Livre III, ch. XVIII, § 1 Since ail trade is in

reality barter, money being a mère instrument for exchanging' things against one another, we will, for simplicity, begin by supposing the international trade to be in form, what it always is in reality, an actual trucking of one commodity against another. As far as we hâve hitherto proceeded, we hâve found ail the laws of interchange to be essentially the same, whether money is used or not ; money never governing, but always obeying, those gênerai laws....

§ 2. When the trade is established between the two countries, the two commodities will exehange for each other at the same rate of interchange in both countries — bating the cost of carriage, of which, for the présent, it

willbe moreconvenientto omit the considération

Suppose that 10 yards of broadcloth cost in England as much labour as 13 yards of linen, and in Germany as

much as 20' This supposition being made, it

would be the interest of England to import linen from Germany, and of Germany to import cloth from England. When each country produced both commodities for itself, 10 yards of cloth enchanged for

— agio vards of lineii iii Eiigland, and for 20 in Germany. They will iiow excliange for the same nunibei' of yards of linen in both. For wath number ? If for 15 yards, England will bc just as she was, and Germany will gain ail. If for 20 yards. Germany will be as before, and England vsill dérive ilie whole of the benefit. If for any number intermediate between lo and 20 the advantage will be shared betweeu the two countries. If, for example, 10 yards of cloth exchange for 18 of linen, England will gain an advantage of 3 yards on every 15, Germany will save 2 ont of every 20. The problem is, what are the causes which détermine the proportion in which the cloth of England and the linen of Germany will exchange for each other ?

Let us suppose, then, that 10 yards of cloth, in both countries, exchange for 17 yards of linen.

The dsmand for a commodity. that is, the quantityof which can fînd a purchaser, varies, as we hâve before remarqued, accordingto the price. In Germany the price of 10 yards of cloth is now 17 yards of linen ; or whatever quantity of money is équivalent in Germany to 17 yards of linen. Now, that being the price, there is some particular number of yards of cloth, which will be in demand, or will find purchasers, at that price. There is some given quantity of cloth, more than which could not be disposedof at that price ; less than which, atthat price. would not fully satisfy the demand. Let us suppose this quantity to be 1000 times 10 yards.

Let us now turn our attention to England. There, the price of 17 yards of linen is 10 yards of cloth, or whate-

ver quantity of money is équivalent in England to 10 yards of cloth. There is some particular number of yards of linen which, at that price, will exactly satisfy the demand, and no more. Let us suppose thatthis number is 1000 times 17 yards.

As 17 yards of linen are to 10 yards of cloth, so are 1000 times 17 yards to 1000 times 10 yards. At the existing- exchange value, the linen which England requires will exactly pay for the quantity of cloth which. on the same terms of interchange, Germany requires. The demand on each sida is precisely sufficient to carry ofï the supply on the other. The conditions required by the principle of demand and supply are fulfilled, and the two commodities will continue to be interchanged, as we supposed them te be, in the ratio of 17 yards of linen for 10 yards of cloth.

But our suppositions might hâve been difïerent. Suppose that, at the assumed rate of interchange, England had been disposed to consume no greater quantity of linen than 800 times 17 yards : it is évident that, at the rate supposed, this would not hâve sufficed to pay for 1000 times 10 yards of cloth which we hâve supposed Germany to require at the assumed value. Germany would be able to procure no more than 800 times 10 yards at the price. To procure the remaining 200, which she would bave no means of doing but ))y bidding higher for them, she A>ould otfer more than 17 yards of linen in exchange for 10 yards of cloth : let us suppose her to ofTer 18. At that price, perhaps, England would bc inclined to purchase a greater quan-

tity of linen. She would consumo, possibly, at tliat price, 900 tinies 18 yards. On tlio ollicr hand, clotli having risen in price, thc demand of Germany for it wonld probably hâve diminished. If, instead of 1000 limes 10 yards, slie is now conlented witli 900 times 10 yards, thèse will oxactly pay for the 900 times 18 yards of linen which England is willing to iake at the altered price : the demand on each side will again exactly suffice to take off the corresponding supply ; and 10 yards for 18 will hc the rate at which, in both countries, cloth will exchange for linen.

The converse of ail this would bave happened, if instead of 800 times 17 yards, we had supposed that England, at the rate of 10 for 17, would bave taken 1200 times 17 yards of linen. In this case, it is England whose demand is not tully supplied ; it is England who, by bidding for more linen, will alter the rate of interchange to her own disadvantage ; and 10 yards of cloth will fall, in both countries, below the value of 17 yards of linen. By this fall of cloth, or what is the same thing, this rise of linen, the demand of (lermany for cloth will increase, and the demand of England for linen will diminish, till the rate of interchange bas so ajusted itself that the cloth and the linen will exactly pay for one another : and when once this point is attained, values will remain without furfher altération.

It may be considered, tluMoforc, as establishcd, that when two countries trade togethcr in two conimodities, thc exchaniic value of thèse commodities relativelv to

èach other will adjust itsclf to the inclinations and cirbumstances of the consumers on both sides^ in sucti inanner that the quantities required by each country, of the articles which it imports from its neighbour, shall be exactly sufficient to pay for one another. As the inclinations and circumstances of the consumers cannot be reduced to any rule, so neither can the proportions in which the two commodities will be interchang-ed. Ten yards of cloth cannot exchange for more than 20 yards of linen, nor for less than 15. But they may èxchange for any intermediate number. The ratios, therefore, in which the advantage of the trade may be divided between the two nations, are varions. The circumstances on which the proportionate share of each country more remotely dépends, admit only of a very gênerai indication.

