THE UNDERLYING PRINCIPLES 345 
value of the two, expressed in the currency of either country, is the 
same. The price of foreign exchange thus may change without any 
movement in the general range of prices in either country. And 
it may change very much indeed. Therein, of course, the situa- 
tion differs radically from that under gold-standard conditions. 
When gold is the standard in both countries, foreign exchange 
fluctuations remain within narrow limits, whereas the level of 
prices in each country, tho it changes but slowly, is subject to no 
restrictions at all analogous. When, however, there are dislocated 
exchanges — the monetary conditions in each country remaining 
constant, as here assumed — the level of prices in each country 
remains the same (subject to a minor correction presently to be 
stated) even under the impact of great disturbances in international 
trade, whereas the foreign exchanges may show wide and rapid 
fAuctuations. 
It is in this respect — the possibility of wide fluctuations in the 
rate of exchange — that the conditions differ most obviously from 
those of transactions under the gold standard. When gold can flow 
from country to country, such a change in the balance of payments 
as has just been supposed does indeed bring its first impact on the 
quotations for foreign exchange. But those quotations must re- 
main within the narrow limits of the gold points. Soon specie 
begins to move, and then further movements begin, in prices and in 
the movement of goods. Under paper-standard conditions, how- 
ever, exchange may fluctuate widely, may soar or decline with the 
changing volumes of remittances ; but nothing therein disturbs the 
general monetary situation. 
This then is our first proposition, and a fundamental one. In 
the absence of a common monetary standard, the rate of foreign 
exchange depends on the mere impact of the two quantities on 
hand at the moment.! 
We may proceed now to the next stage: how the movement of 
! This general line of reasoning on the equalization of payments thru alterations 
in the rates of foreign exchange is fully worked out in a notable paper by Professor 
J. W. Angell, International Trade Under Inconvertible Paper, Quarterly Journal 
of Economics, Vol. 36 (May, 1922). Essentially the same reasoning underlies 
Hawtrey’s compact treatment in his Currency and Credit (p. 61. 2nd edition).