Chapter XXX: Appendix: To Chapter XIII

THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES[301]

The word, "trade," as used in connection with statistics of foreign and domestic trade has been irritatingly ambiguous. Few writers, in speaking of domestic trade, have meant the same thing by trade that they have meant by the word when speaking of foreign trade, and hence we have had many pointless efforts to institute comparisons between the two, and some very misleading statements about the matter. Thus, figures have been offered which would show that the foreign trade of the United States is only a fraction of 1% of the domestic trade. This conclusion is reached by taking the figures for banking transactions discussed in Chapters XIII and XIX as representative of domestic trade, and comparing them with the annual figures for exports and imports. This procedure is fallacious for several reasons:[302] the figures thus reached for domestic trade exceed even the total trading within the country, as shown in Chapter XIX. In the second place, as shown in Chapter XIII, the bulk even of these deposits which do represent real trading grow chiefly out of speculation. Even in ordinary trade, goods are counted several times before reaching the final consumer. It is clear, therefore, that even an accurate figure for total trading within the country would have little relevance when we are seeking a figure to compare with exports and imports. Nor, if a comparison of the actual trading in which foreigners participate with the trading exclusively between Americans is sought, can we take the export and import figures as representative of the foreign trading--they do not include a multitude of highly important transactions in which foreigners participate. Very much of the business of the New York Cotton Exchange, the New York Stock Exchange, the Chicago Board of Trade, and other speculative markets represents foreign buying and selling, especially arbitraging transactions, and the other "invisible items" of foreign trade need merely to be mentioned for the economist to recognize the fallacy of a comparison which omits them.

What figures are relevant when we wish to compare foreign and domestic trade? First we must make clear the purpose for which the comparison is to be made. If we are concerned with the calls made by foreign and domestic trade on the money market, we should make use of a different method of comparison than that which will be here employed. The purpose of the comparison here undertaken is to determine how much of our American labor, land and capital is at work producing for the foreign consumer, as compared with the land, labor and capital in America producing for the American consumer. The comparison here undertaken is concerned with the question which is usually uppermost in the minds of those who undertake such a comparison, namely, _how important_ is our foreign market to us? Obviously, for such a comparison as this, we should not count a given case of eggs twelve times merely because it changed ownership twelve times in getting from farm to breakfast table. Items of export and import count only _once_ in the figures for export and import. We must find a figure for domestic "trade" in which items count only once, allowing no turnovers of the same goods to swell the total, if we wish to make our figures comparable.

The method proposed for making this comparison, for a long series of years, is a modification of the method used by the writer in an article in the _Annalist_ of Feb. 7, 1916. A figure based on the bank deposits of _retail merchants_ in Kinley's 1909 investigation was there taken as properly comparable with the export and import figures. The final sale to consumer by retailer is "the one far off divine event" toward which the whole productive process moves. Everything else in production and exchange looks forward to this. Ultimately, from the demand of the final consumer comes all the demand that is directed toward the agencies of production, even though the laborer sees his immediate market in the person of the employer, and the capitalist or landlord sees his immediate market in the person of the active business man. The figure reached for retail trade by the method then employed was $34,500,000,000 for 1909. This figure was too high, as shown in Chapter XIII above, and the figure reached now for retail _deposits_ by the same method is $32,000,000,000. Even this figure is too high, however, as I there concluded, to represent retail _trade_, and I shall use it only as a check on King's figure for _the total income of the United States in 1910_, which I shall use as a base figure instead of my own. King's figure for the total income of the United States in 1910 is $30,500,000,000.[303] I take this figure as including all that the American people spend for consumption, with retailers, physicians, hotels, theatres, etc., and also their net savings for the year. Part of this they spent for foreign products. The rest they spent at home. This residue spent at home gives us a figure which we may properly compare with the amount the foreigner spends in America, as indicating the ratio of foreign to domestic trade for the purpose in hand. We subtract, in other words, from the figure for total income the figure for _imports_. Then we compare the residue with the figure for _exports_, and get our ratio of foreign to domestic trade. The export and import figures must first, however, be reduced to a _retail_ basis. That is, assuming that wholesale prices are two-thirds of retail prices, we add 50% to the figures for exports and imports (which are wholesale figures) before making the subtraction and the comparison. The ultimate consumer, both in Europe and America, pays for imports and exports on a _retail_ basis.[304] This method, applied to the figures for 1910, gives us a ratio of about 10:1 for domestic to foreign trade--the lowest percentage for foreign trade which we shall find for any year in the period investigated, 1890-1916.

