By G. M. STEELE, D.D.

III.
EXCHANGE.

1. Exchange is the mutual and voluntary transfer of the right of property held by different persons. This implies, (a) the existence of the right of property; (b) that the transfer must be mutual, otherwise there is no exchange; (c) that it be voluntary, otherwise it would be robbery.

2. The principles that form the basis of exchange are the same as those implied in the great law of association and individuality; namely, those which give rise to the combination and division of labor. There is usually some one kind of labor, or at most a few kinds, for which each individual is competent. But the variety of occupations so nearly corresponds with the variety of aptitudes in every well-ordered community, that each may, with little effort, find the calling to which he is suited.

But while each individual is thus limited in his productive capabilities, his claims and wants are nearly limitless. He is in need of a thousand commodities, only a very few of which he can produce. He depends for the remainder of these upon his fellow-men. On the other hand, he can produce a thousand times as much of the few kinds of commodities to which he devotes himself, as he himself needs. These he transfers to his fellow-men, taking in return the surplus of their several products. This is exchange, or commerce. It is implied in the very constitution of man. Association is an imperative condition of humanity.

3. A distinction is sometimes made between commerce and trade—a wise distinction, as it seems to me, though observed by but few writers. The former is the object to be accomplished; the latter is the agency through which it is accomplished. Thus, a farmer has wheat, butter, eggs, poultry, wool, etc., which he wishes to exchange for cloth, sugar, agricultural implements, boots and shoes, and a hundred other articles. He can not go to the several producers of these, carrying his own products to exchange for them, except at immense disadvantage. Hence arises the necessity for the trader, or merchant. Trade and commerce have sometimes been represented as mutually antagonistic. This is true only to a certain extent. The great economical point to be guarded is to have no more traders than are necessary to make the exchanges. When the industrial and commercial conditions of a country are such that the producers and consumers, who are the real exchangers, are placed and kept at a great distance from each other, so that they can not combine with each other except through the agency of a great number of middle-men, the conditions are highly detrimental to the interests of the parties chiefly concerned. Beyond a certain point, the greater the power of trade, the worse it is for commerce. It is nevertheless true that there are certain natural obstacles to direct commerce which can be surmounted only by some kind of intermediate agency; and this makes the trader necessary. In this respect, and to this extent, trade is an aid to commerce. Yet commerce should be as direct as possible. To this end it is desirable that the greatest number of commodities for which productive facilities exist, should be produced in the same community.

4. The general law of exchange is value for value. This will be obvious if we recur to one of our statements concerning the nature of value, namely, that is the quantity of one commodity that may be equitably exchanged for a given quantity of another. It will be still more obvious if we recall the complete definition: value is our estimate of the sacrifice requisite to secure possession of a desired object. Thus, if it require the labor of one day to produce a pair of shoes, and the labor also of a day to produce three bushels of oats, then the rule of exchange would be three bushels of oats for a pair of shoes, because the required labor in the one case is precisely equal to that in the other.

This is the fundamental law, but it is modified in its operation by certain other facts and principles. Chief among these is the law of supply and demand. By supply is meant the quantity of any commodity which is in the market. Demand signifies the quantity which is desired at a given price. The definitions are sometimes erroneously given of supply as the quantity which exists, and demand as the quantity desired. But a man may offer for sale a load of wheat, provided the price is a dollar a bushel, but withdraw it from the market if the price is but ninety cents. A thousand people in a certain town may desire diamond necklaces, but not half a dozen may be able to purchase them. Hence supply is all that is offered in the market; and demand is desire with ability to purchase.

Demand and supply affect prices in this way. Suppose a community has been exclusively using wood for fuel, and their wood can be had at a certain price. After a time a coal mine is discovered in the vicinity, and coal can be furnished much cheaper than wood. This would lessen the demand for wood. As there would be the same amount for sale as before, the seller would be in competition, and the price would fall. So if for any reason before the discovery of the coal the supply of wood had been diminished one half, the demand being the same, the price would rise. Thus we have the general principle that other things being equal, the greater the supply, the less the price; the smaller the supply, the greater the price; the greater the demand, the greater the price; and the smaller the demand, the less the price. In other words, the price varies directly as the demand, and inversely as the supply. In general price varies as the cost of production plus or minus the effect of supply and demand. These principles are affected again in many ways which we can not here explain. Yet the variations are always temporary, and the price or market value always tends to seek the level of cost of production.

