An Outline of International Price Theories

CHAPTER VII

DEVELOPMENTS SINCE 1918: THE TRANSFER PROBLEM

1. Theories of Transfer and Their Developments Before the Great War

Another problem which had been much discussed during the post-War period was the transfer problem. By the “transfer problem” is meant the problem of the mechanism through which an international payment is actually transferred from one country to another or, in other words, the mechanism through which a disturbance in the balance of payments of a country that is caused by the making of a payment to a foreign country is corrected and equilibrium is restored. That international payment may be a reparation payment, an international loan, an interest payment, or a payment of debt arising from a great purchase of foreign goods or services. Allowance should, of course, be made for differences in details, but the main problem is the same for all cases, viz. how does a payment in monetary form ultimately lead to a payment in commodities and services.

There are, as indicated above, two different theories of transfer, viz. the classical theory and the Wicksellian theory. According to the classical theory, when a payment has to be made to foreigners but is not accompanied by an equivalent receipt from them, the volume of buying power of the country (relative to other countries) would, ceteris paribus, become excessive. The currency being excessive, gold, in the case of an international gold standard, will flow out of the country. Prices will fall in that country and rise in the countries receiving gold. Those shifts in the prices of the trading countries will encourage exports of the paying country and discourage its imports. Thus the balance of trade turns favourable to the paying country and the payment is ultimately transferred in the form of commodities and services. The essence of the transfer mechanism, as described in the classical theory, is to be found in the contraction or expansion of the volume of circulation and in the fall or rise of prices. The transfer of a payment, therefore, leads to a shift of the barter terms of trade in favour of the receiving country.

The Wicksellian theory of transfer, on the contrary, denies the shift of the barter terms of trade in favour of the receiving country as a necessary consequence of transfer. According to the Wicksellian doctrine, when a payment to foreigners is not accompanied by an equivalent receipt, the aggregate expenditures or outlays of the country are greater than its aggregate receipts or incomes. The necessary consequence is for those citizens whose incomes are less than their expenditures to contract their expenditures so that the income of every citizen again equals his expenditure. Equilibrium in the balance of payments is thus restored without any shift in the barter term of trade.

The difference between those two theories of transfer may be explained also by the difference in the assumptions regarding the demand conditions in the countries between which the transfer is made. The classical economists seem to have made the assumption, at least implicitly, that the demand curves are given and remain unchanged when the transfer is made. Upon that assumption, as pointed out by Dr. Iversen, “an increase or decrease in the imports and exports of either country must be accompanied by movements in their prices along these given demand curves. And as an international capital movement means a change in the relation between exports and imports (or other current credit and debit items) in both countries, the conclusion . . . that it must also be accompanied by a shift in their relative price levels, seems inevitable; to create the necessary export surplus the new lending country is forced to offer its goods at cheaper terms.”1 The advocates of the Wicksellian theory of transfer, on the contrary, question the legitimacy of making that assumption. Their argument may be given in the words of Professor Robbins:—

The fact that a loan is raised for abroad, or that reparation taxes are paid, deprives domestic payers of spending power. Some of this spending power would be spent on imports. The situation is, therefore, to that extent automatically eased. . . . It is a fundamental error to assume that the conditions of demand for export are unaffected by the fact that transfer is to be made. It is not merely a matter of the shape of the demand curve. It is a question of the movement of the demand curve as a whole. If I lend a man £100 out of a fixed income that means that immediately my demand curves are moved to the left—at any price I demand less—while his demand curves are pushed to the right—at any price, he demands more.2

That shift in the demand curves is sometimes sufficient to increase the exports and to decrease the imports of the paying country to an extent that the payments to be made are actually transferred in the form of commodities, without any shift in the price levels.

Both doctrines of transfer have, as shown above, a long development. It was in the hands of Thornton that the transfer problem was first subject to elaborate analysis. Thornton, as pointed out above, subscribed both to the Wicksellian and the classical theories. He considered, however, the former to be true only in the long run. He was attacked by Wheatley and Ricardo, who insisted that even in the short run there was no reason to expect a transfer to cause an outflow of gold from the paying country, a fall in its prices and a shift of the term of trade against it. Thereby they came near to the Wicksellian theory of transfer. Ricardo was attacked by Malthus, who stood firmly for the classical theory.

In the first half of the nineteenth century the problem of Irish absenteeism received much discussion in Ireland and England. It had been said that “as much as one-third of the entire produce of Ireland was sent out of the country in payment of rents to absentee proprietors”. Naturally people were very much concerned about the question whether the large payments made to the absentee proprietors would be economically disadvantageous to Ireland or not. The vulgar writers thought that the income of the absentees was entirely drawn in specie and that the payment meant the outflow of money or “the Measure of all Commerce, a certain Quantity thereof is necessary, for the carrying in the Trade of each country, in Proportion to the Business thereof”.3 Thus the outflow of gold that ensued would discourage commerce and lead to unemployment or to a fall in wages in Ireland. That view was attacked by M’Culloch. In his evidence before the Committee on the state of Ireland, M’Culloch, in answering the question whether the population of Ireland would be benefited by the expenditure among them of a certain portion of the rent which would have been remitted to England if the proprietor had been absent, said:—

No, I do not see how it would be benefited in the least. If you have a certain value laid out against Irish commodities in the one case, you will have a certain value laid out against them in the other. The cattle are either exported to England, or they stay at home. If they are exported, the landlord will obtain an equivalent for them in English commodities; if they are not, he will obtain an equivalent for them in Irish commodities; so that in both cases the landlord lives on the cattle, or on the value of the cattle: and whether he lives in Ireland or in England, there is obviously just the same amount of commodities for the people of Ireland to subsist upon.4

It followed that wages in Ireland would not be affected,5 or, in other words, the factorial term of trade would not be altered as a result of the payment of rent to the absentee proprietors. M’Culloch’s reasoning is based upon the assumption that when the payment is made there will be be such a shift in the demand curves of the countries, between which the transfer is made, that the payment is actually transferred in the form of commodities without any movement of gold. For he considered as undoubtedly true that “in every instance, in which a demand arises for a bill of exchange to remit rents, it is, in point of fact, a demand for exportation of Irish produce, that would not otherwise have existed”. If the demand for the exchanges was one million pounds, the increased demand for exports would also be one million pounds.6 Since the exports of Ireland were increased, there would be the same quantity of labourers employed on the whole, as if the landlord resided upon his own estate and spent his income upon it. A similar theory was advanced by Senior. Senior’s reasoning also started with the assumption that the payment would not lead to any outflow of gold.7 He found that M’Culloch’s theory was correct in case a country did not export raw material or, to put the same thing in other words, in case the country did not export anything other than the products of labour. In that case the number of labourers employed would remain unaltered and the wages of labour would not be affected.8 But M’Culloch’s theory would not be correct if Ireland was exporting raw produce, i.e. produce of land and not produce of labour. In that case, wages in Ireland and consequently the factorial term of trade would be affected:—

In a country which exports raw produce, wages may be lowered by such non-residence. If an Irish landlord resides on his estate, he requires the services of certain persons who must also be resident there to minister his daily wants. He must have servants, gardeners, and perhaps gamekeepers. . . . A portion of his land or, what comes to the same thing, a portion of his rent, must be employed in producing food, clothing, and shelter for all these persons, and for those who produce that food, clothing, and shelter. If he were to remove to England, all these wants would be supplied by Englishmen. The land and capital which was formerly employed in producing corn and cattle to be exported to England to provide the subsistence of English labourers. The whole quantity of commodities appropriated to the use of Irish labourers would be diminished, and that appropriated to the use of English labourers increased, and wages would, consequently, rise in England and fall in Ireland.9

