depreciation which makes the hundred dollars worth only half as much as before has precisely the same effect on the four dollars, and therefore can not alter the relation between the two. Unless, indeed, it is known and reckoned upon that the depreciation will only be temporary; for people certainly might be willing to lend the depreciated currency on cheaper terms if they expected to be repaid in money of full value.

In considering the effect produced by the proceedings of banks in encouraging the excesses of speculation, an immense effect is usually attributed to their issues of notes, but until of late hardly any attention was paid to the management of their deposits, though nothing is more certain than that their imprudent, extensions of credit take place more frequently by means of their deposits than of their issues. Says Mr. Tooke: "Supposing all the deposits received by a banker to be in coin, is he not, just as much as the issuing banker, exposed to the importunity of customers, whom it may be impolitic to refuse, for loans or discounts, or to be tempted by a high interest; and may he not be induced to encroach so much upon his deposits as to leave him, under not improbable circumstances, unable to meet the demands of his depositors?"

In truth, the most difficult questions of banking center around the functions of discount and deposit. The separation of the Issue from the Banking Department by the act of 1844, which renewed the charter of the Bank of England, makes this perfectly clear. After entirely removing from their effect on credit all influences due to issues, England has had the same difficulties to encounter as before, which shows that the real question is concerned with the two essential functions of banking-discount and deposit. Since 1844, there have been the commercial disturbances of 1847, 1857, 1866, and 1873. Although no expansion of notes, without a corresponding deposit of specie, is possible.

§ 5. Before quitting the general subject of this chapter, I will make the obvious remark that the rate of interest determines the value and price of all those salable articles which are desired and bought, not for themselves, but for

the income which they are capable of yielding. The public funds, shares in joint-stock companies, and all descriptions of securities, are at a high price in proportion as the rate of interest is low. They are sold at the price which will give the market rate of interest on the purchase-money, with allowance for all differences in the risk incurred, or in any circumstance of convenience.

The price of land, mines, and all other fixed sources of income, depends in like manner on the rate of interest. Land usually sells at a higher price, in proportion to the income afforded by it, than the public funds, not only because it is thought, even in [England], to be somewhat more secure, but because ideas of power and dignity are associated with its possession. But these differences are constant, or nearly so; and, in the variations of price, land follows, cæteris paribus, the permanent (though, of course, not the daily) variations of the rate of interest. When interest is low, land will naturally be dear; when interest is high, land will be cheap.

A lot of land, which fifty years ago gave an annual return of $100, if ten per cent was then the common rate of interest, would sell for $1,000. If the return from the land remains the same ($100) to-day, and if the usual rate of interest is now five per cent, the same piece of land, therefore, would sell for $2,000, since $100 is five per cent of $2,000.

The price of a bond, it may be said, also varies with the time it has to run. At the same rate of interest, a bond running for a long term of years is better for an investment than one for a short term. The lumberman, who looks at two trees of equal diameter at the base, estimates the total value of each according to the height of the tree. Then, again, a bond running for a short term may be worth less than one for a long term, even though the first bears a higher rate of interest. That is, to resume the illustration, one tree, not rising very high, although larger at the bottom, may not contain so many square feet as another, with perhaps a less diameter at the bottom, but which stretches much higher up into the air.

CHAPTER XX.

OF THE COMPETITION OF DIFFERENT COUNTRIES IN THE SAME MARKET.

§ 1. In the phraseology of the Mercantile System, there is no word of more frequent recurrence or more perilous import than the word underselling. To undersell other countries-not to be undersold by other countries-were spoken of, and are still very often spoken of, almost as if they were the sole purposes for which production and commodities exist.

Nations may, like individual dealers, be competitors, with opposite interests, in the markets of some commodities, while in others they are in the more fortunate relation of reciprocal customers. The benefit of commerce does not consist, as it was once thought to do, in the commodities sold; but, since the commodities sold are the means of obtaining those which are bought, a nation would be cut off from the real advantage of commerce, the imports, if it could not induce other nations to take any of its commodities in exchange; and in proportion as the competition of other countries compels it to offer its commodities on cheaper terms, on pain of not selling them at all, the imports which it obtains by its foreign trade are procured at greater cost.

