The Nature of the Subject. — We have now studied two of the main parts of economic theory. We have learned something regarding the consumption of goods, and also something regarding their production. We have now to study the question how and by what means goods are exchanged among men, and what determines the quantitative ratios in which they exchange. By the conditions of modern industry almost every man produces more of some one commodity or of some few commodities than he himself consumes; and, on the other hand, every man consumes very many goods which he himself has not produced. This is only possible because men transfer goods from one to another. Such transfers of goods constitute a very great part of our economic life. The business of one important industrial class, that of merchants, consists in effecting such transfers. The operations in which merchants are engaged we call by the general name commerce. But commerce requires a multitude of other businesses to assist it, among which are especially prominent those of providing means of communication and transportation, such as public roads, railways, telegraphs, telephones, and banks. These agents of commerce, while they do not confine their functions entirely to the assistance of merchants, aid the entire community in bringing about desired transfers of goods.

Exchange. Transfers of goods are of two kinds: they may be either one-sided transfers, as in the case of gifts, bequests, inheritance, taxes, and fines; or they may be two-sided transfers, as is the case with nearly all economic transfers with which we have to do.

The part of economics which we are about to study is by most economists called " exchange," because the term "exchange," referring to two-sided transfers, covers so many of the transactions that are the subject of our study. But since money and banks, which are to be treated in the present part of the book, are agencies in assisting in one-sided transfers as well as two-sided transfers of goods, we have used the expression " transfers " of goods rather than the word " exchange " to express more completely the nature of the subject.

Since exchanges of goods regularly increase the utility of the goods exchanged, it is evident that exchange is a part of production and might be treated under that general heading. But the phenomena of exchange are of a character so distinct and so important that it is considered better to treat them in a part by themselves.

Advantages of Exchange. It is not uncommon even to-day to hear men talk as if an exchange of goods could benefit only one of the two exchangers. Sometimes, indeed, men speak as if what is gained by one party to an exchange, whether an individual or a nation, must be at the loss of the other. We do not stop to think that when we purchase a hat or a suit of clothes, we regularly profit by the transaction; but it is evident that if we did not think the thing purchased more useful to us than the money paid for it, we would not make the exchange. Let us study for a moment the reasons why men find it profitable to exchange. In the first place, (1) the tastes and customs which in part determine utility vary (a) from nation to nation, and (b) from man to man. It is evident, then, that when a commodity passes from an individual or a nation with little taste for it to one with a strong liking for it, the exchange increases the utility of the commodity. In the second place, (2) the natural resources of different countries vary widely. Goods which one country or one section can easily have in abundance, another country or section may be able to produce only with great difficulty. Thus, the planter of the South and the farmer of the Northwest can both profit by the exchange of the cotton of the one for the wheat of the other. In the third place, (3) individuals also differ from one another either by nature or by training in their fitness for different kinds of work. Thus, one man is especially fitted by nature or by training for carpentry, another for milling. In all such cases each individual will find his greatest advantage in doing that which he can best do, exchanging the surplus of his product for other goods which he desires but which others can produce to greater advantage.

The Machinery of Transfers. In every modern nation there now exist on a large scale institutions and appliances for the furtherance of transfers. These may be briefly enumerated as follows : (1) means of transportation and communication ; (2) systems of weights and measures ; (3) money and credit and banks ; (4) commercial laws and commercial administration, including the assistance of consuls who act in part as commercial agents of their governments in foreign countries ; (5) middlemen of all sorts, including retail and wholesale dealers. Inasmuch as exchange is a part of production, these instruments of exchange are also instruments of production. It is through them that goods receive the time and place utilities which fit them for final consumption.


1.Transfers of goods are of two kinds: one-sided and two-sided. The latter are known as exchange, under which heading this general subject is often treated. Exchange develops the phenomena of value and price.

2.All exchange is regularly profitable to the two parties to the transfers, for the reasons that men and places differ in their natural and acquired aptitudes for different kinds of production, and that individuals and nations also differ in their tastes and customs in consumption.

3.Modern industry has developed an elaborate mechanism for its exchanges, including means of communication and transportation ; systems of weights and measures; money and credit and banks; commercial laws and administration; middlemen of all sorts.


1.Give examples of one-sided transfers; of two-sided transfers.

2.What are some of the sources of advantage in exchanges between the United States and Cuba ? Between a lawyer and a doctor ?

3.Mention some of the means of transportation; of communication.

4.How would the adoption of international systems of weights and measures aid exchanges?


Any standard treatise. See particularly: —

Nicholson, J. S.: Principles of Political Economy, Vol. II, Ch. I, pp. 3-10.