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INTERNATIONAL TRADE 
quences of a sudden remittance of very large sums? of a great 
subsidy, for example, by one country to another? of a heavy 
indemnity ? How are payments of this kind effected, what are 
their consequences ? 
There is a well known passage in the Wealth of Nations in which 
Adam Smith refers to the subsidies which England made to Prussia 
and her other allies during the Seven Years War (1756-63). The 
remittances, he says, could not have been in specie, for the sums 
exceeded the total specie circulating at home. They must have 
been effected by sending out goods against which bills of exchange 
were drawn by the exporters and then sold to the British Govern- 
ment. And according to Adam Smith the actuating force which 
caused the resort not to money but to goods was simple enough. 
The “merchant” who is engaged in foreign business makes a profit 
on the exportation of goods, but makes none (or a very narrow one) 
on the exportation of specie; he is naturally led to “exert his 
ingenuity’ toward selling goods abroad ; and thus the transactions 
are wound up thru an exportation of goods, not thru an outflow of 
specie. 
All this of course must cause the Ricardians to shake their heads. 
In the language of the younger Mill they “applied to Smith’s 
more superficial view of political economy the superior lights of 
Ricardo.” ! These superior lights would have led them to analyze 
in quite a different way the successive stages in great payments for 
subsidies or like operations. First there would be a sale of bills 
on the foreign countries by the “merchants” (bankers) to the 
Government; then a rise in foreign exchange to the specie export- 
ing point. Specie flows out; prices fall in the remitting country, 
and rise in those that receive its specie; then goods begin to be 
exported ; and so on, until equilibrium is again reached. It is not 
necessary to follow the several steps into every detail, or to point 
out the difference between a single great payment, like that of the 
Franco-German indemnity, and a series of heavy payments spread 
over many years. Essentially the same question arises in any case 
where an extremely large remittance has to be made in short order: 
1 J. 8. Mill’s Autobiography, Ch. 1, p. 28.