One country (A) can only undersell another (B) in a given market, to the extent of entirely expelling her from it, on two conditions: (1) In the first place, she (A) must have a greater advantage than the second country (B) in the production of the article exported by both; meaning by a greater advantage (as has been already so fully explained) not abso

lutely, but in comparison with other commodities; and (2) in the second place, such must be her (A's) relation with the customer-country in respect to the demand for each other's products, and such the consequent state of international values, as to give away to the customer-country more than the whole advantage possessed by the rival country (B); otherwise the rival will still be able to hold her ground in the market.

Let us suppose a trade between England and the United States, in iron and wheat. England being capable of producing ten cwts. of iron at the same cost as fifteen bushels of wheat, the United States at the same cost as twenty bushels, and the two commodities being exchanged between the two countries (cost of carriage apart) at some intermediate rate, say ten for seventeen. The United States could not be permanently undersold in the English market, and expelled from it, unless by a country (such as India) which offered not merely more than seventeen, but more than twenty bushels of wheat for ten cwts. of iron. Short of that, the competition would only oblige the United States to pay dearer for iron, but would not disable her from exporting wheat. The country, therefore, which could undersell the United States, must, in the first place, be able to produce wheat at less cost, compared with iron, than the United States herself; and, in the next place, must have such a demand for iron, or other English commodities, as would compel her, even when she became sole occupant of the market, to give a greater advantage to England than the United States could give by resigning the whole of hers; to give, for example, twenty-one bushels for ten cwts. For if not-if, for example, the equation of international demand, after the United States was excluded, gave a ratio of eighteen for ten-the United States would be now the underselling nation; and there would be a point, perhaps nineteen for ten, at which both countries would be able to maintain their ground, and to sell in England enough wheat to pay for the iron, or other English commodities, for which, on these newly adjusted terms of interchange, they had a demand. In like manner, England, as an exporter of iron, could only be driven from the American market by some rival whose superior advantages in the production of iron enabled her, and the intensity of whose demand for American produce compelled her, to offer ten cwts. of iron, not merely for less than seventeen bushels of wheat, but for less than fifteen. In that case, England could no longer carry on the trade without loss; but, in any case short

of this, she would merely be obliged to give to the United States more iron for less wheat than she had previously given.

It thus appears that the alarm of being permanently undersold may be taken much too easily; may be taken when the thing really to be anticipated is not the loss of the trade, but the minor inconvenience of carrying it on at a diminished advantage; an inconvenience chiefly falling on the consumers of foreign commodities, and not on the producers or sellers of the exported article. It is no sufficient ground of apprehension to the [American] producers, to find that some other country can sell [wheat] in foreign markets, at some particular time, a trifle cheaper than they can themselves afford to do in the existing state of prices in [the United States]. Suppose them to be temporarily unsold, and their exports diminished; the imports will exceed the exports, there will be a new distribution of the precious metals, prices will fall, and, as all the money expenses of the [American] producers will be diminished, they will be able (if the case falls short of that stated in the preceding paragraph) again to compete with their rivals.

The loss which [the United States] will incur will not fall upon the exporters, but upon those who consume imported commodities; who, with money incomes reduced in amount, will have to pay the same or even an increased price for all things produced in foreign countries.

But the business world would regard what was going on under economic laws as a great and dreaded disaster, if it meant that prices were to fall, and gold leave the country. Those holding large stocks of goods would for that time suffer; and so, at first, it might really happen that "exporters," in the sense of exporting agents (not the producers, perhaps, of the exportable article), would incur a loss. In the end, of course, the consumers of imports suffer. But, temporarily, and on the face of it, exporters do lose.

§ 2. According to the preceding doctrine, a country can not be undersold in any commodity, unless the rival country

1 In this illustration I have retained as nearly as possible the form of that given by Mr. Mill for the trade between England and Germany in cloth and linen.