This section is from the "The Science Of Wealth" book, by Amasa Walker.
Whether the sale of such stocks abroad is desirable or not, will depend entirely upon the character of the commodities sent in return for them, whether these be for advantageous or disadvantageous consumption; and this again will depend upon the financial and commercial condition of the country from which they are sent. Suppose one hundred millions sent to England, and returned in railroad iron, which, put into use, pays a net income of ten per cent, besides facilitating the transport of cotton and wheat, and thus adding to the national wealth. As these stocks pay the American holders but six per cent, and by selling them and investing the amount in railroads they get ten, there is a clear gain in income of 662/3 per cent. The foreigner, on the other hand, who could only get four per cent for his money in home investments, now gets six, an improvement upon his income of fifty per cent. Both parties are benefited. On the other hand, if the amount sold were returned in fancy goods, jewelry, &c, which increased the consumption of luxuries, but in no way contributed to reproduction, the country would in a short time be poorer to the whole amount. The foreigner would hold his bond, and get his interest; but the American would have nothing to show for it. Or stocks may be exported in payment for an actual balance of trade. If, with all our export of commodities and specie, there still remains an adverse balance, American stocks of one kind or another may be sent and sold to adjust it. By this last operation, the debt is merely "extended," or postponed; and as the interest upon this must be annually paid, a larger export of commodities, specie, or stocks must be made in the future.
If the foregoing illustrations of the manner in which a foreign debt may be contracted are correct, as we think will not be disputed, the remaining question is, what policy on the part of the United-States government could have secured in the past, or can secure in the future, a desirable return for its bonds sent abroad.
If all bonds were sold for cash, and the specie sent in return, the operation would be simple, and its effects apparent; but bonds, when sent abroad, in reality enter into the exports of the country, are negotiated through bankers, and their proceeds become "exchange." If a railroad sends its bonds abroad, the returns will probably be in the iron used for its construction; but, if a city or State, the funds are to be expended at home, and the currency of the country is all that is desired by the sellers. The bonds go into the hands of a banker or agent, who negotiates them abroad, and holds the amount as foreign exchange, which he sells to the merchant, who wishes to remit for purchases abroad. As these operations increase the quantity of exchange for sale, they naturally promote importations, not of money, but of merchandise. And here we must ask pardon for again referring to the hackneyed theme of an inflated currency. If, at the time when bonds are thus being sent abroad, the currency of the country is expanded, prices generally advancing, profits enlarging, and there is great inducement!to extend trade, the importer, consciously or unconsciously, is affected by this state of things, and sends forward large orders. The consumption of foreign goods is encouraged, since they are easily paid for (in promises), at home and abroad. It will not be surprising if the consumption of the country is thug increased to the full amount of the bonds sold; at all events, there can be no doubt that it will be increased to a very considerable extent.
The fact that the sale of these bonds has brought into market a large amount of foreign bills of exchange gives the banks an inducement to increase their discounts, because there will be no call for specie to be sent abroad, the only thing they ever seriously fear. Thus, on every hand, facilities for expansion and additional consumption are multiplied. At present (1865), American stocks are exported under circumstances absolutely appalling. With gold at forty per cent premium, foreigners can obtain them at 71½ per cent; that is, at a discount of 28½ per cent. With the amount so disposed of, merchandise is purchased and returned to the United States, where it is sold at the extravagantly inflated prices of a redundant credit currency. What the consumer of the imported commodities is thus taxed, and what the country actually loses, it is neither easy nor agreeable to calculate. But such is the condition of our financial affairs at present; and it is quite likely to continue, as no effectual measures are being taken at the present time to contract the currency.
There are those who advise, as a remedy for the evils of over-importation under such circumstances, the imposition of a very high tariff, so that this influx of foreign goods may be prevented. But, however disinterested such coun-. sel may be, the remedy proposed will not meet the case. We have already proved, if we have proved any thing in this work, that the quantity of currency is more influential in determining the amount of foreign importations than the rate of tariff duties. While there is a great excess of currency, twice or thrice the legitimate amount required by the exchanges of the country, as at present, nothing short of absolute prohibition of all trade will prevent importations, however high the tariff, which, although it does have a tendency to reduce the consumption of foreign goods, may be more than counterbalanced by a superabundant currency. The remedy lies in another direction; viz., in the restoration of the currency to a specie standard. This, although it should be a gradual process, would, as soon as it began, check importations and increase exports; the premium on gold would be reduced; and our stocks, when sold abroad, would bring us in return the full amount of their value. The process of saving amongst all classes would at once commence. Debts, principal or interest, can only be paid by savings; and economy will begin when contraction is inaugurated.
With the present inflated currency, with high prices, large speculative operations, and extraordinary profits, the idea of economy is simply absurd. Hence the great necessity of a change of policy. No country was ever being more rapidly depleted than the United States at the present moment (1865), though the fact will only be realized when the consummation of the present disastrous policy has been reached.