Art. VII.—The Balance of Trade.

Transactions and Proceedings of the Royal Society of New Zealand, Volume 37, 1904, Page 173

Art. VII.—The Balance of Trade. By H. W. Segar, Professor of Mathematics, University College, Auckland. [Read before the Auckland Institute, 20th June, 1904.] Plates III.-VI. Introduction. By the “balance of trade” of a country is meant the difference between the imports and exports as ordinarily understood and recorded in its trade returns. In the usual and generally recognised method of calculating these returns the exports are calculated at their value at the port of shipment, and the imports represent the value of the goods at their place of origin plus the cost of freight and insurance. Transit trade is generally omitted, the imports then being goods for home consumption,

and the exports goods of home production. Such imports and exports are described as “special” when it is necessary to distinguish them from the total imports and exports, which include the re-exports, or goods of the transit trade, which are imported only to be exported again. Bullion and specie are usually excluded from the general returns, and separately accounted for. Variations from this standard practice sometimes occur. For instance, the United States value their imports at the port of shipment, and do not add freight, insurance, and other charges. The imports of the United States thus appear considerably smaller than they would do if valued in the same manner as those of most other nations. Again, New Zealand and most gold- and silver-producing countries include these metals in the value of their exports. This, though varying from the recognised practice, is to some extent justifiable, as the production of gold in many of these countries forms quite a considerable proportion of the national industry, and the output of gold must be included in the exports if these are to give a fair representation of the commercial position. The United States, however, does not adopt this practice. These exceptions have to be carefully borne in mind in making comparisons. The question also as to whether re-exports are included or excluded should always be attended to before making application of any returns of imports or exports. In the case of the United Kingdom these re-exports reach now as much as seventy millions annually, and there are instances of places, as Malta, with small consuming and productive power whose trade consists mainly of this class of goods. In what follows we shall generally speak of gold only, and deal only with the statistics of gold, and not of gold and silver. In the case of the nations from whose trade returns we shall take illustrations, the part played by silver in international transactions is secondary to that played by gold, and it is unnecessary to complicate the subject by taking both into account. It would, of course, be very different in the case of countries having silver standards; but even then the general argument would not be affected, though the statistics used would necessarily have to include silver. The Graphical Illustrations. Figs. 1–5 represent, by the usual graphical method, the balance of trade respectively for the United Kingdom, the United States, Germany, France, and New Zealand. An excess of imports is represented above the base line, and an excess of exports below it. Figs. 1–4 are drawn to the same scale, and so are suited for direct comparison; that for New Zealand is

on a scale which with respect to the vertical measurements is fifteen times as great. The graphs in figs. 1–4 are constructed from data deduced from those given in the volume of Memoranda and Statistical Tables (cd. 1761) issued by the Board of Trade. The statistics do not in any case go further back than the year 1854, because of the unsatisfactory nature of the returns before that date; while in the case of Germany, for a similar reason, they start from the year 1880. The graph representing the balance of trade for New Zealand (fig. 5) is the only one representing statistics in which gold and silver are included; in the other figures the balance of import or export of gold is represented by a second graph. In fig. 1 the lower graph represents it for the years 1858–1902; in fig. 2 the dotted graph represents it for the years 1878–1902; and in figs. 3 and 4 the dotted graphs represent it for the period 1884–1902. Positive and Negative Balance. The balance of trade is commonly described as favourable when the exports are in excess, and as unfavourable or adverse when the imports are in excess. These words “favourable,” “unfavourable,” and “adverse,” as thus used, are misleading, appearing to indicate as they do that an excess of imports is in some way disadvantageous to a nation, and an excess of exports an advantage. This use of the words originated in the old mercantile theory in which it was regarded as of essential importance to a country's prosperity to have, and to bring about by restraints on foreign trade if necessary, an excess of exports of merchandise and an inward flow of the precious metals. Very little consideration makes plain the unsoundness of such a notion; for an excess of exports, or the nominally favourable condition of trade, may be due to paying interest on loans, as in the case of New Zealand, and an excess of imports may be due wholly or in part to the receipt of interest, as in the case of the United Kingdom. Adam Smith appealed to the experience of his time against the notions exemplified in the use of the word “favourable” as applied to the balance of trade. “There is no commercial country in Europe,” he writes, “of which the approaching ruin has not frequently been foretold by the pretended doctors of this system, from an unfavourable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour and against their neighbours, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country,

on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade…. have been enriched by it.” In other words, Adam Smith claimed that attempts to bring about by policy what was considered a favourable balance had been actually unfavourable to national prosperity. It is not easy to avoid altogether the use of words which, in spite of their bearing on their surface the erratic ideas that were current during the infancy of the science of economics, have become part of the current phraseology of the mercantile world; but it is most necessary to dissociate them altogether in this connection from their ordinary connotation, and to regard them merely as indicating whether the exports or imports are in excess, without suggesting anything beyond. Indeed, it will be better for us to use the word “positive” as indicating an excess of imports, and “negative” as indicating an excess of exports. These words at least correspond to something tangible. Thus, when the balance of trade is positive, a country is obtaining for consumption an amount of products in excess of what she produces; and when it is negative the country has left to consume less than she actually produces. The words seem suitable; at all events they do not tend to convey entirely false notions. to those who have not special knowledge or have not had special warning; and they will not have that fatal power which words sometimes have of cheating the mind, even occasionally of careful and well-instructed thinkers. In accordance with this terminology it will be convenient to speak sometimes of the balance of trade as rising when an excess of imports increases or an excess of exports diminishes, and as falling when the contrary movement takes place; and this will correspond exactly with the way in which we should speak in the ordinary course of the corresponding graphs in the accompanying figures. We shall now proceed to consider the elements on which the balance of trade depends. International Payments. The transactions between nations are of much the same character as between individuals, and, except in the case of bankruptcy, the payments in goods and coin and services rendered on the one side must pay for those on the other, in a similar way. A nation may have to pay— (1.) For goods received by it, including gold; (2.) Interest on loans received by it; (3.) The principal of loans advanced by it, or the return of the principal of loans borrowed by it; (4.) Tributes or indemnities;

