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Our Passive Trade Balance

[Editor’s Note: Published in January 1914 in Neue Frei Presse,”Our Passive Trade Balance” (“Unsere passive Handelsbilanz”) would prove to be Eugen von Böhm-Bawerk’s last publication before his death. Ludwig von Mises mentions the article in an essay written after Böhm-Bawerk’s death, but to our knowledge, this is the first time the essay has appeared in English. Nathan Keeble located a scan of the article posted by the Austrian National Archives. Translation by Kai Weiss.]

As is well known, the trade balance of the Austro-Hungarian monarchy has become strong and increasingly passive since 1907.1 Previously, it had been active for more than thirty years, from 1875 to 1906, with the only exception of 1898, when a very small amount of passivity had been recorded. Even earlier, the years 1859 to 1869 were active, and the years 1870 to 1874 showed a passive trade balance in rapid changes. After the long active period from 1875 to 1906, passivity set in 1907, initially with the small number of 44.7 million Crowns, and then again in 1907, so as to rise rapidly over the annual numbers of 142.8, 427.4, 434.3, 778.4 to the level of 822.9 million in 1912, which is extremely important for our circumstances. Also, the balance for the current year of 1913 is likely to close with a very substantial level of liabilities.

Why has our trade balance again become passive? Opinions on this vary considerably. Or, to be more precise, we are facing a phenomenon which has caused a great deal of public and professional interest and concern, but has not yet been fully clarified in a completely satisfactory manner. It came upon us like a mysterious surprise. In the beginning, they were believed to be purely mechanical because of the pressure to increase imports of food products and raw materials and because of the known causes of the severe impediment to our export, particularly to the Orient. But as passivity grew and, especially since it was constantly settling in, this mechanical explanation - we will see later on why - turned out to be insufficient, and our experts began to look for other, deeper explanations for the equally strange and disturbing phenomenon. A substantial part of the arising and interesting discussion took place in the columns of the Neue Freie Presse and therefore I am very pleased to be able to bring some thoughts to the public, which arose from the consideration of the strange problem in my mind, also at this place, which is excellently suited for this purpose.2

I’m much more a theoretician than politician and therefore stand in the mastery of concrete practical details, in the intimate knowledge of the individual economic facts which emerged in the various import and export sectors during the critical period, certainly far behind the excellent professionals who have spoken before me on this issue. On the other hand, however, I believe that it is precisely on this issue that full clarification cannot be achieved without the aid of theory; that, in this case, it is almost more important than knowledge of the concrete facts to interpret these against the background of certain fundamental theoretical insights; and I therefore believe that I dare to contribute, so to speak, my theoretical might to solving our great economic mystery.

First, a few words about the previous explanations. I have already spoken of the purely mechanical explanation of the need to increase imports of raw materials and to reduce exports as a result of disruptive wartime turmoil and perhaps an even more restrictive trade policy. Certainly these mechanical reasons explain something, but certainly not everything and not the main thing in the long run. The passivity of our trade balance was then associated with the “industrialization” of our homeland on several occasions and in different opinions. One of the most intelligent representatives of this opinion believed it to be in connection with the prophecy that because of this very origin the passivity would remain permanent and would not disappear any more. I would like to believe, conversely, that this attached prophecy shows that there is something wrong with the statement that has been made. There is no direct connection between industrialization and the passivity of the trade balance.

The connection is only mediated by intermediate members. And these intermediate members, paradoxically as this may sound, can be of quite the opposite nature. National e conomies can become rich by developing their industrial production, so rich that they are able to sell their accumulated wealth and capital to other, poorer nations in the form of loans or other types of interest-bearing or profitable capital investments in poorer countries abroad. Then, the interest and other incomes of these foreign capital investments, as we will see later, do not flow into the rich industrialized country in the form of money, but in the form of imported products that can be bought for the amount of interest owed or similar, and constitute an extra increase to the imports, which, because it is already paid in advance by the interest owed, no longer needs to be paid for by exported products, as is usually the case in international trade in goods, and which therefore constitutes a plus of imports over exports, in other words a passive form of the trade balance. And because the interest receipts or otherwise invested capital abroad are so permanent as these capital investments themselves, a passivity of the trade balance resulting from such a cause can and must also be a permanent one. This is the case with the rich industrialized countries such as England, Germany, France and Belgium. The most striking example is England, whose trade balance has been constantly passive for many decades, for example in 1912 with the colossal figure of almost 146 million pounds sterling or about 3500 million crowns. Unfortunately, however, the paradigm of the creditor states, which have become rich as a result of industrial development, does not yet fit into our case at all. Regrettably, our overall monarchy as a whole is still one of the debtor states that is predominantly committed to foreign countries, and there can therefore be no question of us having already achieved the desired degree of ‘permanent passivity’, which is based on the permanent influx of goods from foreign debtor states.