The theory advanced by M’Culloch and Senior, which is very near to the Wicksellian theory of transfer, was criticized by Longfield and Stuart Mill. Both Longfield and Mill showed that the making of a payment would have the same effect as an increase in the demand for foreign goods and consequently would lead to a shift in the barter terms of trade in favour of the receiving country and against the paying country. In other words they advanced the classical theory of transfer.10

Mill restated the classical theory in his Principles. The theory was then refined by the authors, whom we have described in Chapter V above. In 1854, as already indicated, the classical theory was criticized by Cairnes, who presented his version of the Wicksellian theory. In 1889, Mill’s restatement was once more criticized, this time by Bastable.11 Bastable doubted “whether Mill is correct in asserting that the quantity of money will be increased in the creditor [i.e. the receiving] and reduced in the debtor [i.e. the paying] country. . . . Nor does it follow that the scale of prices will be higher in the creditor than in the debtor country The argument was as follows:—

Suppose that A owes £1,000,000 annually. This debt is a claim in the hands of B, which increases her purchasing power, being added to the amount of that power otherwise derived. To the extent that B’s demand for foreign products through the use of her exports is reduced by this application of her claim and the terms of exchange are thereby rendered more favourable to her—so far, and so far only, does A lose. It is plain that, under the actual conditions of trade, any effect of the kind must be insignificant. The fluctuations of the terms of international exchange are confined within comparatively narrow limits, owing to the competition of different countries and the enormous number of commodities dealt in; while, within those limits, the special force under consideration can have but little power. . . . The sum of money incomes will no doubt be higher in the former [B]; but that increased amount may be expended in purchasing imported articles obtained by means of the obligations held against the debtor nation. . . . The inhabitants of the former, having larger money incomes, will purchase more at the same Price, and thus bring about the necessary excess of imports over exports.12

Furthermore, B might wish to take from A new goods beyond the excess of A’s exports over imports represented by the payment. In so far as that happened the terms of trade would be in A’s favour.

Another criticism of the classical theory of transfer was raised by Nicholson.13 Nicholson was of the opinion that the solution given by the classical economists, even upon the simplifying assumptions was merely a possible one, but “not the only one or the most probable”. Nicholson offered an alternative explanation that was similar to the explanation given by Bastable. He first examined the case “that owing to great natural discoveries—e.g. of mineral oil—England is able to add a considerable amount to its exports to other gold-standard countries, e.g. to France The mechanism of adjustment described by Nicholson was as follows:—

The new oil may at once take the place of one or more particular old exports and the balance may remain as before. Suppose, however, that the foreign consumer purchases the oil with money entirely saved from things produced at home, e.g. French candles. This money being transferred to the English oil providers, they may demand particular French goods and so far an additional import is secured to balance the new export. Or they may demand more English goods, in which case they consume the English goods (or their substitutes) formerly sent abroad, and there is a sufficient displacement of exports.14

He next examined the case of a tribute. The mechanism of adjustment was given in the following passage:—

The government of the paying country must levy taxes to the amount of the annual tribute, and thereby will diminish the consuming power of the people by so much. Assume that . . . actual money is taken from the pockets of the people. We may suppose that in consequence there will be partly a lessened demand for imports and partly an excess of home commodities available for export. At the same time the receiving country—when the money is sent to it—will have so much more to spend and can take more imports and also consume things formerly exported. In this way an excess of exports from the paying country equivalent to the tribute can be brought about without any change in general prices.15

The doctrine of adjustment of the balance of payments through changes in the demand schedules, as suggested by Cairnes, Bastable, Nicholson, and other economists, found one of its best presentations in Wicksell’s Lectures, which was published at the beginning of the present century. Wicksell’s statement is so excellent that we have associated the doctrine with his name.

Before the Great War, the most famous indemnity was that imposed upon France by the Treaty of Frankfort, in 1871. The discussions connecting with that indemnity16 are also very interesting. Then came the Great War, the economic conditions of which induced a renewal of theoretical speculations upon the problem of transfer.

2. The Earlier Controversy: Taussig, Wicksell, and Viner

The new discussion was opened by Professor Taussig. In a paper published in 1917,17 Professor Taussig analysed the transfer mechanism both under an international gold standard and under a paper standard. His analysis was substantially the same as that of Mill. Taussig recognized, however, that a loan might increase the demand of the borrowing country for foreign goods. Should the borrowers use the money or credit put at their disposal in buying once for all the goods produced by the lending country, there would be “no remittance at all”; and foreign exchanges, prices of the two countries or the barter terms of trade would not be affected.18 But that was, to Taussig, a highly improbable and extremely rare case. Normally, a great part of the funds borrowed would be spent at home on domestic goods and services. In the latter case Hume’s law would work to restore equilibrium in the balance of payments.

Professor Taussig went a step further in investigating the case of depreciated paper.19 The conclusions he reached in that original essay were restated with great lucidity in his book on international trade.20 In that book, he started with a case of two countries each of which had a fixed quantity of inconvertible paper currency. He first inquired what would be the equilibrium rate of exchange under such a case. He found that:—

In the absence of a common monetary standard, the rate of foreign exchange depends on the mere impact of the two quantities on hand at the moment [i.e. the impact of the monetary supply on the monetary demand].

The price of foreign exchange . . . depends at any given time on the respective volumes of remittances. It results from the impact of two forces that meet. The outcome is simply such as to equalize the remittances; such that the money value of the two, expressed in the currency of either country, is the same.21

He next inquired how changes in the conditions of the balance of payment were brought about under that case and compared it with the mechanism under an international gold standard. He took for illustration a sudden burst of loans from Great Britain to the United States. The payments which the former had to make were increased. The amounts of the new payments were exactly the same as the amount of the loan. “There is no more demand for sterling exchange than before; no more purchases of British goods are made than before, and no larger remittances have to be made to London.”22 In other words, Professor Taussig made the assumption underlying the whole classical doctrine of transfer, viz. that the transfer does not of itself create, for the receiving country, a greater demand for the goods and services of the paying country. Upon that assumption, there was clearly an enlarged demand for bills of exchange to be met by an unchanged supply. The price of the bills naturally rose sharply, since no money of one country could enter into the circulation of the other and the only means of remitting was by bills of exchange. Therein lies the first difference between the case of a dislocated exchange and that of a gold standard: “Under specie it is the foreign exchanges that never vary, barring the minor fluctuations within the gold points. Under paper, however, a new and different normal quotation for foreign exchange will be established.”23 Closely connected with that is another difference between the two cases: “Under specie the level of domestic prices in each country will be changed. . . . But with dislocated exchange, the level of domestic prices in each will remain as it was before.”24 Thus under specie the money income in both countries would change, while under paper it would not.25 It followed that under paper the prices of exported goods—though during the stage of readjustment (during the lag) somewhat lower than before in the borrowing country and higher in the lending country—would ultimately return to their former level, because they followed in the long run the course of domestic prices. Under specie, on the other hand, exported prices, like the domestic prices, would fall in the lending country and rise in the borrowing country.26 Only in regard to the prices of imported goods would there be the same result under paper as under specie, i.e. they would be permanently cheaper in the lending country than before.27 It was necessarily so because only through that change in the relative prices of imported articles could more goods move from the lending to the borrowing countries, and lending was paid in commodities. Taken as a whole, the position of the borrowing nation would, in the case of inconvertible paper, be as follows:—