(5.) Profits of investments in its territory and owned by foreigners or others resident abroad; (6.) Sums assigned privately by individuals—as by foreign residents assigning portions of their earnings to their families abroad, or by natives residing or travelling abroad drawing on their home resources, and so on; (7.) For maintenance of its army, navy, and representatives abroad; (8.) Charges and commissions for services rendered to it, as, e.g., by the ships and traders, bankers, insurance offices, &c., of another nation. And just as a nation may have to pay on any of these accounts, so she may have to receive on similar accounts. Thus a nation may have to be paid, just as an individual may, for services rendered, risk taken, capital lent, and so on—i.e., for items other than the sale of goods. Thus, say, a million's worth of service rendered by a nation is essentially as truly an item of her exports as is so-much coal, iron, or cotton goods, and it is sold in the same way, just as the worker as truly sells the labour of his hands or brain as the tradesman sells his goods. The amount owing by other nations is determined by, and must include, these other items as well as the mere goods exported. Hence the term “invisible exports” was originally applied by Sir R. Giffen, and is now generally applied to these items of national earning-power other than the sale of visible material commodities. We see, then, that a nation may be creditor or debtor to the rest of the world on many different accounts other than the sale or purchase of goods. In its foreign trade equal amounts of its imports and exports pay for one another, and the excess of merchandise and gold, either imported or exported as the case may be, settles an account in which is included capital borrowed, lent, or invested, interest and profits, and so on, as enumerated above. This account, and therefore the excess of merchandise and gold imported or exported, is independent of the buying and selling of commerce, and depends only on the relation between the country and the rest of the world in respect to these other matters. Before pursuing this subject further, however, we shall consider the extent to which gold is used in international trade. The Limited Use of Gold in International Trade. Erroneous notions on this subject are the cause of much of the false reasoning that is painfully common on matters of foreign trade. If we review the statistics which the illustrative figures exemplify we shall find that the use of gold in international trade is of a very limited nature. During the years 1858–1902 the

annual excess of imports of merchandise into the United Kingdom reached as high as £180,000,000, but the greatest excess of imports of gold did not reach £15,000,000, while the excess of export of gold reached only as much as £5,500,000. In the case of the United States the excess of exports of merchandise during the years 1878–1902 reached as much as £137,000,000, but the greatest excess of imports of gold was less than £21,000,000, and the greatest excess of exports was only £17,500,000. Germany's excess of imports was in 1898 over £66,000,000, but during the years 1884–1902 the greatest excess of imports of gold was less than £12,000,000, and gold was only exported in excess once, and that to the extent of less than £750,000. During the same years the excess of imports to France reached just on £48,000,000; the corresponding figure for gold is only slightly over £15,000,000, and the greatest excess of export of gold was only £6,500,000. For the benefit of those who have any hungering suspicion that imports and exports, or the differences between them, are paid for in gold, we may repeat some of these facts. During the years considered for the several countries the annual excess of imports of merchandise into the United Kingdom reached £180,000,000, but her excess of export of gold was never as much as £5,500,000; the excess of exports of merchandise from the United States reached £137,000,000, but she never imported in one year an excess of gold as much as £21,000,000; Germany imported an excess of merchandise of over £66,000,000 in one year, and in only one year of the nineteen did she export any excess of gold at all, and that only to the extent of a fraction of a million; lastly, France, with an excess of imports reaching nearly £48,000,000 in 1891, sent out an excess of gold only reaching at most in one year £6,500,000. But not only does the excess of import or export of gold in any year not bear comparison with the excesses that we generally have of merchandise, but it is to be further noted that the graphs representing the gold balances, unlike those representing the balances of merchandise, fluctuate generally about the base line: one time there is an excess of imports, at another an excess of exports, according to the fluctuations of trade. If, then, we take the totals for a number of years back, instead of the separate annual returns, we shall find the excess of imports or exports of gold bearing a much more insignificant proportion to the corresponding figures for merchandise, the excesses of imports and exports of gold in different years to a certain extent balancing one another. The excess of imports of merchandise, for instance, to the United Kingdom, during the period 1858–1902, was £3,984,000,000, and, instead of there being an excess of export