But now there is a second, just the opposite, intermediate cause, which can link industrialization with passivity, but only with momentary, temporary passivity. When a poor, well-funded country begins to turn its attention from agriculture to industry , it may well be that it will not be able to finance the large, costly investments required to set up and equip its industrial production facilities, including the necessary auxiliary institutions for a full transport and traffic system, from its own capital resources, but has to get into debt for its procurement from foreign countries. It borrows the necessary capital from abroad - again, in the last instance, not in the form of money, but directly or indirectly in the form of any products or means of production, which supplement the inadequate stock of goods of the domestic economy in those directions which require the intended technical investments to be made. Due to and on the occasion of these debt contracts, a flow of goods pours into the domestic market, which does not have to be paid for by the domestic market like its other ordinary trade imports through an identical export of its own products, but which can remain unpaid for the time being because of the borrowing that has taken place, and which therefore, just as in the opposite case of the interest-bearing creditor states considered earlier, justifies a plus in the import of goods over the export of goods or a passive trade balance. Of course, a passivity arising from this intermediate cause cannot be permanent or everlasting. Because you cannot continue indebtedness indefinitely; you have to pay off the debts you have incurred sooner or later, and, in any case, you have to start sending the interest on the debts you have contracted abroad as soon as possible. Both types of out payments must sooner or later, but in any case in the foreseeable future, cause a decline in the flow of goods, an export of products to foreign countries that will first reduce the passivity of the trade balance, then balances and finally end even in the opposite, an active trade balance; accordingly, countries that are in debt have passive trade balances, countries releasing themselves from their debts by means of repayment, or punctually paying off their debt interest without further indebtedness, have active trade balances.

Is this perhaps the paradigm that fits our case? Certainly much more likely than the paradigm of the permanently “passive” creditor states. And if a different variant of opinion wants to explain our passivity as a “transition” phenomenon connected with (especially in Hungary increasingly onsetting!) industrialization, then it will certainly come closer to the truth. But it is impossible to explain everything, and in particular the striking change in the shape of our trade balance since 1907. That is because industrialization with its capital requirements, especially in the western parts of the overall monarchy, has already begun much earlier and has nevertheless been accompanied by an active trade balance for many years. It is therefore logical to conclude that the equally sudden and sharp turnaround, which we have before us as a problem in need of explanation, cannot be fully explained by a cause which, although perhaps to a lesser extent but also at the time of the active trade balances, had been effective.

Another attempt to explain the situation will focus on the home-sent earnings of our emigrants. It is not through indebtedness that, in this view, we acquire the capital goods that have become necessary, as a result of our progressive industrialization, which we have acquired from abroad, but rather we earn it with the earnings of our emigrants. Our passivity, like the passivity of the wealthy creditor states, although it is due to another intermediate cause, does not mean indebtedness, but, on the contrary, an increase in the wealth of our monarchy, which we owe to the hard work and thriftiness of hundreds of thousands of our emigrated workers. Again a grain of truth, but certainly again not the explanation of the main thing. If our emigrants’ earnings were lacking, however, the passivity of our trade balance would most likely be somewhat lower than it actually is. But the difference that is involved in the change from quite respectable activity to enormous passivity is far too big to be explained by this cause. In the 25 years from 1879 to 1903, we had an average activity of 225 million Crowns, in 1912 a passivity of almost 823 million; this gives an explainable difference of 1048 million. Now, the annual figure of emigrants’ earnings for the year, which is included in their attempted explanations, does not amount to more than 460 million. (Others suggest the figure is even lower.) Moreover, if one considers that the emigrants also have to lead a not inconsiderable amount of capital to foreign land, although emigration has increased again in the last decade, it was already effective before 1903 in the same sense and therefore already provided several hundred million in earnings per year at that time. The result is that the increase in earnings which has occurred since then means that, even in the best case scenario, only a very modest fraction of the difference in the trade balance can be explained. The main point of the amendment must therefore be explained differently.

I fear that the right explanation will be far less optimistic. I believe, that in the last few lustrums in our trade balance, we will once again have become very passive, simply because we have started again in the same lustrums to be heavily indebted to foreign countries. We had previously had a long list of active trade balances, because at that time we had succeeded in bringing foreign debt to a halt, smoothing off the interest due on old debts by means of exported flows of goods and even redeeming a considerable proportion of our old debt securities by means of the same goods flows sent abroad. And we have now become passive again, because we have once again started to get even more indebted abroad; for reasons which, although they may be related to a certain extent to the industrialization of our homeland, which is so often called upon for that purpose, but which, I believe, can be attributed to a different and much stronger part of all sorts of other, far from entirely pleasing phenomena, which are even more profoundly in our private and, above all, public economic life. This positive opinion of mine is to be explained and justified in a second article.

  • 1In modern usage, the term “passive” would likely be translated as “negative.” In this case, however, we have kept the author’s original usage. The translator notes: “You wouldn’t use ‘passiv’ in German anymore either, but ‘negativ’ as well. It’s an old word that is only used in bookkeeping today, but I think it fits to Böhm-Bawerk’s writing style.”
  • 2For context, see commentary in Neue Freie Presse from 28 June, 22 and 23 December 1911 and 24 January 1913 with the equally ingenious and meaningful remarks of an anonymous “outstanding trade politician,” as well as the Secret Councils of Matlekovits and v. Jankovich.
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