This comparison is still unfavorable to foreign trade. Domestic trade, in our figures, includes savings and investments, including investments made by Americans abroad. Import figures are marred by undervaluations, exports are not all counted, and the figures for exports and imports do not include foreign investments in America. American investments abroad should not be counted as part of domestic trade. Moreover, our figures take no account of travellers' expenditures, or of services performed by professional men of one country for men in another, or of certain other "invisible items." But while this makes our percentage for foreign trade too low for all years, it probably does not greatly upset the results for yearly variations in the ratio except for the year 1916, when the figure for domestic trade is left decidedly too high, and the ratio for foreign trade is too low, as compared with previous years.

For years other than 1910, indirect calculations must be resorted to for domestic trade. I have substantial confidence in the rough accuracy of the figure chosen for 1910 in view of the convergence of two widely different sets of data. My figure for retail deposits in 1909 is $32,000,000,000. King's figure for total income is $30,500,000,000 for 1910. King's figure seems to me a better figure to use for the purpose in hand. I use my own merely as a rough check on his. For years other than 1910, the figure for net income is calculated as a percentage of King's figure for 1910, by means of an "index of variation." It is assumed that the net income of 1905, for example, bears the same relation to the index for 1905 that the absolute figure for net income of 1910 bears to the index for 1910, and net income for 1905 is then computed by "the rule of three." The index of variation chosen is _railway gross receipts_ weighted by _wholesale prices_. I think that railway gross receipts are, on the whole, the most dependable and easily manageable index of physical volume of production that we have, though recognizing difficulties, later to be discussed, in using them for the purpose in hand. Railroads touch virtually every kind of business in the country. Variations in the _pecuniary_ volume of production and consumption, however, if due to rising or falling _prices_, rather than to changing physical volume, would not be indicated by changes in railway gross receipts. The same volume of transportation might represent widely varying pecuniary values of goods transported. Railway rates do not vary from year to year with prices of goods, even though high-priced goods are normally charged higher rates than low-priced goods. The index, therefore, must include _prices_ as well as physical volume of transportation. For 1910, therefore, railway gross receipts and an index of prices are multiplied together, and counted as 100%. The same thing is done for railway gross receipts and prices for other years, and the results reduced to percentages of the result for 1910. The figure for net income in any other year is then readily computed as a percentage of the figure for 1910. The results, for the years 1890-1916, appear in the tables below.[305]

