INTERNATIONAL TRADE, the theory of which has caused more con fusion among economists, statesmen and men of affairs than any other economic problem. The important question, which has been the bone of controversy, is: whether or not that country which has the balance of trade in its favor is really the gainer, or in other words, is it better for a country to export more than it imports, receiving the balance in gold? At one time, it was universally be lieved, and it still is, to a wide extent, that the gain which any country derived from foreign trade could be estimated by the amount of money it brought into the country. Therefore it was the policy of every government to encourage exports and discourage imports, the idea being that the more exports exceeded imports, the more money, or wealth, would be brought into the country. This was hav ing the "balance of trade" in its favor. If, on the other hand, imports exceeded exports, obviously gold would have to be sent out of the country and, if this continued for a long period, so it was believed, the country would be impover ished. To guard against this, many gov ernments gave bounties to exporters and heavy duties were imposed on imports, leading to a system of protection.
Adam Smith, in his "Wealth of Na tions," was the first to expose this fal lacy, with so much conviction that large ly through his influence England adopted a free trade policy, and those countries which follow a protectionist policy do so, not to interfere with foreign trade, but to encourage certain industries.
The fallacy was based on the theory, or belief, that gold was actual wealth, whereas it merely represents wealth. Therefore, that gold which a country re ceives for the "balance of trade" in its favor, represents the difference in value between the goods it has imported and those which it has exported. Having sent out of the country more actual wealth than it has received in return, obviously it is the poorer to the extent of just that difference. If this balance is only temporary, no harm results, as, at a later date, heavier iinports will make up for the deficit. But should there be a continuous tendency to accumulate gold, paid for a continuous excess of exports over imports, then the country will gradually grow poorer, unless, as has been the case with England, this gold is invested in foreign countries. Otherwise the increasing supply of gold has a tendency to decrease in value in trinsically, and in the wealth it repre sents. The nation which hoards gold, which it has received in exchange for its wealth, is inclined toward the condition of the miser, who turns all his posses sions into money and, while theoretically very rich, is as poor as the lowest paid laborer. The highest benefits from in ternational trade, therefore, are attained where the exchange of goods is actually trade; that is, where exports are paid for by their equivalent in value with imports.