of gold, there was an excess of import of gold also to the extent of £170,600,000. But in order to have a period for which we can compare the similar statistics for the other countries we shall take the years 1884–1902, the first of these years being the earliest for which I have the returns of the gold imports and exports for all four countries by me. During this period the United Kingdom had a total excess of imports amounting to £2,456,600,000, and there was also an excess of imports of gold amounting to £91,700,000; the United States had a total excess of exports of merchandise amounting to £866,000,000, and likewise an excess of exports of gold amounting to £14,900,000; Germany had a total excess of imports of merchandise amounting to £700,700,000, and likewise an excess of imports of gold amounting to £60,700,000; and lastly, France had an excess of imports of merchandise amounting to £513,500,000, and likewise an excess of imports of gold amounting to £83,500,000. So far, then, are the actual circumstances from justifying the idea that a country is paid for its excess of exports or pays for its excess of imports in gold, that we have found, in the case of the four leading commercial nations, during the recent period of nineteen years, that in the countries where merchandise is imported in excess gold also has been imported in excess, and that the one country which has had an excess of exports of merchandise has also had, on the whole, an excess of export of gold. In the case of England, Germany, and France there must of necessity be on the average a predominant import of gold, as these countries produce none themselves, and yet require a certain amount for the expansion and renewal of the coinage, the manufacture of jewellery—a considerable value of which is exported—and for general application in manufactures and the arts. Such an amount of gold as is required for these purposes has to be imported like any other necessary material not produced at home. That the amounts imported by these countries should be so nearly comparable as are the values of the total excesses of imports of gold—namely, £91,000,000, £60,000,000, and £83,000,000—is not then a mere coincidence. The differences between these values and those actually required for the purposes referred to are only small amounts, comparable with those that are imported and exported in periods of two or three years through the ordinary fluctuations of commerce. This constitutes an absolute demonstration from the statistical side alone that these effects are not cumulative—that is, that a nation cannot continue for any but a comparatively short period to have an inflow of gold over and above what is required for use and consumption.

The case of the United States is not an exception, for, although we have found that during the period considered she exported in the total an excess of nearly £15,000,000 of gold, yet when we allow for the production of gold in that country, which amounted to £188,000,000 in the same period, we find she had £173,000,000 for home use. This amount is considerably larger than for any one of the other three countries, but no more perhaps than might be relatively expected from the rapid increase in the numbers and wealth of the population. It will be noticed that the import of gold by the non-gold-producing nations has been greatly stimulated of recent years. This is a consequence of the greatly increased production of gold. The large amounts of gold produced can only find an outlet by finding their way into the various countries, and to a large extent into the several currencies, enlarging the same and producing higher prices. The amounts of the excesses of imports of gold we have considered above would have been much less again but for this cause. It is not difficult to see that the use of gold in commerce is thus limited, because it could not well be otherwise. Even if a nation were minded to pay for her imports with gold, she would find it impossible to achieve her object. If it were possible to export every coin in the country, any one of the great countries we have been considering would, in attempting the feat, be left without coinage in a few months.* The Director of the United States Mint estimated the stocks of gold in these countries to be: United Kingdom, £91,000,000; United States, £192,000,000; Germany, £138,000,000; France, £167,000 000. The United Kingdom, if she paid in gold even only for the excess of her imports over her exports, would be without gold in about six months only. But, as commerce is actually carried out, the importer does not send a box of gold in payment for his goods, nor does the exporter receive any such, but gold or credit, and generally credit, is passed on to a fellow-townsman or fellow-countryman. What passes between nation and nation consists mainly of drafts and bills of exchange. The rates of exchange tend to resist even the passage of the smallest amount of gold, and, by discouraging imports if they tend to come in in excess and encouraging exports, or vice versa, tend to make the imports and exports keep their proper balance as determined by the several factors of international indebtedness, without the passage of gold. To quote the words of Professor Nicholson: “If there is at any time an excess of imports into a country, the importers (through their brokers or agents or correspondents) will find that they must pay more for foreign bills. This increase of cost will no doubt affect all, but not to the same extent. Some of the

imports will (compared with the great bulk) have yielded little or no profit, and some of the importers will have little or no credit. The fall in the exchange will tend to check these scarcely profitable or marginal imports, and also to stimulate the exports of a similar character. Some of the importers may be unable to meet their engagements, others may be obliged to accept onerous terms for postponement, and others will purchase the bills drawn against the additional exports. In this way it is seen that the balance of imports and exports will, in ordinary cases of inequality, be restored by operating directly upon the doubtful margins, and not by general operations on prices.” If gold, though, has eventually to pass to settle international transactions, a portion of it, of course, may be what is required on account of the general requirements we before considered. Gold must, apart from temporary fluctuations, be distributed amongst the nations so as to be accommodated, in the words of Ricardo, “to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter.” New Zealand, for instance, must export the main bulk of the gold she produces, and, this being a comparatively steady quantity, there is a relation between her average prices and those of the rest of the world which brings this about. Similarly, countries which do not produce gold must import a certain average amount depending on their needs. But any gold which passes in excess or defect of this amount, though it may do so temporarily without affecting prices or credit, merely diminishing in the one country and increasing in the other the bankers' reserves, must, if it remains, increase credit and prices in the receiving country and lower them in that which has lost the gold. An addition of, say, £10,000,000 represents a considerable proportionate increases in England's stock of gold. Were such a sum to get into circulation it would be sufficient to raise her average prices substantially, and so check her exports, while the prices of foreign goods would be relatively low, and this would give imports an impetus which, aided by the diminished exports, would tend to again withdraw the gold. Thus prices change in a way which ultimately offers a decisive resistance to the former tendency, and may promote a reaction. And so this abnormal stream of gold ebbs and flows, always in relatively small quantities, according to fluctuations in business. The direction of the flow at any moment does not depend on relations of permanent indebtedness, but on the accounts that are due at the time. Gold may flow into a country that is on the point of becoming hopelessly insolvent; it may be an outward and visible sign of the payment of her last loan, which, however, would mainly be received in the form of goods.

