The National System of Political Economy

Book II, Chapter XXIII
THE MANUFACTURING POWER AND THE INSTRUMENTS OF CIRCULATION.

IF the experience of the last twenty-five years has confirmed, as being partly correct, the principles which have been set up by the prevailing theory in contradiction to the ideas of the so-called 'mercantile' system on the circulation of the precious metals and on the balance of trade, it has, on the other hand, brought to light important weak points in that theory respecting those subjects.

Experience has proved repeatedly (and especially in Russia and North America) that in agricultural nations, whose manufacturing market is exposed to the free competition of a nation which has attained manufacturing supremacy, the value of the importation of manufactured goods exceeds frequently to an enormous extent the value of the agricultural products which are exported, and that thereby at times suddenly an extraordinary exportation of precious metals is occasioned, whereby the economy of the agricultural nation, especially if its internal interchange is chiefly based on paper circulation, falls into confusion, and national calamities are the result.

The popular theory maintains that if we provide ourselves with the precious metals in the same manner as every other article, it is in the main indifferent whether large or small quantities of precious metals are in circulation, as it merely depends on the relation of the price of any article in exchange whether that article shall be cheap or dear; a derangement in the rate of exchange acts simply like a premium on a larger exportation of goods from that country, in favour of which it oscillates from time to time: consequently the stock of metallic money and the balance between the imports and exports, as well as all the other economical circumstances of the nation, would regulate themselves in the safest and best manner by the operation of the natural course of things.

This argument is perfectly correct as respects the internal interchange of a nation; it is demonstrated in the commercial intercourse between town and town, between town and country districts, between province and province, as in the union between State and State. Any political economist would be deserving of pity who believed that the balance of the mutual imports and exports between the various states of the American Union or the German Zollverein, or between England, Scotland, and Ireland, can be regulated better through State regulations and laws than through free interchange. On the hypothesis that a similar union existed between the various states and nations of the earth, the argument of the theory of trusting to the natural course of things would be quite consistent. Nothing, however, is more contrary to experience than to suppose under the existing conditions of the world that in international exchange things act with similar effect.

The imports and exports of independent nations are regulated and controlled at present not by what the popular theory calls the natural course of things, but mostly by the commercial policy and the power of the nation, by the influence of these on the conditions of the world and on foreign countries and peoples, by colonial possessions and internal credit establishments, or by war and peace. Here, accordingly, all conditions shape themselves in an entirely different manner than between societies which are united by political, legal, and administrative bonds in a state of unbroken peace and of perfect unity of interests.

Let us take into consideration as an example the conditions between England and North America. If England from time to time throws large masses of manufactured goods on to the North American market; if the Bank of England stimulates or restricts, in an extraordinary degree, the exports to North America and the credit granted to her by its raising or lowering its discount rates; if, in addition to and as a consequence of this extraordinary glut of the American market for manufactured goods, it happens that the English manufactured goods can be obtained cheaper in North America than in England, nay, sometimes much below the cost price of production; if thus North America gets into a state of perpetual indebtedness and of an unfavourable condition of exchange towards England, yet would this disorganised state of things readily rectify itself under a state of perfectly unrestricted exchange between the two countries. North America produces tobacco, timber, corn, and all sorts of means of subsistence very much cheaper than England does. The more English manufactured goods go to North America, the greater are the means and inducements to the American planter to produce commodities of value sufficient to exchange for them; the more credit is given to him the greater is the impulse to procure for himself the means of discharging his liabilities; the more the rate of exchange on England is to the disadvantage of North America, the greater is the inducement to export American agricultural products, and hence the more successful will be the competition of the American agriculturist in the English produce market.

In consequence of these exportations the adverse rate of exchange would speedily rectify itself; indeed, it could not even reach any very unfavourable point, because the certain anticipation in North America that the indebtedness which had been contracted through the large importation of manufactured goods in the course of the present year, would equalise itself through the surplus production and increased exports of the coming year, would be followed by easier accommodation in the money market and in credit.

