Exports and War on the Continent

In this respect, too, Kersaint's previously cited speech of January 1, 1793, is significant, as was pointed out as far back as 1850 by the first historian of the Continental System, Kiessel-bach, and has been emphasized in our own time by the English historian, Dr. J. Holland Rose. 'The credit of England', says Kersaint, 'rests on fictitious riches. The real riches of that people are scattered everywhere and essentially mobile. On her own soil the national wealth of England is to be found almost exclusively in her Bank, and the whole of that structure is supported by the prodigious activity of her maritime commerce.' With such an idea it was evidently easy to arrive at the thought of ruining the whole credit system of England by an attack on her trade. The same line of thought—the dependence of the credit system on foreign trade—is followed more completely in several papers of French authorship referred to by Kiesselbach and made the subject of an interesting investigation by Miss Cunningham. The writer was a Chevalier De Guer (or Deguer), who had gone to England as a Royalist émigré and had there made a special study of the British system of finance. He is of especial interest in this connexion, for the reason that Napoleon, in a letter of 1803, expresses great satisfaction with his work, and desires from him a more detailed account of the position of British finances. On the whole, he regarded that system as well worthy of imitation, even as regards the circulation of bank-notes, but at the same time he believed that it had certain weak points. He brought out his results, for the enlightenment of his countrymen, especially in a paper entitled Essai sur le credit commercial comme moyen de circulation, which was originally printed in Hamburg in 1801, but was afterwards reprinted in France, and also in other articles, one of which Napoleon caused to be inserted in his official organ, Le Moniteur, for 1803.

The discussions in question were connected especially with the questions of the gold reserve of the Bank of England and the British rates of exchange; and these connexions are of great interest here. As every one knows, Great Britain supported the struggle of the Continental powers against France by means of subsidies of varying magnitude. From the beginning of the revolutionary wars down to the Peace of Amiens in 1802, the sum total of these subsidies, according to the official statement, amounted to about £14,300,000, including one loan of £4,600,000 to the Roman Emperor in 1795. The total amount of extraordinary payments on the Continent, however, was much larger than that, exceeding £41,000,000 for the three years 1794-6 alone. The ability of Great Britain to continue these subsidies during the later phase of the Napoleonic wars, supplemented by her ability to maintain her own troops on the mainland, was manifestly one of the points in the economic position of Great Britain which, politically speaking, was bound to take a fore-most place in the eyes of the French statesmen. It was important, therefore, to see how strong the connexion of those subsidies was with the British system of credit.

In this respect, also, Adam Smith's representation of the case is highly illuminative. In his famous criticism of the mercantile system as he conceived it, he is led to discuss the question—which is also well known in connexion with the recent war—as to the importance of gold reserves for carrying on war and consequently also as to their necessity for British payments on the Continent. He thus gets an opportunity to show that the expenses of war are defrayed 'not with gold and silver, but with consumable goods', and that these goods may be acquired by exporting from the belligerent country some part either of 'its accumulated gold and silver', or of 'the annual produce of its manufactures', or of 'its annual rude produce'. After a clear discussion of the first of these alternatives, he lays it down that 'the enormous expense of the late war (Seven Years War) must have been chiefly defrayed, not by the exportation of gold and silver, but by that of British commodities of some kind or other'; and he makes the weighty observation that, as a consequence of this, the exports of Great Britain had been unusually great during the war, without yielding any corresponding imports in return. But in so far as payment for the continental war was effected by means of precious metals, 'the money of the great mercantile republic,' those metals must also have been purchased with British export goods, since neither the accumulated bullion reserves nor the annual production of gold and silver was anything like sufficient to cover the huge sums in question. In general, therefore, he concludes that it is the exports of England that enable her to wage war on the Continent, and chiefly the exports of finer and more fully manufactured industrial articles, which are able to bear high transportation charges. 'A country whose industry produces a great annual surplus of such manufactures, which are usually exported to foreign countries, may carry on for many years a very expensive foreign war, without exporting any considerable quantity of gold and silver, or even having any such quantity to export.' Adam Smith also describes how this works out in practice. The government arranges with a merchant to remit the necessary supplies to the theatre of war, and the merchant, in order to establish a claim there, sends out goods either to that country or to another country where he can buy a draft on the former.

