The effect of loans upon the equation differs at different periods, according as they are just being made, are continu ing, or are being repaid. When foreign capital is first in vested in a country, whether it is lent to the government or to individuals or to corporations, either gold must be re mitted 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 orig inal 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 indi cate 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 in dicate 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 (merchan dise imports and exports) of the principal countries of the world are given in significant groupings which call for vari ous explanations. As the war altered all the lines of com merce, these figures are retained as illustrating the principle and the normal conditions better than could recent figures.
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 Scandi navian countries (especially Norway) carry on a large com merce for other nations which is paid for in these ways. The excess of impoits in the third group probably is the result of new investments that were being made in Canada by Eng 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 ex ports.
lish and American capitalists, in Turkey especially by Ger mans, and in China by Americans and Europeans.
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 de pendent as well on various other items in the balance as on those here considered.
§ 9. Oancelation of foreign indebtedness. In the inter national business of any two important countries to-day, such as England and America, the number of credit and Fig. 2, Chapter 15, shows in more detail, by years for 1896 to 1914, on a different scale, the facts for which Figure 1 shows only the aver ages.
debit transactions is enormous. If each trader had to at tend to the forwarding of the means of payment for his pur chases, he would, of course, deduct from the amount of his in debtedness the amount due him from his foreign correspond ent, and might from time to time "remit" the balance in the form of a shipment of gold. This simple offsetting and can celation of debits and credits would greatly limit the amount of gold that would have to be shipped. But still, under such conditions, there must be a very large number of shipments of gold by different individuals, and a large proportion of these shipments would be going in opposite directions at the same time. Now, a merchant in New York called M may have a balance to pay in London to X, and at the same time a merchant in London called Y have a balance to pay in New York to a man called N. If M can buy from N his claim in the form of an order, draft, or bill of exchange, and send it to X, the latter may through his bank collect the sum from Y. In this way a further cancelation of indebtedness would occur.
When all persons having either debits or credits to be paid in New York and in London, respectively, are dealing with the banks in these cities, and the banks and special exchange brokers are constantly buying and selling these bills, a mar ket is created for London exchange in New York (and con versely in London), and a much easier and more nearly com plete cancelation of indebtedness results. In effect, all the debits and credits between the two countries are merged into one big ledger balance, and the international shipment of gold bullion finally made is just the amount needed to balance the accounts payable at the time. Industrial indebtedness is represented in various forms : bills of lading for goods shipped, drafts made by the creditor on his debtor for goods shipped or property sold, checks or letters of credit for trav elers, bonds and notes public and private. These are the ob jects dealt in by the bankers who are the agents to carry on the work of exchange.