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By Root 1323 0

ineffective; if there is no inflationary policy, then they are superfluous. The most important of these methods is the prohibition or limitation of the importation of certain goods that are deemed dispensable, or at least less indispensable than others. This causes the sums of domestic money that would have been used for the purchase of these commodities to be used for other purchases and naturally the only goods here concerned are those that would otherwise have been sold abroad. These will now be purchased at home for prices that are higher than those offered for them abroad. Thus the reduction of imports and so of the demand for foreign exchange is balanced on the other side by an equal reduction of exports and so of the supply of foreign exchange. Imports are in fact paid for by exports and not by money, as Neo-Mercantilist dilettantism still continues to believe. If it is really desired to dam up the demand for foreign exchange, then the amount of money to the extent of which it is desired to stop importation must be taken away from those at home—say by taxation—and kept out of circulation altogether; that is, not used for state purposes, but destroyed. That is to say, a deflationary policy must be followed. Instead of the importation of chocolate, wine, and lemonade being limited, the members of the community must be deprived of the money that they would otherwise spend on these commodities. Then they must limit their consumption either of these or of some other commodities. In the former case, less foreign exchange will be wanted, in the latter more foreign exchange offered, than previously.

5 The Suppression of Speculation

It is not easy to determine whether there are any who still adhere in good faith to the doctrine that traces back the depreciation of money to the activity of speculators. The doctrine is an indispensable instrument of the lowest form of demagogy; it is the resource of governments in search of a scapegoat. There are scarcely any independent writers nowadays who defend it; those who support it are paid to do so. Nevertheless, a-few words must be devoted to it, for the monetary policy of the present day is based largely upon it.

Speculation does not determine prices; it has to accept the prices that are determined in the market. Its efforts are directed to correctly estimating future price situations, and to acting accordingly. The influence of speculation cannot alter the average level of prices over a given period; what it can do is to diminish the gap between the highest and the lowest prices. Price fluctuations are reduced by speculation, not aggravated, as the popular legend has it.

It is true that the speculator may happen to go astray in his estimate of future prices. What is usually overlooked in considering this possibility is that under the given conditions it is far beyond the capacities of most people to foresee the future any more correctly. If this were not so, the opposing group of buyers or sellers would have got the upper hand in the market. The fact that the opinion accepted by the market has later proved to be false is lamented by nobody with more genuine sorrow than by the speculators who held it. They do not err of malice prepense; after all, their object is to make profits, not losses.

Even prices that are established under the influence of speculation result from the cooperation of two parties, the bulls and the bears. Each of the two parties is always equal to the other in strength and in the extent of its commitments. Each has an equal responsibility for the determination of prices. Nobody is from the outset and for all time bull or bear; a dealer becomes a bull or a bear only on the basis of a summing up of the market situation, or, more correctly, on the basis of the dealings that follow on such a summing up. Anybody can change his role at any moment. The price is determined at that level at which the two parties counterbalance each other. The fluctuations of the foreign-exchange rate are not determined solely by bears selling but just as much by bulls buying.

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