Such would be the state of things if the interchange between the English manufacturer and the American agriculturist were as little restricted as the interchange between the English manufacturer and the Irish agriculturist is. But they are and must be different: if England imposes a duty on American tobacco of from five hundred to one thousand per cent.; if she renders the importation of American timber impossible by her tariffs, and admits the American means of subsistence only in the event of famine, for at present the American agricultural production cannot balance itself with the American consumption of English manufactured goods, nor can the debt incurred for those goods be liquidated by agricultural products; at present the American exports to England are limited by narrow bounds, while the English exports to North America are practically unlimited; the rate of exchange between both countries under such circumstances cannot equalise itself, and the indebtedness of America towards England must be discharged by exports of bullion to the latter country.

These exports of bullion, however, as they undermine the American system of paper circulation, necessarily lead to the ruin of the credit of the American banks, and therewith to general revolutions in the prices of landed property and of the goods in circulation, and especially to those general confusions of prices and credit which derange and overturn the economy of the nation, and with which, we may observe, that the North American free States are visited whenever they have found themselves unable to restore a balance between their imports and their exports by State tariff regulations.

It cannot afford any great consolation to the North American that in consequence of bankruptcies and diminished consumption, the imports and exports between both countries are at a later period restored to a tolerable proportion to one another. For the destruction and convulsions of commerce and in credit, as well as the reduction in consumption, are attended with disadvantages to the welfare and happiness of individuals and to public order, from which one cannot very quickly recover and the frequent repetition of which must necessarily leave permanently ruinous consequences.

Still less can it afford any consolation to the North Americans, if the popular theory maintains that it is an indifferent matter whether large or small quantities of precious metals are in circulation; that we exchange products merely for products; whether this exchange is made by means of large or small quantities of metallic circulation is of no importance to individuals. To the producer or proprietor it certainly may be of no consequence whether the object of his production or of his possession is worth 100 centimes or 100 francs, provided always that he can procure with the 100 centimes as large a quantity of objects of necessity and of enjoyment as he can with the 100 francs. But low or high prices are thus a matter of indifference only in case they remain on the same footing uninterruptedly for a long period of time.

If, however, they fluctuate frequently and violently, disarrangements arise which throw the economy of every individual, as well as that of society, into confusion. Whoever has purchased raw materials at high prices, cannot under low prices, by the sale of his manufactured article, realise again that sum in precious metals which his raw materials have cost him. Whoever has bought at high prices landed property and has left a portion of the purchase money as a mortgage debt upon it, loses his ability of payment and his property; because, under diminished prices, probably the value of the entire property will scarcely equal the amount of the mortgage. Whoever has taken leases of property under a state of high prices, finds himself ruined by the decrease in prices, or at least unable to fulfil the covenants of his leases. The greater the rising and falling of prices, and the more frequently that fluctuations occur, the more ruinous is their effect on the economical conditions of the nation and especially on credit. But nowhere are these disadvantageous effects of the unusual influx or efflux of precious metals seen in a more glaring light than in those countries which are entirely dependent on foreign nations in respect of their manufacturing requirements and the sale of their own products, and whose commercial transactions are chiefly based on paper circulation.

It is acknowledged that the quantity of bank notes which a country is able to put into and to maintain in circulation, is dependent on the largeness of the amount of metallic money which it possesses. Every bank will endeavour to extend or limit its paper circulation and its business in proportion to the amount of precious metals lying in its vaults. If the increase in its own money capital or in deposits is large, it will give more credit; and through this credit, increase the credit given by its debtors, and by so doing raise the amount of consumption and prices; especially those of landed property. If, on the contrary, an efflux of precious metals is perceptible, such a bank will limit its credit, and thereby occasion restriction of credit and consumption by its debtors, and by the debtors of its debtors, and so on to those who by credit are engaged in bringing into consumption the imported manufactured goods. In such countries, therefore, the whole system of credit, the market for goods and products, and especially the money value of all landed property, is thrown into confusion by any unusual drain of metallic money.

The cause of the latest as well as of former American commercial crises, has been alleged to exist in the American banking and paper system. The truth is that the banks have helped to bring about these crises in the manner above named, but the main cause of their occurrence is that since the introduction of the 'compromise' bill the value of the English manufactured goods has far surpassed the value of the exported American products, and that thereby the United States have become indebted to the English to the amount of several hundreds of millions for which they could not pay in products. The proof that these crises are occasioned by disproportionate importation is, that they have always taken place whenever (in consequence of peace having set in or of a reduction being made in the American customs duties) importation of manufactured goods into the United States has been unusually large, and that they have never occurred as long as the imports of goods have been prevented by customs duties on imports from exceeding the value of the exports of produce.

