Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

§ 11. International monetary balance and price levels. The balance of all accounts for or against a country (including new loans, current interest, and repayments) must thus eventually be settled in money. This cannot fail to effect the general level of prices in both countries, though this is brought about often only in indirect and gradual ways.

The flow of money out of a country causes the loan market of a country to tighten (interest and discount rates to rise) in proportion as the reserves of the banks are reduced. Then “general prices” begin to fall.8 When prices fall, imports decline, as the country is not so good a place in which to sell: when prices rise, imports increase, as it is a better place in which to sell. The opposite effect is produced on exports, and thus in a short time the national credits and debits are again brought into equilibrium. A slight movement of money in either direction is enough to influence prices and set in motion forces to counteract a further flow of money. Decade after decade the circulating medium of leading countries changes very slightly in amount, and the fluctuations in its amounts during periods of so-called “favorable balance of trade” and of “unfavorable balance of trade” are only the smallest fraction of the value of goods passing through the ports of the country.

It is therefore absurd to imagine, as is sometimes done, that a country could continually import goods until it was drained of all its money, or that by any possible set of devices it could forever have an excess of exports to be paid for by a continual inflow of gold. Long before either of such movements could go far, the automatic readjustment of international prices would inevitably check it, and secure and retain for each country its due portion of the money.

References.

Bastable, C. E., The theory of international trade. N. Y. Macmillan. 1903. Brown, H. G., International trade and exchange. N. Y. Macmillan. 1914. Clare, G., The A B C of the foreign exchanges. N. Y. Macmillan. 1895. Escher, Franklin, Foreign exchange explained. N. Y. Macmillan. 1917. Goschen, Viscount, The theory of the foreign exchanges. N. Y. Scribner. 1898.

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