Ludwig von Mises Institute

Chapter 5
The Export of Gold

A notion extensively prevails in this country, that gold c i specie moves from place to place only to settle balances of account, and that the "balance of trade" is always against the country that parts with its gold, and in favor of that which receives it. A leading New York print keeps this idea before its readers, as an apology or justification for the large and increasing shipments of gold from this country to England, and asks, "What better can we do with the surplus gold we produce, than pay our debts and obtain a profit on its production?"

Certainly we can do no better with any commodity we may possess than pay our debts with the surplus, and produce more; but to suppose that this operation is peculiar to the precious metals, in the intercommunication of commercial countries, is a radical error. The constant departure of gold, as it arrives at New York, is deemed an evil by the good sense of a great majority of the people of this country; they know that specie is the only real money, and that the real is better than the fictitious of every good thing; but the constant repetition of the fallacious idea, that the balance of trade is against us, by those whose position or employment is supposed to make it necessary for them to investigate and understand the subject, deludes the public and throws the responsibility upon the wrong issue, or rather changes it from the cause to the effect. The cause is the degradation of the value of gold by the creation of fictitious dollars, convertible into gold. The effects are the shipment of the gold, and return of foreign merchandise in exchange.

"Too many imports" has been sung and said through all the changes of partisan political music, recitative and declamative, ever since the peace of 1815; and people have been deluded thereby to believe that excessive imports keep a permanent "balance of trade" against this country with England, and with all the rest of the world. A permanent balance of trade against one of two countries can no more exist than between one of two individuals; settling day is always coming round. The balance of trade between two countries is the aggregate balance of account between the individuals of the two countries. Of course it may vary one way or the other, but that it stands always or often against us is a delusion.

The customhouse figures tell little or nothing about it. If I send abroad a commercial adventure, with an investment of $50,000, registered at that sum among the exports, and accumulating $50,000 profit on the voyage, my vessel returns into port with a cargo of $100,000 registered among the imports, where is the balance of trade? What is there in this state of the account to cause an export of gold? Or, if my vessel is chartered, and earns me while abroad $10,000, which sum is invested in the return cargo, and of course registered among the imports, where is there any balance to pay by me or by the country? These figures would serve to show a balance of trade of $60,000 against us, when $60,000 of specie may have been gained to the country, with no balance due at all. Whether the returns come in specie or merchandise, the gain to the country is the same.

It happens, that for the two fiscal years, ending June 30, 1856, our exports exceeded our imports in the aggregate $26,000,000, and it will be remembered that, besides this sum, our navigation probably earned about $40,000,000 per year, to which must be added the profits of our foreign enterprises, included in the imports, and there would seem to be an immense balance in our favor. Nevertheless, we exported more than we imported, of coin and bullion, $94,000,000, in the same time. This shows at a glance that coin and bullion are exported, like all other commodities, because they are worth less here than in Europe, and are not sent abroad to pay debts more than wheat, beef, cotton, tobacco, or anything else. The truth is, the balance of trade is a chimera.

There is a vast preponderance of intelligent and productive labor in this country, relative to population, over any other on the globe, from the comparative absence of unproductive consumers. We have no great wars, with their constant incumbrances of standing armies and huge navies—no privileged classes, with their retainers, to feed upon the substance of the people, yielding no return—few paupers—and we have a comparatively small public debt, and inexpensive government. All these advantages are conspicuously shown in the rapid growth of the nation in population and wealth, and they secure the balance of trade between nations, as between individuals, to the most industrious and frugal, not in balances of account but in substantial possessions.

Notwithstanding all this, we make a losing business in exporting the gold, and create a most unhappy state of things at home, by the policy which makes its export necessary. We sell it constantly for less than it is worth—not being aware that the only measure of the value of gold is to be found in the price of all other commodities. Of itself it is a commodity, constantly altering in value by its own plentifulness or scarcity, and by the increase or reduction of its substitute in the currency—that is, bank money—both bank notes and credits. It is more sensitive in value than any other commodity, because it is universally desired, and can be more readily transported at small cost. Any appreciable deviation, therefore, will put it in motion from place to place. If the quantity of money is increased ten per cent, in relation to the property offered for sale, gold immediately falls in value by an average rise of ten per cent in the prices of commodities or property. This operation will infallibly compel the sale of gold, instead of commodities, to the nearest market having less money in relation to commodities, and we lose ten per cent in the transaction, that amount being added to the price of imports.