The blame for these crises has further been laid on the large capital which has been expended in the United States in the construction of canals and railways, and which has mostly been procured from England by means of loans. The truth is that these loans have merely assisted in delaying the crises for several years, and in increasing it when it arose; but these very loans themselves have evidently been incurred through the inequality which had arisen between the imports and exports, and but for that inequality would not have been made and could not have been made.

While North America became indebted to the English for large sums through the large importation of manufactured goods which could not be paid for in produce, but only in the precious metals, the English were enabled, and in consequence of the unequal rates of exchange and interest found it to their advantage, to have this balance paid for in American railway, canal, and bank stocks, or in American State paper.

The more the import of manufactured goods into America surpassed her exports in produce, and the greater that the demand for such paper in England became, the more were the North Americans incited to embark in public enterprises; and the more that capital was invested in such enterprises in North America, the greater was the demand for English manufactured goods, and at the same time the disproportion between the American imports and exports.

If on the one hand the importation of English manufactured goods into North America was promoted by the credit given by the American banks, the Bank of England on the other side through the credit facilities which it gave and by its low rates of discount operated in the same direction. It has been proved by an official account of the English Committee on Trade and Manufactures, that the Bank of England lessened (in consequence of these discounts) the cash in its possession from eight million pounds to two millions. It thereby on the one hand weakened the effect of the American protective system to the advantage of the English competition with the American manufactories; on the other hand it thus offered facilities for, and stimulated, the placing of American stocks and State paper in England. For as long as money could be got in England at three per cent. the American contractors and loan procurers who offered six per cent. interest had no lack of buyers of their paper in England.

These conditions of exchange afforded the appearance of much prosperity, although under them the American manufactories were being gradually crushed. For the American agriculturists sold a great part of that surplus produce which under free trade they would have sold to England, or which under a moderate system of protection of their own manufactories they would have sold to the working men employed therein, to those workmen who were employed in public works and who were paid with English capital. Such an unnatural state of things could not, however, last long in the face of opposing and divided national interests, and the break up of it was the more disadvantageous to North America the longer it was repressed. As a creditor can keep the debtor on his legs for a long time by renewals of credit, but the bankruptcy of the debtor must become so much the greater the longer he is enabled to prolong a course of ruinous trading by means of continually augmented credit from the creditor, so was it also in this case.

The cause of the bankruptcy in America was the unusual export of bullion which took place from England to foreign countries in consequence of insufficient crops and in consequence of the Continental protective systems. We say in consequence of the Continental protective systems, because the English—if the European Continental markets had remained open to them—would have covered their extraordinary importations of corn from the Continent chiefly by means of extraordinary export of English manufactured goods to the Continent, and because the English bullion—even had it flown over for a time to the continent—would again have found its way back to England in a short time in consequence of the augmented export of manufactured goods. In such a case the Continental manufactories would undoubtedly have fallen a sacrifice to the English-American commercial operations.

As matters stood, however, the Bank of England could only help itself by limiting its credit and increasing its rate of discount. In consequence of this measure not only the demand for more American stocks and State paper fell off in England, but also such paper as was already in circulation now forced itself more on the market. The United States were thereby not merely deprived of the means of covering their current deficit by the further sale of paper, but payment of the whole debt they had contracted in the course of many years with England by means of their sales of stocks and State paper became liable to be demanded in money. It now appeared that the cash circulation in America really belonged to the English. It appeared yet further that the English could dispose of that ready money on whose possession the whole bank and paper system of the United States was based, according to their own inclination. If, however, they disposed of it, the American bank and paper system would tumble down like a house built of cards, and with it the foundation would fall whereon rested the prices of landed property, consequently the economical means of existence of a great number of private persons.

The American banks tried to avoid their fall by suspending specie payments, and indeed this was the only means of at least modifying it; on the one hand they tried by this means to gain time so as to decrease the debt of the United States through the yield of the new cotton crops and to pay it off by degrees in this manner; on the other hand they hoped by means of the reduction of credit occasioned by the suspension to lessen the imports of English manufactured goods and to equalise them in future with their own country's exports.

