Balanceof Trade

Balance of Trade, a term originating in connection with the Mercantile System of Political Economy (q.v.). The most important part of the wealth of a nation was held to consist in the specie acquired by trading with foreign nations. This, it was argued, could always purchase goods on an emergency; other goods could often only be realised with difficulty; and the first duty of a statesman was, therefore, to secure that ample specie should be in the country in case of a foreign war. The object of economic policy was held to be to sell more to the foreigner than was bought from him: he would then have to pay the balance in specie to the exporting country. Thus, when the value of exports exceeded that of imports the balance of trade was said to be favourable. This view is best set forth in Thomas Mun's England's Treasure in Foreign Trade (1685). To maintain a favourable balance - usually by prohibition of the export of specie and by high import duties - was the great object of the policy of every European state till Adam Smith showed in the Wealth of Nations that a reserve of specie was not necessary for the successful conduct of a foreign war, and that, in fact, the wealth exported to pay for recent wars had taken the form, not of specie, but of manufactured goods. The English Government had remitted the money required by bills which it purchased, and the consequent rise of the premium on foreign bills had stimulated the export of goods against which such bills could be drawn. In recent times the term "unfavourable balance of trade" has been chiefly used with reference to the relation between imports and exports. As "exports pay for imports," owing to the invention of bills of exchange and other substitutes for coin, it would seem to follow that if imports always largely exceed exports in value (as is the case with regard to the United Kingdom) the excess must be somehow paid for out of the national capital, a process which must eventually result in national bankruptcy. The "balance of trade," in fact, is now always apparently unfavourable to England. The explanation is (a) that the values of imports are stated to the compilers of the Customs returns plus the charges for freight, etc., and the values of exports without this addition; (b) the bulk of the excess, however, is due to the interest on our foreign investments and payment for the immense carrying trade between foreign countries, much of which is conducted with English capital. Details will be found in the works of Sir Thomas Farrer and Mr. Giffen.