§ 4. International payments entering into the “financial account.”

Before closing this discussion, it is fitting to point out in what manner and degree the preceding conclusions are affected by the existence of international payments not originating in commerce, and for which no equivalent in either money or commodities is expected or received—such as a tribute, or remittances, or interest to foreign creditors, or a government expenditure abroad.

To begin with the case of barter. The supposed annual remittances being made in commodities, and being exports for which there is to be no return, it is no longer requisite that the imports and exports should pay for one another; on the contrary, there must be an annual excess of exports over [pg 428] imports, equal to the value of the remittance. If, before the country became liable to the annual payment, foreign commerce was in its natural state of equilibrium, it will now be necessary, for the purpose of effecting the remittances, that foreign countries should be induced to take a greater quantity of exports than before, which can only be done by offering those exports on cheaper terms, or, in other words, by paying dearer for foreign commodities. The international values will so adjust themselves that, either by greater exports or smaller imports, or both, the requisite excess on the side of exports will be brought about, and this excess will become the permanent state. The result is, that a country which makes regular payments to foreign countries, besides losing what it pays, loses also something more, by the less advantageous terms on which it is forced to exchange its productions for foreign commodities.

The same results follow on the supposition of money. Commerce being supposed to be in a state of equilibrium when the obligatory remittances begin, the first remittance is necessarily made in money. This lowers prices in the remitting country, and raises them in the receiving. The natural effect is, that more commodities are exported than before, and fewer imported, and that, on the score of commerce alone, a balance of money will be constantly due from the receiving to the paying country. When the debt thus annually due to the tributary country becomes equal to the annual tribute or other regular payment due from it, no further transmission of money takes place; the equilibrium of exports and imports will no longer exist, but that of payments will; the exchange will be at par, the two debts will be set off against one another, and the tribute or remittance will be virtually paid in goods. The result to the interests of the two countries will be as already pointed out—the paying country will give a higher price for all that it buys from the receiving country, while the latter, besides receiving the tribute, obtains the exportable produce of the tributary country at a lower price.

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It has been seen, as in Chart No. XIII, that, considering the exports and imports merely as merchandise, there is, in fact, no actual equilibrium at any given time in accordance with the equation of International Demand. Another element, the “financial account” between the United States and foreign countries, must be considered before we can know all the factors necessary to bring about the equation. If we had been borrowing largely of England, Holland, and Germany, we should owe a regular annual sum as interest, and our exports must, as a rule, be exactly that much more (under right and normal conditions) than the imports. Or, take another case, if capital is borrowed in Europe for railways in the United States, this capital generally comes over in the form of imports of various kinds; but, if our exports are not sufficient at once to balance the increased imports, we go in debt for a time—or, in other words, in order to establish the balance, we send United States securities abroad instead of actual exports. This shipment of securities is not seen and recorded as among the exports; and so we find a period, like that during and after the war, from 1862 to 1873, of a vast excess of imports. Since 1873 the country has been practically paying the indebtedness incurred in the former period; and there has been a vast excess of exports over imports, and an apparent discrepancy in the equilibrium. But our government bonds and other securities have been coming back to us, producing a return current to balance the excessive exports.280In brief, the use of securities and various forms of indebtedness permits the period of actual payment to be deferred, so that an excess of imports at one time may be offset by an excess of exports at another, and generally a later, time. Moreover, the large expenses of people traveling in Europe will require us to remit abroad in the form of exports more than would ordinarily balance our imports by the amount spent by the travelers. The financial operations, therefore, between the United States and foreign countries, must be well considered in striking the equation between our exports and imports. As formulated by Mr. Cairnes,281the Equation of International Demand should be stated more broadly, as follows: “The state of international demand which results in commercial equilibrium is realized when the reciprocal demand of trading countries produces such a relation of exports and imports among them as enables each country by means of her exports to discharge all her foreign liabilities.” If we were a great lending instead of a great borrowing country, we should have, as a rule, a permanent excess of imports.

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