5. Trade has been spoken of as an agent of exchange. An instrument also is needed. The primitive method of exchange was by barter. That is, by giving the commodity one produces for that which one desires to possess. But this was early found inconvenient. The man who made shoes and wished to exchange some of them for a coat, would not readily find a coat-maker in want of shoes; or if he should, the latter very likely would not want just so many pairs of shoes as would be equal in value to the coat. All other exchanges might be at a similar disadvantage. What is needed is a commodity which will be a medium of exchange—which every one will be willing to receive for any commodity which he has for sale, and which will command anything which he wishes to buy. Such a commodity is usually the main element in the machinery of exchange, and is what constitutes money.

This instrument in order to meet the want, it is generally believed, must have the following characteristics: 1. Value in the material of which it is made. 2. Uniformity of value throughout the world. 3. Much value in small bulk. 4. Approximate constancy of value. 5. Not readily destructible. 6. Divisibility into small portions which are capable of being reunited. 7. Of universal use. 8. Capable of receiving stamps and marks. Most of these properties are found in gold and silver, if not to such an extent as has been claimed for them, at least so far that they have been the basis of the money of the civilized world.

6. But supplementing in a certain way, and representing these, the instrument of exchange comprises also the large element of credit. This consists chiefly of book accounts, promissory notes, bank notes, government notes, bank deposits, checks, drafts, bills of exchange, stocks and bonds. One of the great agencies in modern commerce by which credit is made effectual as a part of the mechanism of exchange is that of banks. Banks are institutions which serve to abbreviate and facilitate the business of exchange and to extend and render available the credit of the community.

There are four kinds of banks, namely: savings banks, banks of deposit, banks of circulation and issue, and banks of discount. In our modern banking system the last three are generally found in combination, that is, each bank exercises all the functions implied.

A savings bank is an institution in which small sums of money are deposited from time to time as they accumulate in the hands of persons of moderate incomes. The depositors are credited with these amounts, and receive a certain, usually not very large, rate of interest in any case, and an additional amount contingently. The bank loans the money thus deposited in large sums to trustworthy persons who can furnish good security, the rate of interest being somewhat higher than that paid to the depositor.

The benefit of such an institution is two fold. In the first place there are many persons who have small sums of money which they desire to be earning something in some safe place. The amount is too small to be loaned to advantage. Such persons are not likely to know how, even if the sums at their disposal were sufficient, to find the best investment, or to determine concerning the security offered. But put into the hands of men who make this their business, under rules devised by the best financial talent of the community, and who can combine these small sums and invest them to the best advantage, it is made both safe and profitable for the small capitalists.

In the second place there are many persons who wish to unite their labor and skill with capital in some productive enterprise, and having no capital of their own, desire to borrow. They do not know the persons who have money to loan. The savings bank affords them an opportunity and gives them an advantage which they would not otherwise have. It is a benefit first to those who have some surplus, but are unable to loan it to advantage; secondly to those who are in want of capital, but do not know where to find it.

A bank of deposit grows out of the necessities of commerce in a community where much business is transacted. All persons engaged in trade will find from time to time large or smaller accumulations of money in their hands which it is not safe without considerable expense, to keep by them. Hence the custom of depositing these for safe keeping in the bank. Usually no interest is paid as the money may be withdrawn any time at the will of the depositor. It was early found that only a small proportion of these deposits were likely to be withdrawn at any one time; hence a considerable proportion of them could be loaned on short time, and thus the bank would in this way receive compensation for its care, without expense to the depositors. In this way, too, the capital of the community could be kept more fully employed.

