THE UNDERLYING PRINCIPLES 359

With exchange at £1 = $10, the goods exactly pay for each other. Exchange
remains at this rate so long as there are no other transactions. The barter
terms of trade, be it observed, are 50 of American cotton for 50 British steel.
(2) Great Britain next is called on to remit to the United States for loans
the sum of £250,000 a year. The American borrowers can draw on London
bankers to that amount. The amount of sterling exchange on sale in New
York, which before was £1,000,000, now is raised to £1,250,000. The only
persons who buy that exchange are the representatives in New York of the
British steel firms which have sold steel for $10,000,000. That sum, no more
and no less, these representatives have to convert into British funds; they want
sterling exchange for remittance to London. And no one else wants sterling
exchange. The amount offered for the sterling exchange on sale is then the
precise sum of $10,000,000; the amount of exchange on sale is £1,250,000.
The price of sterling bills — the rate of exchange — falls to $8.00; £1 = $8.00.
At that rate the transactions balance. If exchange happened to be quoted the
other way — if in London, say, it were quoted in terms of so many shillings to
the dollar — the figure would be 2s. 6d. to the dollar, as compared with a previous
 quotation (on the same basis) of 2s. to the dollar. The pound is worth
less in dollars than before; the dollar is worth more than before in pounds
and shillings.
The barter terms of trade remain unchanged. The same quantities of goods
pass between the two countries. Great Britain sends no more goods to the
United States than before, and the United States no less goods to Great
Britain : and yet Britain’s additional payments to the United States are met.
By a stroke of the pen, so to speak, without any alteration in the substance of
things, the loan remittances are provided for.
(3) Consider now the consequences on the prices of the two commodities,
cotton and steel. And here again begin by simplifying the case as regards the
two articles. Suppose both to be primarily articles of export from the two
countries, and their prices determined, in the first instance at least, by the
conditions of the export market. Cotton continues to sell at 4.84. in London,
and steel continues to sell at $0.20 in New York. But 4.84. in London, translated
 into American currency at the new rate of exchange, means less American
money than before. Before the disturbance of foreign exchange, 4.84. in
London meant $0.20 in New York. Now, however, at the new rate of £1
= $8.00, 4.84. in London means only $0.16 in New York. The price of cotton,
while unchanged in London, falls to $0.16 in New York. On the other hand,
the price of steel, remaining as before at $0.20 in New York, now realizes to the
British seller more than before in London. At the new rate of exchange, the
British seller gets for $0.20 in New York, not 4.84. in London, but 6d.
Observe that these precise changes in prices — the one advantageous to the
British steel sellers, the other disadvantageous to the American cotton sellers —