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countries, Italy was left without gold money. Then, since the bulk of her imports and the interest on foreign debts exceeded her exports, she met with a yearly deficit. In order to make up this deficit, the subsidiary silver coins, the one and twofranc pieces were sent abroad." Such a thing happened both in 1893 and 1894. Had Italy been able to make up this deficit by means of commodities, had she been able to increase her exports, her silver pieces would have remained in the country with the gold money. The sorrowful complaint of the Spanish Cortes was indeed childish, when they addressed a petition to the King at Valladolid in 1442, because the foreign merchants drew the money out of the country. Those innocent Spanish Representatives failed to see that it was the fault of the people, who only bought commodities of foreigners without exporting any at all. The foreign merchants, therefore, had to get money in return for their commodities. History furnishes us many such instances. The same thing happened in Italy after 1887: gold and silver flowed out of the country, and we were compelled to resort temporarily to inconvertible paper money. The rate of exchange in Italy rose to a great height, in spite of its fluctuation. But money itself has nothing to do with this case: the real source of the evil is the great difference between imports and exports. If Italy could succeed in exporting more than she imports, the premium of exchange which she now pays would disappear, and gold money would automatically flow into the country. Even when Italy had her own gold currency, the temporary Auctuations in her imports and exports brought about some variation in the premium on exchange. The great exportation to France of Italian silks during the months of June and July diminished the premium on exchange.

1887 1888 1889 1890

June. 100.53 100.35 100.25 100.82

July. 100.52 100.23 100.49 100.99

1 The Italian coin circulating in France reached an amount equal to 28% of the French coins in circulation.

? It is a very important phenomenon, because the business of the brokers was then very much hampered.

December

January
1887-88.
101.34

101.68
1888-89 ·
IO1.03

101.62
1889-90
IOI.IT

101.09
1890-91 .
101.37

101.37 These figures are noteworthy. They show the great influence that the conditions of the trade in commodities had on the rise and fall of the rate of exchange. From this it clearly appears how just it is to state that the fluctuation of the rate of exchange is independent of the bad money which a country may have. The redundant circulation of paper money augments the prices within the country, but it does not alter the ratio of international trade: at Lyons Italian silks are paid for in gold, whatever their price in paper money may be in Italy. Accordingly, the Italian merchant orders commodities in France and pays for them in gold, according to the conditions of the French market. The lack of equilibrium caused by paper money affects the prices within the country. The rate of exchange, however, is the result of importation and exportation in reference to the conditions of the credit of a given state. If the credit of such a state is good abroad, it will supply the great difference between its imports and exports, and the rate of exchange is hardly affected by the temporary difficulty. But if a country without any credit abroad incurs an excess of imports, a premium on exchange is the result. If a country lacks credit abroad, there is a high premium on exchange, and in such a case it is necessary to restore the equilibrium of the economic relations to foreign countries. For instance, the United States during the Civil War had to pay a very high premium on exchange. But no sooner was the war over, than their credit was restored, and the premium, which had reached its highest point in July, 1864, viz.: 285, fell from 200 to 140, and kept on falling, while the prices of commodities remained at the same level to which the paper currency had brought them. This happened immediately after the war, viz. 1866-68, and it repeated itself during the period that preceded the great crisis of 1873 and also in the successive years, 1871-74.1

1 F. W. Taussig, Results of Recent Investigations on Prices in the United States, in the Bulletin de l'Institut International de Statistique, Tome VIII, Vol. ii, p.32.

In Spain the paper currency of the Bank of Spain increased as follows:

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The annual increase was even greater in the following years: 1887

612 millions of pesetas. 1889

735 1891

814

In 1891 the premium on exchange rose as high as 14%, as it did in Italy in 1894. But in Spain, as in Italy, the circulation was not increased in order to meet the need of the increased commercial transactions; it rose on account of the lack of economic equilibrium; the paper circulation increased, and it was for a time convertible into gold, but it soon became inconvertible, and caused the maddest form of public debt. Nevertheless, the premium on exchange cannot be an effect of such inconvertibility of the paper money; the premium and the inconvertibility of the paper money itself are the results of the lack of economic equilibrium. Napoleon I did not believe in credit, because he was convinced that credit spoiled the future. We do not believe that credit always swallows up the future, but we must admit that such was the case with Italy. The increase in the paper circulation beyond the requirements of commerce is a credit in behalf of the citizens, which the government borrows of the future. And, likewise, a country incurs a debt weighing on the nation's industries when it consumes and imports more than it exports. Then again, if any cause at all brings about public distrust—whether such a cause be the failure of some economic institution or some political panic—the payment of those debts becomes necessary, and, if the country is insolvent, it undergoes a crisis. It is evident that here the crisis is due to a deranged balance of trade, nor can it be overcome unless the circulation reaches its regular limits, and unless the balance of trade with the foreign countries is gradually restored.

