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By Root 1209 0

more kinds of money, whether they are employed side by side in the same country (the parallel standard) or constitute what is popularly called foreign money and domestic money, it is the exchange ratio between individual economic goods and the individual kinds of money that is decisive. The different kinds of money are exchanged in a ratio corresponding to the exchange ratios existing between each of them and the other economic goods. If 1 kg. of gold is exchanged for m kg. of a particular sort of commodity, and 1 kg. of silver for m/15 1/2 kg. of the same sort of commodity, then the exchange ratio between gold and silver will be established at 15 1/2. If some disturbance tends to alter this ratio between the two sorts of money, which we shall call the static or natural ratio, then automatic forces will be set in motion that will tend to reestablish it. [1]

Let us consider the case of two countries each of which carries on its domestic trade with the aid of one sort of money only, which is different from that used in the other country. If the inhabitants of two areas with different currencies who have previously exchanged their commodities directly without the intervention of money begin to make use of money in the transaction of their business, they will base the exchange ratio between the two kinds of money on the exchange ratio between each kind of money and the commodities. Let us assume that a gold-standard country and a silver-standard country had exchanged cloth directly for wheat on such terms that one meter of cloth was given for one bushel of wheat. Let the price of cloth in the country of its origin be one gram of gold per meter; that of wheat, 15 grams of silver per bushel. If international trade is now put on a monetary basis, then the price of gold in terms of silver must be established at 15. If it were established higher, say at 16, then indirect exchange through the instrumentality of money would be disadvantageous from the point of view of the owners of the wheat as compared with direct exchange; in indirect exchange for a bushel of wheat they would obtain only fifteen-sixteenths of a meter of cloth as against a whole meter in direct exchange. The same disadvantage would arise for the owners of the cloth if the price of gold was established at anything lower, say at 14 grams of silver. This, of course, does not imply that the exchange ratios between the different kinds of money have actually developed in this manner. It is to be understood as a logical, not a historical, explanation. Of the two precious metals gold and silver it must especially be remarked that their reciprocal exchange ratios have slowly developed with the development of their monetary position.

If no other relations than those of barter exist between the inhabitants of two areas, then balances in favor of one party or the other cannot arise. The objective exchange values of the quantities of commodities and services surrendered by each of the contracting parties must be equal, whether present goods or future goods are involved. Each constitutes the price of the other. This fact is not altered in any way if the exchange no longer proceeds directly but indirectly through the intermediaryship of one or more common media of exchange. The surplus of the balance of payments that is not settled by the consignment of goods and services but by the transmission of money was long regarded merely as a consequence of the state of international trade. It is one of the great achievements of Classical political economy to have exposed the fundamental error involved in this view. It demonstrated that international movements of money are not consequences of the state of trade; that they constitute not the effect, but the cause, of a favorable or unfavorable trade balance. The precious metals are distributed among individuals and hence among nations according to the extent and intensity of their demands for money. No individual and no nation need fear at any time to have less money than it needs. Government measures designed to regulate the international