To what extent this in itself absolutely conclusive statement—the capacity of which to throw light on the Continental System has not, to my knowledge, been observed—rightly leads to the conclusion that the exports of Great Britain were a necessary pre-condition for her capacity to carry on a war against France on the mainland, is a question which must be entirely reserved for later discussion. The only thing it is necessary to point out here is how very obvious such a consequence must have seemed. In De Guer's writings, as summarized by Miss Cunningham, that conclusion is reached without reference to Adam Smith, it is true, perhaps without his being known and, in any case, without any of his lucidity of thought. De Guer points out that, when war was waged in Westphalia or the Netherlands a hundred years earlier, as in Marlborough's time, England had no difficulty either in providing her own troops with what they required or in paying subsidies, for she could send goods there and thereby obtain balances to her credit on the spot. But as the Belgian ports had now been closed, and the theatre of war had also been moved to the Upper Rhine and the Danube, great credit difficulties had arisen in the paying of subsidies. Thus De Guer's way of putting things might inspire still greater hopes than that of Adam Smith as to the difficulty of maintaining the continental war if the exports of the subsidizing power were cut off from the Continent. Indeed, the French litterateur seems to have simplified the problem to the extent of having left out of account what is called 'triangular trade', which means that the exports to one country are used in order to buy drafts on, i.e., to pay debts to, another country. With such a conception the mere closing of the Continent might seem sufficient for the purpose, even if British trade as a whole were left undisturbed.

In his practical conclusions De Guer approaches the view that Adam Smith undertook to controvert. When England cannot pay subsidies by exporting goods abroad, the consequences, in De Guer's opinion, will be one or the other of the following: either she must export gold; and with the great circulation of paper currency within the country, as contrasted with the small increase of its supplies of metallic currency, this exposes all the note-issuing banks to the danger of collapse; or, on the other hand, she must neglect to export precious metals; and as she has not sufficiently large balances to her credit on the Continent to correspond with her payment of subsidies, the rates of exchange will then go against her to such an extent as to be ruinous to her trade. As usual, external phenomena, more or less correctly conceived, here affected the train of thought. There had been a heavy decline in the metallic reserves of the Bank of England (almost down to £1,000,000) which had led to its suspending payments in February 1797; and the attention excited by this event seems to have overshadowed the fact that the reserves only the next year rose again to £6,500,000, or even £7,000,000, and that during the following years, despite considerable fluctuations, they never again went down to the point where they were at the time of the suspension of payments. The British rates of exchange, especially on Hamburg, had fluctuated violently, and had been particularly 'unfavourable' to England, as has already been partially hinted, in the years 1794 and 1800-1801; and this was popularly connected with the great payments on the Continent, which undoubtedly coincided to some extent in time with these phenomena. De Guer's view was consequently very easily explained; to what extent it was correct, is a question which does not appertain to this stage of our inquiry.

What does concern us here, on the other hand, is the excellent basis for an attack on British exports created by such a theory. On the one hand, the conception of the rates of exchange and the supplies of precious metals, as effects of the balance of payment abroad, and, on the other hand, the conception of the general solvency of Great Britain as dependent on the bullion reserves of the banks, had carried people forward (or back) to a justification of the old mercantilist trade policy on a much stronger basis than before. For the commercial policy of the mercantile system also built on the doctrine of the balance of trade, on the danger of 'insufficient weight in the scales of trade'; but in the sixteenth and seventeenth centuries, unlike the Napoleonic period, there had been no system of note circulation with a metallic covering which might be assumed to be ruined by an unfavourable balance of payments.