How far the exportation of cotton can afford the means of balancing the importation of manufactured goods is, however, very doubtful. For more than twenty years the production of this article has constantly outstripped the consumption, so that with the increased production the prices have fallen more and more. Hence it happens that, on the one hand, the cotton manufacturers are exposed to severe competition with linen manufactures, perfected as these are by greatly improved machinery; while the cotton planters, on the other hand, are exposed to it from the planters of Texas, Egypt, Brazil, and the East Indies.

It must, in any case, be borne in mind that the exports of cotton of North America benefit those States to the least extent which consume most of the English manufactured goods.

In these States, namely, those which derive from the cultivation of corn and from cattle-breeding the chief means of procuring manufactured goods, a crisis of another kind now manifests itself. In consequence of the large importation of English manufactured goods the American manufactures were depressed. All increase in population and capital was thereby forced to the new settlements in the west. Every new settlement increases at the commencement the demand for agricultural products, but yields after the lapse of a few years considerable surplus of them. This has already taken place in those settlements. The Western States will therefore pour, in the course of the next few years, into the Eastern States considerable surplus produce, by the newly constructed canals and railways; while in the Eastern States, in consequence of their manufactories being depressed by foreign competition, the number of consumers has decreased and must continually decrease. From this, depreciation in the value of produce and of land must necessarily result, and if the Union does not soon prepare to stop up the sources from which the above-described money crises emanate, a general bankruptcy of the agriculturists in the corn-producing States is unavoidable.

The commercial conditions between England and North America which we have above explained, therefore teach:

(1) That a nation which is far behind the English in capital and manufacturing power cannot permit the English to obtain a predominating competition on its manufacturing market without becoming permanently indebted to them; without being rendered dependent on their money institutions, and drawn into the whirlpool of their agricultural, industrial, and commercial crises.

(2) That the English national bank is able by its operations to depress the prices of English manufactured goods in the American markets which are placed under its influence—to the advantage of the English and to the disadvantage of the American manufactories.

(3) That the English national bank could effect by its operations the consumption by the North Americans, for a series of years, of a much larger value of imported goods than they would be able to repay by their exportation of products, and that the Americans had to cover their deficit during several years by the exportation of stocks and State paper.

(4) That under such circumstances the Americans carried on their internal interchange and their bank and paper-money system with ready money, which the English bank was able to draw to itself for the most part by its own operations whenever it felt inclined so to do.

(5) That the fluctuations in the money market under all circumstances act on the economy of the nations in a highly disadvantageous manner, especially in countries where an extensive bank and paper-money system is based on the possession of certain quantities of the precious metals.

(6) That the fluctuations in the money market and the crises which result therefrom can only be prevented, and that a solid banking system can only be founded and maintained, if the imports of the country are placed on a footing of equality to the exports.

(7) That this equality can less easily be maintained in proportion as foreign manufactured goods can successfully compete in the home manufacturing markets, and in proportion as the exportation of native agricultural products is limited by foreign commercial restrictions; finally, that this equality can less easily be disturbed in proportion as the nation is independent of foreign nations for its supply of manufactured goods, and for the disposal of its own produce.

These doctrines are also confirmed by the experience of Russia. We may remember to what convulsions public credit in the Russian Empire was subjected as long as the market there was open to the overwhelming consignments of English manufactured goods, and that since the introduction of the tariff of 1821 no similar convulsion has occurred in Russia.

The popular theory has evidently fallen into the opposite extreme to the errors of the so-called mercantile system. It would be of course false if we maintained that the wealth of nations consisted merely in precious metals; that a nation can only become wealthy if it exports more goods than it imports, and if hence the balance is discharged by the importation of precious metals. But it is also erroneous if the popular theory maintains, under the existing conditions of the world, that it does not signify how much or how little precious metals circulate in a nation; that the fear of possessing too little of the precious metals is a frivolous one, that we ought rather to further their exportation than favour their importation, &c. &c. This manner of reasoning would only be correct in case we could consider all nations and countries as united under one and the same system of law; if no commercial restrictions of any kind against the exportation of our products existed in those nations for whose manufactured goods we can only repay with the productions of our agriculture; if the changes wrought by war and peace caused no fluctuations in production and consumption, in prices, and on the money market; if the great credit institutions do not seek to extend their influence over other nations for the special interest of the nation to which they belong. But as long as separate national interests exist, a wise State policy will advise every great nation to guard itself by its commercial system against extraordinary money fluctuations and revolutions in prices which overturn its whole internal economy, and it will attain this purpose only by placing its internal manufacturing production in a position of proper equality with its internal agricultural production and its imports with its exports.

