Buying or lending, these are the only two ways of using money.

Frédéric Bastiat
Complete Works, Volume 2, pages 164 to 158 (in French)
May 8th, 1847

Here is a macroeconomics lesson in four pages about the circulation of money. Further to the poor harvests in England and France, enormous quantities of wheat have been imported and protectionnists worried about the cash outflows (“negative” trade balance) that could be observed because the Russians did not start immediately to import products in exchange of it. However, the latter sitting on huge quantities of gold (one hundred million is mentionned), they quickly sent back their gold in the form of investments. It was then another opportunity for the protectionnists to worry, not about the gold inflows (“positive” capital balance) but about the interests that will have to be paid (thus creating new outflows).

What Frédéric Bastiat shows here is that there is no reason to worry about cash outflows that only reflect the underlying economic situation. The initial issue was the poor harvest. This is a fact that is completely out of control of politicians. The question that remains is thus about the desirability of opening borders in order to counter difficulties (allowing wheat and gold to enter when they are in short supply) or not. Of course, free-traders advocate in favour of this solution.

It is unfortunate to note that these questions have not yet been understood nowadays when protectionnists like Donald Trump keep on lamenting about the trade balance while this is a non sequitur, which has been understood by Adam Smith 250 years ago!

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