INTERNATIONAL PAYMENTS 199 
tion between all forms of the circulating medium on the one hand 
and the volume of goods (or transactions’) on the other. When 
set forth in this way, and with attentive consideration of the 
many and complex factors which enter into the determination of 
the total volume of effective money, the doctrine cannot, in my 
judgment, be controverted.! But the thing important for the 
mechanism of international payments, in relation to the theory of 
international trade, is not the validity of the complex and guarded 
doctrine. What signifies is a more special and limited proposition, 
namely, that the specie constituent has a peculiar and determinative 
effect on the range of prices. The specie which thus is of domi- 
nant consequence is such as moves freely from country to country 
in settlement of international balances; in our modern world, 
primarily gold. Yet gold is but a minor item in the heterogeneous 
list of things which make up the circulating medium of modern 
countries — bank notes and government notes, subsidiary coin, 
above all the great structure of bank credits and bank deposits. 
(I speak here, needless to say, of countries in which the whole mass 
rests on a specie basis, still leaving for later consideration the case 
of inconvertible paper.) This minor constituent, none the less, 
as it moves from country to country, is supposed to affect prices 
and wages, to cause changes in the quantities of goods exported 
and imported, to bring about notable readjustments in the terms 
of international exchange and in the prosperity of the trading 
sountries. 
The questions of the mechanism of international trade, then, 
become related not so much to the general reasoning of monetary 
theory as to the reality of the connection of prices with specie 
movements. They become questions on the one hand of the 
sensitiveness of prices to specie inflow and outflow, on the other 
hand of the ultimate domination of prices by these movements. 
No one can now reason, as Ricardo and Mill did, on the supposition 
that the circulating medium of a modern country consists exclu- 
sively of gold, or that an increase or decrease in the gold supply 
'T would refer the reader to what I have said on this large subject in my 
Principles of Economics, 3d edition, Chapter 30.