The index number will register during the period of readjustment a fall in prices. Imported goods will be cheaper as the immediate consequence of the new rate of foreign exchange. Exported goods also will be cheaper. Domestic goods will be unchanged. The general price level will thus be shown by the index to be lower. As time goes on the exported goods will no longer show a fall in price, i.e. the initial fall will be succeeded by a rebound to the original figures. Their producers will be led to lessen supplies in such a way that the returns to them will be as great as to other domestic producers. But imported goods will have fallen in price definitively. When all has settled down the general price level . . . will be lower than it was before the disturbing influence set in, domestic prices (including those of exported goods) being the same as before but the prices of imported goods lower.28

The opposite was true of the lending nation. To sum up, the mechanism described by him has the following sequential order of events:—

The remittances [due to a sudden burst of loans] first set in; then the exchanges are affected; then prices shift; at last the imports and exports of goods are modified.29

A similar result would be obtained if the initiating cause of disturbance was an altered state of demand for trading commodities,30 or a change of their supply.31

In spite of all those differences between a case under gold and a case under paper, there was one fundamental similarity in the outcome, viz. that the barter terms of trade turned against the lending country and its consumers were worse off. The barter terms of trade were unfavourable to the lending country because, while its export prices remained unchanged, its import prices became higher. Its consumers were worse off because they bought dearer imported goods with the same money incomes.

Taussig’s original article was criticized by both Wicksell32 and Hollander.33 The main argument put forward by them is similar to that of Bastable and Nicholson. Wicksell’s view has been given in an earlier chapter above and need not detain us. Nor is anything to be gained from a detailed consideration of Hollander’s view, because he presented nothing which was really new.

To the criticism of Wicksell and Hollander we may add another criticism. Professor Taussig started with the assumption that the quantity of paper money was fixed in both countries. He also tacitly assumed that the banks in the borrowing country did not expand their credit as a result of an increase in their foreign assets. The more reasonable assumption seems to be that of an increase in the quantity of the circulating medium in the borrowing country, which may or may not be accompanied by a contraction of currency in the lending country. Upon the latter assumption the difficulty in the making of a transfer becomes much smaller, and the exchange rate of the American dollar becomes lower than that expected by Professor Taussig.

The Taussig-Wicksell controversy was reviewed by Professor Jacob Viner. Viner agreed with Wicksell in that the use of the proceeds by the borrowing country in the purchase of its domestic goods would also operate to adjust the international balance since that purchase would reduce the amount of commodities in the borrowing country available for export. “Nevertheless,” he said, “even with this correction, Taussig’s argument still holds that without gold movements and changes in price levels there is no visible mechanism whereby increased purchases by the borrowers of foreign commodities, and of those domestic commodities which otherwise would be exported, will exactly equal the amount of the borrowings.”34 The mechanism as described by the classical economists remained an indispensable means of adjustment in the balancing of international accounts. He then attempted to verify the classical doctrine by a study of the pre-War Canadian balance of international indebtedness. He came to the conclusion that the evidence supplied by the pertinent statistical data of Canada’s borrowing, trade, and price movements did give an inductive proof of the explanation given by the classical economists.

He was of the opinion, however, that the analysis must be extended beyond a general and unqualified discussion of changes in “general price levels”. He followed the examples of Cairnes and particularly of Taussig in analysing the trends of what he called “the sectional price levels”. Like Taussig, Viner began by distinguishing “domestic”, “import,” and “export” price levels. He then investigated what would be the effects of international capital inflow on those price levels. He found from Canadian experience that prices in general rose so much “that the rise in the prices of domestic commodities was most marked, that the prices of import commodities, which was least subject to the influence of domestic conditions, rose least, and that the rise in the prices of export commodities, which are subject to both internal and external influence, was intermediate between the rise in import prices and the rise in domestic prices”.35 As domestic prices rose relative to import prices, imports were stimulated. At the same time, exports were checked by two factors: First, labour would be withdrawn from industries producing for export to the development of the enterprises for which the foreign capital was borrowed. Secondly, exports being governed by the conditions of the world market the rise of their prices in any one country would decrease the volume of its exports considerably.36

3. The Reparation Discussions: The Controversy between Keynes and Ohlin

The transfer problem was also much discussed during the period of post-War adjustment in connection with the Reparations Payments. Opinions may again be divided into two groups, viz. the classical doctrine and the Wicksellian doctrine. Mr. Keynes37 and Professor Taussig38 were the most important champions of the former view. Unlike them, Dr. Anderson39 explained the transfer of reparations along the lines of Wicksellian doctrine. Assuming sound currency and acting industry in Germany (which was the essential pre-condition), the process of payment was as follows: “The first financial step . . . would be taxation of the German people, with the accumulation of bank balances in Germany to the credit of the German Government as a result of the tax receipts. The second step would be the transfer by the German Government of the right to draw against these bank balances to the French Government, to the Belgian Government, and to other countries to whom she owes indemnities. The third step would be the sale by these creditor countries of these German balances in the foreign exchange markets to whatever buyers appeared. The buyers of these balances in German banks would be those who had remittances to make to Germany, and these buyers would be primarily purchasers of German goods in every part of the world.” The problem, however, is why and how there would be enough buyers to absorb those German balances to the amounts that the indemnity involved. To that Dr. Anderson gave the following answer:—

In the first place, the taxation in Germany would reduce the buying power of the German people to such an extent that they could not consume at home the whole of the products of their industry. As the Government reduced their incomes by taxation their ability to consume would be reduced. Secondly, the offering of large quantities of mark exchange in the foreign exchange markets of the world would tend to lower its value, and so make German goods a little cheaper than they otherwise would be when priced in dollars, francs, pesos, or yen. On the other hand, the buying power of the outside world would be increased by this same process.40

That is probably the first application of the Wicksellian doctrine to the German reparation problem.

There were many other writings on the reparation problem. It is, however, impossible for us in this general survey to examine all of them.41 We propose to go directly to the controversy between Mr. Keynes and Professor Ohlin regarding the payment of German reparations.

In an article on the German transfer problem,42 Mr. Keynes presents once more the classical doctrine of transfer. His statement is substantially the same as that which Taussig presented in an article in 1917.

It is untrue to say that Mr. Keynes ignored the fact that the demand schedules might shift as a result of a payment of reparation. He clearly says:—

Let us suppose that the German factors of production produce nothing but exports and consume nothing but imports, in this case it is evident that there is . . . no Transfer Problem . . . If £1 is taken from you and given to me and I choose to increase my consumption of precisely the same goods as those of which you are compelled to diminish yours, there is no Transfer Problem.43

He recognizes that the balance of trade would adjust itself to the making of a reparation payment “to the extent that high taxation causes German consumers to buy less foreign goods”. What he insists on is that “only a proportion of their abstention from consuming will be in respect of foreign goods” and that is not, especially in the case under examination, a very large proportion. For that reason he turns to the classical doctrine of transfer.

