342 
INTERNATIONAL TRADE 
and in prices that we are now to examine, but the characteristics 
of international trade between countries having different monetary 
standards, and between which no money can pass. 
The two countries may be imagined to be Great Britain and the 
United States; a paper pound in the former, a paper dollar in 
the latter — Bradburys and greenbacks. The range of prices 
in each country will be determined by the several quantities of 
pounds or dollars. The volumes of the respective paper money 
being fixed, the level of prices will remain unchanged in each so 
long as the volume of commodities remains the same. This 
states the result in the barest form of the quantity theory, the 
most extreme and perhaps most offensive. I will leave it to the 
conversant reader to make all needed corrections and qualifica- 
tions on the score of spending habits or rapidity of circulation, 
expansion and contraction of credit, changes in the volume of 
goods and in their marketing, and so on. Let these internal con- 
ditions be supposed to remain unchanged thruout.! 
Assume now that the quantity of paper pounds in Great Britain 
has not materially changed from the quantity of gold pounds 
previously used, and that prices in Bradburys are not materially 
different from what they had been under gold. In the United 
States, on the other hand, assume that the quantity of paper 
dollars has greatly changed, has doubled; and that prices in 
greenbacks are twice as high as they had been under gold. Assume 
that the rate of foreign exchange has settled down to figures con- 
forming to the altered price conditions. Suppose that sterling 
exchange is quoted in New York at the figure of ten dollars to the 
pound, which would be equivalent to quoting in London (if this 
way of figuring foreign exchange transactions happened to be 
adopted there) one dollar for two shillings, or approximately one 
penny for four cents. Such, on the reasoning of the Ricardians and 
also on that of the purchasing-parity school, would be the estab- 
lished or normal basis of foreign exchange rates; and this rate of 
1 The exactness of the accordance between prices and monetary quantity is 
important, I think, for the argument of the present chapter. Compare what was 
said above, Ch. 17, p. 198.