regions. (For the purposes of international trade theory, the "effectiveness" of a factor should be understood to mean its marginal physical productivity function with respect to variations both in the amount of that factor and the amounts of the other factors associated with it in production.) Ohlin, in his criticism of Taussig's analysis, seems to forget, for the time being, that Taussig had not made the same abstraction, but that, on the contrary, he had always placed marked emphasis on the importance of comparative differences in "effectiveness." Unless it is assumed that each factor, in each industry, has identical "quality" or effectiveness in the two regions, Ohlin's contention that international trade would be impossible if Taussig's assumption of identical relative scales of wages and interest in the two regions were applicable to all factors, or if Taussig's assumption of identical proportions of labor and capital in all industries were applicable to all factors and both regions (ibid., pp. 561-62), is incorrect in both cases. In each case, the existence of comparative differences in effectiveness would suffice to provide a basis for trade.

137. [137] Interregional and international trade, pp. 30-31. It obviously does not preclude the study of varying proportions between labor and land. Ohlin lays special emphasis on the variable proportions between labor and capital, as a reaction, no doubt, against the Ricardian assumption—at times—of fixed proportions between labor and capital. But the Ricardian analysis is more vulnerable in its treatment of land as an element in cost than in its treatment of capital. I venture the guess, moreover, that the relative abundance of natural resources as compared to all other factors taken together has been in the past, and continues to be today, a much more important element in determining the nature of international specialization than the relative abundance of capital as compared to labor. Cf., to the same effect, N. G. Pierson, Principles of economics (translated from the Dutch), II (1912), 195.

138. [138] Ibid., pp. 30-31.

139. [139] Cf. Wealth of nations, Cannan ed. II, 100:

Our merchants frequently complain of the high wages of British labor as the cause of their manufactures being undersold in foreign markets; but they are silent about the high profits of stock. They complain of the extravagant gain of other people; but they say nothing of their own. The high profits of British stock, however, may contribute towards raising the price of British manufactures in many cases as much, and in some perhaps more, than the high wages of British labor.

140. [140] See supra, p. 494.

141. [141] Principles, Works, p. 211. In a footnote Ricardo adds: "If countries with limited capitals, but with abundance of fertile land, do not early engage in foreign trade [i.e., the carrying and entrepót trade?], the reason is, because it is less profitable to individuals, and therefore also less profitable to the State." It was a familiar doctrine in the eighteenth century that only countries like Holland, rich in capital and poor in natural resources, could specialise in the entrepót trade.

142. [142] Principles, Works, pp. 100-01.

143. [143] Principles of political economy, 2d ed., 1836, pp. 106-07. The above quotation reproduces only part of the relevant material. See also the first edition of the Principles, 1820, pp. 104-5. Cf. also Malthus, The measure of value, 1823, p. 47: "It is evident, therefore, that the values which determine what commodities shall be exported, and what imported, depend...partly upon the quantity of labor employed in their production, partly upon the ordinary rates of profits in each country, and partly upon the value of money." Malthus explains that by "value of money" he means the "money price of labor." (Ibid., p. 46.)

144. [144] J. R. McCulloch, Principles of political economy, 2d ed., 1830, pp. 355-56 (also in later editions). McCulloch is taking for granted, along Ricardian lines, that the quantity of money remains constant, and that a rise in money wages must consequently be accompanied by a fall in interest rates.

145. [145] Some leading principles of political economy, 1874, pp. 119-20.

In connection with his discussion of the relation between wage levels and the course of foreign trade, Cairnes (ibid., p. 327, note) pointed out that a general change in the rate of wages in a country, by resulting in relative changes in the money cost of production as between industries in which fixed capital was important and industries in which outlays on wages were important, would affect the course of trade. On the ground that "these are details...into which it is scarcely necessary to enter in arguing the general question of the effect of wages on foreign trade," he did not attempt to explain in detail the nature of the changes which would occur. He claimed, however, that a fall in wages "might easily have the effect of checking instead of promoting the exportation of an article if it happened to be one in the production of which fixed capital was largely employed."

146. [146] Cf., e.g., Thomas Hopkins, Economical enquiries, 1822, pp. 84-86; Lord Stourton, Three letters...on the distresses of agriculture, new ed., 1822, pp. 62-64; John Rooke, Free trade in corn, 2d ed., 1835, pp. 22-23; J. S. Eisdell, Trentise on the industry of nations, 1839, I, 343.

E.g. Wakefield cited, in 1833, the following passage from the London Times as representing a prevalent English opinion (England and America, 1833, II, 47-48):

All political writers in this country have visited with censure the present policy of the American general governemnt in attempting by high protecting duties to force the establishment, or to encourage the extension, of manufactures in the United States. With the high price for labor that exists in the United States, with their scanty supply of monied capital, with their unlimited range of uncultivated or half improved soil, it was almost a crime against society to divert human industry from the fields and the forests to iron forges and cotton factories.

147. [147] E.g., Francis Bowen, American political economy, 1870, p. 484; N. G. Pierson, Principles of economics, II (1912), 192-95; Angell, Theory of international prices, 1926, p. 472. Ohlin (op. cit., p. 33) makes acknowledgements to an important contributions (in Swedish) by Hecksher, in 1919.

