Balance of Trade. The theories connected with the balance of trade arose out of the 'mercantile system' of political economy. In the mercantile system, which looked upon the possession of gold as the grand aim, it not unnaturally came to be a maxim that a nation becomes richer in proportion as the money-value of its exports exceeds that of its imports; the excess being paid in gold, was thought to be just so much added to the national wealth. Now, the difference between the money-value of the exports and imports of a state is called the 'balance of its trade;' and by the adherents of the mercantile system, this balance was said to be 'in favour' of the country or 'against' it, according as the exports or the imports showed the excess.
As a practical result of this theory, every sort of device was adopted in order to bring out a favourable balance. Laws were enacted prohibiting importation of foreign manufactures, or imposing high duties upon them, and giving premiums and other protective encouragements to exportation. The aim of commercial legislation, in short, was to promote the flow of the precious metals to one's own country, and to keep them there. The fallacies of the balance of trade were obviously due to a mistaken conception of the nature of wealth, and must therefore be traced to the errors of the Mercantile System (q.v.).
Connected with this, though very different, are the recent discussions regarding the balance of trade. For many years the imports of Great Britain have in value greatly exceeded the exports. Will not this tend eventually to the national impoverishment, especially as so large a proportion of the imports is devoted to consumption as food and luxuries? With reference to this question, the following points should be considered: That a great proportion of the revenue of this country is drawn from investments abroad, and with these investments we can pay largely for our imports; also that an important part of our business with foreign countries consists in a carrying trade, from which we draw considerable profits. In point of fact, our national wealth is continually growing, though doubtless Britain has reached a stage when an increasingly large proportion of its wealth must be devoted to investment abroad, and a less proportion to productive work at home. In this question there is a special necessity for a criticism of statistics, figures being so misleading unless they are carefully scrutinised.