5. The fundamental fallacy of the whole Ricardo-Mill system of Economics is clearly seen in these extracts, for Mill says that the value of a pipe of wine in England will depend on the cost of production of the cloth which purchases it, that the value of a foreign commodity in any country depends on the quantity of home produce which must be given in exchange for it. The fallacy of this doctrine is manifest. Mill says, for example, that if £100 worth of cloth is exported to Bordeaux, and purchases wine which sells in England for £500, that the value of the wine in England is £100! Can anything be more absurd?

To revert to our previous example of the sailor and the Fijian in a former chapter. The English sailor takes out an axe which cost 2s. 6d. in England, and purchases a pair of shells, which sell for ten guineas in England; Mill maintains that the value of the shells in England is 2s. 6d. !

This is precisely as absurd as to say that if a man spends £1 in producing an article which he can sell for £5, the value of the article is £1!

This is exactly the fallacy of the Ricardian system of Economics. The very first day Bentham read Ricardo's work, he wrote back to him to say that it was all founded on the fallacy of confounding Cost with Value; the Value of a thing is not what it has cost, but what it will sell for.

Now the course of trade in such a case would be this. The English merchant would first consider the price of Bordeaux wine in the English market, and its price in the Bordeaux market, both of which depend upon the Demand and Supply in the respective markets. He would then consider what English articles were suitable for the Bordeaux market, and their prices in each market, which also equally depend upon Supply and Demand. He would then select that article which was cheapest in the English market, and highest in the Bordeaux market. He would export that to Bordeaux, and buy wine with the proceeds; and when the wine was brought to England, his profit would be the difference between the cost of the English article, its freight, &c., to Bordeaux, and the freight, &c., of the wine to England, and the selling price of the wine in England. And, of course, he never would think of estimating the value of the wine by what he gave for it, but by the price he could get for it. And all the various prices of the articles in these transactions are governed

by the Law of Supply and Demand in each case and at all times.

Having thus shewn the unphilosophical nature of the basis of Mill's theory of International Values, and International Trade, we need not examine them any more, nor his alleged Equation of International Demand: the very slightest consideration will shew the absurdity of the whole doctrine. Such things cannot be fundamental laws of Economics, because it is a mere accident that countries are foreign to each other. When countries coalesce and become one, what becomes of International Values, and International Trade, and the Equation of International Demand? They simply collapse, and vanish into nothing. Suppose that the idea of the United States of Europe were realised; or suppose that the theory of the old Roman Empire were realised that there could be but one Emperor on earth, to whom all the nations of the earth were subject, what would become of the alleged Equation of International Demand? It would vanish into air! and with it the Ricardo-Mill system of Economics.

It has long ago been observed that for the purpose of trade the whole earth is one nation: and the Laws of Value must be the same in all places, in all times, and between all places, distant or near, foreign or home. Having swept away these absurdities, we now proceed to explain the mechanism of the Exchanges.

ON THE THEORY OF THE EXCHANGES.

1. We have said that when an interchange of like things takes place, such as commodities for commodities, or currency for currency, it is called an exchange. The "Exchanges" is that branch of Economics which treats of the exchange of the money of one country for the money of another, and of the remission of debts from one place to another by paper documents. They are merely an exemplification of the doctrines of Coinage and Credit, which have been so fully explained in the preceding chapters.

2. Next to a universal language, it would be the greatest commercial blessing to all nations, if they could agree to use one uniform measure of value, and the same weights and coins. No small part, nay, we might almost say the chief part, of the

intricacy and subtlety of the subject of exchanges, arises from different nations using different metals as the legal measure of value, and coins of all different denominations and values. If all nations could be brought to a uniformity on these subjects, there would be no more difficulty in understanding the Theory of the Exchanges between them than of those between England and Scotland. The artificial intricacy of the subject of exchanges gives rise to the employment of a considerable amount of labour, which is unprofitable to the community at large, exactly in the same way as a superfluous amount of technicality in a system of law gives rise to a large amount of unnecessary law business. Every one who has travelled abroad knows how detrimental the different exchanges are to his purse, as he passes through the different States. If any one were to take a quantity of money with him abroad, and pass through several different States, like those in Germany, it would soon dwindle away to almost nothing by the repeated operations of exchanging it for the current money of the country he happened to be in at the moment. The profits of the money-changers, as they do not arise out of natural operations, but out of the artificial distinctions in the different coinages, are wholly unprofitable to the community at large; because, in this case it is true, what many people think of real commerce, that the gains of one party are wholly made up of the losses of a number of others; whereas, the test of genuine commerce is, that both parties gain by the very nature of the transaction. It is clear, that the gains of the money-changers are no more additions to the wealth of the community, than the practice of sweating sovereigns in a bag, where the apparent profit is made up of the losses on each coin.

