freely to move wherever they please; there is to be no barrier to the free exchange of goods. The problem of economic organization is to be worked out for the economic world as a single entity. Under freedom from interference, population and capital will gravitate towards those places where they can get the largest returns, or where they can best utilize nature's contributions. Where they go, industries will be established. The goods produced will not have to be consumed in the region in which they are produced; they will likewise naturally seek the places where they can command the highest prices. Under this system the people of any territory do not seek directly to supply all their own wants. They produce surpluses of the goods in the making of which natural resources or acquired skill make them pre-eminently fit, and exchange them for similar surpluses produced by their neighbors, far or near. Such an economic organization is nothing else than a territorial division of labor. It makes industry more efficient through the better utilization of natural resources, through the development of specialized skill, and through the larger volume of capital accumulated out of the larger earnings. The expenses of trade are a tax upon this system; but the exchange which trade makes possible pays at least its own expenses. If it failed to do so, it could not be carried on. In the majority of cases it yields, in addition, a surplus to both parties. Neither of these alternatives can be perfectly realized. The former cannot be, because it is practically impossible to find a unit of territory logically small enough. The latter cannot be, because of the expenses of transportation. The cost entailed by distance will always involve the element of a scattering over wide territories of the establishments producing many separate goods. It will permit only a few localized industries to satisfy world-wide demands. But distance is to be looked upon, not as a friend, but an enemy, to material progress. Every invention in transportation which reduces the costs of carriage is to be regarded as a means to greater social economy, and as an effective device for extending still further the market, specializing more narrowly in production, and swelling the volume of material goods. On the contrary, everything which increases costs must be looked upon as a device tending to break society up into smaller groups, decrease the area of the market, and reduce the amount of material wealth. Now, protection is a system of taxes the object of which is to cause industrial society to be organized in a smaller group than otherwise it would be. It is nothing else than an increase in the costs of carrying goods from place to place. Consequently its interference with the establishment of a natural economic organization prevents the fullest utilization of limited. social resources and leads to the production of a smaller volume of goods than would be attained through free trade. The theory of free trade is premised upon the proposition that a trade yields an advantage, not to one, but to both parties to the transaction. Since society is an aggregate of individuals, trade in aggregate yields a corresponding advantage. Political lines are artificially drawn. Their presence cannot affect either the nature or the advantages of trade. Therefore the way to fullest national prosperity, not for particular individuals or industries, but for society as a whole, is through the policy of untrammeled commerce. B. THE MECHANISM OF INTERNATIONAL TRADE 136. The Theory of International Exchange Let us try to determine how settlement is made by a country for goods bought abroad. It is evident that the trade in question is not between the countries involved, but between individuals living in these countries. To get to the heart of the matter, let us take a very simple illustration: Suppose that Brown, a New York exporter of wheat, sells to Carpenter, a London importer of wheat, 10,000 bushels of wheat at the rate of five bushels for £1. Suppose, too, that at approximately the same time, Dixon, a London exporter of china, sells to Andrews, a New York china merchant, a consignment of china valued at £2,000. It is evident that as the matter stands, Andrews in the United States must remit £2,000 to Dixon in London, and that Carpenter in London must remit £2,000 to Brown in the United States. If each debtor sent the actual money to his creditor, the money would have to cross the ocean and come back again. But, cannot some economy be devised to avoid the trouble and expense of this useless shipment? It can be done very simply. Brown, let us say, meets Andrews. He tells Andrews of his sale of grain; Andrews, in turn, tells him of his importation of china. Together they hit upon a plan of avoiding the shipment of gold to cancel the debts. Brown writes out an order on Carpenter instructing him to pay the sum due him to Andrews. This he presents to Andrews, who, in return, pays him in gold the American equivalent of £2,000. Since the amount of gold in one pound sterling is equal to $4.8665, this amounts to 2,000 times $4.8665. Andrews indorses the order which he has received from Brown and sends it to Dixon in payment for his china. Dixon, in turn, presents it to Carpenter, who pays him £2,000. Thus, it is evident, both Brown and Dixon have been paid in full the amounts due them, and Andrews and Carpenter freely to move wherever they please; there is to be no barrier to the free exchange of goods. The problem of economic organization is to be worked out for the economic world as a single entity. Under freedom from interference, population and capital will gravitate towards those places where they can get the largest returns, or where they can best utilize nature's contributions. Where they go, industries will be established. The goods produced will not have to be consumed in the region in which they are produced; they will likewise naturally seek the places where they can command the highest prices. Under this system the people of any territory do not seek directly to supply all their own wants. They produce surpluses of the goods in the making of which natural resources or acquired skill make them pre-eminently fit, and exchange them for similar surpluses produced by their neighbors, far or near. Such an economic organization is nothing else than a territorial division of labor. It makes industry more efficient through the better utilization of natural resources, through the development of specialized skill, and through the larger volume of capital accumulated out of the larger earnings. The expenses of trade are a tax upon this system; but the exchange which trade makes possible pays at least its own expenses. If it failed to do