International Trade

by Faustino Ballvé

A quotation from Karl Marx. Caravans and trading posts. The world market. Marts, trades halls and exchanges, fairs and expositions. Commodity exchanges, warrants, and transactions at long distance and involving deferred delivery. Futures. Tribunals of commercial arbitration. Money-changers, bills of exchange, securities, and the stock exchange.

Through its exploitation of the world market, the bourgeoisie has given a cosmopolitan character to production in every country. To the great chagrin of the reactionaries, it has deprived industry of its national character. The old, established national industries have been destroyed or are on the point of being destroyed. They have been supplanted by new industries, whose production poses a vital problem for all civilized nations—industries that no longer process indigenous raw materials, but raw materials bought in the most distant regions and whose products are consumed not only at home, but in every part of the world.

In place of the old wants, satisfied by the products of the country, we find new wants, requiring for their satisfaction the products of the most remote lands and diverse climes. In place of the old national isolation and local self-sufficiency, we have universal trade and the interdependence of nations.

This is how Karl Marx and Friedrich Engels, in their famous Communist Manifesto of 1848, describe, in vivid fashion, the economy of their age. But in spite of the fact that Marx did his writing in the library of the British Museum, which at that time was the largest in the world, he was not, it would seem, well versed in history; for even in the most remote eras of antiquity we find the famous caravans—already mentioned in the Thousand and One Nights—transporting products between the farthest reaches of the Orient and the most distant lands of the Occident then known.

Centuries before Socrates and Plato, Tyrian traders plied their fragile craft as far as the Atlantic coast of the Iberian peninsula. Later, the Greeks and the Phoenicians established trading posts along the Mediterranean littoral as far as the mouth of the Rhone, and the Romans, sailing beyond England, penetrated all the way to Ireland.

The Tartars and the Mongols carried on a commercial traffic from the Pacific to the Danube, whence they continued as far as the Baltic and the North Sea. From here the Vikings carried their trade to the coasts of Africa and apparently, as certain competent historians assure us, traversed the icy seas, by way of Bering Strait, to America. Thus, we find in the extreme Orient the most distant products of the Occident, like steel blades from Toledo and the amber of the Baltic; and, on the other hand, the silks, brocades, rugs, jewelry, and perfumes of the Orient found their way as far as England and Sweden.

Even the most cursory perusal of any treatise on commercial geography¹ should suffice to convince one that there has always been a world economy constituting a unified totality. No matter how superficially we survey the daily life of any person, even the least civilized, we shall find that he continually, and without even being aware of it, depends on the products of distant lands. We need hardly mention the machinery produced in the great industrial countries like England, France, Belgium, Germany, and the United States, and dispersed all over the world, or the perfumes of Grasse or the silks of Lyon, which are used by elegant ladies everywhere, or the woolens of Australia, which clothe the middle and the upper classes of every country; nor need we speak of products as local as coffee, tea, and tobacco, which are in universal use, or of the fine woods of the Orient and Central America, which adorn the homes of people in every latitude. In the houses of even the most humble inhabitants of the Orient we shall find cooking utensils and sewing machines manufactured in Europe and the United States, just as we find in the Occident cloves and spices of Oriental provenance and countless knickknacks from China and Japan.

In a word, the true market is the world market. At the center of this market, in the Middle Ages, were the small Italian republics, especially those of Genoa and Venice, and the free cities of the Hanseatic League, as well as their neighbors, the Flemish ports, in particular that of Antwerp. It was here that the characteristic institutions of the world market—the trades halls and the exchanges—as well as the peculiar forms of mercantile transactions involving operations at a distance and deferred delivery² first came into being.

The most primitive form of market is the local mart or trading center, which still exists today among almost all the peoples of the world. Later, markets or fairs were held regularly, generally every week, in which the indigenous merchandise of the region was offered for sale: cereals, milk products, cattle and meat, certain textiles, household utensils, etc. These were followed later still, not by national, but by international markets, at which traders from all parts of the world would make a stop as they crossed back and forth along the trade routes. These merchants seldom brought with them the goods they had for sale but kept them on deposit in warehouses, in ships anchored in the harbor, or on the docks of the so-called ports of call. They made their sales by exhibiting samples of their merchandise or simply on the basis of qualitative classifications, which means that what they had to offer consisted of fungible commodities: consumers’ goods and raw materials, like fibers and minerals, susceptible of being qualitatively graded and interchangeable within each category. The places where these merchants congregated in Italy and Spain were called, at the end of the Middle Ages and at the beginning of the modern era, loggias or lonjas. The most ancient of these trades halls are probably those founded by the Catalans in Alexandria and the celebrated llotja de mar of Barcelona of the fourteenth century, still standing in a magnificent Gothic edifice of which a smaller imitation was later made in Valencia. (There is also a French loge de mer at Perpignan.) It should not be forgotten that international maritime traffic from the Baltic to Constantinople was regulated for four centuries by the first document having the character of a commercial code, the Consulado de mar, apparently drawn up in the thirteenth century at Barcelona, although the first known edition of it dates from 1484.

In the same period, a family of Dutch exchange brokers named Van Burse founded a similar institution in Bruges, whence comes the word “bourse,” which passed to Antwerp and into almost all other countries except the Anglo-Saxon. An analogous institution, called the Royal Exchange, was founded in London by Sir Thomas Gresham (whose name has been given to the supposed law—undoubtedly attributable to him, but apparently first formulated by Copernicus—according to which bad money drives good money from the market). In modern times it has once again become the fashion to hold expositions, sometimes national, but chiefly international, the most famous of which is the Leipzig trade fair in Germany. At these expositions the articles displayed and traded are not fungible commodities, but almost exclusively manufactured or finished goods, such as, at Leipzig, fine furs, books, machinery, and precision instruments.