A change in fiscal policy may cause a limited flow of gold for a time which has no tendency to return, with the result that the country permanently retains a greater or less amount of gold than would otherwise have been retained. Suppose, for instance, that the duties on imports were raised. If the change were sufficiently considerable and extensive to diminish the volume of imports, exports would be discouraged as a consequence in the manner described above. If the effect on the exchanges were not sufficient to reduce the exports from what they would have been in the absence of the increases of duties by the same amount as the duties diminished the imports, gold would have to pass, but only to the extent necessary to raise prices to the level necessary to diminish the exports by the necessary amount. The country would then use more coins in carrying on her internal trade at higher prices, and other nations would have the privilege of consuming the goods she produced in exchange for them. These effects are, of course, those which would ensue other things being the same, but in actual cases they are generally effective merely in modifying those fluctuations, due to other causes, which are always taking place in commerce, and the extent of which is obvious from the changes taking place from year to year in the balance of trade, as clearly indicated in figs. 1–5. Consequently it is generally difficult to trace these effects of a change in tariff, especially as such changes are generally more or less gradual, and when severe are so only on a very limited number of articles and not on the whole mass of imports. Increases in duties may, for example, be made just about the time when a period of extensive foreign investment is setting in, with the result that gold may be exported instead of imported, though the latter is the effect which the increase in duties would tend to bring about if operating alone. Exports paying for Imports. We can now understand clearly what is meant by what we often hear—that imports are paid for by exports. This would obviously be untrue if by it were meant that imports and exports are of equal value. But this is not in the least intended by this statement. It is, I imagine, by this time hardly necessary to say that it is used by way of brevity for a principle which cannot be accurately stated in a few words. And this principle is substantially this—that, other things remaining the same, an increase in imports, that has to be paid for, is paid for in the end by an increase in exported goods; or, if foreign products are consumed, the total home production is not ultimately lessened in value thereby, though of course it will be changed in character. Gold may pass to a certain extent, which, however, is only trivial compared with the total volume of trade; but any such passage

cannot continue beyond what is required by and determined by the necessities of the country. A demand for foreign products, then, is ultimately a demand for an equal value of home products, and this is what is chiefly in view, as a rule, when it is said that exports have to pay for imports. It is often lamented that we in New Zealand import this from America, that from Germany, and something else from England. But it should be understood that if we imported nothing we should export only about as much as would be needed to pay interest on our debt; and if we took no canned fruit, no soap, no leather, and so on, we should export less mutton, less wool, and less butter. The fact that our people prefer to produce butter and mutton shows that we could only exchange to our own disadvantage a portion of those industries for the others we pine after. By protection we can undoubtedly foster the smaller industries which do not already completely supply our wants, but it is at a greater loss to the great staple exporting industries and to the nation at large. There is not, of course, intended any suggestion in what we have said that the balance of trade must remain constant; in fact, we have seen that it fluctuates rapidly within short periods. But these changes have now been proved, both statistically and theoretically, to be due in only a very minor degree and only temporarily to foreign goods displacing home-made goods, or the reverse. The balance of trade depends on the many elements we enumerated in the early part of this paper, and any but the more temporary fluctuations are mainly due to operations in the loan market and great movements of capital. When a nation borrows or lends abroad, a change in the balance of trade represents the transaction, and so also when any of the factors of international indebtedness are changed. But the ordinary transactions of trade do not affect these. If a merchant in Auckland orders a large supply of cotton goods or hardware, the Government does not as a consequence issue a new loan. And so an increase in importations brought about and to be paid for in the ordinary way of business must call forth an equal increase in the exports of goods. The effect of a single transaction may not be very visible, as a single drop of rain may not appear to raise the level of a large lake, but nevertheless the level is raised always to an extent proportional to the amount of rain that falls. The effect of the single transaction is there: it only wants the assistance of some others to be patent to all. Import Duties. We have seen that a restriction, in the form of duties, on imports must, after a time, equally restrict exports. Similarly

duties levied on exports, either by the exporting nation or that receiving the goods, must in the end restrict the imports as much as the exports. In either case the injury done to the total trade is double of that done to either part of it. If, then, a nation, through discontent at restrictions inflicted by foreigners on her trade, herself decide to tax her imports, she merely duplicates the injury. Foreigners having reduced the volume of her trade by the levying of duties, she practically decides to reduce it still further. The foreigners have reduced their own trade by their duties, but are unconscious as a people, no doubt, of their self-inflicted injury. They may be very sensitive to the injury done to their exports by the duties of others—this injury is direct and patent, and their attention is riveted on their exports; but the injury done to their exports by their own duties on their imports is indirect and therefore unknown to the great mass of the people and, unfortunately, of statesmen. Yet the injury which is self-inflicted is greater than the other, for if a nation restricts her trade by import duties she experiences the full effect on her exports, but each of her rivals only bears a share on theirs. It is worthy of notice that in the case of England any damage to the import trade brought about by the levying of duties would produce a much greater proportionate effect on the export trade. Of late years the import trade has been almost exactly half as much again as the export trade. Consequently, e.g., the reduction of the import trade by one-third would involve the reduction of the export trade by one-half, and the reduction of the import trade by two-thirds would practically obliterate the export trade altogether. In addition to the direct loss involved in the diminution of export trade, we have further to consider that, England being the great carrier of the world, and carrying much the greater portion of her own trade, the loss to shipping has to be added to that of exports, a feature that is of smaller importance and generally insignificant in the case of other nations. Such are the plain direct effects of import duties on foreign trade. They do not affect greatly or permanently the balance of trade, and they do not therefore increase employment, but they diminish foreign trade and the advantages that accrue from it, and in the case of England they would diminish the amount of employment for her shipping. There are many refinements and secondary effects that one might discuss and ought to discuss in any attempt at completely describing the effect of import duties, but the only object here is to explain briefly and to emphasize these simple considerations, which are fundamental, but which are commonly misunderstood, and even when understood are too frequently lost sight of. Without frequent references

