The subject of international trade calls for somewhat extended study before we leave the division of transfers or exchange. Nations do not live to themselves alone. More and more with the passing years trade is overleaping narrow local limits and is becoming world-wide in extent. International trade is always in the last analysis trade between pairs of individuals, and is in many respects precisely similar to trade among individuals in a single community or country. But there are certain features in which it differs so materially from trade within a nar--rower area or within a single political unit that it calls for special treatment.

In the present chapter we shall first study the nature of international trade, and shall conclude with a discussion of the restrictions, usually in the form of tariff duties, laid by nations upon international commerce.

I. The Nature of International Trade

An Exchange of Goods for Money. Whenever an individual in one country sells goods to an individual in another country, he sells the goods for money just as he would to a person in his own community. But owing to the difficulty and risk of sending money back and forth in payment of individual claims resulting from innumerable sales and purchases, great banking houses have developed a system by which the greater part of such transactions are effected without the use of money at all. The system of international exchange is quite like that of the clearing-house, which has already been explained. When an American exporter sends goods to an English importer, there are two methods by which payment may be made. More commonly the exporter "draws on" the importer for the agreed amount; that is, he writes an order upon the importer to pay, usually at some specified place, the amount named in the face of the bill. This bill of exchange, attached to a bill of lading of the goods and other documents, the exporter sells to a bank, which thus purchases a right to have a certain amount of money paid at its order in England. The other method of closing such a transaction is for the English importer to go to an English bank and there purchase a draft drawn by the bank upon an American bank in favor of the American exporter. In either case, if the transaction stood alone, money would have to cross the ocean to pay for the goods. But, as a matter of fact, English exporters are at the same time shipping goods to American importers, and are thus securing counter claims upon Americans. It is evident that if the claims upon the one side equal the claims upon the other, no money need be sent, provided the various claims are brought together and cancelled. It is precisely this function that banking houses doing an international business perform. They buy bills from exporters and sell drafts to importers.

We have here assumed that only two countries are parties to the international exchange. When we consider the case of several nations or of all, there is no difference except in the greater complexity. Thus it is evident that if A in New York owes a sum of money to B in London, while C in London owes the same amount to D in Paris, and E in Paris in turn owes the same amount to F in New York, the debts of all may be settled without a cent of money leaving any one of the countries.

The Rate of Exchange. An English gold pound equals by weight $4,866 in American money. Hence, in the above case, if bankers made no charge for their services, the rate of exchange between New York and London would stand at,1 for $4,866, or exchange would be at par. Let us see now some of the forces which determine how far above or below par the rate may go.

The Balance of Trade. Assuming for the moment that the only transactions affecting international exchange are the exports and imports of commodities, we can see that if at any time one country America, for example is importing more goods from England than it is exporting, the balance of trade is for the time against that country. In such a state of things, New York banks will have many demands for drafts upon London and few offerings of bills on London. Conversely, London banks will have many offerings of bills on New York, but few demands for drafts upon New York.

But it is the purpose of banks in both places to make drafts balance bills in order to avoid sending specie in payment. Hence the New York banks will seek to discourage the demand for drafts on London by charging a higher price for them, and will at the same time try to encourage the offering of bills by paying a higher price for them. London banks will in the same way lower the price offered for bills on New York and will sell more cheaply drafts drawn by them on New York. Exchange is then said to be "against" New York and "in favor of " London. A New Yorker wishing to meet a debt of 1 in London will be obliged to pay for the necessary draft more than $4,866. He will have to pay a premium. A London debtor at the same time can extinguish a debt in New York by the payment of less than 1 for each $4,866 of the debt.

The "Specie Point." Neither New York nor London bankers will charge such a rate for drafts or pay such a rate for bills as will make it profitable for individual debtors to send the specie or bullion instead of appealing to the banks. But there are even narrower limits to fluctuations in the rate of exchange. The bankers themselves naturally have the best facilities for making shipments of money, and as the rate of exchange rises or falls, a point is reached at which it will be more profitable for the banks to send the metal in settlement of outstanding balances. This point is called the "specie point." As the bankers' cost of shipment, including freight, insurance, packing, loss of interest, etc., is now about two cents per English gold pound on average shipments, the specie points in English American exchange stand at about $4,846 and $4,886. In other words, gold begins to go out from New York when exchange rises above $4,886, and begins to leave London for New York when exchange falls below $4,846.