Since the solution of the Transfer Problem does not come about, in the main, by the release to foreign consumers of part of the exportable goods now consumed by Germans and their abstention from buying part of the imported goods, the solution must come about “by the diversion of German factors of production from other employments into the export industries.”44 That diversion is possible only when the export industries can sell an increased output. “They cannot sell an increased output at a profit unless they can first reduce their costs of production.” There are three ways of bringing that about:—

Either German industrialists must increase their efficiency faster than industrialists elsewhere; or the rate of interest in, Germany must be lower than elsewhere; or the gold-rates of efficiency-wages must be reduced compared with elsewhere.45

To him, only the last way, i.e. the reduction of money wages, is important in the case under consideration. It follows that the Transfer Problem requires a fall of German money-wages relative to other countries, a reduction of German export prices and a shift of the barter terms of trade against her.

A reduction in the money wages, however, does not always help her and sometimes may even injure her. That is true of the following cases:—

(i) When the output, e.g. personal services or buildings, cannot be exported anyhow;

(ii) Where the world’s demand for Germany’s goods has an elasticity of less than unity, i.e. where a reduction in price stimulates demand less than in proportion, so that the greater quantity sells for a less aggregate sum;

(iii) Where Germany’s foreign competitors fight to retain their present trade connections by reducing their own rates of wages pari passu;

(iv) Where Germany’s foreign customers, reluctant to allow this more intensive competition with their home products, meet it by raising their tariff.46

“Moreover,” he says, “if a reduction in price of 10 per cent stimulates the volume of trade by 20 per cent, this does not increase the value of the exports by 20 per cent, but only 8 per cent (1.20 x 90 = 108).”

There are, however, three points in which Mr. Keynes departs from the classical approach to the problem of transfer. First he assumes the economic structures of the commercial world to be inflexible. He says:—

My own view is that at a given time the economic structure of a country, in relation to the economic structures of its neighbours, permits of a certain “natural” level of exports, and that arbitrarily to effect a material alteration of this level by deliberate devices is extremely difficult.47

That is obviously not “classical”, because the classical economists assumed the cost and price structures to be flexible and the elasticity of demand to be greater than unity. Second, he asserts that some items in the international accounts other than the commodity items are more important in the adjustment of disturbance:—

Historically, the volume of foreign investment has tended, I think, to adjust itself—at least to a certain extent—to the balance of trade, rather than the other way round, the former being the sensitive and the latter the insensitive factor.48

The classical economists, on the contrary, assumed the balance of trade to adjust itself to the volume of foreign investment. Third, in one of his rejoinders, he calls attention to a new problem, which was perhaps tacitly raised in his original paper. That problem is, how is the payment first transferred in monetary form? It is only when payment can first be transferred in the form of money and credit that the transfer can have any effect on the demand conditions. “If Germany was in a position to export large quantities of gold or if foreign balances in Germany were acceptable to foreign Central Banks as a substitute for gold in their reserves, then it would . . . help the situation by changing demand conditions.”49 But what Germany could do along those lines would be, according to Mr. Keynes, quite negligible. For that reason Germany could only make the monetary transfer “if she has already sold the necessary exports”; so that the monetary transfer itself “cannot be part of the mechanism which is to establish the situation which will permit her to sell the exports”.50 Thus it is possible, at least in the case under consideration, that transfer in the form of commodities should precede monetary transfer. The traditional approach to the problem, on the contrary, always assumes an approach the other way round and takes the problem of monetary transfer for granted.

When Mr. Keynes comes back to the problem of adjustment of disturbances in the balance of payments in his general treatise on money,51 he is contributing to the general theory and no longer confines himself to the particular case of German Reparation payments. There he takes his position on the classical doctrine.

Before going into his theory it is desirable for us to explain some of the symbols employed by him: In his book B = the Foreign Balance = “the balance of trade on income account, resulting from the excess of the value of home-owned output of goods and services (other than gold), whether produced at home or abroad, placed at the use and disposal of foreigners, over the value of the corresponding foreign-owned output placed at our use and disposal,” L = the values of foreign Lending = “the unfavourable balance of transactions on capital account, i.e. the excess of the amount of our own money put at the disposal of foreigners through the net purchase by our nationals of investments situated abroad, over the corresponding amount expended by foreigners on the purchase of our investments situated at home”; G = the exports of gold. By definition we have L = B + G. There cannot be, however, equilibrium in international trade so long as there is a continuous movement of gold into or out of the country. “The condition of external equilibrium is, therefore, that G = O, i.e. that L = B.”52 Thus the existence of external equilibrium depends upon the factors governing L and those governing B. He finds that the former are the relative interest rates at home and abroad, while the latter are the relative price-levels at home and abroad of the goods and services which enter into international trade. But “there is no direct or automatic connection between these two things; nor has a Central Bank any direct means of altering relative price-levels. The weapon of a Central Bank consists in the power to alter interest rates and the terms of lending generally.”53 Thus, he still denies the doctrine that B is directly a function of L.

The direct weapon that the Central Bank can use in regulating external disequilibrium is the bank rate. But to employ the bank rate as a weapon to meet external disequilibrium would, for a time, mean a divergence of the terms of credit from their domestic equilibrium level, if they are originally in equilibrium. Hence the first effect of using bank rate to preserve external equilibrium will be to produce internal disequilibrium.54 That, however, is true only of a transitional period. When the change in bank rate has worked out its effect via prices on B so as to bring about a stable equilibrium between L and B, the internal equilibrium will once again be restored. Thus he says:—

Bank-rate is both an expedient and a solution. It supplies both the temporary pick-me-up and the permanent cure—provided we ignore the malaise which may intervene between the pick-me-up and the cure. . . . The essence of the matter can be set out briefly. Raising the bank-rate obviously has the effect of diminishing L, the net amount of lending to foreigners. But it has no direct influence in the direction of increasing B. On the other hand, just as the dearer money discourages foreign borrowers, so also it discourages borrowers for the purposes of home investment—with the result that the higher bank-rate diminishes . . . the volume of home investment. Consequently total investment falls below current savings (assuming that there was previously equilibrium), so that prices and profits, and ultimately earnings, fall, which has the effect of increasing B, because it reduces the costs of production in terms of money relatively to the corresponding costs abroad. On both accounts, therefore, B and L are brought nearer together, until in the new position of equilibrium they are again equal. . . . At the new level of equilibrium we shall once again have . . .I = S. But we shall also have B = L. For since B moves in the opposite direction to P and P in the opposite direction to L—B, whilst L moves in the opposite direction to the bank rate, for every value of bank-rate there is a value of P at which B—L; and since S moves in the same direction as bank-rate and I moves in the opposite direction, there is always a value of bank-rate for which I = S. Consequently there is always a pair of values of bank-rates and of P at which both I = S and B = L.55

Mr. Keynes calls attention to the growing importance of the role of the international movement of liquid capital:—

In modern times, when large reserves are held by capitalists in a liquid form, comparatively small changes in the rate of interest in one centre relatively to the rate in others may swing a large volume of lending from one to the other. That is to say, the amount of foreign lending is highly sensitive to small changes. The amount of the foreign balance, on the other hand, is by no means so sensitive. . . . This high degree of short-period mobility of international lending, combined with a low degree of short-period mobility of international trade, means—failing steps to deal with the former—that even a small and temporary divergence in the local rate of interest from the international rate may be dangerous.56

When the bank rate is put up against an unfavourable balance of payments, the existence of capital in liquid form in the international market would cause the gap between L and B to be filled by the flow of short-term capital. That will quickly restore apparent equilibrium at a stage quite insufficient to work out its effect on B and to re-establish underlying equilibrium. The result is to delay the credit measures, while the progressive accumulation of short-term indebtedness becomes itself an independent threat to equilibrium.