to them reasoning on matters connected with foreign trade is only too certain to err, and it is impossible without having regard to them to give their proper weight to many other considerations that are in their nature valid. Statistics of the Balance of Trade. Coming to the actual study of the statistics of the balance of trade, we may note that the chief of the items already enumerated as represented by the balance of trade are generally (1) interest on loans and profits on investments; (2) capital; (3) sums transmitted on account of individuals; (4) payment for services rendered. That interest on loans and profits on investments may be a large item in a nation's account will be generally understood, and we all know that some nations are always borrowing and others lending. It may not at first, however, be realised how important the third item may be. In the report for the year 1891 on the foreign trade of Italy it was estimated that foreign travellers brought at least £21,000,000 into the country, £7,000,000 of this being due to American citizens alone; while Mr. C. P. Austin, Chief of the Bureau of Statistics, United States, estimates the expenses of American tourists abroad at from £15,000,000 to £20,000,000 over the expenses in America of foreign tourists. Again, it is estimated that in France the general travelling public, and the winter residents in the south, spend annually about £15,000,000. The fourth item, that of payment for services rendered, is particularly large, as we shall see presently, in the case of the United Kingdom on account of the services rendered by British shipping. In considering the balance of trade it is well to remember that unless a nation is making payments abroad it is the normal state of things for the imports to be larger than the exports. If goods are exported they sell for a price greater than their price in the exporting country by the expenses of shipment, including insurance and other charges. The goods bought abroad are generally entered in the imports at a value including their cost, insurance, freight, &c. The increased value is due mainly to the services of shipping, and if foreign shipping be employed the increase in value for the most part goes to the carrying nation. But most nations employ, more or less, their own shipping, and so appropriate to themselves some of their extra value. In some cases, as in that of the United States, the statistics of imports, instead of giving their values as landed, give the values of the goods when shipped abroad, and so do not exhibit the increase in value. But even with a number of such exceptions it is found that when the total imports of all the chief

countries of the world are added together they exceed the total exports by a sum in the neighbourhood of £250,000,000. This, apart from inaccuracies in the statistics, represents the value added by shipping and allied services, and the United Kingdom, by her great mercantile fleet and commercial services, must secure nearly one-half of this added value. Again, it should be carefully borne in mind that it does not in the least follow that a country is prosperous because it has an excess of exports, or the reverse of prosperous because it has an excess of imports. An excess of exports may, it is true, be due to great wealth and an increase in the foreign investments of its citizens, but it may be due to the country having to pay interest on loans contracted in the past, or to the fact that much of its industry is exploited with foreign capital and its profits have to be sent abroad. An excess of imports, again, may be due to poverty of native capital, to borrowing, or to the withdrawing of foreign investments, and the living of the nation on its capital, but it may also be due, in whole or in part, to the receipt of interest on loans and profit on capital it has advanced, or it may be due to payment for services rendered. Thus neither an excess of imports nor an excess of exports can be considered in itself as being favourable or unfavourable. Also observe there is no necessary relation between the magnitude of the balance of trade and the volume of trade. The balance of trade may be depressed (i.e., smaller than at some time previous and some time afterwards) at a time when trade is exceptionally brisk, and the balance of trade may be inflated when trade is exceptionally slack. Once more I may point out that there is no necessity for gold to flow out of a country when the balance of trade is exceptionally high, or to flow in when the balance is exceptionally low. In fact, gold may flow in with other goods, and out with other goods, in discharging for the nation the obligations of the moment. A very cursory glance at figs. 1–4 will show that the balance of imports and exports of gold bears no correspondence to that of general merchandise. One other feature strikes us at once on contemplating these figures, and that is the great fluctuations. The line as a whole rises, for instance, in the case of the United Kingdom, and falls in the cases of the United States and New Zealand. The rise or fall, however, is on the average wave-like. There are a few years for which the line is higher than for neighbouring years; then after a depression for a number of years the same thing happens again. But this, again, does not come about uniformly: there are irregular changes from year to year, though these changes are generally not comparable with the difference between the

highest of a maximum period and the lowest of either of the adjoining minimum periods. These maximum and minimum periods are due to the movements of capital, but we should be careful not to exaggerate their importance. Investments may often be diverted either from foreign trade to home trade, or vice versâ, with advantage, and any such considerable movement makes a great change in the balance of trade in one direction or the other. Although such great importance is usually attached to the value of the exports, it is true that the very prosperity of a nation, giving full employment to its capital, may be such as to diminish for a period its exports, either absolutely or relatively to the imports, by leaving it little or no surplus capital to be invested abroad; and a flight of capital abroad, increasing the exports, may be due to want of opportunity at home. The former seems recently to have been the condition of both England and Germany, which, during a period of almost unprecedented prosperity, increased their imports far more rapidly than their exports. That a great growth of the imports is consistent with great national prosperity is well illustrated by a table issued by the Board of Trade, showing that whereas during the years 1893–99 the value of manufactured and partly manufactured goods imported into the United Kingdom increased from £98,000,000 to £140,000,000, the percentage of members of trade-unions unemployed diminished steadily from 7.5 to 2.4—i.e., to less than one-third of the former proportion. On the other hand, it was in 1886, when the exports came nearer in value to the imports than they had done for twelve years, that the acute commercial depression set in. Balance of Trade of the United Kingdom. Fig. 1 illustrates the balance of trade of the United Kingdom from 1854 to 1902. From 1899 onwards the graph is double: the lower line gives the balance of trade when the exports of ships and their machinery are taken into account, and the upper line when they are not. The values of these exports were first given in 1899, though the tonnage, from which a rough estimate of the values can be found, is given for a much longer period. The item has in recent years been a much more valuable one than ever before, and has in some years exceeded £9,000,000 in value—too big an item altogether to be left out of account in the total of the exports, though its inclusion now and its omission formerly vitiates to some extent comparisons between different periods. For this reason it is as well perhaps to exclude it from actual values compared, though allowance should always be made mentally for its great increase in value. We have previously described the general character of the

