The idea of a balance of international payments

The preceding section has purposed to show that wherever two regions engage in reciprocal economic and financial relations the volume of the payments in the two directions tend to balance and that this tendency is present even where no currency frontier intervenes between the trading areas. It is the central problem of international finance. We turn now to a very hasty glance at the historical development of the idea of a balance of international payments.

For a period of about two hundred years prior to the publication of Adam Smith Wealth of Nations in 1776, "the most pervasive and the most emphasized doctrine is the importance of having an excess of exports over imports. To this doctrine and the trade regulations which it inspired, Adam Smith . . . gave the name of the 'commercial' or 'mercantile' system, which later became . . . the now familiar 'mercantilism.'" Probably best known and most easily accessible of these polemical writings is Thomas Mun England's Treasure by Forraign Trade, written about 1630 but not published until 1664.

Very early-- ProfessorViner discovered references as far back as 1381--it was observed that if a country's exports and imports were not exactly equal, there would be a balance payable or receivable in gold or silver. Soon after 1600 the term "balance of trade" came into common usage to denote this excess. Attaching, for a number of reasons, a very great importance to a net inflow of specie or "treasure," the mercantilist urged that every effort be made to encourage exports and to discourage imports, in order that there might be a net export surplus or, as it ultimately came to be called, a "favorable" balance of trade.

Fully to explain why a continuous inflow of precious metals was desired by the mercantilists would require more space than can be spared. Briefly, the case for a favorable balance of trade was based on the indispensability of precious metals as an emergency fund for the state, as a means of storing or saving "wealth," as a source of "capital," and to stimulate trade by its service as a circulating medium.

If England had happened to be a large-scale producer of gold and silver, it is possible that the mercantilist doctrine of the balance of trade would not have been developed with such vigor. But she was not, and the mercantilist was correct in insisting that an excess of exports over imports was the only certain way of provoking an inflow of precious metals from other countries. In conceding that much it is not intended to defend the mercantilist system, its concepts of wealth and capital, and the self-interested protectionism that it provoked.

The mercantilist, then, perceived the nature of the international balance of a country. Moreover, the ablest of the writers --for example, Thomas Mun--distinguished clearly between commodity exports and imports, and the other typical international transactions such as freight earnings, insurance payments, tourist expenditures, and so on. The terminology of the mercantilist, however, was confusingly simple. By the phrase "balance of trade" he meant the whole statement of a country's international transactions--commodity or merchandise as well as noncommodity. Not until very late in the period of mercantilist writing was the term "balance of payments" devised to refer to the entire balance of international transactions, reserving the term "balance of trade," as in present-day usage, to the commodity export-import accounts of a country.