148. [148] Protection to young industries, 2d ed., 1884, pp. 7-12; Some aspects of the tariff question, 1915, chap. iii and passim; International trade, 1927, chap. vii.

149. [149] Especially in his Some aspects of the tariff question, 1915.

150. [150] Unless Edgeworth's vague reference to "proper index-numbers" is accepted as an explanation: "The conception [of "units of productive power"] might be facilitated by imagining each country to employ a monetary standard corrected by proper index-numbers, so that the efforts and sacrifices incurred in procuring a unit of the standard money should be constant." Review of Bastable, Theory of international trade, Economic journal, VII (1897), 399, note.

151. [151] W. Lexis, article "Handel," in Schönberg, Handbuck der Politischen Oehonomie, 3d ed., II (1891), 902.

152. [152] V. Pareto, Cours d'économie politique, II (1897), 210 ff. Pareto makes acknowledgments to Barone for the extension of his cost analysis to include the "ophélimité indirect."

153. [153] Pareto, ibid., p. 211. The error did not carry over, I believe, into the foreign-trade analysis of the classical school from the income side, but I can find no explicit recognition of the issue before Pareto.

154. [154] Ohlin, "1st eine Modernisierung der Aussenbandefstheorie erforderlich?" Weltwirtschaftliches Archiv, XXVI (1927, II), 97-115; ibid., Interregional and international trade, 1933, appendix iii, pp. 571-90, and passim.

155. [155] Haberler, "Die Theorie der komparativen kosten," Weltwirtscheftliches Archiv, XXXII (1930, II), 356-60: ibid., The theory of international trade, 1936, especially, pp. 175-98.

156. [156] E. S. Mason, "The doctrine of comparative cost," Quarterly journal of economics, XLI (1926).

157. [157] Taussig, International trade, 1927, chap. vii.

158. [158] Ibid., p. 67.

159. [159] Ibid., pp. 61-66.

160. [160] Ibid., pp. 67-68.

161. [161] Interregional and international trade, p. 572.

162. [162] Ibid.

163. [163] Ibid., p. 582, note.

164. [164] Cf. Ricardo, Notes on Malthus [1820], p. 37:

Besides omitting the consideration which I have just mentioned [i.e., intensity of labor] he [i.e., Malthus] surely does not reckon on the labor bestowed on machines, such as steam engines, etc., on coal, etc., etc. Does not the labor on these constitute a part of the labor bestowed on the muslins?

165. [165] Cf. Taussig, International trade, 1927, pp. 68-69. Cf. also, ibid., Some aspects of the tariff question, 1915, p. 38 (italics in the original):

When the effectiveness of labor is spoken of, the effectiveness of all the labor needed to bring an article to market is meant; not merely that of the labor immediately and obviously applied (like that of the farmer), but that of the inventor and maker of threshing-machines and gangplows, and that of the manager and worker on the railways and ships.

166. [166] Land costs are not "real" costs as the term is here used. They must be dealt with, therefore, by means of income analysis, or by adding them to the real costs, See supra, pp. 493, note 6; 509-10.

167. [167] For an admission of this by Böhm-Bawerk, see his "One word more on the ultimate standard of value," Economic journal, IV (1894), 720-21.

168. [168] Böhm-Bawerk, as far as I know, never abandoned his original position that money costs of production are determined solely by (technological costs and) the demands for the factors of production. But if disutilities can influence values, as he conceded, they can do so only through their influence on money costs. Wieser, making concessions to the irksomeness of labor as a value-determining factor, concluded that "Services of equal utility, but of different degrees of hardship, are so regulated in regard to value that the more troublesome labor is more highly appraised" (Natural value, 1893, p. 198) but failed to explain how this extraordinary result was brought about.

169. [169] They assumed, for instance, uniform rates of pay in all occupations for each kind of productive service, and fixed amounts of labor irrespective of the rates at which its services were remunerated. The quantity of capital, in the sense of the amount of postponement of consumption, or, given the amounts of the other factors, in the sense of the "average length of the productive period," they took to be a function of the rate of interest, but by confining their emphasis to the increase in product which resulted from a lengthening of the productive period they avoided the necessity of treating postponement or abstinence from immediate consumption as a cost even though it were irksome.

170. [170] "Commonplace book," Berkeley, Works, Fraser ed., 1871, IV, 457.

171. [171] "Die Theorie der komparativen Kosten," loc. cit., pp. 357 ff.; Der internationale Handel, 1933, pp. 132 ff.; English ed., The theory of international trade, 1936, pp. 175 ff. It had been used, as a supplement to the doctrine of comparative real cost, by Pareto, in response to a suggestion from Barone. See supra, p. 509.

172. [172] A. Lerner, "The diagrammatical represcntation of cost conditions in international trade," Economica, XII (1932), 346-56.

173. [173] W. W. Leontief, "The use of indifference curves in the analysis of foreign trade," Quarterly journal of economics, XLVII (1933), 493-503.

174. [174] Chart XI was originally prepared for and presented in a lecture given by me at the London School of Economics in January, 1931. It is in its essentials similar to the later and more elaborate constructions of Lerner and Leontief. For my present purpose, which is to stress the limitations rather than the possibilities of this approach, my simpler diagram suffices, but as exhibitions of geometrical ingenuity their constructions are far superior. No use is made here of the EE1 line in chart XI.