changes in the balance of trade for the United Kingdom. We see quoted sometimes with alarm the great rise from £81,000,000 in 1887 to £183,000,000 in 1903, a change averaging nearly £6,500,000 a year over a period of sixteen years. But this change is in character and magnitude by no means unique. In the five years from 1872 to 1877 the balance of trade rose from £40,000,000 to £142,000,000, an average of £20,000,000 a year. That such changes need not be due to freedom of trade is clear when we compare with them corresponding changes that have taken place in the commerce of other nations that have had in operation considerable protective duties. The balance of trade of Germany increased from a negative balance of £5,000,000 in 1886 to a positive balance of £53,000,000 in 1892, and further to £66,000,000 in 1898, being an average of £10,000,000 a year in the earlier period, and of £6,000,000 a year during the whole period of twelve years. The balance of trade of France increased from a negative balance of £13,500,000 in 1875 to a positive balance of £62,500,000 in 1880, an a average annual increase of £15,000,000. These changes during comparatively small periods in the balance of trade in Germany and France are quite as considerable, or, relatively to the total foreign trades of the respective countries, more considerable, than those for the United Kingdom. If there are any peculiar features in the balance of trade for the United Kingdom, they do not consist, then, in the fluctuations that take place during five, ten, or fifteen years, but in the great magnitude of the balance of trade as it stands at present, and in the way it has increased, not merely during the last few years—which increase may be considerably affected by one of those temporary fluctuations which the trade of no nation can be freed from—but, apart from such fluctuations, for the whole of the period which fig. 1 illustrates. The dotted line serves to show roughly the general trend of the balance of trade. It will be noticed that the fluctuations in the graph of the balance of trade relatively to this line represent changes not at all considerable compared with the total volume of trade. The average rise during the whole period is less than that during the years 1872–77, or during 1887–1902: during each of these latter periods we have a temporary fluctuation combining with the rise due to the more permanent causes in operation, producing a very rapid rise, but even then such only as can be paralleled, as we have seen, from the balances of trade of other countries. It is grossly unfair to compare the balance of trade for a minimum year with that for a maximum year without distinguishing these two elements. Of late much has been made of this rise in the balance of British trade. But before we can infer anything as to the soundness

of British trade and prosperity from this rapid growth it is necessary to analyse its contributing causes. Now, to begin with, England, as a great capitalist nation, possesses capital all over the world advanced as loans and invested in industries and commercial undertakings. From this she has to receive interest and profits. Now, in 1901–2 the profits that could be identified as foreign for income-tax purposes was £62,500,000. But the Board of Trade report on British and foreign trade and industry points out “that this total only includes foreign and colonial securities, coupons, and railways, and hence is exclusive of the return on British capital invested in a large number of miscellaneous industrial enterprises abroad. It is, moreover, certain that the profits assessed to income-tax form only part of the whole, and that some of these profits escape assessment, while others are not identified as foreign. We are justified in concluding that £62,500,000 is a minimum figure, which is probably largely exceeded, though we are unable to say by how much.” Sir Robert Giffen in 1898 estimated the total at £90,000,000. There is no one in a better position to judge, and his authority is admitted and his estimates accepted by many who would be glad to be able to reject them if they reasonably could. Another item for which England has to receive payment is the services of her shipping. It is impossible here to go into the detail by which this matter has been investigated. It is sufficient to notice that, making every allowance for expenses incurred abroad in connection with the carrying trade, the Board of Trade report regards £90,000,000 again as a minimum estimate of the amount of imports earned by British shipping. These two items are the greatest, but there are many other which, though of smaller amount, are yet each substantial, and probably in the total very considerable. But these are even more difficult to investigate than the others. All we can say is that the best statistical talent that England can supply is agreed in assigning £180,000,000 as the smallest possible income derived from abroad at the present time in respect to the two main items alone. When any comparison is made between any such estimate as to what the United Kingdom earns abroad and the balance of trade, it is to be remembered that the degree of accuracy with which the values of imports and exports are returned is of great importance. Such errors as exist are probably comparatively unimportant in comparisons of like returns for different periods, for they no doubt tend in the same direction at different times, and are roughly proportional to the totals. But in comparing an estimate deduced from them with one derived from altogether

