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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

XIV. Exchange Rates

Hume conceded that the fall in the exchange value of a country's currency when for any reason there was adverse pressure on its balance of payments tended to exercise an equilibrating influence by providing an extra incentive to commodity export and a deterrent to commodity import. He held, however, that this could be but a minor factor in the process of adjustment, and although he gave no reasons it may be presumed that he saw that under a metallic standard the maximum possible range of variation of the exchanges, i.e., between the specie export and import points, was so limited as to make it extremely unlikely that such variation could exert an appreciable direct influence on the course of trade.1 Since his time the maximum range of variation has become still narrower under normal conditions because of reduction in the cost of transporting specie, and scarcely anyone today would dispute that under an international metallic standard exchange variations are a negligible factor as far as their direct influence on commodity trade is concerned.2 It has sometimes been suggested, however, that this narrowing of the range between the gold points has not been an unalloyed benefit, since by its facilitation of specie shipments it has contributed to the instability of national credit structures. Proposals have been made, starting with Torrens in 1819,3 artificially to widen the margin between the specie points, by seigniorage charges, premiums on gold for export, different buying and selling prices for gold at the Central Bank, generous tolerance for underweight in the internal specie circulation, differential buying or selling prices for the gold of the particular degrees of fineness most in supply or demand abroad, and other similar devices, and such practices have, for this or other reasons, been followed. To the extent that such practices exist, the range of possible exchange fluctuations under a metallic standard, and therefore the possible influence of exchange variations on the course of trade, can of course be somewhat increased. In effect this is an attempt to retain the advantages of an international metallic standard while escaping in part one of its incidents, namely, the direct dependence of the national stock of money, or of the specie reserves upon which it rests, on the state of the foriegn exchanges. But the same advantages of partial freedom of the quantity of the exchanges can be more safely, and especially for an important financial center whose effectiveness depends largely on its ability to attract foreign short-term funds, more cheaply obtained, by the maintenance of excess specie reserves, than by artificial widening of the range between the gold points. Even with such widening, moreover, unless it were carried to much greater lengths than has ever been customary, the direct influence of exchange rate fluctuations on the course of commodity trade would still be negligible. But even small variations in the exchanges can exert an appreciable influence on the movement of short-term capital funds, and through them on the mechanism of adjustment. This phase of the machanism is discussed in the next chapter, in connection with the discussion of the relation of banking processes to the mechanism.

In their discussion of the foreign exchanges, the writers on the theory of international trade with apparently almost complete unanimity expound a particular error of minor practical importance but revealing lack of due precision in exposition or thought. They hold that when the balance of payments is even, the exchanges will be at their mint par.4 The correct statement is that when the balance of payments is even the exchanges will be somewhere within the export and import points. The mint par has significance for the exchanges only as a base point from which to determine the specie export and import points. Equilibrium between the amount of foreign bills demanded and offered is as likely to be reached at any one as at any other rate within the limits of the specie points. Except for the approximately fixed limits to the range of possible fluctuation of the exchanges under an international metallic standard, there is no basis for differentiating the theory of the foreign exchanges between two currencies having a common metallic standard, on the one hand, and between two currencies on different standard, on the other hand.

[1]Hume, Political discourses (1752), in Essays moral, political, and literary, 1875 ed., I, 333, note. Cf. W. Whewell, “Mathematical Exposition of certain doctrines of political economy. Third memoir,” Transactions of the Cambridge Philosophical Society, IX, part II (1856), 7: “The rate of exchange may be looked upon as an instrument which measures the force of that current [i.e., gold movements], and does not add anything to that force, or produce any effect of its own, except, it may be, to regulate and reduce to steadiness the casual and transient impulses.”

[2]I at one time interpreted J. H. Hollander, as did also Taussig, as holding that exchange rate fluctuations within the limits of the specie points were the effective factor in bringing about a transfer of international borrowings in the form of commodities instead of specie. (See Hollander, “International trade under depreciated paper,” Quarterly journal of economics, XXXII [1918], 678, and my Canada's balance, 1924, p. 150.) But upon a rereading I am now inclined to interpret him as holding that the adjustment takes place automatically, without any moving factor, as in Ricardo's version, or perhaps with an automatic and precisely adequate relative shift in demand implied as the moving factor, with the variations in the exchange rates just happening, and serving no function in the mechanism.

[3]See supra, pp. 206-07.

[4]The only instance I have noticed in the literature of explicit correction of this error is in Harry D. White, The French international accounts, 1880-1913, 1933, 156, note, where the perpetration of this error in my Canada's balance is properly rebuked. I was in excellent company, however. Ricardo, J. S. Mill, Bastable, Marshall, Taussig, have all, at one time or another, made the same error.