productive to less productive employments. This waste of efficiency of capital and labour is everywhere represented in rising expenses of production, which tend to raise prices in all protected industries towards the limit set by existing duties, thus forcing them perpetually to demand increased protection.

CHAPTER VII

HOW THE BALANCE OF IMPORTS AND

WH

EXPORTS IS ACHIEVED

S I

HILE it is generally recognised that in the processes of international trade a balance of import and export values is maintained if a sufficient period of time be taken, it is not always clearly understood how this balance is maintained. To say that imports cannot exceed exports because a nation, like an individual, must in the long run pay for what it buys is a true but an inadequate solution of the problem. It is precisely because a nation is not an individual that the simple answer is not sufficient. A, B, C, D, members of the British nation, trade with E, F, G, H, members of other nations; if A stops buying the goods he used to buy from E, thereby reducing the aggregate imports of his nation, how does A's action prevent F, G, H from buying some goods they used to buy from B, C, D, thereby reducing the aggregate exports of A's nation? The mere statement that exports

must balance imports because people must pay for what they buy requires further explanation, because the persons who are the direct payees are not the same persons who have done the buying. If some British firms cease to buy from foreigners, other British firms will cease to sell to foreigners; if some British firms increase their purchases abroad, other British firms must increase their sales abroad; if some German or American firms "dump" increased quantities of goods upon our shores, other Germans or Americans must either buy more goods from us or cause other foreigners to buy more goods from us, so that the "dumping" induces an expansion of our export trade. These propositions, though quite true, do not at first sight seem involved in the statement that a nation must pay for what she buys.

A good deal of mystification has arisen by the nature of the concrete illustrations to which resort is had in arguing the matter. If I buy a motor-car for £500 in Paris instead of buying it in London, how shall I be compelling Frenchmen or some other foreigners to buy an equivalent amount of English goods? It will surely be better for English trade if I pay a little more for an English-made car. Now, this sort of illustrative argument, which seems so convincing to the tyro in economic reasoning, has a fatal defect. The illustration is on too small a scale. All changes of trade are brought about through changes of prices, and if too small an

example be taken, a single act of purchase, it seems absurd to impute to it any influence upon the price in the trade, still less on general prices in a country. To show how the purchase of a single motor-car in Paris will alter the relation between British and Continental prices of commodities in general is impossible by reason of the triviality of the cause; or, taking the industrial instead of the financial side, it is equally impossible to show that so small an incident can affect the flow of capital and labour as between the motor-car industry and other industries, thus again altering general prices in England and on the Continent. No network of reasoning can be made so fine that a fictitious fish, made small enough, cannot get through. To argue the issue intelligibly, cases of sufficiently large dimensions must be taken.

§ 2. Let our problem be to prove how a stoppage of imports must cause a corresponding stoppage of exports. There are two modes of proof, the first financial, the second concretely industrial. Let us suppose that a prohibitive tariff were to stop entirely the imports of dairy produce into Great Britain from Denmark and other Continental countries for which we pay some £30,000,000 per annum. English importers of dairy produce no longer draw bills to this amount and send them abroad in payment. Foreign merchants who are buying goods of various sorts from England are in the habit of paying for these

goods, not by sending cash, but by buying from foreign bankers and brokers bills on London. Since the number of these bills is now reduced to the extent of £30,000,000 per annum, the supply of them will be short in relation to the demand, and the price paid on the Continent for the use of this convenient mode of payment will be raised. A merchant wishing to buy from England must now pay a larger number of francs and centimes in order to make a payment of £100 to England. That is equivalent to a rise of prices of English goods to Continental buyers, and must operate in some measure to check purchases and so to stop English exports. In England, on the other hand, there will be a corresponding superfluity of bills on Paris, Berlin, etc., the price of these bills will sink, an English sovereign will buy a larger number of francs and centimes. This means a fall of Continental prices for English buyers, and will stimulate English merchants and importers to buy more foreign goods in place of the dairy produce we have ceased to buy, and to restore the old aggregate of imports.

We have here a double process of automatic adjustment, a shrinkage of English exports and an expansion of foreign imports, tending to produce a new balance of international trade.

But let us suppose that this first mode of readjustment is incomplete, and that there still remains on the Continent a deficiency of bills on London as