i28 
sa] 
INTERNATIONAL TRADE 
Proceed now a step further. Assume again a simple case, for 
elucidation of the principles. Suppose that loans go on year after 
year, the same amount annually. Each year Englishmen lend to 
Americans a given sum, say 10 millions. Assume also, for 
simplicity, that there are no direct purchases by the borrowers, 
but always — in the first instance, that is — a flow of specie into 
the borrowing country. In due time, the length of the interval 
depending on the sensitiveness of prices to the increase or decrease 
of specie, a continuing favorable balance of trade appears in Great 
Britain and the reverse appears in the United States. The lend- 
ing country has a steady excess of exports, the borrowing country a 
steady excess of imports. Specie no longer flows; the continuing 
loans are made thru the mechanism of merchandise movements. 
At an early stage in the operations, however, another factor 
begins to enter. Each year the borrowing country has to pay 
interest on the loans contracted so far; and to that extent the 
amount which the lending country has to remit on capital account 
is reduced, as regards the net balance of the international account. 
The interest charge to be paid by the borrowing country grows 
with every year. The capital sum from the lending country 
remains (under our supposition) the same from year to year. 
The accumulating interest charge will grow, and in time will be 
equal to the constant capital sum. Eventually, it will be greater. 
At the outset the transactions lead the lending country to make 
remittances to the borrowing; in the end it is the borrowing coun- 
try which has to remit. 
These shifts in the relations between creditor and debtor country 
will manifest themselves in the flow of specie between them and 
in their merchandise transactions. The initial flow from the lend- 
ing country is destined to be checked in any case by the changes in 
prices. But it will be checked the more quickly by the accruing 
interest charge. The accommodation of the merchandise balance 
(the balance of trade) to the balance of payments will therefore 
take place more promptly than in the case of other invisible items, 
such as tourist expenditures. And eventually there will be a 
reversal of the initial features. Specie will flow back to the