As indicated above, the fulfilment of the condition of external equilibrium depends on two things: first, relative price-levels which affect B; and, second, relative interest-rates which affect L. External disequilibrium may thus arise either from disequilibrium in relative price-levels or from disequilibrium in relative interest rates. He finds that there is a radical difference between those two cases. “In the first case, the disequilibrium can be cured by a change in price-levels (or, rather, of income-levels) without any permanent change in interest rates, though a temporary change in interest-rates will be necessary as a means of bringing about the change in income-levels. In the second case, on the other hand, the restoration of equilibrium may require not only a change in interest-rates, but also a lasting change in income-levels (and probably in price-levels). That is to say, a country’s price level and income-level are affected not only by changes in the price-level abroad, but also by changes in the interest rate, due to a change in the demand for investment abroad relatively to the demand at home.”57

Mr. Keynes’s original article are criticized by Professor Ohlin.58 Professor Ohlin finds Mr. Keynes’s main thesis to be erroneous. “This erroneous conclusion is reached because of the fact that the shift in buying power is ignored, except in so far as it directly affects demand for international goods.”59 Professor Ohlin is of the opinion that the shift in buying power consequent on a payment of reparation or an international loan affects both directly and indirectly the demand for international goods. Its direct effect in increasing the borrowers’ demand for foreign goods and reducing the lenders’ may not be important. But it has an indirect effect: It increases the demand for home market goods in the borrowing country. That increased demand for home markets goods “will lead to an increased output of these goods. In a progressive country this means that labour and capital, that would otherwise have passed to export industries and industries producing goods which compete directly with import goods, now go to the home market industries instead. Output of these import-competing goods and of export goods increases less than it would otherwise have done. Thus, there is a relative decline in exports and an increase of imports and an excess of imports is created”. A corresponding adjustment takes place in the lending country and an excess of its exports is created.60 As the shift in purchasing power indirectly affects the demands for foreign goods, it also occasions changes in the sectional price levels. Home market prices tend to rise in the borrowing country and fall in the lending country, relative to prices of export and import goods and prices of the goods which compete with import goods. But it is not necessary, according to Professor Ohlin, that the borrowing country’s export prices should rise and the lending country’s fall.61 In other words, there is no reason to suppose, as Mr. Keynes did, that the barter terms of trade must turn against the paying country.62

Professor Ohlin restates his theory of transfer in his book on international trade.63 He starts with the case of demand variation and investigates the possible effects of an increase of B’s demand for some of A’s goods. A and B being two trading regions. The first effect which he finds is on the distribution of buying power, which is equal to “total gross income, increased by borrowings and reduced by loans, and expressed in terms of money with reference to a period of time”. The total buying power of the two regions being constant, A will have, as a result of the change in demand, a greater buying power and B a smaller one than before. That alteration in buying power means a corresponding shift in the demand curves. A demands more of B’s goods so that “the balance of trade is automatically kept in equilibrium The second effect is that on the scarcity of A’s factors in relation to the scarcity of B’s factors. As the demand for A’s export goods increases, the relative scarcity of the factors required for the production of those goods, and consequently the relative scarcity of all A’s factors regarded as a group is increased. That leads us immediately to the third effect, viz. “if the total money value of the product of both regions is kept constant, A will get a higher, B a lower money income than before”, and the fourth effect, viz. “if the price level for factors in general in A and B taken together is kept constant, the level of A factors rises and that of B factors drops”. Since prices of factors entering into the export industries in A rise relative to B one should expect—the fifth effect—that prices of A’s export goods and goods using factors of the same sort as the export goods will also rise relative to B. That means the movement of the terms of trade in favour of A.64 That shift in the terms of trade is, however, not the same as the shift postulated by the classical economists. The former is purely the result of the original change in the demand data, while the latter is a part of the process of adjustment.

He next examines the case of international capital movements from B to A. The first effect is that the buying power in A is increased and that in B reduced. “There is thus a market in A for more of B’s goods than formerly. On the other hand, the market in B for A’s goods is not as big as it was before. The local distribution of the total demand has changed. A has become a better and B a worse market for goods of all kinds.” Consequently A buys more and B less of their combined production than before. A will acquire “an import surplus corresponding to the size of the loans”, if the additional demand of A is directed to those goods which B abstained from buying as a result of lending. “If the borrowing individuals in A demand other goods than those demanded by the lenders in B, the direction of the total demand will obviously have undergone a change. This results in a change also in the relative scarcity of the factors of production and in the relative prices of goods. The goods for which there is a greater demand than before becomes somewhat dearer and the others somewhat cheaper.” In other words, there may be a change in the terms of trade. But that change may be as well in favour as against the lending country. It all depends upon the direction of demand.65

Costs of transfer are so far left out of account. As soon as we take into consideration costs of transfer, we are introducing “domestic” or “home market” goods, which may be competing or non-competing with “international” goods. In that case Professor Ohlin’s treatment is the same as that given in his original paper. There will be an increase in the manufacture of non-competing home market goods in A, and of international goods and competing home-market goods in B.66 “The result of the change in the direction of production will be a changed relative scarcity of the corresponding factors.”67 “The productive factors used in large proportions in expanding industries become more scarce and the others less scarce than before.”68 The change in the relative scarcity of factors naturally involves a change in the price of factors. Such a readjustment also leads to changes in sectional price levels. In A home market prices and, to a lesser extent, also semi-international prices rise in comparison with export prices. In B the former fall in comparison with the latter.69 There is, however, “no justification for assuming that a noticeable change of the terms of exchange in favour of A is the normal or probable outcome, either in the beginning of the borrowing period or later.” “The shift in demand from B factors, regarded as a whole, to A factors, which the borrowing implies, need not enhance the scarcity of the various productive factors used in A’s export industries compared with those used in B’s.” Hence it is conceivable that, in spite of the changes in the sectional price levels, the relative position between A’s export prices and B’s (and therefore the terms of trade) may remain unchanged.70

Professor Ohlin also goes into the question of monetary transfer. He recognizes now that a monetary transfer comes before the real transfer of goods and services.71 That monetary transfer involves an increase in the foreign currency reserves in A, which leads to an inflation of credit “probably by lowering the discount rate”.72 “Such an increase in credit and buying power must tend to affect the prices of various sorts of commodities and industrial agents. Directly or indirectly it also tends to increase imports, while keeping back exports.”73 Therein Professor Ohlin comes, consciously or unconsciously, very near to the classical theory of transfer.