But the credit factor in the deposit system soon came to have a much wider scope than is here indicated. Instead of each depositor going to the bank and drawing his money as he needs it, he now gives an order or check on the bank to any man to whom he may have occasion to make a payment. In many cases the receiver of such a check also has deposits at the same bank. In such a case he sends in the check to be deposited with his cash for the day. The amount is debited to the drawer of the check, and credited to the depositor of it, and thus by a simple transfer of credit much business is done without the intervention of any money. This expands into a great and complicated system of exchange between individuals doing business at different banks, by banks in different cities, and by traders in remote nations. Goods are sold in one locality and paid for in the goods of another locality by means of drafts, bills of exchange, etc., meeting and canceling one another, so that very little money is transferred from point to point.

The function of discount and loan, as has been intimated, is in modern banking usually combined with that of deposit, as also that of circulation or issue. When the capital of a bank is paid in by the stockholders, and the officers elected, it is then ready for business under regulations imposed by its charter. There are two ways in which the public is accommodated. First, when a wholesale city merchant sells a bill of goods to a country retail merchant, it is frequently the case that the former makes out his bill, which the latter accepts, promising to pay in thirty, sixty or ninety days. This accepted bill the wholesale merchant carries to his bank, where it is received with his endorsement, and the cash, less the interest for the given time, is paid him or placed to his credit. This is discounting a bill. A loan is sometimes made by a borrower’s giving his own note endorsed by some reliable person, and payable in some brief time as above. Sometimes the note is discounted; at other times the interest is paid when the note is taken up.

The function of circulation is exercised by the issuing of bank-notes to be circulated as money. When a bank is instituted the stockholders are required to pay in their respective shares in metallic or lawful money. But as the borrower would find coin most inconvenient to carry about, the device arose of substituting notes of the bank, payable on demand, thus leaving the specie in the bank. It was further soon observed that only a very small proportion of these notes were likely to be called for at any one time. Hence a large part of the specie could be used for other purposes instead of being kept idle in the vaults. Under the national bank system now in operation the capital of the bank may be largely invested in United States bonds which are retained in the government treasury, but on which the bank draws the usual interest. The bills of the bank are then guaranteed by the government, so that there is never any loss to the holder of the bills, even if the bank fails.

PROTECTION AND FREE TRADE.

7. We have space but for a very brief outline of this important question. It is one which has for a long time agitated the public mind, and one on which honest and highly intelligent men widely differ. A protective tariff so called, is a system of duties levied by the government of a country on certain commodities produced in other countries to prevent their coming into unequal competition with similar commodities of domestic production in such a way as to cripple or destroy the industries implied in the latter.

Free trade is opposed to all those duties, the design of which is to afford any advantage to domestic industry. It implies the same freedom between producers in different nations as between those in the same community.

The main arguments in favor of protection are as follows:

(1) It is the only sure defense of new and feeble industries against the unequal competition of those long established in other or older communities. Freedom of competition is admitted as desirable, but it is denied that this exists under the conditions referred to. A community which has long experience, skilled labor, and accumulated capital, possesses great advantages in the contest with a nation destitute of them.

(2) It is urged that a restrictive system gives a steady and uniform market at an expense less than the benefit accruing.

(3) It is also supposed to be essential to societary completeness; that is, to such a diversification of industry as will most profitably meet the diversity of ability and aptitude in the community.

(4) It is thought to be necessary to the highest prosperity of the unprotected interests. Among these agriculture is the most prominent. It is for its advantage that the tax of transportation be saved by having manufacturing communities in the midst of agricultural areas. Also, a community compelled to confine itself to agriculture mainly, must virtually transport its soil, the land constantly diminishing in fertility.

The advocates of free trade, on the other hand, present the following arguments in its favor, and objections against protection:

(1) Free trade is said to be the method of nature.

(2) It is objected that protection violates the right of every man to do what he will with his own.

(3) It is said to be of the nature of a tax on all the other industries for the support of those protected.

(4) It is objected that the restrictive system causes a diminution of exports from the protected country, on the principle that if the latter does not buy of the former, then the former can not pay for the goods of the latter.

(5) Another argument is that “infant industries” under protection never come to maturity.

(6) Finally, the case of the United States is cited as an instance of free trade on a large scale between widely remote sections, with the most satisfactory results.