175. [175] Theory of international trade, p. 197.

176. [176] Lionel Robbins, "Remarks upon certain aspects of the theory of costs," Economic journal, XLIV (1934), 2, note 5. If "forms of exchange" means "results of choices between alternatives of all kinds" and if "demand" is read to mean "preferences between alternatives of all kinds" instead of what it usually means in economic theory, I would not think of objecting to what is claimed, except for the references to the Wicksteed constructions, which, however reinterpreted, are either wrong or useless.

Chapter IX

1. [1] The tendency on the part of Marshall and Edgeworth to allow cost analysis to recede into the background, and to deal with the question of gain or loss from trade primarily in terms of income analysis is in sharp contrast with Allyn Young's contention that the treatment of the problem should be solely in terms of costs: "Here again the study of costs affords the only practicable road to conclusions respecting net gains or losses. Gains come from economies. The economies of international trade are by no means an exact measure of its net benefits. But that net benefits are more or less according as the economies secured are more or less, is a justifiable assumption."—"Marshall on consumer's surplus in international trade," Quarterly journal of economics, XXXIX (1924), 150. (Italics in the original.)

2. [2] Malthus, Principles of political economy, 1st ed., 1820, pp. 461-62. (Italics in the original text.)

3. [3] Ibid., p. 462.

4. [4] Cf. ibid., p. 460.

5. [5] Ricardo, Principles of political economy, 1st ed., 1817, p. 107.

6. [6] Ibid.

7. [7] Notes on Malthus [1820], p. 215. Ricardo means presumably that the increased income can be saved and invested instead of being immediately consumed.

8. [8] Principles, Ist ed., p. 462. Ricardo would not have disputed this. Cf. Principles, Works, 260: "One set of necessaries and conveniences admits of no comparison with another set; value in use cannot be measured by any known standard; it is differently estimated by different persons."

9. [9] In a limiting case, where under constant cost conditions the relative prices of all the various commodities would be the same under free trade as their relative costs of production at home, import duties could still be restrictive of import without affecting the amount of the national real income, the distribution of the national money income, or the relative prices of different commodities.

10. [10] The theory of international trade, 1936, pp. 193-95.

11. [11] "We know the nature of the gain [from trade]: it consists in extending the range of our satisfactions, and in cheapening the cost at which such as in its absence would not be beyond our reach are obtained; and we know that the amount which it brings to us under each of these categories cannot but be very great; but beyond this indefinite and vague result our data do not enable us to pass." (Some leading principles of political economy, 1874, p. 421.)

12. [12] Mill first presented his analysis in Essay 1 of his Essays on some unsettled questions of political economy, written in 1829-30, when he was twenty-three years of age, but not published until 1844. He reproduced it, with extensions, but also with important omissions, in the first edition (1848) of his Principles of political economy, bk. iii, chap. xviii, "Of international values." Edgeworth could not find terms of praise too high for this chapter; it was a "great chapter" (Papers relating to political economy, 1925, II, 7), a "stupendous chapter" (ibid., II, 10, 20), and an exposition of the general theory which was "still unsurpassed" (ibid., II, 20). Graham, on the other hand, declares that it presents doctrine which is "in its essence fallacious and should be discarded."—"The theory of international values," Quarterly journal of economics, XLVI (1932), 581.

13. [13] Graham's heaviest criticisms are directed against Mill's alleged error in assuming that the conclusions derived from this simplified case had general validity. Cf. supra, pp. 453-54.

14. [14] Mill does not seem to have used this term, whose first use is commonly attributed to Torrens.

15. [15] Cf. Mill, Principles, Ashley ed., p. 592:

The law...may be appropriately named the equation of international demand. It may be concisely stated as follows. The produce of a country exchanges for the produce of other countries at such values as are required in order that the whole of her exports may exactly pay for the whole of her imports. This law of international values is but an extension of the more general law of value, which we called the equation of supply and demand.

16. [16] J. L. Shadwell, A system of political economy, 1877, p. 406.

17. [17] "Theory of international values," Quarterly journal of economics, XLVI (1932), 606.

18. [18] Bastable, Theory of international trade, 4th ed., 1903, p. 180.

19. [19] J. S. Mill to Cairnes, June 23, 1869, The letters of John Stuart Mill, H. S. R. Elliot ed., 1910, II, 207. (Italics in the original text.) Mill's reasoning here is clear enough, and sound enough, if it is remembered that, like all the earlier English economists, Mill distinguished in his thinking, even if not in his terminology, between "demand" as a quantity actually taken at a particular price and "demand" as a schedule of quantities which would be taken at different prices.

20. [20] Principles, Ashley ed., pp. 585-88, 594-95.

21. [21] Cf. Edgeworth, "On the application of mathematics to political economy," Journal of the Royal Statistical Society, LII (1889), 557, fig. 3, for a similar demonstration by means of a Marshallian diagram.