A piece of gold of 25 ‰ grains weight is called a dollar, a piece of 258 grains is called an eagle, and a piece of 480 grains an ounce. It is a great mistake to suppose that the value of gold is determined or fixed by these names or weights, any more than the value of lead is determined by its own weight. If we double the quantity of gold in relation to the commodities offered for sale, two ounces must be given for what one would have bought before. Double the quantity of lead, and the same effect is produced upon lead. We use gold as a medium of exchange, and therefore, instead of saying that two ounces of gold have fallen in value to one, we say that the price of the commodity offered in exchange has risen from one ounce to two ounces of gold. By the same law of value, we give two ounces of lead for what one would have bought before; only by expressing the change in the lead itself, we say it has fallen in price—we can buy two ounces for the same sum of money that would have bought but one before. All, therefore, that the government does by the mint law is to decree that a certain commodity shall be the medium of exchange and tender in the payment of debts. It would have been better, and the subject more easy of comprehension, generally, if the government had adopted the ounce as the unit of value with decimal divisions.

It is perfectly obvious, that as bank money is convertible into gold and silver on demand, its increase reduces the exchange value of those metals; and that at any time when the exchanges are at par or in our favor, and when, necessarily, it will not pay to export gold, and we are exporting merchandise in exchange for imports, an increase of bank loans will immediately turn the exchanges against us, by the degradation of the value of money, which raises the price of merchandise. The shipment of merchandise is checked to the extent of the export of gold which follows; the productive labor and business of the country are checked to a corresponding degree, and an unnecessary entanglement of debt succeeds; for it is transmuting debt into money which drives the coin and bullion abroad.

It is not true, as some writers have said, that we may as well ship the gold and produce more; for if we retain the gold, it is real money capital in hand, preventing debt, and the repetition of debt which follows the absence of money. We may export commodities in the place of gold, and still produce more gold, increasing business, profit and capital thereby immensely.

It is, perhaps, unnecessary for me to say that I am an avowed bullionist in banking. The whole theory of banking in this country rests on a great mistake—that increasing fictitious money increases business—whereas it is the increase of value—the product of labor alone—that increases business, or adds to the wealth of the country. The fictitious dollar, made without labor, by merely writing a promise on paper, is destructive to business. It degrades gold as much as it adds to prices; that rise of prices is a dead loss to the country; for it is indubitably nothing but the degradation of gold; and at that degraded value we sell it, under the delusion that we are made richer by the higher price of commodities at home, not perceiving that $1.10 in money will buy no more of the wants of life than $1 bought before.

The true policy is to keep down the volume of the currency to a firm reality; keep it, if possible, lower in relation to commodities than any other nation. There are two ways to do this: one is to reduce the money; the other, to increase the commodities. Either method will insure the sale of all the surplus products; for they would, by either of them, be cheaper here than elsewhere.

But we cannot keep the volume of the currency permanently below that of other nations, even if we sweep away the whole of the bank money. Gold and silver must flow in as fast as the bank money is withdrawn. It is well known to every student of political economy that no vigilance of government can prevent their going to that market where there is an effectual demand for them. Adam Smith says, that

all the sanguinary laws of Spain and Portugal were not able to keep their gold and silver at home. ... If in any particular country their quantity fell short of the effectual demand, so as to raise their price [value] above that of the neighboring countries, the government would have no occasion to take any pains to import them. If it were even to take pains to prevent their importation, it would not be able to effectuate it. Those metals, when the Spartans had got wherewithal to purchase them, broke through all the barriers which the laws of Lycurgus opposed to their entrance into Lacedæmon.

