364 INTERNATIONAL TRADE 
countries, the United States and Great Britain, to be in the initial 
position described in the preceding chapter (prior to the remittance 
there considered). There is a given rate of exchange, and a stable 
adjustment of prices and of the barter terms of trade; all are 
mutually related to one another and in proper accord. An increase 
of demand then sets in for American commodities in Great Britain. 
Let it be an increase of demand in the strict sense, in the “sched- 
ule sense,” to use Professor Fisher’s phrase. The British buy 
the same quantity of cotton, but pay a higher price! Great 
Britain then has to make larger remittances to the United States 
than before. The sterling rate of exchange is affected precisely 
in the same way as when the added remittances on loan account 
had to be made by Great Britain. Exchange in New York drops; 
the pound sterling can buy less dollars, and the dollar can buy more 
of sterling. The American cotton sellers neither gain nor lose. 
They realize more pounds sterling in Great Britain, but no more 
American dollars when they sell their exchange in New York. 
The situation is odd; the British buyers of cotton lose, but the 
American sellers of cotton do not gain. It is the new rate of foreign 
exchange which conjures up this paradoxical outcome, acting as a 
sort of deus ex machina. 
There are other consequences, however. The new rate of for- 
eign exchange has an effect on British exporters of steel different 
from that on American exporters of cotton. The British exporters 
gain. They sell in the United States (in this initial stage) exactly 
as much steel as before, and receive for this unchanged quantity 
not indeed more dollars in the United States, but more pounds 
in Great Britain. Then sets in a sequence similar to that 
traced in the preceding chapter. Imports of steel into the United 
States from Great Britain swell ; and the rate of exchange moves 
back toward its former position (but not back all the way to the 
1 In order to isolate the effects of the change in demand, let it be supposed further 
that the shift is from a British domestic commodity (one not entering at all within 
the range of international trade) toward a commodity imported from the United 
States. The price of the British domestic commodity thereupon will fall below the 
normal figure. It will remain below that figure until its supply is decreased by a 
transfer of labor and capital to the making of goods for export, which will in the end 
serve to pay for the added American goods.