The object of the trades halls or commodity exchanges is to save space and time. Present in symbolic form, through their owners or the latters’ agents, are commodities of the most distant provenance: coffee, tea, sugar, cotton, linen, furs, metals, cereals, etc. The buyers make their purchases from samples or according to graded classifications of quality and receive, not the merchandise itself, but an order for its delivery or simply a negotiable instrument, consisting of an endorsable warehouse receipt, called a warrant. Often the merchandise involved in the transaction is never seen, but title to it may be transferred by successive acts of assignment. In this way, transportation over long distances is avoided. Thus, a parcel of cotton coming from the United States and actually arriving at Argentina may have been purchased in London first by a Portuguese, who then resold it to a Greek, who, in turn, sold it to an Argentinian, the cotton being still in the field all the while.

But time—that great enemy of the entrepreneur—is also saved by means of transactions in futures, i.e., present contracts for the purchase or sale of commodities to be delivered at a specified date in the future. This kind of operation makes it possible for the processor of raw materials to be sure that he will have them, at a fixed price, when he needs them and thereby facilitates his calculations in advance of his entering into sales contracts.³

Such transactions are usually carried on by means of samples or simply on the basis of qualitative grades (e.g., average Santos coffee, good middling cotton, etc.), in standardized units and at prices that are often little more than approximations based on estimates (e.g., of the alcoholic content of liquids or of the resistance of cotton to twisting, etc.). Both buyer and seller deposit funds as a guarantee of good faith. Since transactions of this kind can give rise to misunderstandings and disputes, the exchanges, and most notably those specializing in particular commodities, have established international tribunals of commercial arbitration, to which the contracting parties can submit their case for a decision concerning quality, quantity, and the final terms of settlement. These organs of arbitration, like the one for cotton at Liverpool or New York, for coffee at Le Havre, etc., have justly earned an excellent reputation for their integrity and enjoy a prestige based on universal respect and esteem. Their decisions are recognized by almost all the courts of justice in the world as binding obligations on the contracting parties. The result is that transactions of this kind, apparently the most difficult and perilous, never give rise to insoluble conflicts.

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In order to meet the monetary needs of international trade, a foreign-exchange market developed. In the early days of international trade, buyers resorted to money-changers to obtain the foreign money demanded by the seller. As the handling of specie proved cumbersome, expensive (because of the costs of transportation and insurance), and dangerous, the bill of exchange was invented. The buyer in Paris who needed pounds sterling paid a money-changer francs, in exchange for which he received from the money-changer an order drawn on the latter’s London agent to pay the bearer pounds sterling to the amount shown. If this bill bore a signature in which the seller had confidence, he accepted it in payment and incurred no risk because it was drawn to the order of a designated person, who could endorse it over to another person, but it was payable only to the ultimate bearer whose name appeared last on it.

The person acquiring the bill paid a premium for it to the one who provided him with it, and the amount of this premium remained subject to the law of the market—i.e., of supply and demand. Those who were in a position to offer such instruments of payment were accustomed to congregate in a certain place, which was also frequented by those who needed them, and there competition resulted in the best price for both buyers and sellers. In Paris these transactions took place as early as the fourteenth century on the Pont-au-Change. Hence arose the foreign-exchange or money markets, which later became stock exchanges dealing in all types of securities, because not only was there a need for instruments of payment, but people also wanted to invest money in stocks and bonds (loans represented by credit instruments to which title is transferable, like mortgage debentures) of national or foreign enterprises or to place money at interest by the purchase of government bonds, national or foreign, constituting claims on the public debt. The prices quoted for all these different types of securities fluctuated, like those of any commodity, according to the law of supply and demand, the confidence they inspired, or the outlook for the future of the companies or governments issuing them. For similar reasons, fluctuations also took place not only in the premiums charged for instruments of payment in the money market, but also in the rate of foreign exchange itself, and the law of supply and demand always resulted in the rate of exchange most acceptable to all concerned.

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This is what we could characterize as the normal state of commercial intercourse between nations, and this too is the mechanism by which it functions. Its enormous advantages are easily conceived. They consist essentially in the fact that every buyer can obtain, almost without leaving his home (because the telephone, the telegraph, and the facilities provided by exchange brokers render any personal dislocation unnecessary), anything that he needs, no matter where it comes from. On the other hand, the seller can, also without leaving his home, and even sometimes without seeing his merchandise, have it sent anywhere in the world. The commodity and securities exchanges are mirrors in which are reflected all the vendible goods in the world in their quantity and quality, and where producers find registered the needs and anticipations of people everywhere at any time. This public offer and demand, in free and open competition, automatically eventuates, in the form of market quotations, in the prices exactly suited to ensure that the producer will not withdraw from production and that the consumer will not refrain from buying. In a word, thanks to free trade and the efficient service of exchanges and arbitrage operations (i.e., conjoined purchases and sales to take advantage of price differentials in differently situated markets), the result is the best and cheapest world-wide distribution of goods.

And yet this system has its detractors and has for some time now been in a state of crisis because its critics have succeeded in influencing public opinion. Against the world-wide free economy two enemies have arisen: nationalism and socialism; and another enemy disguised as a friend: so-called central planning, or the doctrine of the planned economy. We shall concern ourselves with these three tendencies in the two succeeding chapters.