The Keynes-Ohlin controversy occasioned some very interesting reflections on the part of Mr. Robertson, Professor Pigou, and other economists.74 According to Mr. Robertson, there is no real contradiction between the two views.75 It is, however, reasonable to expect the terms of trade to move against the reparation paying country (say Germany) and in favour of the receiving country (say America). The reason is as follows:—

In all probability German goods have more nearly the character of money—which can be surrendered or gained without leading to a change in its marginal utility—to Germans than they have to Englishmen, and English goods have more nearly the character of money to Englishmen than they have to Germans. Hence there is a considerable balance of probability that the willingness of Englishmen to trade will be reduced more than the willingness of Germans, and so that the ratio of interchange will be turned against Germany.76

Similar conclusions have been reached by Professor Pigou.77

4. The Restatements by Haberler, Iversen, and Nurkse

Professor Haberler’s view, especially that given in his book on international trade, is an eclectic one.78 He begins by presenting Wicksell’s proposition that because of the endeavour of people to maintain a balance of their incomes and expenditures, the debit items and the credit items in the national balance sheet tend to be equal. If each individual’s balance of payments is in equilibrium,

his receipts exactly equal his expenditure over the appropriate period of time. This implies that the balance of payments between any economic group and the rest of the economy must also be in equilibrium; for the external balance of payments of a group is merely an aggregate of the balance of payments between members of the group and persons outside it. . . . When an individual A in the dollar country pays 100 to the crown country, there must be an individual B in the dollar country, whether he is identical with A or not, who is in receipt of 100 from the crown country. This is an obvious corollary of the postulate that every individual balance of payments is in equilibrium.79

He next reviews the Keynes-Ohlin controversy and comes to the conclusion that “the truth lies in this case midway between the two conflicting theories, both of which are one-sided and give an over-simplified picture of the facts”.80 Keynes is one-sided because he “ignores the shifts on the demand side produced by the payments themselves”. The doctrine that the terms of trade are unaffected by an act of transfer is also one-sided because it is true only of a frictionless market, in which the adjustment would be instantaneous. During the period of transition, Keynes is right to expect the barter term of trade to turn in the normal case in favour of the receiving country. That shift “is to be expected in the normal case where the direct influence of changes in demand on the balance of trade is insufficient to create the necessary export surplus, because foreign countries spend only a small part of their receipts for reparations on the purchase of German exports The extent of the fall in the price of German exports depends on two factors: first on the elasticity of demand “after the payment had been made and the curve has therefore shifted”; and, second, on the conditions of supply in Germany and also, mutatis mutandis, in the competing industries abroad.81

Finally Professor Haberler calls attention to the possibility which “has not been considered by either party”, viz. that the terms of trade may move in favour of the paying country. It would arise “if the increase of foreign demand were for German exports, and the fall in Germany’s demand related to imports”.82 That, however, is only a theoretically possible, but not a very probable, case.

The theory of transfer is carried a step forward, in 1935, by both Mr. Iversen and Dr. Nurkse. The most important contributions they made is their analysis of the effects of transfer on the terms of trade. As pointed out above, critics of the classical doctrines have come to the conclusion that as a result of transfer “the terms of trade may remain unaffected, they may move against the country paying reparations or, on the other hand, they may move in favour of it”. Although Professor Pigou and Mr. Robertson have shown that normally we should expect the barter terms of trade to turn against the paying country, yet neither of them has given an answer as satisfactory as that of Iversen or Nurkse.83

Dr. Iversen84 presents a doctrine of transfer which amounts to a combination of the doctrines of Ohlin, Robertson, Pigou, Keynes, and Haberler. Like Keynes and White, Iversen makes a distinction between the problem of monetary transfer and that of real transfer. Iversen considers gold and short-term credit as the two important media of international payment through which monetary transfer is effected.85 His treatment of the problem of real transfer86 is, on the whole, similar to that of Ohlin. Upon the assumption that all goods were “international”, the trade balances of the borrowing and the lending countries are easily adjusted to changes in their “balances of payments” through a shift in the buying power—a reduction by the amount of the loan in the lending country and a corresponding increase in the borrowing country. If that leads the borrower to buy exactly the same goods which the lender refrains from buying, then the adjustment is complete and there is no change in the barter terms of trade. But that is highly improbable. “In all likelihood, a transfer of capital will be accompanied by a change in the direction of demand: for some goods (now wanted by the borrower) the demand will be greater than before, for others (previously used by the lender) it will be less.” The changed conditions of demand may alter the relative scarcity of the factors of production, thus influence all prices and quantities within the price structure, and cause a change in the barter terms of trade. When costs of transporting commodities and hence the existence of home-market goods are introduced, the changed demand conditions will mean changed localization of demand and will lead to changes in the relative positions of sectional price levels. “The most important aspect of the change in demand conditions caused by the transfer of buying power is that the demand for domestic commodities is increased in the borrowing country and decreased in the lending.” That shift in demand will cause the home-market prices to go up in the borrowing and to fall in the lending country. In that case, as in the case of zero cost of transport, it is impossible to lay down a definite rule regarding the change and the direction of the barter terms of trade. “There is a certain probability, however, that the terms of trade will move against the lending country.” The reason is twofold. On the one hand, the direct effect of the change in the direction of demand for international goods is likely to turn the terms of trade against the lending country because of the reason given by Mr. Robertson and Professor Pigou.87 On the other hand, the indirect effects of the shifts in the demand for home-market goods are also likely to turn the terms of trade against the lending country. One of those effects, as already indicated, is that the home-market prices go up in the borrowing and fall in the lending country. That shift in prices will also alter the factor prices. Upon the assumption underlying most of the classical expositions of international trade theory—that all goods produced in a country require for their production identical “units of productive power” (i.e. a combination of the factors of production in fixed proportion)—or upon the assumption that the factor combinations used in a country’s home-market industries are similar to those in its export industries, the prices of export goods will also go up in the borrowing and fall in the lending country. Hence the terms of trade are in favour of the former.88

The conclusion that it is reasonable to expect the terms of trade to turn against the lending country has also been reached independently by Dr. Nurkse.89 He begins by assuming that the costs of transfer were equal to zero and consequently there were no “domestic” goods. Upon that simplifying assumption, the effects of transfer might be either to turn the terms of trade in favour of the borrowing country or against it, according to the conditions of income elasticity of demand. As soon as costs of transport are introduced, he continues to show, there are reasons to expect, as the classical economists did, the terms of trade to turn against the lending country. For the introduction of transport costs gives rise to a new class of goods, viz. “domestic goods” as distinguished from “international goods In the actual world, the volume of “domestic goods”, is, in almost all countries, large in comparison with that of international goods. If one assumes, as it is reasonable to do, that the borrowing or receiving country divides the extra income between domestic goods and international goods in about the some proportion as the old income, then the terms of trade will move against the lending and in favour of the borrowing country.90

In the restatements of Haberler, Iversen, and Nurkse, we find the solution of the problem of transfer. While we must recognize the importance of the shift in demand as a mechanism of transfer, normally, for the reasons given by Nurkse and Iversen, we should expect the barter terms of trade to change as a result of the making of a transfer and, furthermore, to change in the direction indicated by the classical doctrine.

