Section XV. Mode in which the Precious Metal, or Medium of Exchange, Distributes Itself Among the Nations of the Globe

In the country of the mines, whence gold distributes itself to the rest of the world, gold is in relative plenty. As an addition is constantly making to the quantity already possessed, there is a constant tendency in the gold of that country to fall in relative value; in other words, a constant tendency in the price of other things to rise. As soon as any commodities have risen sufficiently high to enable them to be imported, they will come in from that country, be it what it may, from which, prime cost and cost of carriage taken together, they come the cheapest; and gold will go out in exchange.

By this importation of gold into that second country, it becomes relatively plentiful there, and prices rise. Some commodity, or commodities, become there at last so dear, that they can be imported, with profit, from another country: commodities, as in the previous instance, come in, and gold goes out. It is unnecessary to trace the operation farther. In this manner gold proceeds from country to country, through the whole connected chain of the commercial world.

In a preceding section we found, that it is the interest of two nations to exchange with one another two sorts of commodities, as often as the relative cost of producing them is different in the two countries. If four quarters of corn, for example, and 20 yards of cloth, cost, each, the same quantity of labour in England, but not the same quantity in Poland, it would be the interest of the two countries, the one to produce corn, the other to produce cloth, and to exchange them with one another.

Suppose, while four quarters of corn and 20 yards of cloth required the same quantity of labour in England; that in Poland 20 yards of cloth required twice as much labour as four quarters of corn. In these circumstances, cloth, as compared with corn, would be twice as dear in Poland as in England; in other words, four quarters of corn, which in England would be of equal value with 20 yards of cloth, would in Poland be equal to no more than 10 yards. In a traffic of these commodities, between England and Poland, there would be a value of 5 yards of cloth to be gained by each upon every repetition of the transaction.

Supposing, as we have done, that in Poland, if she produced corn and cloth for herself, four quarters of corn would have the same value as 10 yards of cloth, it follows, that if she had the use of money, the price of four quarters of corn, and of 10 yards of cloth, would be the same. In England, according to the supposition, the price of four quarters of corn and that of 20 yards of cloth would be the same.

There are two supposeable cases. The price of one of the two commodities, corn for example, is either—1. equal in the two countries, or—2. it is not equal. The illustration of any one of these cases will suffice for both.

Let us suppose that, in the two countries, the price of corn is equal. If it is, the price of a yard of cloth must in Poland be twice as great as it is in England. In these circumstances, what will happen is obvious: the cloth, which is cheap in England, will go to Poland, where it is dear; and there it will be sold for gold, because there can be no counter importation of corn, which, by supposition, is already as cheap in England as in Poland.

By the importation, in this manner, of English cloth into Poland, gold goes out of Poland, and comes into England. The consequence is, that gold becomes more plentiful in England, less plentiful in Poland. From this first consequence, a second ensues; that prices gradually rise in England, fall in Poland: the price of corn, for example, and, along with it, the price of cloth, rise in England, fall in Poland. If when we suppose the traffic to begin, the price of corn in each country is 1l. per quarter, the price of cloth being, by consequence, in Poland 8s., in England 4s. per yard; the supposed exchange of cloth for gold will gradually, in England, raise the price of corn above, in Poland sink it below, 1l. per quarter; raise the price of cloth in England above 4s. per yard, sink it below 8s. per yard in Poland. In this manner, the price of corn in the two countries gradually recedes from equality, the price of cloth gradually approaches it. At a certain point in this progress, corn becomes so dear in England, and cheap in Poland, that the difference of price will pay for the cost of carriage. At that moment a motive arises for the importation of corn into England; and prices regulate themselves in such a manner, that in England corn is dearer than in Poland, by the expense of carrying corn; cloth is dearer in Poland than in England, by the expense of carrying cloth, from the one country to the other. At this point, the value of the cloth imported into the one country, and that of the corn imported into the other, balance one another. The exchange is then at par, and gold ceases to pass.

From the consideration of the same circumstances, it will farther be seen, that no alteration can take place in the interchange of commodities between the two countries, without a new distribution of the precious metal; that is, a change in the relative quantities which they previously possessed.

Let us suppose that, in England, some new commodity is produced, which Poland desires to obtain. A quantity of this commodity is imported into Poland; and it can be paid for only in gold, because we have supposed that at this time, the corn and cloth, respectively imported, pay for one another. In this case, as in that which I have previously explained, the price of commodities soon begins to rise in England, fall in Poland. In proportion as prices rise in England, and fall in Poland, a motive is produced to import a greater quantity of Polish goods into England, a less quantity of English goods into Poland. And again the balance is restored.