Book IV, Chapter III, 1

On the Extraordinary Restraints on the Importation of Goods of Almost Every Kind from Countries with Which the Balance Is Supposed to Be Unfavorable.

Part I—On the Unreasonableness of These Restraints, Even on the Principles of the Commercial System.

To impose extraordinary restraints on imports of almost every kind from particular countries with which the balance of trade is supposed to be unfavorable is the second means by which the commercial system proposes to increase the quantity of gold and silver. Thus, in Great Britain, Silesian lawns may be imported for domestic consumption on payment of certain duties; but French cambrics and lawns may be imported only through the port of London, where they must be warehoused for export. Wines from France bear higher duties than those from Portugal or, indeed, from any other country. Under the so-called impost of 1692, a duty of five and-twenty per cent. of their assessed value was placed on all French goods, while most goods from other nations faced much lighter duties, seldom exceeding five per cent. French wine, brandy, salt, and vinegar were excepted, since these goods were already subject to other heavy duties under other laws or particular clauses of the same law. In 1696, the first duty being thought insufficient to discourage imports, a second duty of twenty-five per cent. was imposed on all French goods except brandy, together with a new duty of five-and-twenty pounds per ton of French wine and another of fifteen pounds per ton of French vinegar. French goods have never been exempted from any of the general subsidies or duties of five per cent. imposed on all or most of the goods listed in the book of rates. Counting the one-third and two-third subsidies together as a complete subsidy, there have been five such general subsidies; before the present war began, therefore, seventy-five per cent. may be regarded as the lowest duty to which most goods grown, produced, or manufactured in France were liable. For most goods, however, those duties amount to prohibition. The French, for their part, have, I believe, treated our goods and manufactures just as severely, though I am less familiar with the particular burdens they have imposed. These mutual restraints have ended almost all open commerce between the two nations; smugglers are now the principal importers both of British goods into France and of French goods into Great Britain. The principles examined in the preceding chapter sprang from private interest and the spirit of monopoly; those I shall examine here spring from national prejudice and hostility. As might be expected, they are still more unreasonable. They are unreasonable even on the commercial system’s own principles.

First, even if it were certain that free trade between France and England, for example, would leave the balance in France’s favor, it would not follow that this trade would harm England, or turn the overall balance of its trade further against it. If French wines are better and cheaper than Portuguese wines, or French linens than German linens, it would be more advantageous for Great Britain to buy from France both the wine and the foreign linen it needs than to buy them from Portugal and Germany. Although the value of annual imports from France would greatly increase, the value of all annual imports would fall in proportion as French goods of the same quality cost less than those of the other two countries. This would hold even if all the French goods imported were consumed in Great Britain.

But, secondly, a large part of them might be re-exported to other countries and sold at a profit, bringing back a return perhaps equal in value to the original cost of all the French goods imported. What has often been said of the East India trade might also be true of the French trade: although most East India goods were bought with gold and silver, re-exporting part of them to other countries brought back to the trading country more gold and silver than the original cost of the whole. One of the most important branches of Dutch trade today is carrying French goods to other European countries. Even some of the French wine drunk in Great Britain is secretly imported from Holland and Zealand. If trade between France and England were free, or if French goods could be imported at the same duties as goods from other European countries, with those duties refunded on export, England might share in a trade that has proved so advantageous to Holland.

Thirdly and lastly, there is no reliable measure by which to determine which side holds what is called the balance between any two countries, or which exports the greater value. National prejudice and hostility, continually spurred by the private interest of particular traders, generally govern our judgment on every question about it. Two measures are often cited on such occasions: customs-house records and the exchange rate. The customs-house records are now, I think, generally acknowledged to be a very uncertain measure because the assessed values of most goods in them are inaccurate. The exchange rate is perhaps almost as uncertain.

