344 INTERNATIONAL TRADE 
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Rae | 4 Li £0 
Or, what comes to the same thing, the demand in London for “dol- 
lars,” 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 ex- 
change falls in New York. It is not material whether the trans- 
actions 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 conven- 
lence 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 rea- 
soning which underlies the quantity theory of money. In the 
present case, there is in the foreign exchange market a given sup- 
ply of sterling exchange, a given quantity offered for sterling. 
The price in Bradburys of dollar exchange will rise exactly in pro- 
portion 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