BALANCE OF TRADE. The balance of trade is a theory arising from the apparent relation of exports to imports. The protectionist school of political economy holds that excess of exports over imports constitutes what is termed a °favorable balance,° which must be returned to us in gold and silver, this being the profit to the nation on its foreign trade. According to this theory the one desir able thing in foreign commerce is the exporta tion of merchandise. It should be said that all protectionists do not share in a belief in this theory.
In a great measure and in its more exag gerated form, this doctrine is a survival of the old mercantile theory which down to the time of Adam Smith controlled most of the legisla tion relating to commerce, and which held that gold and silver were the only wealth. It still retains a firm hold on the popular mind, but it may be said that the full weight of the teach ings of orthodox political economy is against the notion that excess of exports constitutes a favorable balance.
The argument of the latter is that if the theory is true there cannot be too great an ex cess of exports, and that our imports should therefore consist only of gold and silver. In this ((reduction to absurdity° (since a country has no more need of an excessive supply of the metals than of any other commodity) the f ree trade school of political economy rejects the conclusions based upon the apparent excess of exports over imports.
Opponents of the theory hold that such trade as exists between two countries, exclusive of what is paid as interest, rent or tribute, must show a mutual profit, and represent to each a corresponding excess of the value of importa tion. For illustration: A commodity costing in one country $75 will be bought in another for $100, in exchange for a commodity costing $75 in the country of its exportation and $100 in the importing country, such difference rep resenting the degree of desirability of these particular commodities to each country. It will be observed that this precisely reverses the *balance of trade° theory.
Countries may be able to show a favorable balance from hvo causes, neither of which con tributes to their prosperity. It may result from
an actual drain, as in the case of Ireland, which used to be sapped of its wealth by absentee landlords, and in India, where the same phenomenon is caused by a similar drain in the form of tribute, official salaries spent outside the country, pensions, etc. But in these in stances it is clear that there is a condition un profitable to both countries. Or, on the other hand, it may result, as in the United States, which has the same favorable balance, by rea son of the large sums annually paid as interest on loans that entered originally into railroad building, industrial improvements, etc. Most of the royal families of Europe, not to mention less exalted individuals, draw large dividends from American investments. Money spent by American tourists abroad helps to swell this favorable balance.
For proof that this theory has no such rela tion to national prosperity as its friends con ceive, its opponents point to England, whose commercial greatness is rivalled by this coun try alone, and which has a prevailing °unfavor able° balance, because she has been the money lender of the world, and her excess of imports represents the return received by her people for moneys invested in foreign lands.
It is impossible to account for the growing increase of our own export balance wholly on the explanation that such excess is rent or in terest upon loans. Much of such excess is in deed fictitious, and is to be accounted for by undervaluation of imports and overvaluation of exports. In the latter case there is a strong in ducement to overvalue, in order to conceal the fact that many of our exporters are selling goods cheaper abroad than at home. The in ducement to undervalue imports is quite as strong. In short, customs statistics, with every desire on the part of the Treasury Department to be accurate, are of necessity unreliable. See POLITICAL ECONOMY ; FREE TRADE ; PROTECTION. Consult Bastable, C. F., 'Theory of Interna tional Trade' (4th ed., 1903); Goschen, G. J., 'Theory of the Foreign Exchanges' (3d ed., 1896); Paish, George, 'Trade Balance of the United States' (in of the National Monetary Commission, Sen. Doc. 579, 1910).