22. [22] The differences in the methods of constructing Marshall's and my curves do not call for differences in the elasticity formulae, if the same symbols are used to represent the same variables in the two diagrams. In both diagrams each curve can be regarded either as a demand curve or as a supply curve, each with a distinct elasticity coefficient. There will thus be a total of four elasticities. Write X for the total amount of E-goods, Y for the total amount of G-goods, the subscripts E and G for the countries England and Germany respectively, y = Y/X for the price of E-goods in G-goods, and 1/y = X/Y for the price of G-goods in E-goods. Then if eDE is the elasticity of English "demand" or willingness to buy German goods, eSE is the elasticity of English willingness to sell English goods, eDG is the elasticity of German willingness to buy English goods, and eSG is the elasticity of German willingness to sell German goods, then:

The demand elasticity and the supply elasticity of each country are of course closely related to each other, as they are but different aspects of the same phenomenon. The relationship between the two elasticities for England can readily be shown:

Similarly,

When the coefficient of demand elasticity of a country is unity, therefore, thecoefficient of its supply elasticity is zero. In the text, reciprocal-demand curves are referred to as "elastic" if the coefficient of their demand elasticity is numerically greater than unity and of their supply elasticity is algebraically greater than zero and as "inelastic" if the coefficient of their demand elasticity is numerically smaller than unity and of their supply elasticity is algebraically smaller than zero.

Although expressed in different terms, this usage corresponds to Marshall's use of the terms "elastic" and "inelastic" in connection with his reciprocal demand curves. (Cf. Marshall, Money credit & commerce, pp. 337-38, note.)

23. [23] Mill, Principles, Ashley ed., pp. 596-604.

24. [24] Cf. Marshall, Money credit & commerce, p. 354, note 3.

25. [25] Cf. letter from Marshall to Cunynghame, June 28, 1904; "As to international trade curves:—mine were set to a definite tune, that called by Mill." (Memorials of Alfred Marshall, A. C. Pigon ed., 1925, p. 451.)

26. [26] Marshall's analysis is available in his The pure theory of foreign trade (printed for private circulation in 1879, reprinted in 1930), and his Money credit & commerce (published in 1923, though in the main written much earlier), bk. III, and appendices H and J.

27. [27] The pure theory of foreign trade, p. 2.

28. [28] Marshall, Money credit & commerce, p. 178.

29. [29] Graham, "The theory of international values," Quarterly journal of economics, XLVI (1932), 601.

30. [30] Cf., supra, p. 539, note II, and Marshall, loc. cit., p. 342.

31. [31] Cf. Money credit & commerce, p. 343, fig. 12.

32. [32] F. Y. Edgeworth, "The pure theory of international trade," in Papers relating to political economy, 1925, II, 31-40 (first published in Economic journal, 1894, in substantially the same form).

33. [33] Papers, II, 32.

34. [34] His diagram is drawn on too small a scale to make this certain, but the absence of any statement to the contrary in his text and the fact that in all his other diagrams his reciprocal demands are drawn curvilinear from their point of origin warrants this interpretation.

35. [35] Cf. supra, chart X, p. 468, for a terms-of-trade diagram drawn with reference to these considerations.

Edgeworth states that if production is not under conditions of constant cost, "there should be substituted for the straight line OS (and mutatis mutandis for OT) a curve of constant advantage, or indifference-curve (not shown in the figure) representing states for which the advantage to England is no greater than if there had been no trade." (Papers, II, 33.) He must mean a curve representing states for which the importation of an additional unit of the G-good by country E would be no more advantageous than its production at home, if this curve is to be the analogue for variable costs of his OS line. In chart XV, OS is not a "no-gain from trade" curve, but is a curve of "no-gain from import as compared to domestic production of the G-good." If country E were to export more than OL units of E-goods at the ML/OL terms—or even on terms more favorable to itself—it might be incurring a loss from undue specialization of the sort discussed in the preceding chapter. (See supra, p. 451.) The location in the chart of a "no-gain from trade" curve requires knowledge of the utility functions as well as of the cost conditions. It would never fall below the OS line (or, in the case of variable costs, the OS' curve) and would never rise as high as the OE curve. (See infra, p. 572.) I have inserted in chart XV a "no-gain from import as compared to domestic production of the G-good" curve, OS', applicable to conditions of increasing costs. At any point, b, on OS', the slope with respect to OX of a tangent to OS' at that point represents the number of units of G-goods which could be produced at home by country E at a cost equal to the cost of producing a unit of E-goods in addition to what would be its output of E-goods if it was exporting Od E-goods in exchange for db G-goods. (The slope with respect to OX of the tangent to OE at a represents the number of units of G-goods per unit of E-goods in which country E would be willing to export Od units of E-goods.) Since production is under conditions of increasing cost, the number of units of the G-good which country E could produce at the same cost as an additional unit of the E-good will be greater, the greater its output of E-goods. As OS' is drawn concave upward in chart XV, it is implicitly assumed that increased export of E-goods involves increased output of E-goods, i.e., that as more E-goods are exported, the domestic consumption of E-goods decreases, if at all, by a smaller amount than the increase in exports. The OS' curve must be drawn below the OE curve at all points, and the identity of the two curves from O to C in chart XV is an error. Since in country E, for each output of E-goods corresponding to a given export by it of E-goods, its relative marginal costs of production of E-goods and G-goods must correspond to its supply-price of E-goods in terms of G-goods, a tangent to the OS' curve at any point must be parallel to a vector drawn from O to the vertically corresponding point on the OE curve. This excludes the possibility of identity of the two curves for any part of their course.