• 1It is the practice of some economists to divide economic analysis into three departments, viz., statics, comparative statics, and dynamics. Economic statics deals with the conditions of equilibrium, if they exist at all. By conditions of equilibrium we mean those positions in which the price system will remain at rest, once it reaches them, provided that there is no fresh disturbance. That, however, does not imply that conditions of equilibrium must necessarily be reached ultimately by the price system. Comparative statics is concerned with the differences in the conditions of equilibrium in two or more price systems that are due to differences in the given data in the different systems. Economic dynamics deals with the problem, how a change in the fundamental data disturbs the price system and how the disturbances are corrected. It shows us, as Professor Robbins has pointed out, “the actual process of change—the path followed through time between one equilibrium position and the other.” In economic dynamics we have to see whether it is necessary or likely that the original change in data would lead to secondary changes in data. It is mainly because of those secondary changes in data that we have to differentiate between a doctrine of dynamics and one of comparative statics. In the latter we always suppose that when the original data change all other things will remain the same. In dynamics, however, we are not allowed to make the assumption of ceteris paribus.
• 2In dividing history into periods, we find it convenient to use certain dates, but the selected dates are only approximately accurate indicators. Nobody can point to a certain date as marking the exact point of time at which a historical stage or period either terminated or began. Nevertheless, we have to draw some lines of demarcation, however inexact they may be.
• 3The term, quantity theory of money, is sometimes defined as the theory that, in a given period of time, the product of the total volume of goods bought and sold multiplied by the average price of those goods is equal to the volume of the circulation of the medium of exchange. In such general terms, the theory does not indicate whether an increase in the circulation of money would lead to an increase in the volume of the goods or to a rise in their average price. The causal sequence may run either from the volume of the circulation to the average price of the goods transacted, or from the circulation to the volume of those goods. In the strict sense of the term, however, the quantity theory of money assumes the causal relation to run only from the circulation to the average price. We shall, in this essay, use the term in that strict sense. As to the theory that an increase (or decrease) of money would lead to an increase (or decrease) of the volume of goods and transactions, we shall call it “the doctrine that money stimulates trade and production”.
• 4Ibid., p. 34.
• 5Ibid., p. 69.
• 6Ibid., p. 105.
• 7For example, St. Thomas Acquinas, Nicholas Oresme, and Molinæus had developed, or at least indicated, a similar theory.
• 8Hales, op. cit., pp. 87, 115 f.
• 9That “theory of the store of value”, as it might be called, has been wrongly credited to Petty by Suviranta (The Theory of the Balance of Trade, 1923, pp. 52 f.). That theory is the natural outcome of the financial conditions in the sixteenth century and the greater part of the seventeenth century when gold and silver were alone easily exchangeable values, because foreign investment was practically unknown in those days and goods were not so easily exportable as at later periods.
• 10People having “plentie of things” and wanting to store up the surplus would naturally be willing to exchange these things for such wares as would lie in lesse Romes, and contineweth longest with out perishinge, and be carried to and fro with lesse charge, and be most currant at all times and at all places”. Gold and silver were “most of that sort” (Hales, op. cit., p. 72). See also p. 73.
• 11Discourse, Lamond’s ed., pp. 86–7; see also p. 113.
• 12Ibid., p. 35.
• 13That is in essence what has been called after Thomas Mun the balance of trade theory. The theory, in fact, had a long process of development. As early as the last quarter of the fourteenth century we find very definite statements of it in English by one of the officers of the Mint in his evidence before Parliament. The statement is as follows: “. . . As to the fact that gold and silver come not to England, whilst that which is in England is carried abroad, . . . if the merchandise exported from England be well and justly governed, the money which is in England will remain, and great plenty of money will come from abroad. It must be ascertained that no more foreign merchandise come within the realm than the value of the merchandise of this country that goes out of the realm.” However, the exact term balance of trade itself seems to have been coined in 1615 and the term favourable balance of trade in as late as 1767. See W. H. Price, “The Origin of the Phrase ‘Balance of Trade’,” Quarterly Journ. of Economics, xx (1905), pp. 157–167.
• 14Hales, op. cit., p. 102.
• 15Discourse, Lamond’s ed., pp. 88, 65.
• 16Ibid., pp. 47, 51 passim.
• 17Ibid., p. 40, see also pp. 43 ff., 47 f.
• 18It should be noted that the domestic demand for imported goods could not be permanently inelastic. When the balance of payments of the country turns unfavourable and specie flows out, then, other things being equal, the total income of consumers falls. The fall in consumers’ income will sooner or later lead to a reduction in the total value of its imports.
• 19Seigneur de Malestroit (second half of the sixteenth century) was a “member of the royal council of France and comptroller of the Mint”.
• 20“Lon ne peut dire qu’vne chose soit maintenant plus chere qu’elle n’estroit il y a trois cens ans, sinon que pour l’achepter il faille maintenant bailler plus d’or ou d’argent que l’on n’en bailloit alors. Or, est-il que pour l’achapt de toutes choses, lon ne baille point maintenant plus d’or n’y d’argent que Ion en bailloit alors. Doncques puis ledict temps rien n’est encbery en France. Les maxims sont clairs.” (Les Paradoxes sur le faict des Monnyes, Paris, 1578 ed. used, p. 4). Compare Paul Raveau, Précédé d’un Étude sur le Pouvoir d’Achat de la Livre, Paris, 1926.
• 21Les Paradoxes sur le faict de Monnyes, Paris, 1578, p. 15.
• 22Other writers, especially Spanish writers, must have more or less noticed the effects of the influx of the American treasure in raising prices. But there can be no doubt that Bodin is entitled to the credit for first giving due emphasis to the importance of the supply of the money metals and that it was from Bodin and not from others that later writers got that explanation of the price revolution. For that reason we feel ourselves justified in choosing Bodin as the representative exponent of that view. See Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501–1650 (Cambridge, Mass., 1934), pp. 283–306 and Bernard W. Dempsey, “The Historical Emergence of Quantity Theory,” Q.J.E., 1935.
• 23Jean Bodin (1530–1596) was bora and educated at Angers. He spent his college days in studying law; became, after his graduation, a lecturer on jurisprudence and later practised law in Paris. Not being very successful at the bar, he entered government service. In 1568 he published his famous Reponse aux paradoxes de M. de Malestroit touchant l’encherissement de toutes les choses et des monnaies, which was followed in 1578 by his Discours sur le rehaussement et diminution des monnaies, pour reponse aux paradoxes de sieur de Malestroit. It is, however, as political philosopher that he is chiefly noted. In political theory he was sometimes considered as “one of the most important figures after Aristotle”. His famous work, Les six livres de la République, was published in 1576. In it he incorporated the substance of his Réponse. The Réponse has an English translation in A. E. Monroe’s Early Economic Thought. The reference is to Monroe’s edition, pp. 123–6.
• 24Ibid., p. 127.
• 25Ibid., pp. 128–131.
• 26Ibid., p. 131.
• 27As early as the Saxon coinage controversy around 1530, the opponents of depreciation put forward arguments suggestive of the quantity theory.
• 28By the Quantity Theory of Money we mean the doctrine according to which, to use the words of Wicksell, “the value or purchasing power of money varies in inverse proportion to its quantity, so that an increase or decrease in the quantity of money, other things being equal, will cause a proportionate decrease or increase in its purchasing power in terms of other goods, and thus a corresponding increase or decrease in all commodity prices.” One may, of course, use the term, quantity theory of money in a broader sense, viz. in the sense that