The prevailing theory has evidently not sufficiently discriminated between the mere possession of the precious metals and the power of disposition of the precious metals in international interchange. Even in private exchange, the necessity of this distinction is clearly evident. No one wishes to keep money by him, everyone tries to remove it from the house as soon as possible; but everybody at the same time seeks to be able to dispose at any time of the sums which he requires. The indifference in regard to the actual possession of ready money is manifested everywhere in proportion to wealth. The richer the individual is, the less he cares about the actual possession of ready money if only he is able at any hour to dispose of the ready cash lying in the safes of other individuals; the poorer, however, the individual is, and the smaller his power of disposing of the ready money lying in other people's hands, the more anxiously must he take care to have in readiness what is required. The same is the case with nations which are rich in industry or poor in industry. If England cares but little as a rule about how great or how small a quantity of gold or silver bars are exported out of the country, she is perfectly well aware that an extraordinary export of precious metals occasions on the one hand a rise in the value of money and in discount rates, on the other hand a fall in the prices of fabrics, and that she can regain through larger exportation of fabrics or through realisation of foreign stocks and State paper speedy possession of the ready money required for her trade. England resembles the rich banker who, without having a thaler in his pocket, can draw for any sum he pleases on neighbouring or more distant business connections. If, however, in the case of merely agricultural nations extraordinary exports of coin take place, they are not in the same favourable position, because their means of procuring the ready money they require are very limited, not merely on account of the small value in exchange of their products and agricultural values, but also on account of the hindrances which foreign laws put in the way of their exportation. They resemble the poor man who can draw no bills on his business friends, but who is drawn upon if the rich man gets into any difficulty; but who is drawn upon if the rich man gets into any difficulty; who can, therefore, not even call what is actually in his hands, his own.

A nation obtains the power of disposition of the amount of ready money which is always required for its internal trade, mainly through the possession or the production of those goods and values whose facility of exchange approaches most nearly to that of the precious metals.

The diversity of this property of the facility of exchange in respect to the various articles of commerce and of property, has been as little taken into consideration by the popular school of economists in judging of international commerce, as the power of disposition of the precious metals. If we consider in this respect the various articles of value existing in private interchange, we perceive that many of them are fixed in such a way that their value is exchangeable only on the spot where they are, and that even there their exchange is attended with great costs and difficulties. To that class belong more than three-fourths of all national property—namely, immovable properties and fixed plant and instruments. However large the landed property of an individual may be, he cannot send his fields and meadows to town in order to obtain money or goods for them. He can, indeed, raise mortgages on such property, but he must first find a lender on them; and the further from his estate that such an individual resides, the smaller will be the probability of the borrower's requirements being satisfied.

Next after property thus fixed to the locality, the greatest part of agricultural products (excepting colonial produce and a few less valuable articles) have in regard to international intercourse the least facility for exchange. The greatest part of these values, as e.g. building materials and wood for fuel, bread stuffs, &c., fruit, and cattle, can only be sold within a reasonable distance of the place where they are produced, and if a great surplus of them exists they have to be warehoused in order to become realisable. So far as such products can be exported to foreign countries their sale again is limited to certain manufacturing and commercial nations, and in these also their sale is generally limited by duties on importation and is affected by the larger or smaller produce of the purchasing nation's own harvests. The inland territories of North America might be completely overstocked with cattle and products, but it would not be possible for them to produce through exportation of this excess considerable amounts of the precious metals from South America, from England, or from the European continent. The valuable manufactured goods of common use, on the other hand, possess incomparably greater facilities for exchange. They find at ordinary times a sale in all open markets of the world; and at extraordinary crises they also find a sale (at lower prices) in those markets whose protective tariffs are calculated to operate adversely merely in ordinary times. The power of exchange of these articles clearly approaches most nearly to that of the precious metals, and the experience of England shows that if in consequence of deficient harvests money crises occur, the increased exportation of fabrics, and of foreign stocks and State paper, quickly rectifies the balance. The latter, the foreign stocks and State paper, which are evidently the results of former favourable balances of exchange caused by exportations of fabrics, constitute in the hands of the nation which is rich in manufacturing industry so many bills which can be drawn on the agricultural nation, which at the time of an extraordinary demand for the precious metals are indeed drawn with loss to the individual owner of them (like the manufactured goods at the time of money crises), but, nevertheless, with immense advantage to the maintenance of the economical conditions of that nation which is rich in manufacturing industry.

