HE UNDERLYING PRINCIPLES 343
exchange would persist so long as monetary conditions within the
two countries remained the same.
Assume further, as a starting point, that goods alone are the
occasion for remittances between the countries. Their transac-
tions are solely on merchandise account. The sums due in London
for American goods sold to British purchasers are exactly equal in
money value, at ten dollars for the pound, to the sums due in Ne
York for British goods sold in the United States.
Now, in a situation thus simplified, suppose a new factor to
enter. Something happens that disturbs the situation. Suppose
there is a sudden burst of loans by the British to the United States.
No other change takes place; there is a net addition to the remit-
tances made from Great Britain. I assume a sudden burst, because
the point to which I would now direct attention is brought out
most clearly by supposing a change which takes place rapidly and
on a large scale. One might choose for illustration an indemnity
or tribute, or new interest payments by the one government to
the other on a large debt. In practice of course it is rare that
changes of this kind appear suddenly. The case of an indemnit
omes nearest to being cataclysmic, and even that would doubtless
give opportunity for an adjustment in some degree gradual.
The modifications and qualifications that must be observed in
applying the reasoning to changes that come by gradual stages
ill be presently considered. For the moment, attend to the
simple case of a sudden and great increase in the payments that
must be made from London to New York. Suppose the increase
to be 25 per cent. Suppose, too, that this goes on year after
year — is not a sporadic episode, but a steadily continuing series of
remittances. It begins abruptly; it goes on at the same rate for
long time.
The American borrowers have sterling exchange at their com-
mand ; they can draw on the London bankers who finance the
loans. The supply of sterling exchange offered in New York is
greater than before. The amount of the loans is (say) one quarter
of the amount which British importers had previously been paying
to Americans (remitting to New York) for merchandise bought