• 29Réponse (Monroe’s ed.), pp. 138 ff.
• 30Bernardo Davanzati (1529–1606), A Discourse upon Coins (1582). We have used the English translation by John Toland (London, 1696), p. 18.
• 31Ibid., p. 15.
• 32Antoyne de Montchrétien, Traicté de l’économie politique, 1615, Funck-Brentano ed. (Paris, 1889) used, p. 257.
• 33See Professor R. H. Tawney, Introduction to a new edition of Thomas Wilson’s “Discourse upon Usury” (London, 1925).
• 34Ibid., p. 60.
• 35See Memorandum prepared for the Royal Commission on the Exchanges, London, 1564, reprinted in Tudor Economic Documents (edited by Tawney and Power, London, 1924), vol. iii, pp. 346–359.
• 36Ibid., p. 350.
• 37“The Exchange is the gouernere of prices of all warres enterchangablye vented betweene this Realme and the Low Contreyes, because the greateste quantetye of wares transported ether outeward or inwarde is boughte by money taken vppe by Exchange, and also because, althoughe the wares he boughte with his owne moneye, in sellinge of his hondred poundes worthe of wares he Consydered what gaynes he myght have made by Exchange of so muche moneye, and he maketh the price of his wares accordingly or to some Convenyent overpluse.” (Ibid., p. 347.)
• 38See Tawney, op. cit., pp. 138–154.
• 39“Protest against the State Control of Exchange Business,” 1576, reprinted in Tudor Economic Documents, vol. ii, pp. 169–173.
• 40Tudor Economic Documents, p. 172.
• 41See Thomas Milles, The Customers Replie or Second Apologie (London, 1604); The Customers Apologie (London, (1601) 2nd ed., 1609); An out-port-Customers Accompt (London, 1609); and especially Customers Replie, pp. 4–5; ch. x, pp. 14–32.
• 42Thomas Gresham went even so far as to say: “As the exchainge is the thinge that eatts ought [eats out] all princes, to the wholl destruction of ther common well [weal], if itt be nott substantially looked unto, so likewise the exchainge is the cheffest [chief] and richest thinge only above all other, to restore your Majestie and your reallme to fine gowld and sillvar . . .” (“Letter to Queen Elizabeth on the Fall of the Exchanges,” 1558—quoted from Tudor Economic Documents, ii, p. 148). Gresham, it may be noted, has been known for his excellent exposition of the doctrine that bad money drives out good. The doctrine was given the name “Gresham’s Law” by H. D. Macleod in 1858. It had, however, been formulated also by other writers.
• 43Gerrard de Malynes (fl. 1586–1641), the son of an English Mint-master, himself became an Assay Master of the Mint and in 1609 was appointed commissioner on Mint affairs. He had wide experience in trade and was frequently employed by Elizabeth and James I as an adviser on commercial questions. His writings, which bear on the present section, are: A Treatise of the Caker of England’s Commonwealth (London, 1601) and England’s View in Unmasking of two Paradoxes (by De Malestroit) with a Replication unto the answer of Jean Bodin (London, 1603). For his later writings see Sec. 5.
• 44Treatise of the Caker, p. 2.
• 45Ibid., p. 3.
• 46To him the causal sequence ran as follows: “Foreign exchanges—money—commodities.” See also The Maintenance of Free Trade, p. 2.
• 47See Lex Mercatoria, p. 415; The Maintenance of Free Trade, pp. 14–15; The Center of the Circle, pp. 41 f.
• 48Caker, p. 35; see also The Maintenance of Free Trade, p. 61.
• 49Caker, p. 18.
• 50Caker, p. 34.
• 51Ibid., pp. 38–9.
• 52Ibid., pp. 42–3.
• 53Ibid., p. 99.
• 54Ibid., p. 10.
• 55Ibid., p. 11.
• 56England’s View, pp. 55, 60.
• 57“The property of the money . . . is, that plentie of money maketh generally things deare, and scarcitie of money maketh likewise generally things good cheape. Whereas things particularly are also deare or good cheape, according to plentie or scarcitie of the things themselves, or the use of them” (Caker, p. 10). See also England’s View, pp. 7 and 9. In discussing the value of “money” Malynes and his contemporaries (e.g. Mun) had used the term “money” in two senses: firstly in the modern sense, and secondly in the sense of money delivered to (or taken from) foreign countries, i.e. bills of exchange. But in the quotation cited the word “money” is unmistakably used in the modern sense.
• 58Professor J. W. Angell has said of Malynes that he was one who considered the value of money as “something absolute and unchanging” (The Theory of International Prices, p. 18). That is certainly incorrect.
• 59England’s View, p. 65.
• 60Ibid., pp. 65 f.
• 61Caker, p. 35.
• 62England’s View, pp. 65–6.
• 63Ibid., p. 70.
• 64Although he recognized that an inflow of specie could produce opposite results, he was of the opinion that a high rate of exchange did not necessarily cause an inflow of specie. He said that “it would be so, were it not for the tolleration of the monies to go currant farre above their value beyond the seas” (Caker, p. 48). In other words, his theory would apply to countries, the value of whose coins were identical with their metallic contents.
• 65Caker, pp. 117–118.
• 66See, for example, ibid., pp. 106 f.
• 67Discorso intorno allieffett. . . . (1605). See A. E. Monroe, Early Economic Thought (Cambridge, U.S.A., 1927), p. 154. De Santis also stood for an embargo on the exportation of money and for some legal tarif. See Luigi Cossa, An Introduction to the Study of Political Economy (London, 1893), p. 180.
• 68A Brief Treatise on the Causes which can make Gold and Silver Plentiful in Kingdoms where there are no mines (1613, Naples). We have used the English translation in A. E. Monroe, op. cit., pp. 143–167.
• 69Ibid., p. 154.
• 70Ibid., p. 156.
• 71Ibid, pp. 146–153.
• 72It follows that such remedies as the regulation or prohibition of the movement of gold would, according to him, be useless or even harmful. See p. 161.
• 73See P. J. Thomas, Mercantilism and the East India Trade (London, 1926), pp. 8–16.
• 74The following are the most important works in connection with that controversy:—
• 75Edward Misselden (fl. 1608–1654), a prominent merchant, was connected with the East India Company at about the time during which he wrote on economic matters. His economic writings were primarily called forth by the appointment of the standing commission on trade in 1622 and were published, as shown in the preceding note, between 1622 and 1623. In October, 1623, he left England, and “the East India Company invited him to act as one of their commissioners at Amsterdam to negotiate a private treaty with the Dutch”. It is believed that during these negotiations he “must have been brought into close relations with” Thomas Mun. Misselden became deputy-governor of the Merchant Adventurers’ Company at Delft in 1623. He held that post until 1633.
• 76Thomas Mun (1571–1641) “appears to have been early engaged in mercantile affairs in the Mediterranean, especially in Italy and the Levant”. He was very successful and gained a high reputation among merchants. In July, 1615, he was elected a member of the committee or a director of the East India Company, and “he spent his life in actively promoting its interests”.
• 77See, however, Mun, England’s Treasure, ch. xviii, especially pp. 189–190.
• 78Ibid., p. 130 and passim. See also Lewes Roberts, The Treasure of Traffike, 1641 (E.E.T. reprint), p. 110; England’s Great Happiness, 1677 (E.E.T. reprint), p. 262.
• 79Raising of money would have the advantages, he said, of “plenty of money and quickening of Trade in euery mans hand” (Free Trade, p. 106). And when Trade flourisheth, the King’s Revenue is augmented, Lands and Rents improoued, Navigation is encreased, the poor employed” (p. 4).
• 80See The Circle, p. 116, and passim.
• 81In this respect Misselden’s view is not so consistent a balance of trade theorist as Serra and Mun. See Free Trade, chs. i and ii.
• 82The Circle, p. 97.
• 83The Circle, p. 98.
• 84Ibid., p. 100.
• 85Free Trade, p. 104. Too much importance should not be attached to that quotation, significant as it might be, because the term “monies” is here rather ambiguously used.
• 86The Circle, p. 21.
• 87Mun, England’s Treasure, p. 157. See also pp. 143–6, 186, 208, and passim.
• 88Ibid., ch. iii (pp. 127 ff.). It is interesting to note that he had taken into consideration the factor of fishing (p. 130) and that of freight charges (p. 129). That is one of the earliest, if not the earliest, instance of the recognition of the invisible items.
• 89Discourse of Trade, pp. 7–41.
• 90England’s Treasure, chs. 4, 6.