However much the doctrine of the balance of trade may have been scorned by the popular school, observations like those above described encourage us nevertheless to express the opinion that between large and independent nations something of the nature of a balance of trade must exist; that it is dangerous for great nations to remain for a long period at very considerable disadvantage in respect of this balance, and that a considerable and lasting efflux of the precious metals must always be followed as a consequence by important revolutions in the system of credit and in the condition of prices in the interior of the nation. We are far from wishing in these remarks to revive the doctrine of the balance of trade as it existed under the so-called 'mercantile system,' and to maintain that the nation ought to impose obstacles in the way of the exportation of precious metals, or that we must keep a specially exact account with each individual nation, or that in the commerce between great nations a few millions difference between the imports and exports is of great moment. What we deny is merely this: that a great and independent nation, as Adam Smith maintains at the conclusion of his chapter devoted to this subject,*88 'may continually import every year considerably larger values in products and fabrics than it exports; that the quantities of precious metals existing in such a nation may decrease considerably from year to year and be replaced by paper circulation in the interior; moreover, that such a nation may allow its indebtedness towards another nation continually to increase and expand, and at the same time nevertheless make progress from year to year in prosperity.'*89

This opinion, expressed by Adam Smith and maintained since that time by his school, is alone that which we here characterise as one that has been contradicted a hundred times by experience, as one that is contrary in the very nature of things to common sense, in one word (to retort upon Adam Smith his own energetic expression) as 'an absurdity.'

It must be well understood that we are not speaking here of countries which carry on the production of the precious metals themselves at a profit, from which therefore the export of these articles has quite the character of an export of manufactured goods. We are also not speaking of that difference in the balance of trade which must necessarily arise if the nation rates its exports and imports at those prices which they have in their own seaport towns. That in such a case the amount of imports of every nation must exceed its exports by the total amount of the nation's own commercial profits (a circumstance which speaks to its advantage rather than to its disadvantage), is clear and indisputable. Still less do we mean to deny the extraordinary cases where the greater exportation rather denotes loss of value than gain, as e.g. if property is lost by shipwreck. The popular school has made clever use of all those delusions arising from a shopkeeper-like calculation and comparison of the value of the exchanges arising from the exports and imports, in order to make us disbelieve in the disadvantages which result from a real and enormous disproportion between the exports and imports of any great and independent nation, even though such disproportion be not permanent, which shows itself in such immense sums as for instance in the case of France in 1786 and 1789, in that of Russia in 1820 and 1821, and in that of the United States of North America after the 'Compromise Bill.'

Finally, we desire to speak (and this must be specially noted) not of colonies, not of dependent countries, not of small states or of single independent towns, but of entire, great, independent nations, which possess a commercial system of their own, a national system of agriculture and industry, a national system of money and credit.

It evidently consists with the character of colonies that their exports can surpass their imports considerably and continuously, without thereby involving any conclusion as to the decrease or increase of their prosperity. The colony always prospers in the proportion in which the total amountof its exports and imports increases year by year. If its export of colonial produce exceeds its imports of manufactured goods considerably and lastingly, the main cause of this may be that the landed proprietors of the colony live in the mother country, and that they receive their income in the shape of colonial goods, in produce, or in the money which has been obtained for them. If, however, the exports of fabrics to the colony exceed the imports of colonial goods considerably, this may be chiefly due to the fact that by emigrations or loans from year to year large masses of capital go to the colony. This latter circumstance is, of course, of the utmost advantage to the prosperity of the colony. It can continue for centuries and yet commercial crises under such circumstances may be infrequent or impossible, because the colony is endangered neither by wars nor by hostile commercial measures, nor by operations of the national bank of the mother country, because it possesses no independent system of commerce, credit, and industry peculiar to itself, but is, on the contrary, supported and constantly upheld by the institutions of credit and political measures of the mother country.