It may be noticed that my figures for net income in 1900 and 1890 do not correspond very closely with the figures for the same years as independently estimated by King. My figure for 1900 is $12,900,000,000, where his is $17,965,000,000; for 1890, my figure is $9,300,000,000, where his is $12,082,000,000. I am inclined to the view that the figures in my tables come closer to the facts for these years than do his figures, assuming that _his figure_ for 1910 is correct. It will be noticed that on his figures there was an increase of about 50% from 1890 to 1900, and an increase of only about 66% in the decade following. This seems to be an unlikely relation. One would expect a much greater rate of increase for the decade 1900-10, as compared with the preceding decade, than King's figures show. The period from 1890 to 1900 included the terrible panic of 1893 and the prolonged depression ensuing. The panic in 1907 was trifling in comparison, and recovery, as shown by our index numbers in the tables below, was very much quicker. Moreover, falling prices characterized much of the earlier decade. The highest prices of the whole ten years were in 1891. The period from 1900 to 1910 is a period of rapidly rising prices, on the whole. On the basis of our general knowledge of the two periods, one would expect a greater percentage gain by far for the second decade, and I therefore trust the results of the index of variation here chosen, which show that. Similar results are obtained by applying to the base figure for 1910 an index of variation derived from Kemmerer's and Fisher's figures for trade[306] and prices. My figure for 1890 may, moreover, be checked by comparison with the figure given by C. B. Spahr in _The Present Distribution of Wealth in the United States_ (p. 105) for the net income of the country for that year: $10,800,000,000. It may be that my figure for 1890 is too low, but I have not sought to "doctor" it by an arbitrary "correction factor" to make it correspond more closely than it does with the other estimates. It is striking enough that a figure derived from an index of variation, twenty years away from its base, should come as close as this to figures calculated from wholly different data.

One brief comment may be made on the significance of these figures. It may be questioned if figures showing the proportions of our industry devoted to supplying goods for the foreign market correctly indicate the importance of the foreign market to us. It may be urged that if we should lose our foreign market, we should merely turn to producing more for the domestic market, and that the loss would not be the whole of our receipts from foreign trade, but merely the cost of transition, and the loss that comes from shifting to production to which we are less suited. This is, doubtless, true. But the loss reckoned this way may well be greater than the loss reckoned on the basis of my figures! It is equally true, moreover, that our domestic trade is not important to the extent indicated by my figures, since if we lose part of our domestic trade, our producers will turn to supplying more for the foreign market. But one must not regard the cost of transition as a negligible matter! The cost may easily be prolonged depression. Certain parts of our foreign trade are really vital to us, both on the import and (to a less degree) on the export side. The most important practical use to which the figures here given may be put are in connection with short-run problems. Foreign trade is so important to us that any sudden alteration in its amount may bring great adversity or great prosperity--as the course of the present War abundantly testifies.[307]

An application of our method to the years 1850 and 1860 gives a percentage for foreign trade of 12.7 in 1850, and 16.0 in 1860.[308]

Certain other cautions are needed in presenting these figures. For one thing, variations in railway rates will make a given volume of gross earnings mean different things in different years as to the physical volume of traffic. In the writer's opinion, which is confirmed by Professor W. Z. Ripley, there is no possible way of making allowance for this, as the cross-currents affecting railway rates are altogether too numerous and obscure. Nor has any effort been made to allow for variations in the proportions of freight and passenger receipts, or of different classes of freight traffic.

Again, the proportions of railway traffic connected with foreign trade may vary greatly, and it may happen that a big increase in railway gross receipts is due to increasing foreign trade, primarily. There is reason to suppose that much of the increase of 1916 is to be explained that way. This makes our comparison for 1916 particularly adverse to foreign trade, since we count as domestic trade what is really foreign trade. The figures, however, are presented as they stand. Moreover, for 1916, the great increase in foreign trade is in _exports_. Merchandise imports are not much greater than in previous years.[309] Our exports have been chiefly paid for by "invisible items," gold and securities, and short term credits. These do not appear anywhere in our figures. A substantial source of error appears from this cause in our 1916 figure. I should think it safe to put the ratio for foreign trade to domestic trade for 1916 at above 20%, instead of the 17.9% our table shows.

