THE FRANCO-GERMAN INDEMNITY OF 1871 275 
how does the mechanism of international payments function under 
such an extraordinary strain? 
Adam Smith’s explanation was hardly satisfactory in his own 
day; certainly it cannot be so in ours. True, it had a plausibility 
for the 18th century, because then the same individual was likely 
to be both an exporter, an importer, and a dealer in foreign 
exchange. Differentiation in the conduct of these several phases 
of foreign business had barely begun; the “merchant” was likely 
to carry on all of them. And hence Adam Smith, casting about 
for an explanation, might readily conceive that the merchant, 
engaged in varied and interlocking transactions, would turn to the 
alternative of sending goods abroad to meet his bills, even tho this 
obviously would be a troublesome and risky matter, above all in 
times of war. That he should find a greater profit in doing this 
than in sending goods rather than specie is obviously inconsistent 
with Adam Smith’s own doctrine of the equality of profit in the 
employment of different capitals. But before quite ruling out 
Adam Smith’s explanation, one would wish to know more of the 
way in which things actually went in those days. Bookman tho he 
was, he was hungry for facts, and his version of what was taking 
place in his time is not likely to be entirely without foundation. 
None the less, it hardly tells the whole story even for the 18th 
century; and it certainly can tell us very little of what happened 
under such exigencies in later days. 
Ricardo and his contemporaries were confronted by the same 
problem." During the Napoleonic wars great subsidies were made 
to the Continental allies of England, and then also it became a 
question just how the subsidies reached the beneficiaries and just 
how they influenced the movement of specie or that of goods. 
But the Ricardian explanation, as sketched a moment ago, also 
cannot tell the whole story. The process which the Ricardians 
pictured is one which takes time. Here, as in almost all their rea- 
soning, they neglected the element of time, and assumed that the 
1 For an account of those discussions, see the valuable paper by Professor 
N. J. Silberling in the Quarterly Journal of Economics, May, 1924, especially 
pp. 416 et seq