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Some of the best English writers upon commerce set out with observing that the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds. In the course of their reasonings, however, the lands, houses, and consumable goods seem to slip out of their memory, and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that to multiply those metals is the great object of national industry and commerce.

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A. *Principle 1. The dealings of a country with other countries in respect to goods and capital do not commonly lead to net movements of money to or from the first country, until the claims for and against that country growing out of said dealings have failed, for a measurable period, to balance each other.

A very notable popular fallacy-one of the most widespread of those which have to do with economic matters— concerns the effect on a country's monetary stock of its dealings with other countries. It is constantly assumed that buying any goods or services from another country naturally means losing some of our stock of money to that country. If we give up producing some particular commodity for the making of which we show comparatively little fitness, and go to buying that commodity from our neighbors, people at once bewail the fact as certain to draw away some of our money. They even go so far as to fancy that, if we allow perfect freedom of trade, all our money will be drained away. One of the chief reasons for setting forth the principle now before us is that it shows such anxieties to be, in part at least, needless. These anxieties will be still more thoroughly disposed of under Principle 4.

The dealings of one country with another, or, more exactly, of the people of one country with those of another, do not in themselves lead to net money movements. They do so only under the condition named in the principle. In the first place, if international dealings were commonly effected with money directly, there would be few or no net movements, assuming that we have in mind intervals of at

* Taylor-Some Chapters on Money. Copyrighted 1906, by F. M. Taylor. From Chapter IV, pp. 119-123 and 128-134.

least a few months in length. The reason is plain. No sensible person wants money for money's sake. Our neighbor is anxious to get our money by selling us his products, not in order that he may keep that money, but in order that he may use it to buy our products. This is plain within the limits of our own town; and in no essential respects does the trade within the town differ from the trade between it and other towns, or from the trade between the country as a whole and other countries. The merchant in Detroit wants the money which he gets from Ann Arbor people for no other purposes than the money which he gets from Detroit people; that is, to use in buying flour, celery, raspberries, and other things, many of which are produced in various places outside of Detroit, Ann Arbor among them. That is, we can be sure that, if trade between Ann Arbor and Detroit were carried on with money, that money which we sent to Detroit to buy goods, or an equivalent amount, would come back to buy Ann Arbor goods. In short, under normal conditions when trade is carried on with money, that money is like the shuttle in the loom ever flying forth and back, out and in, never tending to stay either in our town or the other town. Doubtless, even in normal times there will be temporary accumulations at either end. But we can be well assured that these will be only temporary, quickly correcting themselves; for in interlocal trade, as in home trade, money is wanted as pay for our goods only that it may be used in buying other peoples' goods.

But, in the second place, under the régime actually prevailing in interlocal trade, it is a matter of course that movements of money do not take place save under the condition named in the principle. Indeed, it has already been fairly established in our preliminary analysis. Under modern conditions, the reciprocal claims and obligations between the dealers of different countries which grow out of their trade dealings are transformed into claims and obligations between the bankers or exchange dealers of those countries; and, between these bankers, money itself actually goes only when their reciprocal claims fail to balance. We only need to add that such failure to balance must be of appreciable duration, a few weeks anyhow; since the first resort of an

exchange dealer with an adverse balance will commonly be to borrow from his correspondent,-money being sent only when it becomes evident that the adverse balance is not going to be turned into a favorable one within a very short time.

We have seen that the principle before us is true as applied to trade relations. We must now show that it is also true as applied to investment transactions-the lending of capital by the people of one place to the people of another place. In the first place, transfers of capital between communities, like trade payments between communities, primarily take the form of debts between the bankers of the different communities. A person in England who lends capital to an American railroad, by purchasing its bonds, does not, in consummating the operation, send over money to that railroad. The bonds are paid for, just as cotton on wheat would be paid for; i. e., either (1) by the New York broker's drawing a bill on London for their value or (2) by the London broker's sending a bill (draft) drawn by some London exchange dealer on his New York correspondent. That is, payment for bonds-the lending of capital by English people to American railroads in the first instance, takes the form, not of money sent, but of a debt created against some London house and in favor of some New York house.

We have learned, in the preceding paragraph, that, in its first stage anyhow, a movement of capital from one country to another means only a movement of credit. But, while such a shifting of capital does not mean a movement of money at the outset, would it not necessarily mean this in the end? For transactions in capital, unlike trade transactions, are almost certainly one-sided. Europe lends to America; but, generally speaking, America does not lend to Europe. The Eastern states lend to the Western, but the Western do not lend to the Eastern. In consequence, European exchange houses would never have any claims on American houses to balance those claims held by Americans against them which had grown out of the buying of American bonds-the lending of capital to American corporations. It would seem, therefore, that money would have to go.

The above reasoning is plausible, but it overlooks one very important element. It is true that the debts of European exchange houses to American houses growing out of the shifting of capital to America, can not be matched by debts running in the opposite direction which have the same origin. But another alternative is possible. America by hypothesis has an abundance of claims on Europe due to the fact that Europe has purchased American bonds-lent America capital; and, of course, America will insist on enforcing these claims, using them to get something which she wants. Further, she may use them to get money. But will she? Is money the thing she wants? Probably not. The real wants of borrowing railroads are, not money, but rails, cars, locomotives, etc. If they do not wish to buy these things abroad, they at least wish to have somebody use, in producing them here, labor and capital which must be released from the production of something else, by buying that something else abroad. Accordingly, the possession of an excess of claims on Europe is likely to increase America's purchases in Europe or in some place where claims on Europe are wanted. That is, the debt of European exchange houses to American exchange houses arising out of the fact that Europe is lending us capital, is likely to be matched with a debt of American houses to European houses arising out of the fact that Americans have bought from Europe more goods than usual. In such case, of

course, these debts will be cancelled and no money will go either way. We are justified, then, in saying that investment transactions between countries, like trade transactions between countries, do not of necessity involve corresponding movements of money.






In introducing Principle 1 of this chapter, I called attention to some popular fallacies with respect to the effect on a country's monetary stock of its dealings with other countries. In that connection, the point particularly combated was that every purchase abroad means the loss of some money. I wish, now, to go into this matter a little more deeply, and show that, generally speaking, all anxieties of this sort are entirely needless, that, save in special cases, to

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