Banking first grew out of the operations of the moneychangers, and was first practised by them, but yet banking and money-changing are wholly different in their nature. The latter produces no benefit to society, the necessity for it only arises out of the artificial and unnecessary defects of the commercial regulations of nations. If these were put on a better footing, the whole trade of money-changing would be swept away at a breath. As the want of proper sanitary arrangements often breeds the diseases which cause the necessity for medical men, so it is the imperfection of the monetary system of the world that produces the necessity for money-changers. Banking, on

the contrary, is wholly different in its nature; it is genuine commerce, and, like all genuine commerce, it promotes the interests of both parties, it blesses him that lends and him that borrows, and augments the prosperity and wealth of the community at large. The correction of the imperfect system which gives rise to the necessity of money-changers would be an unmitigated blessing to every nation in the world; the abolition of banking would he the direst blow commerce could receive.

We have observed that, in former times, when there was comparatively little commerce between different countries, the coinage might circulate for a considerable time in a country without very much losing its value, after it had become considerably depreciated from loss of weight.

When these coins, however, are carried to a foreign country, they are of no value beyond their intrinsic weight as bullion. Though the natives of the country it belonged to, from long habit and association of ideas, see in it a certain denomination, and may receive it at its nominal value long after it has lost its legal weight, a foreigner sees in it nothing but so much bullion. When a person takes the coin of one country to another, and purchases the coin of that country with it, he is said to exchange it. Now, suppose that the coinage of two countries is of the same metal, and that both of the coinages be of their full legal weight and fineness; then if either of them be taken as a standard, which may be called A, then the number of units, or parts of a unit, of the coinage of the other, which may be called B, which contains precisely the same quantity of pure metal, is called the PAR OF EXCHANGE between the country A and the country B. Thus, if the legal standard of France and England were gold, and the pound be taken as the standard unit of England, the number of the standard units of the French coinage which contained precisely as much pure gold as the English pound, would be the par of exchange between England and France. The French standard is a franc, which is a silver coin. The gold Napoleon is also legal tender, which is twenty francs. Now, there is as nearly as possible one-fourth more pure gold in a sovereign than in a Napoleon; therefore, as the par of exchange is the ratio between these two coins, we might say that 1.25 is the par of exchange between England and France. But, as it is invariably expressed in france, 1.25 Napoleons is equivalent to

25 francs, and hence we may, for the sake of argument, call 25. the par of exchange. Hence, if an English sovereign would exchange for 25 francs in Paris, we should say that the exchange was at par.

Though a worn and depreciated coinage might pass for its full nominal value in its own country, in a foreign country it will evidently only exchange for its actual weight in bullion: hence, if the English coinage of sovereigns became worn and clipped, or much diminished in weight, they would not exchange for so many francs as they would do if they were of full weight; hence, an English sovereign, if taken to Paris whilst the French coinage maintained its full weight, in such a depreciated state, might only exchange for 22 or 20 francs, and this would be called a fall in the foreign exchanges; or if an English merchant were bound to pay his creditor in Paris 2,500 francs, he would have to give more than £100 English to purchase them, and the exchange would be said to be so much per cent. against England, by the amount of that difference.

It is evident that this adverse state of the exchange would continue so long as the English coinage remained depreciated; but that if it were restored to its legal standard, that restoration would be itself sufficient to restore the exchange to its usual rate. Hence, we see that if any foreign country maintains its coinage of full weight and purity, that a depreciation of the coinage of England necessarily produces an apparently adverse state of the exchanges, and that a reform of the English coinage is sufficient by itself to restore them to their proper state.

It is also evident that a depreciation of the coinage, by a debasement of its purity, will produce exactly the same effects. It is also clear, that if the coinage of both countries were equally degraded, the rate of exchange would not be altered between them; and that the rate would vary just in proportion as one was more or less degraded than the other.

Now, as when the coinage of a country has become depreciated either from wear and tear, or a debasement of the standard, the consequence is said sometimes to be a fall in the foreign exchanges, and sometimes a rise in the foreign exchanges, it is as well to fix clearly what these expressions mean, as it might be thought they are contradictory, when they are not so. They only refer to two different modes of estimating the coinage.