When the exchange between two places, such as London and Paris, stands at par, it is said to show that the debts London owes Paris are offset by the debts Paris owes London. When, on the other hand, a premium is paid in London for a bill payable in Paris, it is said to show that London’s debts to Paris are not offset by Paris’s debts to London, and that money must be sent out from London to settle the balance; the premium is both asked and paid to cover the risk, trouble, and cost of sending it. The usual state of debts and credits between the cities must, it is said, be governed by their usual dealings with one another. When neither imports from the other to a greater value than it exports to that other, each city’s debts and credits may offset each other. But when one imports more from the other than it exports to it, the former necessarily owes the latter a greater sum than the latter owes it: the debts and credits no longer offset each other, and money must be sent out from the place whose debts exceed its credits. The usual exchange rate, therefore, as an indication of the usual state of debts and credits between two places, must also indicate the usual course of their exports and imports, since these necessarily govern that state.

Yet even if the usual exchange rate is accepted as a sufficient indication of the usual state of debts and credits between two places, it does not follow that the balance of trade favors the place whose debts and credits usually stand in its favor. The usual state of debts and credits between two places is not always governed entirely by their dealings with each other: it is often affected by the dealings of either with many other places. If, for example, English merchants usually pay for goods bought from Hamburg, Dantzic, Riga, etc. with bills drawn on Holland, the usual state of debts and credits between England and Holland will reflect not only those two countries’ dealings with each other but also England’s dealings with those other places. England may have to send money to Holland every year even though the annual value of its exports to Holland greatly exceeds that of its imports from there, and even though what is called the balance of trade is heavily in England’s favor.

Besides, given the way the par of exchange has been calculated up to now, the usual exchange rate cannot reliably indicate that the usual state of debts and credits favors the country which appears, or is supposed, to have the exchange rate in its favor. In other words, the real exchange rate may be, and often is, so different from the calculated rate that the latter often permits no certain conclusion about the former.

When a sum of money paid in England contains, by the standard of the English mint, a certain number of ounces of pure silver, and buys a bill for a sum payable in France containing, by the standard of the French mint, an equal number of ounces of pure silver, exchange between England and France is said to be at par. If you pay more, you are supposed to pay a premium, and exchange is said to be against England and in favor of France. If you pay less, you are supposed to receive a premium, and exchange is said to be against France and in favor of England.

But first, the standards of their respective mints do not always tell us the value of the coins in circulation in different countries. In some countries coins are more worn, clipped, or otherwise degraded below that standard; in others, less. The value of one country’s circulating coins compared with another’s is proportional not to the pure silver they ought to contain but to what they actually contain. Before the reform of the silver coinage in King William’s time, exchange between England and Holland, calculated in the usual way by their respective mint standards, stood five-and twenty per cent. against England. But, as we learn from Mr Lowndes, the circulating English coin was then rather more than five-and-twenty per cent. below its standard value. The real exchange, therefore, may even then have favored England despite the calculated exchange being so heavily against it: fewer ounces of pure silver actually paid in England might have bought a bill for more ounces of pure silver payable in Holland, so that the man thought to pay a premium might in fact have received one. Before the recent reform of the English gold coinage, French coin was much less worn than English coin, and was perhaps two or three per cent. nearer its standard. If the calculated exchange with France was no more than two or three per cent. against England, therefore, the real exchange might have been in England’s favor. Since the reform of the gold coinage, exchange has constantly favored England against France.

Secondly, in some countries the government pays for coinage; in others, private people who bring bullion to the mint pay for it, and the government even receives some revenue from coinage. In England the government bears the cost: bring a pound weight of standard silver to the mint and you receive sixty-two shillings containing a pound weight of silver of the same standard. In France a duty of eight per cent. is deducted for coinage, covering its cost and providing a small revenue to the government. Because coinage costs the holder nothing in England, circulating coin there can never be worth much more than the bullion it actually contains. In France, the workmanship, which the holder pays for, adds to its value just as it adds to the value of worked silver plate. A sum in French coin containing a given weight of pure silver is therefore worth more than a sum in English coin containing the same weight, and requires more bullion or other goods to buy it. Even if the circulating coins of both countries were equally close to their respective mint standards, then, a sum of English money could hardly buy a sum of French money containing an equal number of ounces of pure silver, or a bill on France for that sum. If the extra money paid for such a bill did no more than cover the cost of French coinage, the real exchange might be at par between the countries, with their debts and credits offsetting one another, while the calculated exchange stood considerably in France’s favor. If less than this was paid, the real exchange might favor England while the calculated exchange favored France.

