The National System of Political Economy

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.

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.

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.

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.

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.

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.

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.

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.

(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.

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.

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.

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?

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 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?