36. [36] "The theory of international values re-examined," Quarterly journal of economics, XXXVIII (1923), and "The theory of international values," ibid., XLVI (1932).

37. [37] Supra, pp. 453 ff. and 536 ff.

38. [38] "Theory of international values re-examined," loc. cit., p. 86.

39. [39] "Theory of international values," loc. cit., pp. 583-84.

40. [40] The nearest approach to this proposition that I have found in the literature is the following, by Haberler: "Marshall employs...so-called reciprocal supply-and-demand curves. This theory forms an essential supplement to the theory of comparative costs; indeed, the latter, if carried through to its logical conclusion, merges into the former." (The theory of international trade, 1936, p. 123.)

41. [41] Marshall, Money credit & commerce, p. 171.

42. [42] Edgeworth, Papers, II, 33. The sentence placed in parentheses appears in the original as a footnote.

43. [43] Cf., for instance, Graham's illustration ("Theory of international values re-examined," loc. cit., p. 76) and the accompanying text, where it is assumed "that before international trade is opened up, each country devotes one third of its resources to each of the three products, and that each increases its consumption of the three products proportionately as it secures gains from international trade" (p. 70) even though important changes in relative prices are assumed to take place. With the additional information given as to the economic size of the countries, their cost conditions, and the prices within each country before trade, Graham is justified in his claim that the data given suffice to determine within narrow limits the equilibrium terms of trade when foreign trade is opened up. But he fails to substantiate his claim that it is the cost conditions alone which determine the terms of trade. If the cost conditions are left unchanged but his utility assumptions altered, the equilibrium terms of trade can be changed, within broad limits, in whatever degree and direction is desired.

The same criticism applies to the interpretation given by C. F. Whittlesey—"Foreign investment and the terms of trade," Quarterly journal of economics, XLVI (1932), 449, 459—of results similar to Graham's obtained from arithmetical illustrations involving similar assumptions.

Whereas Graham criticizes the writers in the classical tradition for minimizing the influence of comparative costs on the terms of trade, Angell criticizes them for their alleged belief that comparative costs "in themselves alone, provide a sufficient a prior explanation of the course and terms of trade." (Angell, Theory of international prices, 1926, pp. 371-73.)

44. [44] Cf. "Theory of international values," loc. cit., p. 604: "If both demand schedules were elastic, movements in the terms of trade must necessarily be small."

45. [45] Graham, "Theory of international values," loc. cit., pp. 582-83. (Italics are in the original.)

46. [46] Ibid., p. 583.

47. [47] Cf. A. C. Pigou, Essays in applied economics, 1930, p. 150:

The value of imports in general in terms of exports in general is a notion of exactly the same sort as the value of things in general in terms of money. No precise significance can be given to this notion, and no completely satisfactory measure of changes in it can be devised.

48. [48] I.e., of what I call the "double factoral terms of trade." See infra, p. 561.

49. [49] Cf. Ricardo, Notes on Malthus, pp. 70 ff.

50. [50] Ibid., p. 76.

51. [51] Essays on some unsettled questions, 1844, p. 27.

52. [52] See supra, pp. 537 ff.

53. [53] Cf. Taussig, International trade, 1927, pp. 117-18.

54. [54] W. S. Jevons, The theory of political economy, 1871, p. 136. Cf. Edgeworth, Papers, II, 22: "It is a more serious complaint that Mill takes as the measure of the advantage which a country derives from trade, the increase in the rate of exchange of its exports against its imports. He thus confounds 'final' with 'integral' utility; ignoring the principle of 'consumer's rent.'" Cf. also ibid., "On the application of mathematics to political economy," Journal of the Royal Statistical Society, LII (1889), 558: "To measure the variations in the advantage accruing from trade by the variations of price—or more generally rate of exchange—is a confusion which could hardly have occurred to the mathematical economist."

55. [55] I.e., the excess of the total utility accruing from imports over the total sacrifice of utility involved in the surrender of exports.

56. [56] Jevons, op. cit., p. 138.

57. [57] This reverses Taussig's procedure, where a rise in the index indicates an unfavorable movement of the terms of trade. No question of principle is involved, but it seems to me to be more convenient to represent favorable movements of the indices by rising indices. The formulae which follow are so constructed that a movement of any element in the formula favorable to the country in question operates to raise the index, and vice versa.

58. [58] If, when the technical coefficients of production of the exports were falling, a fall was also occurring in the actual or potential technical coefficients of home production of the import commodities, the single factoral terms of trade would send to exaggerate the trend of gain from trade by treating as a gain from trade a gain from improvement in productivity which was not dependent upon foreign trade for its realization.

59. [59] "Average" and not "marginal" because, whatever changes occur, in each equilibrium situation the utility of the marginal unit of what is surrendered through export will tend to be equal, on the usual "representative individual" assumptions, to the utility of what is obtained in exchange for that marginal unit. What is really significant is the effect on total utility of foreign trade, and the terms of trade index is brought closer to a total utility index if provision is made in it for changes in average relative desirability.