On the Extraordinary Restrictions on Imports of Nearly Every Kind of Good from Countries with Which the Balance of Trade Is Thought to Be Against Us.

Part I—Why These Restrictions Are Unreasonable Even by the Principles of the Commercial System.

The commercial system proposes a second way to increase the supply of gold and silver: put exceptional restrictions on imports of nearly every kind of good from particular countries with which the balance of trade is thought to be unfavorable. In Great Britain, for example, Silesia lawns can be imported for use at home if certain duties are paid. French cambrics and lawns, however, may be imported only through the port of London, where they must be stored for export. Wines from France face higher duties than wines from Portugal or any other country. Under what is called the impost 1692, all French goods faced a duty of five and-twenty per cent. of their assessed value. Most goods from other nations faced much lower duties, seldom above five per cent. French wine, brandy, salt, and vinegar were exceptions. Other laws or specific parts of the same law already imposed heavy duties on them. In 1696, because the first duty was not thought discouraging enough, all French goods except brandy faced a second duty of twenty-five per cent. A new duty of five-and-twenty pounds per ton was also imposed on French wine and another of fifteen pounds per ton on French vinegar. French goods have also been included in every general subsidy or duty of five per cent. imposed on all, or most, goods listed in the book of rates. Counting the one-third and two-third subsidies together as one full subsidy, there have been five general subsidies. So before the current war, seventy-five per cent. was about the lowest duty on most goods grown, produced, or manufactured in France. For most goods, these duties amount to a ban. In turn, I believe the French have treated our goods and manufactured products just as harshly, though I know less about their particular restrictions. These mutual restrictions have ended almost all lawful commerce between the two nations. Smugglers are now the main importers of British goods into France and French goods into Great Britain. The principles discussed in the previous chapter came from private interests and the desire for monopoly. Those discussed in this chapter come from national prejudice and hostility. As one might expect, they are even less reasonable. They are unreasonable even by the commercial system's own principles.

First, suppose free trade between France and England would certainly leave the balance of trade in France's favor. That would not mean the trade harmed England or made the overall balance of all its trade less favorable. If French wine is better and cheaper than Portuguese wine, or French linen better and cheaper than German linen, Great Britain gains by buying the foreign wine and linen it needs from France rather than Portugal and Germany. Annual imports from France would grow greatly in value. But total annual imports would fall in value to the extent that French goods of equal quality cost less than goods from the other two countries. This would hold even if all the imported French goods were consumed in Great Britain.

But, secondly, much of those goods could be exported again to other countries. Selling them there at a profit might bring back a return equal in value, perhaps, to the original cost of all the French goods imported. Something often said about the East India trade might also be true of French trade. Though most East India goods were bought with gold and silver, exporting some of them again to other countries brought back more gold and silver to the trading country than the original cost of all of them. Carrying French goods to other European countries is now one of the most important branches of Dutch trade. Even some of the French wine drunk in Great Britain is secretly imported from Holland and Zealand. England could share in this trade, which benefits Holland so much, if it traded freely with France. The same would be true if French goods could enter on paying only the duties charged to other European nations, with those duties refunded upon export.

Thirdly and lastly, no reliable test tells us which side has what is called a favorable balance of trade between two countries, or which country exports goods of greater value. National prejudice and hostility, always encouraged by the private interests of particular traders, usually shape our judgment on such questions. People have often used two tests: customs-house records and exchange rates. Customs-house records are now, I think, generally recognized as unreliable because most goods are valued inaccurately in them. Exchange rates may be nearly as unreliable.