different sources, and therefore not affected by these same errors, it would be wrong to ignore them. As we are dealing too with the estimated difference of the imports and exports, the error in this difference may bear a much bigger ratio to it than the errors in the estimated imports and exports do to these respective returns, especially as the errors in these may take different directions, either the imports or the exports being undervalued and the other overvalued. Indeed, the exports are undoubtedly undervalued in many instances in the effort to escape a portion of foreign Customs duties. There is no such tendency in respect to undervaluing the imports, as these are mostly free from duty, and those that are subject to duty are mainly of a character which do not lend themselves easily to this manner of deception. In some cases, many think, imports are overvalued for trade purposes in the United Kingdom, as, when it costs nothing, the tendency is to exaggerate the business done. Both these tendencies act in the way of increasing the apparent balance of trade. It is thus difficult by making the comparison we have criticized to deduce anything precise as to the rate at which England is annually investing abroad, or as to how much, if any, she is withdrawing. Some have proved in this way to their own satisfaction that England has recently been living on her capital, that English investments abroad are diminishing in value, or that the volume of American investments in England is becoming phenomenal; but the data will not support such conclusions. For one thing, the margin of error is altogether too large. Moreover, the income-tax returns yearly indicate a continued increase in the total value of British incomes derived from foreign sources. This is sufficient in itself to settle the point. But, looking backward and comparing the present with the past, it appears to me plain that, if England is in a critical position now, she was at least about equally so in and about the year 1877, for in that year (no less than twenty-seven years ago) her excess of imports as recorded reached £141,000,000. The excess of recent years does not appear relatively as great as this when we consider the advance in earning-power of English investments and shipping. From 1882–83, five years after the year considered, to 1901–2 the annual profits from abroad assessed for income-tax increased from under £32,000,000 to £62,500,000, or by nearly 100 per cent.; and although part of this increase may be due to greater stringency on the part of the inland revenue, it must represent for the most part a real increase. The other sources not revealed by the income-tax returns no doubt increased in a somewhat equal ratio. Again, from 1880, three years after the period considered, to 1902 the tonnage of British shipping increased from a little over 6,500,000 tons to over 10,000,000 tons,

or, roughly, about 50 per cent. But it has to be further remembered that in 1877 more than half the tonnage consisted of sailing-vessels, whereas now the tonnage is about 80 per cent steam, and steamers, by reason of their greater speed, have an annual carrying-capacity of about three or four times that of the same tonnage of sailing-vessels. To put it moderately, then, compared with 1877 the British excess of imports at the present time is not relatively greater, and if it is to be reasoned that Britain is now in a bad way because of it, it must also be concluded that she was then also in a very parlous state. We do not now heart that she was then living on her capital, although the alarmists of the time loudly proclaimed their conviction of the fact. Indeed, according to the estimate of Mulhall, the amount of British capital invested, abroad increased during the decennial period 1872–82, in which the year 1877 is centrally situated, by £275,000,000, and interest on this and other more recent investments are now being received. Indeed, the total estimate of British capital invested abroad was £600,000,000 in 1872, and £875,000,000 in 1882, whereas now it is estimated at not less than £2,000,000,000. If, then, in the years about 1877, when the excess of imports reached £142,000,000, England was still investing abroad at such a great rate, surely now, with so much more valuable shipping, and so much more capital invested abroad, she is able to import an excess of £180,000,000 without living on her capital. And what happened after 1877 ? There was a great drop in the excess of imports, and ten years after the excess was less than £81,000,000, as five years before it was only £40,000,000. There is every reason to anticipate that we have now similarly reached a maximum in the balance of trade, and that, as before, the further trend of the graph in Fig. 1 will be for a time downwards. Then a rise again in the balance of trade to £200,000,000 or more in some future year will convince the alarmists of the future that England is living on her capital, though they will be willing to admit that she was not doing so in the year A.D. 1904. Balance of Trade of the United States. Owing to the imports of the United States being valued according to the value at the port of shipment instead of that of importation, the graph representing the balance of trade in Fig. 2 would have to be altered somewhat in form, and raised as a whole relatively to the base line, to make it strictly comparable with those for the other nations. But taking the returns as they are they show that whereas the United States had at one time an excess of imports, she has had annually since 1876, with three exceptions, an excess of exports. Allowance must, however, be

always made mentally for the peculiarity of American returns of imports, which causes an excess of imports to be underrated and sometimes converted into an apparent excess of exports, and an excess of exports to be overrated. In past time vast amounts of foreign capital, chiefly English, found their way to the United States, until the interest and profits on these amounted to a greater sum than that finding its way into the United States. We have now reached the time when the amount of foreign capital annually invested in the United States may relatively be ignored, and when the United States, with her great wealth and vast developed resources, will, especially during or after exceptionally prosperous periods, send out capital to pay off loans, buy American investments held by foreigners, and even to make investments abroad. The great drop in the line of the figure occurring from 1897 onwards undoubtedly represents a period when this feature was exceptionally prominent. It will no doubt be the general tendency for the excess of exports to increase, but unevenly, and the present great excess will probably be succeeded by a period in which the excess will be very much less before the present record is again exceeded, just as the great corresponding change from an excess of imports of £38,000,000 in 1872 to an excess of exports of £55,000,000 in 1879 was succeeded by a change to an excess of imports again of £6,000,000 in 1888. It is interesting to consider how, in the opinion of Mr. C. P. Austin, chief of the Bureau of Statistics, the excess of exports is explained. He went into the matter in May, 1901. He reckons that the United States, unlike the United Kingdom, has to export £10,000,000 in payment for the service of foreign shipping (although estimates differ greatly, and some put it as high as £30,000,000), from £15,000,000 to £20,000,000 in payment of dividends and interest on foreign capital, and from £15,000,000 to £20,000,000 as the expenses of American tourists abroad over and above the expenses in America of European tourists. The balance for the most part would go abroad in the form of capital in any of the ways specified above. The inference would appear to be, if these estimates are reasonably close, that from 1898 to 1901, when the United States exports reached the maximum, the annual flow of capital abroad together with the withdrawal of foreign capital from the States varied something like from £70,000,000 to £100,000,000. This appears at first vast, but when we compare her great area, population, and resources with those of England, and remember that the corresponding average sum for the eleven years 1882–93 in the case of the United Kingdom was no less than £75,000,000, we need not be surprised at something even greater in the future.