60. [60] The commodities whose domestic production is forgone as the result of the allocation of productive resources to production for export may be (1) the same in kind as those exported, or (2) the same as those imported, or (3) different from both. In the second case, the ratio of relative desirability of import and "forgone" commodities will, of course, always be unity, and the incorporation of a relative desirability index in the terms-of-trade index will then have no effect on the latter.

61. [61] Cf. N. W. Senior, Three lectures on the value of money, 1840, p. 66: "the demand in Europe and Asia for thé produce of Mexican labor having increased, the results of a given quantity of Mexican labor would command in exchange the results of a larger quantity of European and Asiatic labor than before." Cf. also R. Torrens, The budget, 1841-44, p. 28: "Where any particular country imposes import duties upon the productions of other countries, while those other countries continue to receive her products duty free, then such particular country draws to herself a larger proportion of the precious metals, maintains a higher range of general prices than her neighbors, and obtains, in exchange for the produce of a given quantity of her labor, the produce of a greater quantity of foreign labor."

62. [62] Cf. F. W. Taussig, International trade, pp. 113-14.

63. [63] The only cleat-cut cases would be losses through defaults on trade debts, through shipwreck, or through seizure of goods by a belligerent in time of war.

64. [64] Taussig points out some of these limitations in the gross barter terms of trade index when computed from statistics of commodity trade alone. Cf. ibid., pp. 119, 254. Cf. also Viner, "Die Theorie des auswärtigen Handel" in Die Wirtschaftstheorie der Gegenuart, II (1928), 121ff.; White, The French international accounts, 1933. pp. 238-41; Haberler, Theory of international trade, 1936, pp. 161 ff.

65. [65] Cf. R. F. Harrod, International economics, 1933, pp. 32 ff., where this point is emphasized.

66. [66] Principles, Ashley ed., p. 585.

67. [67] Cournot, Revue sommaire des doctrines économiques, 1877, pp. 210 ff.

68. [68] Cf., however, the comments of Edgeworth (Papers relating to political economy, 1925, II, 22, note) and Bastable (Theory of international trade, 4th ed., 1903, p. 44, note) on Cournot's criticism of Mill.

69. [69] Cf. supra, p. 472.

70. [70] See, however, Roland Wilson, Capital imports and the terms of trade, 1931, Chap. V, for a discussion of this problem.

71. [71] I.e., should the formula used in constructing the index of the commodity terms of trade of the borrowing country be

or ?

72. [72] Cf. Roland Wilson, op. cit., p. 53, note.

73. [73] Roland Wilson (Capital imports and the terms of trade, 1931, pp. 98-100) discusses the type of index number to be used, but without reference to the influence of capital borrowings on the nature of the bias to be expected in the price indices according to the method of weighting used. He argues that when the world prices of Australia's imports are rising, Australians will tend to increase in relatively greatest degree their imports of those commodities which rise least in price. (Ibid.) This would be a valid presumption if the changes in relative prices were due primarily to the indirect effects on money costs abroad of capital movements or were due to relative changes in the world demands for the different commodities in which changes Australia did not participate, but it would not be a valid presumption if the relative changes in import prices were due primarily to relative changes in world demands in which changes Australia did participate.

74. [74] Marshall, Money credit & commerce, 1923, pp. 160-63, 338-40.

75. [75] Chart XVI is a slightly simplified reproduction of Marshall's fig. 9, ibid., p. 339.

76. [76] The above is Marshall's exposition (ibid., p. 339) reproduced verbatim except for the modifications made necessary by my modification of his chart and except for a few minor verbal changes in the interest of clarity.

77. [77] Allyn Young, "Marshall on consumer's surplus in international trade," Quarterly journal of economics, XXXIX (1924), 144-50. The main theme of this article, however, was not the validity of the consumer's-surplus notion, which was discussed only incidentally, but some apparent errors in computation in Marshall's arithmetical illustration.

78. [78] Ibid., p. 149.

79. [79] Ibid., p. 150.

80. [80] And, it should be noted, taking account simultaneously of "producer's rent," which the domestic-trade theory concept does not do.

81. [81] In the consumer's-surplus concept, as modified here, it is true, however, that with every change in the amount of surplus measured in G-bales as we move along the OG curve from O, there occurs a change in the average utility significance of a G-bale if no change has meanwhile occurred in G's utility functions. What the direction of this change will be will depend on the elasticity of the OG curve, i.e., on whether a movement along the OG curve from O (and therefore an increase of surplus) is associated with an increase or a decrease in the amount of G-bales expected.

82. [82] "The pure theory of international values," in Papers relating to political economy, 1925, II, 31-47 (first published in Economic journal, 1894).

83. [83] Edgeworth, Mathematical psychics, 1881, pp. 115-16.

84. [84] In an earlier essay, Edgeworth had dealt graphically with the determination of the amount of gain or consumer's surplus accruing from trade before and after a disturbance (in this case an import duty, presumably a revenue duty, levied by the country, Germany, whose gain is being measured). He uses for Germany not only its reciprocal-demand curve, but also a "no-gain from trade" curve, which he calls a "collective utility curve," and measures the gain from trade for Germany by the distance at the equillibrium point between the German "no-gain from trade" curve and the German reciprocal-demand curve. His construction is free, therefore, from the objection made above against Marshall's procedure of identifying the reciprocal-demand curve with a total-utility curve. I believe that Edgeworth's procedure here and mine in chart XVII, p. 573, supra, amount to the same thing.—Edgeworth, "On the application of mathematics to political economy," Journal of the Royal Statistical Society, LII (1889), 555-60.