When the exchange rate between London and Paris, for instance, is at par, people say this shows that debts owed from London to Paris are offset by debts owed from Paris to London. But when someone in London must pay a premium for a bill payable in Paris, people say this shows London's debts to Paris exceed Paris's debts to London. Money must be sent from London to settle the balance, and the premium is charged and paid to cover the risk, trouble, and expense of sending it. They say the usual pattern of debt and credit between these cities must reflect their usual trade with each other. When neither imports from the other more than it exports to the other, their debts and credits may balance. But when one imports from the other more than it exports there, it must owe the other more than the other owes it. Their debts and credits do not balance, and the city whose debts exceed its credits must send money out. Thus, people argue, the usual exchange rate indicates the usual state of debt and credit between two places. It must also show their usual exports and imports, which determine that state.

But even if the usual exchange rate reliably showed the usual state of debt and credit between two places, that would not mean trade favored the place whose debts and credits were in its favor. Their debts and credits do not always depend entirely on their trade with each other. They are often affected by trade between either place and many other places. Suppose English merchants normally pay for goods bought from Hamburg, Dantzic, Riga, etc. with bills payable in Holland. The usual debts and credits between England and Holland would then reflect not just trade between those two countries but also England's trade with those other places. England might have to send money to Holland every year, even if its annual exports to Holland were worth much more than its imports from there and the so-called balance of trade strongly favored England.

Besides, given the way the par of exchange has been calculated so far, the usual exchange rate cannot reliably show whether debts and credits actually favor the country whose exchange rate appears to be, or is believed to be, favorable. In other words, the real exchange rate can, and often does, differ so much from the calculated rate that the calculated rate frequently tells us nothing definite about the real one.

Suppose you pay in England a sum containing a certain number of ounces of pure silver according to the English mint's standard. In return you get a bill payable in France for a sum containing an equal number of ounces of pure silver according to the French mint's standard. People say exchange between England and France is then at par. If you pay more, they say you pay a premium, and exchange is against England and in France's favor. If you pay less, they say you receive a premium, and exchange is against France and in England's favor.

But first, the standards of different countries' mints do not always tell us the value of the coins actually in circulation. In some countries coins are more worn, clipped, or otherwise reduced below the standard than in others. The relative value of the coins in circulation depends on how much pure silver they actually contain, not how much they should contain. Before the reform of silver coins in King William's time, the exchange rate between England and Holland was calculated in the usual way from their mint standards. It was five-and twenty per cent. against England. But according to Mr Lowndes, English coins then had an actual value rather more than five-and-twenty per cent. below their standard value. So the real exchange rate may have favored England even then, although the calculated rate was so strongly against it. A smaller number of ounces of pure silver actually paid in England could have bought a bill payable in Holland for a larger number of ounces. The person thought to pay a premium might actually have received one. Before the recent reform of English gold coins, French coins were much less worn than English ones and perhaps two or three per cent. closer to their standard. So if the calculated rate against England in its exchanges with France was no more than two or three per cent., the real rate might have favored England. Since the gold coin reform, exchange has constantly favored England over France.

Secondly, in some countries the government pays for minting coins. In others, private people who bring bullion to the mint pay, and the government even collects revenue from minting. In England the government pays for it. If you bring a pound weight of standard silver to the mint, you receive sixty-two shillings containing a pound weight of silver of the same standard. In France, eight per cent. is deducted for minting. That covers the cost and gives the government a small revenue. In England, where minting costs the owner nothing, coins in circulation can never be worth much more than the bullion they actually contain. In France, the paid-for workmanship adds to their value, as workmanship adds to the value of worked silver plate. A sum of French coins with a given weight of pure silver is therefore worth more than a sum of English coins with the same weight of pure silver. Buying it must require more bullion or other goods. Even if circulating coins in both countries were equally close to their respective mint standards, English coins could hardly buy French coins containing the same number of ounces of pure silver. Nor could they buy a bill payable in France for that sum. If the extra money paid for such a bill merely covered the cost of French minting, the real exchange rate could be at par. The countries' debts and credits might offset one another even while the calculated rate considerably favored France. If the extra money paid were less than that cost, the real rate might favor England while the calculated rate favored France.