On the other hand, Arthur Givinner notes, with a badlyfeigned complaisance, how great an influence the high premium on gold exercises on the foreign trade of Spain. Moreover, he asserts that everywhere the depreciation of money acts as a tariff on imports and as a premium on exports, but this is too common an error to make it a matter of blame. As everyone knows, this was the main argument put forth by Italian protectionists to advocate the levy of duties, after the abolition of inconvertible paper money in 1882. Nothing is more fallacious than this. Spain, Italy, the Argentine Republic and all the other countries that have to pay more or less of a premium on exchange find themselves in the same condition in which an individual finds himself, when he has disposed in advance of all his future gains. We call it a natural thing for such a man to limit his expenses and try to increase his income. And if he has lost his credit, as is the case with those nations that are in financial straits, he will be compelled to curtail his expenses while he must strive to increase his income. This is the only possible solution offered to him by the difficulty which confronts him. There is no other solution. The case is exactly the same with nations that meet with economic disaster. The protectionists, in gross and unconscious ignorance, attribute to the phenomenon of exchange the diminution of the imports into those countries having a mixed currency, if there is also an increase of exports. This phenomenon seems at first sight advantageous to the countries with poor money, because the increase of exports is followed by a corresponding decrease of imports; but it is in reality due to their lack of balance of trade in such countries, which lack has diminished their purchasing power and has compelled them to develop their exports and to sell as much as possible in order to be able to pay their debts. Such is the phenomenon in its rough outline: what seems an advantage to the countries with poor money and with a favorable exchange, is in truth an attempt to repair their past lack of foresight; it is the only available means of restoring the balance of trade. France, owing to the enormous payments which she had to make to Germany after the war of 1870, I A. Givinner, La Politica commerciale della Spagna, Torino, 1895, p. 107.

experienced a great rise in her exchange. Her exports increased considerably. But Gide falls into the same error into which many others have fallen; for he, too, attributes the increase of exports to the stimulus which she received from the rise of the rate of exchange.1

France increased her exports because the debts which countries contract abroad are paid with commodities. If countries that have debts abroad, and that have poor metal money, export more than they import, it is a sacrifice of specie for them. Their currency has been ruined by their lack of balance of trade, and their specie has gone abroad. To recall it and to restore the balance of trade, they must needs resort to the above means; they could not do otherwise. They lack credit abroad, and they must pay with commodities for whatever they buy. If the imports diminished, it is the evidence of a spirit of economy instilled into them by the economic exhaustion under which they labor.? It is useless for countries in good economic condition and with good gold money to put forth extra efforts in order to increase their exports into those countries which are economically ruined on account of their bad currency: the latter cannot pay. It is forcing an individual who has neither money or credit to buy commodities. It is at least amusing to watch those deluded protectionists of Germany, England and France, who vie with each other in envying the poor Latin countries of Europe and America, and the old countries of Asia-economically still so youngonly because all these countries develop their exports a little, while their imports either remain stationary or fall off. These protectionists of countries which are, nevertheless, at the head of economic development, long for bad money and a high rate of exchange; they long for what is the strongest proof of the

1 C. Gide, Principes d'économie politique, Paris, 1896, p. 341.

? The Spanish government spent 77972 millions of pesetas in the years 1894-95. It spent a sum almost equal to this in the two preceding years. But up to 188889 the expenses of the Spanish Government were as high as 850 millions of pesetas, and in 1886-87 they even reached the sum of 940 millions. But, sometimes, the difference between the revenue and the expenses was greater than 150 millions. In 1888-89 the deficit was more than 141 millions.

The economy, therefore, of the following years was due to the above deficit.

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