To increase the business of this country, and more immediately the export trade, we have nothing to do but to utilize the precious metals, by returning to first principles (as I proposed in an article published in your Magazine last year) and banking in coin exclusively. An immediate impetus would be given to traffic by this course. Even if but one bank should adopt it, the favorable influence would soon be felt. They should receive deposits in coin, and allow interest, say 4 or 5 per cent, and lend the money for what it is worth, according to the character of the securities and trouble and distance of collection, separating the two elements of interest and risk. There are securities in which the element of risk is absent; and there are others in which it is so prominent as to demand a guarantee commission greater than the rate of interest, which securities will yet command the money at that sacrifice. Now, it is preposterous to attempt to combine these two elements of interest and risk in one rate of interest or rent of capital. It would be cruelly unjust to the holders of second-class securities to enforce the usury laws, if they could be enforced, for they would not be able to obtain a loan or discount at all. They would be compelled to work for capitalists whose superior securities would take exclusive possession of the loan market. Except for the settlement of estates, and of contracts without stipulation, they are a violation of private rights; and being generally so regarded, they are very properly repudiated by both lenders and borrowers.

The coin and bullion bank should make its support and profit out of the difference of interest and in commissions—never issuing anything but coin or bullion, or certificates of deposit against coin retained to meet their return; and never making an inscription of credit without having coin in hand for the full amount of its undrawn loans.

This policy would change the current of trade immediately, and, if faithfully carried out through the whole country, would bring in $400,000,000 of coin—that being the sum of bank money used in commerce, in excess of the coin held in reserve. It would sink not only the same sum of debt, but the vast repetition of debt which the absence of so much money occasions. And who does not see that it would put in motion an immense activity in all the industrial pursuits of the country? For products must be had to buy the $400,000,000 of gold, whether it comes from our own mines in California or from our exchanges with Europe or any other part of the world.

All men engaged in business in this country in 1846 must remember the sudden activity imparted to trade in the fall of that year; but few have reflected upon its true cause. It was the action of the government in requiring coin for the payment of all public dues. The subtreasury went into operation in that year; and for the fiscal year, from June 30, 1846, to June 30, 1847, the import of coin and bullion exceeded the export, $22,200,000. This, of course, required the export of commodities to the same amount, in addition to the previous trade of the country, and it produced increased action in every branch of business. By some this was attributed to the famine in Ireland, which required an increased quantity of our breadstuffs; but the most that can be said of that is that it may have enabled us to obtain better prices. The famine might have been mitigated by supplies from the north of Europe, and from other regions. The paramount fact is that our government had determined to have the coin, and the country obtained it, as it always will obtain it whenever required, by the sale of its products. An increase of productive labor and increased activity of navigation and commerce in general were the inevitable consequences of this judicious policy. The nation would have obtained the coin without the aid of the famine in Europe. Who, that knows anything of the resources of this country in productive labor, with the wide world for a market, can doubt this fact?

If any wealthy man is desirous of doing a good deed, that may gratify him with the best results in his lifetime, and hand down his name to posterity as a public benefactor, he cannot, in my opinion, do or discover anything to be done so important to his fellow men for a lasting benefit, as to found an institution to check the enormous increase of debt now entangling the business of this country in the most inextricable embarrassment, which, in the nature of things, must destroy the happiness and hopes of numerous families, plunge many a worthy man into despair, and consign him to the grave.

The foregoing was written early in August. Now, in the middle of September, we are in the midst of a financial pressure, presenting the alternative whether the banks shall break their customers or themselves. The former policy prevails at this moment. I regret that I have not space for some further remarks upon this state of things, which springs from the debt banking system as naturally as buboes or carbuncles from the plague.

I aver that it is in the power of ten men in New York, and ten in Boston, to defeat the wretched policy which brings such misery upon the country. This can be done, not only without injury, but with ultimate benefit to the existing banks, with whom I have no quarrel in this matter, knowing them to be led by the same delusion that obscures the subject in the public mind; and it can be done with no more hazard to capital than would be incurred in the deposits of the present savings institutions.