THE UNDERLYING PRINCIPLES 341

when the currencies and the price levels have settled down to some
stabilized level — then the rates of foreign exchange will be found
to be stabilized on the same basis. Fluctuations in the rates may
take place above or below that settled basis, but will not bring
any permanent departure from it.
This doctrine seems to me in need of modification. It fails to
meet a question of fundamental significance: how are changes in
the conditions of international trade — changes in the terms of
trade between countries — brought about when there are dislocated
 exchanges ?

Let us assume two countries each of which has an inconvertible
paper currency. No money of either can enter the circulating
medium of the other. No change in the balance of payments can
cause a flow of money; goods only can move. The case is the
same in principle as that of two countries one of which has a
cold standard, the other inconvertible paper. It is the same,
that is, if the gold standard is steadily and unfailingly adhered to
in the one country, the paper standard similarly adhered to in
the other. As a matter of fact it happens often enough in a paper
country that its paper is not the sole and universal medium of
exchange, gold remaining in use for some payments. Gold then
may pass into the country and out of it, not merely as a commodity
like tin or copper, but to some extent as a monetary medium also.
Where this is the case, the trade between gold standard and paper
standard countries presents some special complications. The situation
 is reduced to its simplest elements if we suppose two paper
standards, and no money in either country which can pass to the
other.

Further, let it be assumed that the monetary situation in both
countries 1s stable. Whatever inflation or deflation there may
have been, is definitive ; each has settled down to a fixed monetary
supply. Prices may be higher than they would be under a specie
régime, or the same, or lower. But they are no longer subject to
change because of increase or decrease in the volume of money.
[t is not the consequences of changes in the volume of money