If we are to be able to judge changes in commerce impartially and without panic we must view things as they are, and get rid of the notion that it is possible by any means whatsoever to reserve for all time pre-eminence in the wealth and commerce of the world for one small island. There must be indisputable merit in a system that has kept it there so long. Balance of Trade of Germany. The line in fig. 3 representing the balance of trade for Germany is only given as starting from the year 1880, as no comparable statistics can be given for previous years owing to the great changes in the methods of compiling the German import and export statistics which took effect in that year. But the fragment that is given is of great interest. It shows a great rise beginning from the year 1886. In 1886 there was an excess of exports of 5,000,000, and this changed by 1898—i.e., in twelve years—to an excess of imports of over 66,000,000. The total change in the balance of trade was thus 71,000,000, in the direction which is commonly regarded as unfavourable. It is worthy of particular notice, too, that this change succeeded the adoption of rather high protection by Germany—which must be of particular interest to such as may still entertain any belief that protection favours exports at the expense of imports. The far more rapid growth of German imports than of exports in this period tells us that if Germany has been sending her goods abroad to a greater extent than before, she has increased her purchases from the rest of the world to a far greater extent. It will be noticed that the import and export of gold is steadier in the case of Germany than in that of the other countries, and that in no year since 1884 has there been any balance of export of gold. The import of gold necessary on the whole has been sufficiently regular to effect a balance of imports in each of these years. This feature is undoubtedly the result of the policy of the State bank of Germany. This is well described by Mr. George Clare as follows: “As to imports, the Reichsbank accelerates them by the simple and legitimate expedient of paying a better rate for foreign gold coin than the tariff price of other State banks, and, in addition, by sometimes bearing the few days' loss of interest incurred in bringing the gold over. To circumvent exporters is doubtless a task of somewhat greater difficulty, but apparently not beyond accomplishment. In the first place the bank immediately parries the demand by putting up its rate, and secondly, in order to gain delay until the increased rate has had time to act, gives the big banking-houses to understand, so it is said, that there are sometimes higher issues to be

considered than mere profit, even in business matters, and that to weaken the national reserve for the sake of gaining a paltry half per mille or so will be regarded by it as an unfriendly and unpatriotic action. As the State bank is powerful for good or evil, there are few bankers in Germany who would care to run the risk of offending it, and hence its wishes are usually respected.” (“The ABC of the Foreign Exchanges,” pp. 131–2.) In this description the words “import” and “export” refer to gold. Balance of Trade of France. In the graph in fig. 4, representing the balance of trade for France, the great rise taking place between the years 1875 and 1880 is conspicuous. During that short period an excess of exports of about 13,500,000 changed into an excess of imports of nearly 76,000,000 the total change in the balance of trade being over 76,000,000 in five years. It corresponds very closely in point of time with the rise in the balance for the United Kingdom which took place during the years 1872–77, and with the considerable fall in the balance for the United States which took place in the years 1872–79. Before this rise in the latter years of the seventies the French balance had been hovering about zero, the imports just about balancing the exports except for fluctuations of usual amount from year to year. Since the rise the balance has been falling pretty steadily on the whole, until it has now almost reached its former condition. This probably indicates that when we allow for the earnings of her shipping, which has about one-tenth of the tonnage of that of the United Kingdom, the investment of French capital abroad is about equal to or rather greater than her income from former investments. It is well known that France is now a large investor abroad. Balance of Trade of New Zealand. In the case of the balance of trade of New Zealand, illustrated in fig. 3, gold is included amongst the exports. The same general feature strikes us as in that of the United States—namely, the change from an excess of imports to an excess of exports; and although when the change from the one to the other took place the circumstances were much the same in both countries, there is now a great difference. In the case of the United States the excess of exports is accentuated by the export of capital from the superabundant wealth of the country; in the case of New Zealand the excess of exports is diminished by the continued import of capital, or by the borrowing of the colony and the continued inflow of outside capital. The popular imagination is not so greatly impressed or so easily alarmed by an excess of exports as by an excess of imports;

but were it not for the continued borrowing the excess of exports would supply much food for reflection. During the period of sixteen years, 1887–1902, New-Zealanders have produced an excess of exports of £33,000,000. This represents fairly what they have produced but not enjoyed. The sum amounts to about £50 per head of the average population for the period. During the same period the public debt of the colony has increased by £20,000,000. Thus the result of the New-Zealanders denying themselves the use of thirty-three million pounds' worth of the produce of their industry during sixteen years has been merely to prevent the colony getting into debt by more than £20,000,000. It follows that during this period the amount due annually to residents abroad, chiefly for interest on loans and profits on investments, has averaged about £3,300,000, or over £3 a head of average population and £15 per family. This is the result of what has been, I believe, in the main a perfectly sound policy. I mention these results merely as being interesting in themselves, and as a testimony to the resources of a colony that can be subject to such obligations and at the same time maintain its population in a state of such considerable comfort. Conclusion. In the foregoing we have not complicated the subject by taking into account changes in average prices. These have been pretty considerable during the whole period considered, and in some cases no valid conclusion can be drawn without taking them into account. I have considered, however, that they would make but very slight difference in the argument of this paper—not sufficient to compensate for the greater complexity their inclusion would induce.