different economic process from that by which prices are said to be influenced only by changes in the quantity of the media of exchange actually offered for goods. One or the other must be wrong.
V. Prices and the International Movement of Metallic Money.
The settlement of the theory of prices, or the principles determining the value of money (suitably defined) has an importance reaching out into the field of the international movements of specie. We can not properly formulate the methods by which the shifting of specie and goods act upon each other in international trade without having previously reached a definite conclusion upon the theory of prices. Thus the examination of and agreement upon the theory of prices will largely determine the statements made concerning the relation between the shipments of specie and the level of prices within a country.
With the Ricardian formula, derived from the experience of England in the early part of the last century, writers have attempted to solve this problem by using the quantity of money in a country as the force regulating the general level of prices; if gold is exported, prices must fall; if gold is imported, prices must rise. In brief, the originating cause of a change in the general level of prices, so far as international trade is concerned, is the shipment of specie. The movement of goods is a consequence of the change of prices brought about by the addition or subtraction of specie. That is, the quantity-theory has been relied upon to solve this highly important and practical problem of money.
The original statement of Eicardo has, of course, been added to and emended; but, in the main, it is intended to show that any one country obtains a part of the world's circulation of specie in the proportion that its trade bears to that of other countries. This quota of gold, for instance, is retained in a country by influences working automatically on the price level through changes in the quantity of gold within that nation. If gold is withdrawn, prices fall, exports of goods are increased, and in due time the gold begins to return until the country's quota of gold reaches an equilibrium adjusted to the relative demands of other countries. The movement of goods forms the variable in the process which aims at a correction of the quota of gold, whenever the equilibrium has been disturbed. The shipment of gold is the initial cause; the movement of goods is a consequence.
In support of this view—the orthodox view—it is held that gold will flow wherever its exchange value is highest. The flow of gold will make it abundant in the receiving nation, and thus, because it is cheap, will raise general gold prices there; or, vice versa, will lower prices in the countries from which gold is taken. The possession of