Such a condition existed for more than a century with advantage between North America and England, exists still between England and Canada, and will probably exist for centuries between England and Australia.

This condition becomes fundamentally changed, however, from the moment in which the colony appears as an independent nation with every claim to the attributes of a great and independent nationality—in order that it may develop a power and policy of its own and its own special system of commerce and credit. The former colony then enacts laws for the special benefit of its own navigation and naval power—it establishes in favour of its own internal industry a customs tariff of its own; it establishes a national bank of its own, &c., provided namely that the new nation thus passing from the position of a colony to independence feels itself capable, by reason of the mental, physical, and economical endowments which it possesses, of becoming an industrial and commercial nation. The mother country, in consequence, places restrictions, on its side, on the navigation, commerce, and agricultural production of the former colony, and acts, by its institutions of credit, exclusively for the maintenance of its own national economical conditions.

But it is precisely the instance of the North American colonies as they existed before the American War of Independence by which Adam Smith seeks to prove the above-mentioned highly paradoxical opinion: that a country can continually increase its exportation of gold and silver, decrease its circulation of the precious metals, extend its paper circulation, and increase its debts contracted with other nations while enjoying simultaneously steadily increasing prosperity; Adam Smith has been very careful not to cite the example of two nations which have been independent of one another for some time, and whose interests of navigation, commerce, industry, and agriculture are in competition with those of other rival nations, in proof of his opinion—he merely shows us the relation of a colony to its mother country. If he had lived to the present time and only written his book now, he would have been very careful not to cite the example of North America, as this example proves in our days just the opposite of what he attempts by it to demonstrate.

Under such circumstances, however, it may be urged against us that it would be incomparably more to the advantage of the United States if they returned again to the position of an English colony. To this we answer, yes, provided always that the United States do not know how to utilise their national independence so as to cultivate and develop a national industry of their own, and a self-supporting system of commerce and credit which is independent of the world outside. But (it may be urged) is it not evident that if the United States had continued to exist as a British colony, no English corn law would ever have been passed; that England would never have imposed such high duties on American tobacco; that continual quantities of timber would have been exported from the United States to England; that England, far from ever entertaining the idea of promoting the production of cotton in other countries, would have endeavoured to give the citizens of the United States a monopoly in this article, and to maintain it; that consequently commercial crises such as have occurred within the last decades in North America, would have been impossible? Yes; if the United States do not manufacture, if they do not found a durable system of credit of their own; if they do not desire or are not able to develop a naval power. But then, in that case, the citizens of Boston have thrown the tea into the sea in vain; then all their declamation as to independence and future national greatness is in vain: then indeed would they do better if they re-enter as soon as possible into dependence on England as her colony. In that event England will favour them instead of imposing restrictions on them; she will rather impose restrictions on them; she will rather impose restrictions on those who compete with the North Americans in cotton culture and corn production, &c. than raise up with all possible energy competitors against them. The Bank of England will then establish branch banks in the United States, the English Government will promote emigration and the export of capital to America, and through the entire destruction of the American manufactories, as well as by favouring the export of American raw materials and agricultural produce to England, take maternal care to prevent commercial crises in North America, and to keep the imports and exports of the colony always at a proper balance with one another. In one word, the American slaveholders and cotton planters will then realise the fulfilment of their finest dreams. In fact, such a position has already for some time past appeared to the patriotism, the interests, and requirements of these planters more desirable than the national independence and greatness of the United States. Only in the first emotions of liberty and independence did they dream of industrial independence. They soon, however, grew cooler, and for the last quarter of a century the industrial prosperity of the middle and eastern states is to them an abomination; they try to persuade the Congress that the prosperity of America depends on the industrial sovereignty of England over North America. What else can be meant by the assertion that the United States would be richer and more prosperous if they again went over to England as a colony?