85. [85] Edgeworth does not himself direct attention to this aspect of his results. Cf., however, infra, pp. 580-81.

86. [86] This is diagram I in Edgeworth's fig. 4, Papers, II, 37.

87. [87] Ibid., p. 34. Edgeworth points out that disturbances of the type labeled H by him and disturbances of the type h require a different graphical procedure where OE, or country E's reciprocal-demand curve, is inelastic, but not when OE is elastic. In chart XVIII, OE is elastic, so that this chart is according to Edgeworth applicable to both types of disturbances. (Ibid., p. 38.)

88. [88] Ibid., p. 36.

89. [89] Edgeworth, papers, II, 22.

90. [90] Cf. ibid., p. 39, fig. 6.

91. [91] Cf. ibid., pp. 38, 71-72. Edgeworth remarks: "It is not contended that the exception is of any practical importance." (ibid., p. 72.)

92. [92] Alfred Marshall, The pure theory of foreign trade [1879], reprint 1930, p.I: cf. also ibid., Money credit & commerce, p. 157:

Thus money, even when firmly based on gold, does not afford a good measure of international values, and it does not help to explain the changes in these values, which are caused by broad variations in international demand; but on the country it disguises and conceals them. For it measures changes in values by standards which are automatically modified by the very variations in international demand, the effects of which are to be measured. (Italics are in original.)

93. [93] Cf. the excellent statement by Haberler, Theory of international trade, 1936, p. 154:

The material difference between the two types of curves is that the Marshallian [foreign-trade] curves give a complete picture, showing the final result of the whole international trade mechanism, and relate to representative bales, while the ordinary [domestic-trade] curves relate to the money prices of an individual commodity, upon the assumption that other things remain equal and in particular that all other prices remain the same, so that they can give only a partial picture..."(Italics are is original.)

94. [94] See H. Cunynghame, A geometrical political economy, 1904, p. 97. (But cf. ibid., pp. 114 ff.)

See also T.O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, pp. 47-50. In a footnote (ibid., p. 48) Yntema concedes that the foreign trade curves which he derives from domestic demand and supply curves in terms of money may not be equivalent to Marshall's reciprocal demand curves:

This derivation is based on the assumption that the import demand price on its fixed-height schedule is a function only of quantity imported and that the export supply price on its fixed height schedule is a function only of quantity exported. Marshall's comments on the interdependence of import demand and export supply seem to refer not to a functional interrelation of fixed-height schedules but to the interdependence which arises out of the necessity of balancing international debits and credits. Where a functional relation between fixed-height schedules does exist, Marshall's curves are still applicable, but they cannot be derived from their component elements by two-dimensional graphs.

The "fixed-height schedules" referred to here are supply and demand schedules of two commodities in terms of adjusted money prices. Marshall nowhere explains the derivation of his reciprocal-demand curves from the complex factors operating within each economy. As Edgeworth comments: "A movement along a supply-and-demand curve of international trade should be considered as attended with rearrangements of internal trade; as the movement of the hand of a clock corresponds to considerable unseen movements of the machinery" (Papers, II, 32). Marshall allowed the operations of the internal machinery to remain unseen, but since his reciprocal-demand curves relate to two "commodities" taken as constituting the entire range of commodities, it seems necessary to assume that Marshall would not have regarded the demand functions and the supply functions of these respective commodities within each country as independent functions.

95. [95] Cf., however, J. W. Angell, The theory of international prices, 1926, p. 454: "First, the assumptions on which the [Marshallian foreign-trade] curves are based, and the limitations to which they are subject, are precisely the same as for composite demand and supply curves of the more familiar sort [i.e., the ordinary domestic-trade theory curves?]. The preference for them is based simply on their greater advantage, for certain purposes, as a graphic device." Cf. also, ibid., pp. 456-57: "The curves also permit an easy measurement of the direct benefits from trade....

96. [96] A. Cournot, Recharches sur les principes mathématiques de la théorie des richesses, 1838, pp. 173-81; Principes de la théorie des richesses, 1863, pp.316-24; Revue sommaire des doctrines kconomiques, 1877, pp.196-213.

97. [97] Cournot, Recherches, 1838. My subsequent references are to the translation by N.T. Bacon: Researches into the mathématical principles of the theory of wealth, 1927, pp. 150-57.

