The Theory of Money and Credit - Ludwig von Mises [112]
The balance-of-payments theory forgets that the volume of foreign trade is completely dependent upon prices; that neither exportation nor importation can occur if there are no differences in prices to make trade profitable. The theory clings to the superficial aspects of the phenomena it deals with. It cannot be doubted that if we simply look at the daily or hourly fluctuations on the exchanges we shall only be able to discover that the state of the balance of payments at any moment does determine the supply and the demand in the foreign-exchange market. But this is a mere beginning of a proper investigation into the determinants of the rate of exchange. The next question is, What determines the state of the balance of payments at any moment? And there is no other possible answer to this than that it is the price level and the purchases and sales induced by the price margins that determine the balance of payments. Foreign commodities can be imported, at a time when the rate of exchange is rising, only if they are able to find purchasers despite their high prices.
One variety of the balance-of-payments theory attempts to distinguish between the importation of necessaries and the importation of articles that can be dispensed with. Necessaries, it is said, have to be bought whatever their price is, simply because they cannot be done without. Consequently there must be a continual depreciation in the currency of a country that is obliged to import necessaries from abroad and itself is able to export only relatively dispensable articles. To argue thus is to forget that the greater or less necessity or dispensability of individual goods is fully expressed in the intensity and extent of the demand for them in the market, and thus in the amount of money which is paid for them. However strong the desire of the Austrians for foreign bread, meat, coal, or sugar may be, they can only get these things if they are able to pay for them. If they wish to import more, they must export more; if they cannot export manufactured and semi-manufactured goods, then they must export shares, bonds, and securities of various kinds. If the note circulation were not increased, then the prices of the objects that were offered for sale would have to decrease if the demand for import goods and hence their prices were to rise. Or else the upward movement of the prices of necessaries would have to be opposed by a fall in the price of the dispensable articles the purchase of which was restricted so as to permit the purchase of the necessaries. There could be no question of a general rise of prices. And the balance of payments would be brought into equilibrium, either by the export of securities and the like, or by an increased export of dispensable goods. It is only when the above assumption does not hold good, only when the quantity of notes in circulation is increased, that foreign commodities can still be imported in the same quantities in spite of a rise in the foreign exchange; it is only because this assumption does not hold good that the rise in the foreign exchange does not throttle importation and encourage exportation until there is again a credit balance of payments.
Ancient Mercantilist error therefore involved a specter of which we need not be afraid. No country, not even the poorest, need abandon the hope of sound currency conditions. It is not the poverty of individuals and the community, not indebtedness to foreign nations, not the unfavorableness of the conditions of production, that force up the rate of exchange, but inflation.
It follows that all the means that are employed for hindering a rise in the exchange rate are useless. If the inflationary policy continues, they remain