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BOOK III.
CH. VI.

The process which equalises the supply

and demand of gold is not

peculiar to

itself, if we substi

tute value for price.

Recapitu lation.

precisely for the same reason that a greater quantity of
labour and capital has not been employed upon the mines
of Cornwall. If the price of copper were greatly increased,
then copper mining would become a more profitable specu-
lation. There would be a greater inducement offered to
extend mining operations, and an increased amount of
copper ore would inevitably be raised. If, on the other
hand, the value of copper were diminished, the profits of
copper mining would also be diminished, and a smaller
quantity of copper ore would be annually raised. If, in
the same way, the value of gold were to increase, or, in
other words, if general prices were to decline, an increased
quantity of gold would be annually produced. If, on the
contrary, the value of gold were to fall, or general prices
to rise, the profits of gold mining would be decreased, and
the annual yield of gold would diminish, because with the
diminution in the profits of gold mining there would be
less inducement to employ labour and capital upon gold
digging. An increase in the demand for gold is evidenced
by a fall in the price of commodities; but, as we have just
stated, such a fall in general prices stimulates an increase
in the annual yield of gold, and in this manner an agency
is constantly brought into operation to equalise the supply
of gold to the demand, or, in other words, to preserve
a uniformity of general prices. The process is exactly
analogous to the equalisation of the supply to the demand
in the case of every other commodity. If the demand for
cotton goods increases, the price or value of cotton goods
will rise, but a rise in the price of cotton goods causes
their supply to be also increased. The reason, therefore,
why there is an apparent exception in the case of gold
arises from this circumstance. An active demand for any
other commodity is characterised by a rise in its price or
value. The same holds true with regard to gold, but since
the price of gold is a meaningless expression, it is neces-
sary to say that an increased demand for gold signifies a
rise in its value; a rise in the value of gold can, however,
only be shown by a fall in general prices.

The leading propositions established in this chapter are briefly these: If the demand for gold increases without the sources of its supply becoming more productive, the increased quantity of gold required will be obtained at

a greater cost, and the result must be that the value of gold will rise. An increase in the value of gold must be shown by a fall in general prices. If, on the other hand, rich gold mines should be discovered, and the cost of obtaining gold should be lessened, the supply of gold will be increased, and its value must inevitably decline, unless circumstances should simultaneously happen which should cause various countries to require a greater amount of gold money. If such circumstances should occur, an increase in the demand for gold might be created, and the whole of the additional gold yielded might be absorbed without the value of this metal being decreased. If, on the other hand, no circumstances should occur to increase the demand for gold, the increase in the supply of gold must cause a decrease in its value. But a diminution in the value of gold, or, in other words, a rise in general prices, creates an increased employment for gold, because if the price of a commodity is increased, a greater amount of money is required to be used each time a commodity is bought and sold. In this way the supply of gold will be always equalised to the demand, because, as the value of gold becomes depreciated by an increased supply, the demand for gold will also be increased in exact proportion to the amount of this depreciation. Thus, if the value of gold is decreased one half, or, in other words, general prices are doubled, the quantity of gold money required will also be doubled. This process of equalisation is moreover assisted by the two following circumstances:

In the first place, as the value of gold diminishes, a greater quantity of it will be used for purposes of art and manufacture, and in this way a portion of the additional supply of gold may be absorbed.

In the second place, a decrease in the value of gold exerts an influence to limit the supply, because gold mining will be rendered less profitable, and therefore the least productive mines will gradually cease to be worked. It will be shown, in a future chapter, that the principles just enunciated render us much assistance in determining the effects which have been produced by the recent gold discoveries in Australia and California.

We have, in this chapter, explained the manner in which the demand for gold is equalised to its supply in the case

BOOK III.

CH. VI.

Circumstances

which tend to equalise the demand

to the supply of gold.

BOOK III.
CH. VI.

of the countries which produce it; but other countries, such as our own, yield no gold; it is obtained entirely as an imported commodity. It will be therefore necessary to call to our aid the principles of international trade, in order to explain how the quantity of gold is regulated which a country like England annually retains for the purposes of coinage. The subject of international trade will therefore be considered in the next chapter.

CHAPTER VII.

FOREIGN COMMERCE OR INTERNATIONAL TRADE.

THE

HE advantages which a country derives from foreign commerce must be patent to the most casual observer. By foreign commerce a country obtains various commodities which she cannot produce herself; her people do not perhaps possess the requisite skill, or her climate and other circumstances of her physical condition are unsuited to the growth and manufacture of the products in question. Foreign commerce therefore extends the range of man's enjoyments; he is not confined to the products of his own soil, but commodities are brought from every region of the world to minister to his wants. Foreign commerce however confers another advantage which is equally important; a single example will show how greatly foreign trade stimulates the production of wealth by increasing the efficiency of labour and capital.

BOOK III.
CH. VII.

Advan tages of interna trade.

tional

The mu

tual advantage

gained by France selling

wheat to England for hard

If the economic condition of two countries is considered it will at once be perceived that there is the greatest possible variation in the relative advantages which they respectively possess for the production of various commodities. For instance, the mixture of coal and iron-stone, in alternate seams, gives England a striking advantage in the manufacture of hardware. On the other hand, a country like France has peculiar facilities for the growth of wheat; ware. her land is fertile, and her labour is cheap. It may therefore be assumed that in England iron is comparatively less costly to produce than wheat, and that in France the production of wheat is comparatively less costly than that of iron. In order to explain the advantage, which each of these countries derives from trading with the other, let it

BOOK III.
CH. VII.

This advantage may be gained whenever the prices

of two articles bear

to each other in different countries.

be supposed that in France the production of a ton of pig iron requires as much labour and capital as the production of twenty sacks of wheat; but that in England the same quantity of iron requires as much labour and capital as would produce ten sacks of wheat; then iron, estimated in wheat, is twice as valuable in France as in England. England therefore might say to France-It will be greatly to our mutual advantage if you will let me supply you with iron, and receive from you wheat in exchange for it. For suppose you give me fifteen sacks of wheat for each ton of iron that I send you, then we shall each gain five sacks of wheat on every transaction; if you manufacture the ton of iron yourself, it would cost you as much as twenty sacks of wheat, whereas you only have to give me fifteen sacks. On the other hand, I should only be able to get ten sacks of wheat for a ton of iron, if I sold the iron in my own country. We therefore each of us obtain a profit upon the transaction, which is represented in value by five sacks of wheat. This is a great gain, and a great saving of wealth, for the gain is made at no one's expense.

In order that two countries should enjoy those striking advantages which have just been pointed out as resulting from foreign commerce, it is not necessary that of the two commodities exchanged the first should be dearer in the one country than in the other, and that the second commodity should be cheaper; all that is necessary is that in a different the two countries there should be a difference in the proportion relative value of the commodities which are exchanged. It is very important to bear this remark in mind; its truth may be illustrated by an example. Suppose the cost price of a ton of iron produced in France is 30l., and that the price of a sack of wheat is 30s.; a ton of iron would therefore exchange in France for twenty sacks of wheat. But, in England, a ton of iron is supposed to exchange for only ten sacks of wheat. Let it therefore be considered that a ton of iron in England is worth 107., and that a sack of wheat is worth 17. Wheat and iron are therefore both cheaper in England than in France, but iron is three times as dear in France as in England, and wheat is only one and a half times as dear. There is therefore a difference in the relative value of wheat and iron in the two countries,

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