The reader will wish to know for a given year how much of the increase or decrease is due to physical growth of business, as represented by railway gross receipts, and how much is due to changes in prices. To give this information, and to make it easy for a critic to check the results, a table showing the index numbers from which the figures for net income are computed is subjoined.[310]

TABLE I[311]

1 2 3 4
Ratio of
Domestic Trade of Foreign Trade of Foreign
Calendar Net Income United States = United States = to
Years of the Net Income minus Exports at Retail Domestic
United Imports at Retail Prices Trade
States Prices

1890 $ 9,300,000,000 $ 8,100,000,000 $1,300,000,000 16.1%
1891 10,400,000,000 9,200,000,000 1,400,000,000 15.2%
1892 10,000,000,000 8,700,000,000 1,400,000,000 16.1%
1893 10,100,000,000 8,900,000,000 1,300,000,000 14.6%
1894 8,300,000,000 7,300,000,000 1,200,000,000 16.5%
1895 8,400,000,000 7,200,000,000 1,200,000,000 16.7%
1896 7,900,000,000 6,900,000,000 1,500,000,000 21.8%
1897 8,000,000,000 6,900,000,000 1,600,000,000 23.2%
1898 9,100,000,000 8,200,000,000 1,900,000,000 23.2%
1899 10,900,000,000 9,700,000,000 1,900,000,000 19.6%
1900 12,900,000,000 11,700,000,000 2,200,000,000 18.8%
1901 14,600,000,000 13,300,000,000 2,200,000,000 16.5%
1902 15,600,000,000 14,200,000,000 2,000,000,000 14.1%
1903 17,700,000,000 16,200,000,000 2,200,000,000 13.6%
1904 18,000,000,000 16,500,000,000 2,200,000,000 13.3%
1905 19,600,000,000 17,800,000,000 2,400,000,000 13.5%
1906 21,500,000,000 19,500,000,000 2,700,000,000 13.8%
1907 26,600,000,000 24,500,000,000 2,900,000,000 11.8%
1908 23,000,000,000 21,300,000,000 2,600,000,000 12.2%
1909 27,600,000,000 25,400,000,060 2,600,000,000 10.2%
1910 30,500,000,000 28,200,000,060 2,800,000,000 9.9%
1911 29,600,000,000 27,300,000,000 3,100,000,000 11.4%
1912 33,800,000,000 31,100,000,000 3,600,000,000 11.6%
1913 34,800,000,000 32,100,000,000 3,700,000,000 11.5%
1914 32,600,000,000 29,900,000,000 3,200,000,000 10.7%
1915 35,400,000,000 32,700,000,000 5,300,000,000 16.4%
1916 49,200,000,000 45,800,000,000 8,200,000,000 17.9%

TABLE II. INDEX NUMBERS FROM WHICH THE FIGURES FOR
NET INCOME ARE DERIVED

1 2 3 4
Composite Net Income[312]
Dun's Prices R. R. Gross Index, R. R. Gr. of the United
Calendar with base Receipts, Rcts. multiplied States in
Years in 1910 reduced to by Prices. billions of
base of (Column 1 x dollars:
1910 column 2.) 100:30.5::(3):$

1890 76.5 39.8 30.8 $ 9.3 billions
1891 81.5 42.0 34.2 10.4
1892 75.6 43.5 32.8 10.0
1893 77.3 42.9 33.2 10.1
1894 71.5 38.1 27.2 8.3
1895 68.0 40.7 27.8 8.4
1896 63.8 40.6 25.9 7.9
1897 62.2 42.4 26.4 8.0
1898 66.4 45.1 29.9 9.1
1899 72.3 49.6 35.8 10.9
1900 78.1 54.0 42.1 12.9
1901 80.6 59.4 47.8 14.6
1902 84.0 62.6 51.3 15.6
1903 83.1 70.1 58.2 17.7
1904 84.0 70.3 59.0 18.0
1905 84.0 76.4 64.2 19.6
1906 88.1 85.0 70.5 21.5
1907 94.0 92.9 86.3 26.6
1908 92.4 81.8 75.6 23.0
1909 99.0 91.7 91.0 27.6
1910 100.0 100.0 100.0 30.5
1911 98.1 99.0 97.0 29.6
1912 104.1 106.9 111.0 33.8
1913 101.7 112.5 114.0 34.8
1914 102.5 104.5 107.0 32.6
1915 106.0 110.0 116.0 35.4
1916 125.0 129.0 161.2 49.2