§ 7. Equation of international exchange. Foreign trade, of course, can take place as barter, and in earlier times very commonly did so. But in the existing monetary economy nearly all trades are expressed in terms of monetary prices. It was shown in the last section that both the prices of all the particular objects of international trade and the general levels of prices in any two trading countries come to be pretty definitely interrelated. Changes in the one country at once compel readjustments in the other. To understand in the most general way how this occurs, a knowledge at least of the elemetary principles of foreign exchange is required, and to this we may now turn.

Let us begin with the proposition known as the equation of international exchange, which is sometimes given thus: The valuation (that is, the estimated total price) of the imports of a country must in the long run equal the valuation of the exports. But this proposition (especially the words "imports" and "exports") must be understood in a much broader sense than that of the movements of merchandise merely. The proposition might better be expressed: the total credits in international trade, created by whatever means, by a nation (including money actually sent abroad) must constantly just equal its total debits (including money imported). Into the balance of accounts between any two nations enter many items: the cash values of the imports and exports of merchandise: freights, insurance premiums, and commissions; the expenses of citizens while traveling abroad; money brought in or taken out by immigrants; the cost of the governmental foreign services (such as the salaries of consuls and of diplomatic representatives) ; subsidies and war indemnities received from or paid to foreign nations; the investments of foreign capital; and credit items of many kinds on both sides of the account.

The effect of loans upon the equation differs at different periods, according as they are just being made, are continuing, or are being repaid. When foreign capital is first invested in a country, whether it is lent to the government or to individuals or to corporations, either gold must be remitted to the borrowing country or goods be sent. But later the interest payments and the eventual repayment of the principal of the loan act in the opposite direction. Accruing interest must be offset annually by exports from the debtor country, and the repayment of the principal requires that either money or goods be exported equal in value to the original obligations. In popular opinion an excess of exports of merchandise is an index, if not the real cause, of national prosperity; but evidently it is no true index whatever on this point. An excess of exports may at any given moment indicate that the country is rich and is lending abroad, or that it is in debt and is paying interest, or that it is repaying the principal. On the other hand, an excess of imports may indicate either that a country is poor, and is borrowing from abroad, or that it is rich, with many foreign investments, and is receiving the income from them in the form of a regular shipment of goods from the debtors.

The following statistics of the foreign commerce (merchandise imports and exports) of the principal countries of the world are given in significant groupings which call for various explanations. As the war altered all the lines of commerce, these figures are retained as illustrating the principle and the normal conditions better than could recent figures.

Countries Having Excess Op Imports Op Merchandise. Exports Op Merchandise

Figures are in million dollars ($1,000,000) and are mostly for the year 1908. (Statistical Abstracts, 1908, p. 769.)

§ 8. Balance of merchandise movements. The first group apparently consists of the older, creditor countries which are drawing some of the income of their investments from abroad each year in the form of food and of raw materials of many kinds. The second group includes countries of very diverse conditions, possibly all having some investments abroad; Italy receives large imports in return for the services of many Italians working in foreign countries, and the three Scandinavian countries (especially Norway) carry on a large commerce for other nations which is paid for in these ways. The excess of imports in the third group probably is the result of new investments that were being made in Canada by English and American capitalists, in Turkey especially by Germans, and in China by Americans and Europeans.

Fig. 1, Chapter 15, shows the average balance of merchandise trade of the United States in various periods, the columns below indicating excess of imports in the period, those above indicating excess of exports.

The countries in the second column are doubtless on the whole debtors, but in varying degrees. The excess exports of some are insufficient even to pay all the current interest, and they are borrowing still more (possibly the British colonies, Japan, and several South American countries) ; others have ceased to borrow and are simply paying interest; whereas the United States at least with its excess of exports was at this time both paying interest and getting out of debt. With the outbreak of the war in 1914 the United States began rapidly buying up its foreign-held securities, and became a creditor nation. Its imports must therefore in future more nearly equal if not exceed its exports, the actual outcome being dependent as ■well on various items in the balance as on those here considered.