344 INTERNATIONAL TRADE

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Or, what comes to the same thing, the demand in London for “dollars,”
 by the bankers who have to meet drafts sent them by their
New York correspondents, becomes greater than before. The
price of dollar exchange rises in London; the price of sterling exchange
 falls in New York. It is not material whether the transactions
 are carried on in the one market or the other, or partly in
one and partly in the other. We may follow the traditional way
of quoting exchange, so many dollars to the pound. For convenlence
 we may treat the problem also as if all the transactions were
executed in one place; the two to which resort is made in practice
being in effect one connected market. Let the place be New York.
Then 25 per cent more of sterling exchange is offered in New York.
There is no more demand for sterling exchange than before; no
more purchases of British goods are made than before, and no
larger remittances have to be made to London.
The situation is of a kind not unfamiliar in economic analysis,
that in which two fixed quantities meet. Such a situation was
assumed in the old reasoning about the wages-fund; such too was
assumed, and I think may still be reasonably assumed, in the reasoning
 which underlies the quantity theory of money. In the
present case, there is in the foreign exchange market a given supply
 of sterling exchange, a given quantity offered for sterling.
The price in Bradburys of dollar exchange will rise exactly in proportion
 to the increased quantity of sterling exchange offered.
Exchange will go to $8.00 to the pound. The same number of
pounds will buy less dollars than before; the same number of
dollars will buy more pounds than before. If all the transactions
took place in London, and if quotations were made the other way
— in terms of the amount of British money which one dollar would
buy — then exchange would shift from a previous rate of 2 shillings
per dollar to a new rate of 2s. 2d. per dollar.
The essential point is that the price of foreign exchange, the
purchasing power of one currency in terms of the other, depends
at any given time on the respective volumes of remittances. It
results from the vmpact of two forces that meet. The outcome is
simply such as to equalize the remittances; such that the money