so, it could not be carried on. In the majority of cases it yields, in addition, a surplus to both parties. Neither of these alternatives can be perfectly realized. The former cannot be, because it is practically impossible to find a unit of territory logically small enough. The latter cannot be, because of the expenses of transportation. The cost entailed by distance will always involve the element of a scattering over wide territories of the establishments producing many separate goods. It will permit only a few localized industries to satisfy world-wide demands. But distance is to be looked upon, not as a friend, but an enemy, to material progress. Every invention in transportation which reduces the costs of carriage is to be regarded as a means to greater social economy, and as an effective device for extending still further the market, specializing more narrowly in production, and swelling the volume of material goods. On the contrary, everything which increases costs must be looked upon as a device tending to break society up into smaller groups, decrease the area of the market, and reduce the amount of material wealth. Now, protection is a system of taxes the object of which is to cause industrial society to be organized in a smaller group than otherwise it would be. It is nothing else than an increase in the costs of carrying goods from place to place. Consequently its interference with the establishment of a natural economic organization prevents the fullest utilization of limited social resources and leads to the production of a smaller volume of goods than would be attained through free trade. The theory of free trade is premised upon the proposition that a trade yields an advantage, not to one, but to both parties to the transaction. Since society is an aggregate of individuals, trade in aggregate yields a corresponding advantage. Political lines are artificially drawn. Their presence cannot affect either the nature or the advantages of trade. Therefore the way to fullest national prosperity, not for particular individuals or industries, but for society as a whole, is through the policy of untrammeled commerce. B. THE MECHANISM OF INTERNATIONAL TRADE 136. The Theory of International Exchange Let us try to determine how settlement is made by a country for goods bought abroad. It is evident that the trade in question is not between the countries involved, but between individuals living in these countries. To get to the heart of the matter, let us take a very simple illustration: Suppose that Brown, a New York exporter of wheat, sells to Carpenter, a London importer of wheat, 10,000 bushels of wheat at the rate of five bushels for £1. Suppose, too, that at approximately the same time, Dixon, a London exporter of china, sells to Andrews, a New York china merchant, a consignment of china valued at £2,000. It is evident that as the matter stands, Andrews in the United States must remit £2,000 to Dixon in London, and that Carpenter in London must remit £2,000 to Brown in the United States. If each debtor sent the actual money to his creditor, the money would have to cross the ocean and come back again. But, cannot some economy be devised to avoid the trouble and expense of this useless shipment? It can be done very simply. Brown, let us say, meets Andrews. He tells Andrews of his sale of grain; Andrews, in turn, tells him of his importation of china. Together they hit upon a plan of avoiding the shipment of gold to cancel the debts. Brown writes out an order on Carpenter instructing him to pay the sum due him to Andrews. This he presents to Andrews, who, in return, pays him in gold the American equivalent of £2,000. Since the amount of gold in one pound sterling is equal to $4.8665, this amounts to 2,000 times $4.8665. Andrews indorses the order which he has received from Brown and sends it to Dixon in payment for his china. Dixon, in turn, presents it to Carpenter, who pays him £2,000. Thus, it is evident, both Brown and Dixon have been paid in full the amounts due them, and Andrews and Carpenter have discharged their full indebtedness. Yet not a single gold coin has made the ocean voyage. Although the illustration just taken is much simpler than what actually happens, it fully embodies the principles. There are three complications which keep the matter from working out so simply. The first is that the Brown and Andrews of our illustration are not likely to know each other personally. This difficulty is obviated by the establishment of exchanges. Brown takes his draft to the exchange and sells it, thus securing payment for the amount due him. Andrews goes to the exchange and buys a draft, which he sends to Dixon in discharge of his obligation. An exchange broker acts as intermediary, and the matter is as nicely handled as in the illustration above. The second difficulty is that the drafts bought by the exchange are not always of just the denominations to accommodate those who wish to discharge foreign indebtedness. This difficulty is as easily obviated. The exchange, let us say, establishes a London branch. Drafts bought are sent to London for collection. The collections are deposited to the order of the New York house. This constitutes. a fund against which new drafts can be drawn by the New York exchange broker. The third difficulty is that at any particular time imports and exports do not balance. Consequently there is a tendency for the demand for and supply of bills to fail of exact correspondence. But this difficulty, too, is overcome, at least partially. What is bought and sold, it must be remembered, is gold to be delivered at a particular place, London. If the demand and supply are in exact correspondence, the price of £1 in London will be practically $4.8665. This figure is found by dividing the number of grains of pure gold in a pound sterling by the number of grains in a dollar. But they are not always in exact correspondence. Let us see how much they can vary. Now it is obvious that Brown has two alternatives. He can sell his draft, or he can have the gold due him collected in London and brought to New York. To take the latter alternative will cost him in freight and insurance charges nearly 3 cents. Since he collects $4.8665 in London, he will receive net about $4.8385. Accordingly, it is to his advantage to sell his draft, rather than import the gold, if he can secure for it anything above $4.8365. Similarly, Andrews has two alternatives. He can buy a draft, or he can send gold to London to discharge his indebtedness. Since it will cost him about 3 cents per £1 to follow the latter course, this will amount to paying $4.8965 for every £1 due in London. Accordingly he will prefer to buy a draft if he can secure it for a figure lower than |