In general it appears to us that the defenders of free trade would argue more consistently in regard to money crises and the balance of trade, as well as to manufacturing industry, if they openly advised all nations to prefer to subject themselves to the English as dependencies of England, and to demand in exchange the benefits of becoming English colonies, which condition of dependence would be, in economical respects, clearly more favourable to them than the condition of half independence in which those nations live who, without maintaining an independent system of industry, commerce, and credit of their own, nevertheless always want to assume towards England the attitude of independence. Do not we see what Portugal would have gained if she had been governed since the Methuen Treaty by an English viceroy—if England had transplanted her laws and her national spirit to Portugal, and taken that country (like the East Indian Empire) altogether under her wings? Do not we perceive how advantageous such a condition would be to Germany—to the whole European continent?

India, it is true, has lost her manufacturing power to England, but has she not gained considerably in her internal agricultural production and in the exportation of her agricultural products? Have not the former wars under her Nabobs ceased? Are not the native Indian princes and kings extremely well off? Have they not preserved their large private revenues? Do not they find themselves thereby completely relieved of the weighty cares of government?

Moreover, it is worthy of notice (though it is so after the manner of those who, like Adam Smith, make their strong points in maintaining paradoxical opinions) that this renowned author, in spite of all his arguments against the existence of a balance of trade, maintains, nevertheless, the existence of a thing which he calls the balance between the consumption and production of a nation, which, however, when brought to light, means nothing else but our actual balance of trade. A nation whose exports and imports tolerably well balance each other, may rest assured that, in respect of its national interchange, it does not consume much more in value than it produces, while a nation which for a series of years (as the United States of America have done in recent years) imports larger quantities in value of foreign manufactured goods than it exports in value of products of its own, may rest assured that, in respect to international interchange, it consumes considerably larger quantities in value of foreign goods than it produces at home. For what else did the crises of France (1786-1789), of Russia (1820-1821), and of the United States since 1833, prove?

In concluding this chapter we must be permitted to put a few questions to those who consider the whole doctrine of the balance of trade as a mere exploded fallacy.

How is it that a decidedly and continuously disadvantageous balance of trade has always and without exception been accompanied in those countries to whose detriment it existed (with the exception of colonies) by internal commercial crises, revolutions in prices, financial difficulties, and general bankruptcies, both in the public institutions of credit, and among the individual merchants, manufacturers, and agriculturists?

How is it that in those nations which possessed a balance of trade decidedly in their favour, the opposite appearances have always been observed, and that commercial crises in the countries with which such nations were connected commercially, have only affected such nations detrimentally for periods which passed away very quickly?

How is it that since Russia has produced for herself the greatest part of the manufactured goods which she requires, the balance of trade has been decidedly and lastingly in her favour, that since that time nothing has been heard of economical convulsions in Russia, and that since that time the internal prosperity of that empire has increased year by year?

How is it that in the United States of North America the same effects have always resulted from similar causes?

How is it that in the United States of North America, under the large importation of manufactured goods which followed the 'Compromise Bill,' the balance of trade was for a series of years so decidedly adverse to them, and that this appearance was accompanied by such great and continuous convulsions in the internal economy of that nation?

How is it that we, at the present moment, see the United States so glutted with primitive products of all kinds (cotton, tobacco, cattle, corn, &c.) that the prices of them have fallen everywhere one-half, and that at the same time these states are unable to balance their exports with their imports, to satisfy their debt contracted with England, and to put their credit again on sound footing?

How is it, if no balance of trade exists, or if it does not signify whether it is in our favour or not, if it is a matter of indifference whether much or little of the precious metals flows to foreign countries, that England in the case of failures of harvests (the only case where the balance is adverse to her) strives, with fear and trembling, to equalise her exports with her imports, that she then carefully estimates every ounce of gold or silver which is imported or exported, that her national bank endeavours most anxiously to stop the exportation of precious metals and to promote their importation—how is it, we ask, if the balance of trade is an 'exploded fallacy,' that at such a time no English newspaper can be read wherein this 'exploded fallacy' is not treated as a matter of the most important concern to the nation?

How is it that, in the United States of North America, the same people who before the Compromise Bill spoke of the balance of trade as an exploded fallacy, since the Compromise Bill cannot cease speaking of this exploded fallacy as a matter of the utmost importance to their country?

How is it, if the nature of things itself always suffices to provide every country with exactly the quantity of precious metals which it requires, that the Bank of England tries to turn this socalled nature of things in her own favour by limiting her credits and increasing her rates of discount, and that the American banks are obliged from time to time to suspend their cash payments till the imports of the United States are reduced to a tolerably even balance with the exports?