Of the distribution of the precious metals through the commercial world.

Livre III. Ch. XXI, 5^ 1. Having now examined the mechanism by which the commercial transactions between nations are actually conducted, we bave next to inquire whether this mode of conducting them makes any différence in the conclusions respecting international values, which we previously arrived at on the hypothesis of barter.

The nearest analogy would lead us to présume the

négative. AVe did not find that the intervention of money and its substitutes madc any différence in the law of value as applicd to adjacent places. Things wliich Avould hâve been oqual in value if the mode of exchange had been by barter, are worfh oqual sums of money. The introduction of money is a mère addition of one more commodity, of which the value is regulated by the same laws as that of ail other commodities. We shall not be surprised, therefore, if wc find that international values also are determined by the same causes under a money and bill system, as they would be under a System of barter ; and that money lias little to do in the matter, except to furnish a convenient mode of comparing values.

AU interchange, is, in substance and efTect, barter ; he Avho sells his productions for money, and Avith that money buys other goods, really buys those goods with his own produce. And so of nations : their trade is a mère exchange of exports for imports ; and whether money is employed or not, things are only in their permanent state when the exports and imports exactly pay for each other. AVhen this is the case, equal sums of money are due from each conntry to the other, the debts are settled by bills, and there is no balance to be paid in the precious metals. The trade is in a state likc that which is called in mechanics a condition of stable equilibrium.

But the process by which things are brought b.ack to this state when they happen to deviate from it, is, at least outwardly, not the same in a barter System and in

a money System. Under the first, the country which wants more imports than its exports will pay for, must offer its exports at a cheaper rate, as the sole means of creating a demand for them siifficient to re-establish the equilibrium. When money isused, the country seems to do a thing totally différent. She takes the additional imports at the same price as before, and as she exports no équivalent, the balance of payments turns against her ; the exchange becomes unfavourable, and the différence has to be paid in money. This is in appearance a very distinct opération from the former. Let us see if it differs in its essence, or only in its mechanism.

Let the country which has the balance to pay be England, and the country which receives it, France. By this transmission of the precious metals, the quantity of the currency is diminished in England, and increased in France. This I am at liberty to assume. As we shall see hereafter, it would be a very erroneous assumption if made in regard to ail payments of international balances. A balance which has only to be paid once, such as the payment made for an extra importation of corn in a season of dearth, may be paid from hoards, or from the reserves of bankers, without acting on the circulation. But we are now supposing that there is an excess of imports over exports, arising from the fact that the équation of international demand is not yet established : that there is at the ordinary priées a permanent demand in England for more French goods than the English goods reqnired in France at the ordinary prices will pay for. Whca this is the case, if a

change ^vorc not maid in tho priées, therc wonld he a per{)ctually rcnewed Ijalance to l)c paid in moncy. The imports require to l)e pcrmancntly diminished or the exports to be increased : which can only be accomplished through priées : and hence, evcn if the balances are at firsl paid fi'om hoards, or by the exportation of bullion, they will reach the circuhition at last, foi' until they do, nothing can stop the drain.

Wlien, thercfore, the state of priées is snch tliat the eqnation of international demand cannot establish itself, the country requiring more imports than can be paid for by her exports, it is a sign that the country bas more of the [)rccious metals or their substitutes, in circulation, than can permanently circulatc, and must nccessarily part with sonie of tliem before the balance can be restored. lier currency is accordingly contracted : priées fall, and among the rest, the priées of exportable articles; for which, accordingly, there arises, in foreign countries, a greater demand : while imported commodities bave possibly risen in priée, from the influx of money into foreign countries, and at ail events bave not participatcd in the gênerai fall. But until tho increased cheapness of English goods induces foreign countries to take a greater pccuiiiary value, or until the increased dcarness (positive or comparative) of foreign goods makcs England take a less pecunary value, the exports of England will be no nearer to paying for lier iiii[><)i'ts Ihan before, antl the stream of the preoioiis metals wliitli liad bciian to tlow ont of Englaii<l. \\\\\ still 11()\N <iu. Ihis oftlux will routinue,

uutil the fall of priées in England brings within reach of tlie forcign market some conimodity which England did not previously send thither ; or until the reduced priée of ttie things wliich she did send, lias foreed a demand aljroad for a suffîcient quantity to pay for the iinports, aided, perhaps, Jiy a reduetion of the English demand for foreign goods, from their enhanced priée, eitlier positive or comparative.

Now this is tlie very process which took place on our original supposition of barter. Not only, therefore, does the trade between nations tend 1o the same equilibrium between exports and imports, vvhether money is employed or not, but the means by which this equilibrium is established are essentially the same. The country whose exports are not suffîcient to pay for her imports, oders them on cheaper ternis, until she succeeds in forcing the nccessary demand : inother words, the Equation of International Demand, uiider a money System as well as under a barter system is the law of international trade. Every country exports and imports the very same things, and in the very same quantity, under the one system as under the other. In a barter System, the trade gravitâtes to the point at which the sum of the imports exactly exchanges for the sum of the exports : in a money system, it gravitâtes to the point at which the sum of the imports and the sum of the exports exchange for the same quantity of money. And since things which are equal to the same thing are equal to one another, the exports and imports which are

e(jual in money priée, would, if monoy wcre not usorl, preciscly oxcliang-e for one anothcr.

I 2. It thus appears tliat thc law of international values, and, consequently. tlie division of thc advantages oftrade amonglbe nations which carry it on. arc the same, on thc supposition of money, as they would be in a state of bartcr.