Again we must remind the student that for the sake of simplicity we have assumed trade to be confined to the two countries mentioned. When the case of international trade in general is taken into account, the subject becomes too complicated for brief explanation. We may simply say then that the rate of exchange between New York and London, London and Paris, Paris and Berlin, etc., is affected not only by the volume and balance of trade between the two countries, but also by the volume and direction of trade balances in the trade of the other nations.

The Limit to Metal Exportation. There is also another natural limit to fluctuations in the rate of exchange and to the exportation of the money metal. The general principle may be illustrated by supposing the case of two nations, neither of which possesses mines. Let us assume again that their transactions are limited to the mutual purchase and sale of goods. What happens when the balance of trade goes for a time against one country or the other ? The rate of exchange having reached and passed the specie point, gold shipments begin from country A, the country of large imports, to country B, the country of large exports. Other industrial conditions remaining the same, A, having less money than before, will become a country of lower general prices; while in B, with its increased stock of metal, prices will rise. What results ? A at once becomes a stronger seller and a weaker buyer; while B, conversely, becomes a stronger buyer and a weaker seller. But increased importations into B and decreased exportations to A will readjust the trade relations to their old position, metal shipments will cease, and the rate of exchange will again approach parity.

The actual conditions are infinitely more complex. Trade is not confined to two nations; international balances depend upon other things as well as upon the transfers of goods; the currency of different nations is not in all cases of equal stability or honesty; many nations are themselves producers and therefore natural exporters of gold. Still it remains true that through the operation of such natural causes as we have just described, the various debts of one nation to the world and the debts of the world to that nation do in the long run tend strongly to balance; and the money metals are distributed among the nations according to their monetary needs.

International Values. The values at which goods exchange in international trade depend upon the same fundamental principles that have been explained in the chapter on value, but these values are especially influenced by the fact that labor and capital do not usually flow so freely from one country to another as they do between different parts of the same country.

Let us suppose that in one of two countries just beginning to trade with each other it is found that the greatest satisfaction of wants results when raw cotton and manufactured silk are produced by an expenditure of labor indicated respectively by 15 cents a pound and 50 cents a yard, but that in the second country it is just worth while to produce the same commodities at 10 cents a pound and 75 cents a yard respectively. Assuming these to be the only two commodities to be exchanged and ignoring the cost of transportation, we may suppose matters to proceed as follows: Silk will be sent from the first country to the second in exchange for cotton. The price of the silk will be somewhere between 50 and 75 cents; that of the cotton between 10 and 15 cents. The precise value in each case will be such that in the long run the values of the cotton and silk exchanged will be equal. Suppose it were not so; imagine that $1,000,000 worth of silk were being exported from the first country and only $500,000 worth of cotton imported. At first the balance might be paid in gold, but the drain of gold from the second country would so lower prices there as to discourage the further importation of silk, and the influx of gold into the first country would so raise prices as to encourage the importation of cotton into that country. This would continue until an equilibrium was established.

Even if one country had greater natural advantages for the production of all commodities, trade would still take place between the nations, since the first country could satisfy its wants most economically by confining its efforts to the production of goods in which its natural advantages gave it the greatest superiority. This can be seen also in the case of individuals. If a man's services to society as a lawyer are so valuable that he can in his working hours earn $10 an hour, both he himself and society will suffer if he spends any of his time in doing his own typewriting, though he may be able to do the work more rapidly than a regular typewriter whom he can employ for $4 a day. Many an able man lessens his efficiency by failing to observe the principle here indicated.

The Advantages of International Trade. By an old theory of a " favorable balance of trade " it was held that the advantage of international commerce lay in securing an excess of exports over imports, that the balance might be paid in " treasure," or money. This idea is similar to the old opinion that trade between two individuals could benefit one only at the expense of the other. Now it is generally seen that countries can sell goods only by buying goods, and that a continuing excess of exports defeats itself by raising prices in the exporting country. The real advantage in international trade is that (1) it enables every country to enjoy goods which it does not itself produce ; and (2) enables each country to secure a maximum of satisfaction by devoting its resources and energies to the forms of production in which it enjoys the greatest relative advantages.