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compared with other bills in the clearance system. What occurs next is a reversion to the gold basis of payment to meet the deficit. Gold begins to flow into England and swells the reserve of the Bank of England. Under ordinary circumstances this increase of gold will cause the Bank to lower its rate of discount, and money on loan will be cheap.

This cheapness of money for advances will cause increased borrowing. People who want money want it for one purpose, viz. to buy with it goods and services they could not otherwise buy. The result of cheap money will therefore be an increase in the rate of demand for goods and services, in relation to the rate of supply, thus causing a general rise of prices. This general rise of prices will check the export trade, foreigners preferring to buy more cheaply elsewhere. Each step in this process is, of course, reversed upon the Continent. The flow of gold to England will raise rates of discount abroad, make money dear for borrowers, check borrowing, reduce demand in relation to supply, lower general prices, make it more profitable for English merchants to buy abroad, and so increase the imports side of the balance. Thus

1 It is, of course, to be borne in mind that borrowers who have thus increased facilities of obtaining money are generally business firms which seek to purchase more capital and to employ more labour for production, thus enhancing the supply of all sorts of commodities. This secondary effect, an increase of the rate of supply, serves as an automatic check upon the continuous tendency of "cheap money" to raise prices.

we see how the stoppage of £30,000,000 of dairy imports into England has set in operation financial forces which, partly by substituting increased quantities of other imports for the prohibited dairy produce, partly by checking English exports, redress the balance between the aggregate of English imports and exports.

§ 3. Turning from financial to concretely industrial movements, we can see the same process of readjustment. The cessation of trade in dairy produce with England, damaging the dairy industry of Denmark, Holland, etc., will divert into other industrial channels the industrial energy, the capital and labour which would otherwise have gone into the upkeep and further development of the dairy trade. Making all due allowance for waste in the transfer of capital and labour already specialised, and for the substitution of industries "naturally" less productive for the more productive dairy industry, this diversion of a larger quantity of capital and labour into other Danish and Dutch industries will, by increasing the rate of supply of these commodities in relation to demand, lower prices. This fall of prices will have its due effect in stimulating English purchases of foreign goods to displace the former purchase of dairy produce. If we look at the effects in England we shall find the converse series of changes. The stoppage of dairy imports, by raising prices in England for all dairy produce, will bring large quantities of capital and

labour into this branch of agricultural industry. We are not entitled to assume that a large mass of capital and labour remains permanently idle waiting for such opportunities. The greater application of industrial energy to dairy work will mean a smaller application in all other industrial employments: thus the rate of supply in other industries shrinks in relation to demand, and so there is a general rise of prices. This general rise of English prices, however small, will have its due effect in checking the purchases of English goods by foreigners, whose general prices, as we see, are falling. So English exports are reduced to balance the reduction of imports by stopping the entrance of Danish and Dutch dairy produce. Incidentally it may be remarked that the new balance brought about by automatic readjustments to compensate an artificial disturbance of the kind supposed will be a balance less advantageous in terms of real wealth to both parties. The capital and labour violently displaced from the dairy industry in Denmark and Holland will be ex hypothesi less productively employed in the other industries to which it has recourse, thus diminishing the aggregate of real wealth produced in these countries, and reacting injuriously also upon Great Britain in obliging her to take a smaller quantity of real wealth than before in the processes of international exchange which she still continues to employ.

Similarly, in England, the same artificial interven

tion has drawn a large amount of industrial energy to leave other employments in which it would have produced a larger quantity of real wealth in order to produce a smaller quantity of dairy wealth to which a tariff has imputed a fictitious value. The aggregate production of wealth in England is reduced. by this artificial diversion, and some of this injury passes to Continental nations in the processes of international exchange.

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of commodities are essentially the same, whether the exchange takes place between members of the same nation and is called internal trade, or between members of different nations and is called international trade. The tendency for commodities to exchange in accordance with the ratio of their marginal cost of production is not, under Free Trade, impeded more in the latter case than in the former by the lack of complete mobility of capital and labour. Wherever fairly large, constant, and various trade relations exist between different nations, a keen comparison is made of the efficiency of capital and labour in the two countries with reference to their natural resources, and on this basis is established an international division of labour which is at once the result and the cause of international trade. Just in proportion as that com

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