above, existing trade barriers would unquestionably exercise an influence, probably a deleterious influence, upon the distribution of capital and labor in the younger country. If the older country had heavy import duties on agricultural products, the expansion of agriculture in the newer country would be retarded and the development of manufactures stimulated. There can be no doubt about the power of one country injuriously to affect the division of labor in another. But will it pay the younger country to adopt countervailing or retaliatory duties? Can it secure the ideally perfect distribution of labor and capital by retaliatory restrictions?

In theory this is partially possible. Revert to the illustration in which under normal conditions the younger country would produce flour, the older country cloth, and both countries houses. Suppose the older country to place a tariff on flour so that more flour and less cloth would be produced there. In all probability the older country would be forced to continue the importation of some of the flour which it consumed. Under this hypothesis the younger country could set in motion partially corrective forces by placing an export duty on the shipment of flour, by giving a bounty on the production of flour, or by levying an excise duty on the production of cloth within its borders. It is interesting to note in this connection that England, in order to counteract the protective influence of the import duties which fiscal necessity forces her to use, imposes an excise duty of equivalent burden on the same goods produced within her border, thus counteracting as far as possible any influence which the import duties might otherwise exercise on production.

In practice, however, such corrective measures are nearly useless. No country knows what the ideal or normal division of labor for her would be. Moreover, export duties and bounties are costly to administer and liable to abuse. Conceivably, of course, trade interference by one country may become so unreasonable, so unsettling, so capriciously injurious, that other countries may be forced to protect themselves. For instance, one country may deliberately adopt the policy - by giving

bounties or preferential freight charges and the like—of preventing the development in another country of an industry in which the former is specially interested. Under such circumstances other countries may be justified in protecting an established industry by the necessary retaliatory legislation.

The general political and social aspects of protection are discussed in the next chapter. They furnish, as will be seen, some theoretical justification for trade restriction. Surveyed as a purely commercial question of dollars and cents, however, the profitableness of the unregulated territorial division of labor is beyond all question of doubt, in the opinion of the authors; and the history of international trade fully confirms the bald theory here outlined. That theory has been exposed to the most searching practical test to which any economic theory could be subjected, and it meets the test successfully. If the theory of comparative costs is correct, it follows that so long as the comparative costs of producing goods vary among the different nations of the world, so long there will be some international trade. Furthermore, since it is impossible to conceive that the costs of producing all kinds of transportable goods will ever be exactly proportional in the several countries of the world, it is evident that international trading is bound to continue. International trade can be permanently suppressed only by raising freight charges to prohibitive level, or by deliberately manipulating tariffs so as to suppress every new international trade connection as soon as it springs up, or by the complete destruction of industry in other parts of the world. According to theory, then, international trade is for practical purposes irrepressible and the ideal of an exclusive home market is a delusion.

This theory, as stated above, has been subjected to the most. searching test. During the last fifty years trade restriction has been piled on trade restriction and protective tariff walls have been built higher and higher. But there has been no diminution in international trade. On the contrary, it has increased and developed by leaps and bounds.

QUESTIONS

1. In what respects does foreign exchange differ from exchange between two American cities?

2. What are the principal influences which affect the rate of exchange?

3. Is the gold supply distributed according to the needs or the respective demands of the various countries? Are needs and demands in this connection identical?

4. Mention as many methods as you can by which governments have endeavored to increase the supply of gold.

5. What is meant by the law of comparative costs? Is the American custom of importing the finer textile fabrics and manufacturing the coarser ones an effect of this law?

6. If a widow needs money so badly that she is willing to pay 200 per cent a year for its use, is it wrong for a money lender to charge this rate?

7. What is the real nature of the balance of trade? Does our excess of exports (merchandise) mean that we are paying off our foreign indebtedness, or merely that we are paying interest on our foreign indebtedness?

REFERENCES

BASTABLE, C. F. Theory of International Trade.

BROWN, H. G. International Trade and Exchange.

CLARE, GEORGE. The ABC of the Foreign Exchanges; The Money Market

Primer.

ESCHER, FRANKLIN. Elements of Foreign Exchange.

FISK, G. M. International Commercial Policies.

GIFFEN, ROBERT. "The Use of Export and Import Statistics," in Economic Inquiries and Studies, Vol. i, Chap. ix.

GOSCHEN, G. J.

LAUGHLIN, J. L.

Theory of the Foreign Exchanges.

The Principles of Money, Chap. x.

MARGRAFF, A. W. International Exchange.

MILL, J. S. Principles of Political Economy, Book iii, Chs. xvii-xx.

SPALDING, W. F. Foreign Exchange and Foreign Bills.

TAUSSIG, F. W. Some Aspects of the Tariff Question, Part i.

WITHERS, HARTLEY. Money Changing.

CHAPTER XVIII

PROTECTION AND FREE TRADE

WE are now in a position to review intelligently the pros and cons of the modern tariff controversy. Because of the limitations of space, the discussion will be confined almost wholly to American conditions, although most of the arguments are applicable to other countries as well.

The Case for Protection. I. One of the most captivating arguments for protection is the assertion that it promotes nationalism, which is held to be a good thing. Domestic trade, it is claimed, draws the citizens of a country together, while international trade is cosmopolitan and tends to their separation. Upon the creation of our federal government, state tariffs were abolished and their place taken by a national tariff designed partly to protect the whole of the country against the rest of the world. The introduction of national protection thus went hand in hand with the promotion of internal free trade; and Professor Schmoller even maintains the general thesis that, historically, this double process of internal abolition and external extension of tariffs marks the formation of new states, particularly federal states. Protection against foreign competition, he asserts, is thus historically coincident with the enfranchisement of internal trade; and has as its main object the creation of a strong national economic unity, without which permanent political unity, he thinks, is impossible. The validity of this argument, it will be noted, depends largely upon the truth of the assumption that the development of a strong feeling of national unity is a thing to be desired

duce diversity in industrial pursuits. It is admitted that protection is temporarily expensive, but so is the prohibition of child labor temporarily expensive. We prevent children from earning a little while they are young in order that they may earn more when they are old. For the same reasons trade unions rightfully insist that apprentices shall be given a broad knowledge of the trade they are learning, although it is more profitable for the employer to have them specialize early in some narrow branch of the work. So, similarly, protection prevents a nation from specializing too exclusively in its undeveloped stage, in order that it may the sooner arrive at industrial manhood.

Economists have generally admitted that there is a certain. amount of truth in this argument. If an industry gets an early start in a given district, this locality is likely to retain its advantage because of the concentration there of capital and labor acquainted with the requirements and possibilities of the industry. Thus 63.3 per cent of all the needles, pens, hooks and eyes, manufactured in this country are made in Connecticut, for no other reasons that one can see than those suggested in the explanatory phrase "the momentum acquired by an early start." And this localization of industry is artificially fostered by the practice, common to exporters all over the world, of selling abroad more cheaply than at home. The export trade seems to be universally coddled. Of course, such localized industries can be maintained only when the cost of transporting the article is small; and when other districts do not possess unusual natural advantages in the way of accessibility to superior raw material, power, or skilled labor. The census studies in the localization of domestic industries1 seem to indicate that while the industrial inertia of which we have been speaking is an important factor, it is not so important as the opposing forces making for territor on of industry.

A most interesti

tries" of a competin

1 Census

tempt to crush the "infant induseffort of English manufacturers

rt i, p. cclx. Cf. also, Twelfth Thirteenth Census, Vol. viii,