98. [98] Attempts have been made to explain this by the argument that Cournot is assuming that no increase takes place in the production of other commodities, i.e., that the values (2) and (4) above are therefore eliminated, and the gain (3) is offset by a corresponding reduction in the domestic consumption of other commodities than M. This interpretation has been made, by Hagen and by others, the basis for a rejection of Cournot's argument on the ground that it makes an unwarranted assumption that the productive resources released from the production of M will find no other employment. By Angell (Theory of international prices, p. 245), the only writer who finds sense and significance in Cournot's thesis, it is made the basis for a defense of the validity of Cournot's argument within the limits of his assumptions. But Cournot, in reply to Hagen, expressly rejects this interpretation and claims that his method of computation gives full consideration to any income resulting from a transfer to other employments of the resources released from the production of M. (Cournot, Principes, 1863, pp. 329-30; Revue sommaire, 1877, pp. 193-95, 205.) The only explanation I can offer, for which there seems some warrant in Cournot's exposition, is that Cournot held that since the change in the price of M and in the money income of producers of M would affect the price and the incomes of the producers of any other one commodity only to a negligible extent, it was permissible to assume that the prices and the incomes of producers in country B of other commodities than M would remain unaltered, i.e., it was permissible to ignore items (3), and (4) above. (See Cournot, Researches, pp. 130-32.) But this would be equivalent to saying that if the contents of a large tank of water were allowed to spread thinly over a great area, because at any one point the amount of water would be negligible, therefore the amount of water over the entire area could reasonably be regarded as negligible as compared to the amount of water originally in the tank.

99. [99] Cf. Edgeworth, Papers relating to political economy, 1925, II, 47-51; Bastable, Theory of international trade, 4th ed., 1903, pp. 173-75; A. Landry, Manuel d'économique, 1908, pp. 838-39; Irving Fisher, "Cournot and mathematical economics," Quarterly journal of economics, XII (1898), 130-32.

100. [100] Revue sommaire, 1877, p. 209.

101. [101] H. Cunynghame, A geometrical political economy, 1904, pp. 48 ff. See especially his fig. 51, ibid., p. 98, and compare it with the Barone diagrams referred to later in the text.

102. [102] Enrico Barone, Grundzüge der theoretischen Nationalökonomie (German translation by Hans Staehle of the original Italian edition of 1908), 1927, pp. 101 ff. Barone does not refer to Cunynghame.

103. [103] Cf. Barone, Grundzüge, fig. 30, p. 102, and fig. 32, p. 105.

104. [104] England at this price would consume CA, but would supply TA from her own production.

105. [105] Germany at this price would produce AF, but would consume AE herself.

106. [106] Ibid., p. 105. Barone, however, had earlier stated that his diagrams deal with the problem "nicht in endgültig korrekter Weise" (ibid., p. 102), but without indicating the nature of their shortcomings.

An algebraic formula introduced in 1904 by A. C. Pigon, applied statistically by Henry Schultz in 1928, and receiving authoritative acceptance today as the "correct method" of determining the effect of duties on prices and domestic output, is essentially an algebraic application of the Cunynghame-Barone graphical analysis. Frovided the method is used only to trace the effect on the price of a particular commodity of a change in the duty on that commodity, all other related circumstances meanwhile remaining substantially unchanged, it probably produces fairly reliable results, and does seem to me to be superior to other methods commonly used. The method would become seriously questionable, however, if applied to trace the effect on price of a substantial change in duty on a major commodity or group of commodities, since some of the factors supposed to be remaining unchanged in the caeteris paribus pound would then actually be undergoing substantial change and these changes would react on the price of the commodity in question. The method would be even more suspect if it purported to serve as a means of measuring the amount of gain or loss to a country resulting from a tariff change, whether the change was a major or a minor one. For the nature of the formula, and an account of the literature relating to it, see Henry Schultz, "Correct and incorrect methods of determining the effectiveness of the tariff," Journal of form economics, XVII (1935), 625-41. Schultz makes clear that the results of the use of this formula become questionable if "the effect of the tariff on the prices of other commodities and on the balance of international payments [are] too great to be neglected" (ibid., p. 641), which is certain to be the case when the tariff changes are major ones.

107. [107] R. Auspitz and R. Lieben, Untersnchungen über die Theorie des Preises, 1889, pp. 408-29. Cf. the comments of Edgeworth, Papers relating to political economy, II, 58-60.

Appendix

108. [108] Papers relating to political economy, II, 5.

109. [109] Political Economy Club, Minutes of proceedings, VI (1921), 291.

110. [110] Theory of international trade, 4th ed., 1903, p. 12, note.

111. [111] The ability of labor freely to choose its occupation and the ability of entrepreneurs, whatever their occupation, to hire labor at uniform rates are, of course, different, though related, concepts. Both are significant for the doctrine of comparative real costs, but only the latter is relevant for the theory of mechanism.

112. [112] The principles of political economy, 2d ed., 1887, p. 216.

113. [113] J. H. Williams, "The theory of international trade reconsidered," Economic journal, XXXIX (1929), especially pp. 205-09. It has conspicuously failed to do so in his own case. Cf. his Argentine international trade under inconvertible paper money 1880-1900, 1920.

114. [114] "The theory of international trade reconsidered," loc. cit. p. 203.

Bibliography

115. [115] This is a list of titles of works cited in the text (including the footnotes). In order to save space, a number of titles to which references of minor importance only are made are here omitted, and where a number of different items in the collected works of an author have been used, the items contained in such works are not listed here separately. Where a date is enclosed in square brackets, it represents, unless otherwise indicated, the date of first publication. Place of publication is not given for periodicals, and for other works is given only if it is not London. Since there is little overlapping between the two lists, separate listing is given for the titles cited in the first two chapters and for those cited in the remainder of the book.

End of Notes

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