Sec. 10. #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 affect the general level of prices in both countries, tho 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.[10] 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, by continually importing goods, be 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 prices would inevitably check it, and secure and retain for each country its due portion of the money.

[Footnote 1:  See Vol.  I, ch. 17, sec. 10.]

[Footnote 2:  See Vol.  I, ch. 5, secs. 1 and 7.]

[Footnote 3:  See Vol.  I, ch. 6, sec. 11, on the origin of markets.]

[Footnote 4:  See Vol.  I, chs. 36 and 37.]

[Footnote 5:  Recall ch. 4, in general, on the nature of monetary demand.]

[Footnote 6:  See Vol. 1 for numerous statements of the effects of varying quantities of agents upon the economy of utilization; e.g., pp. 138, 163, 164, 213, 228, and chs. 34 and 35 entire.]

[Footnote 7:  This theory has usually been presented under the name of “the doctrine of comparative costs.”  The word “costs” is very misleading in this connection because it is now always applied to enterpriser’s outlay.  It seems best, therefore, to replace it in this phrase by the word “advantages.”  Of course, it never can be true that an article can be “profitably” imported when its monetary costs (all things considered) are higher in the exporting than in the importing country.  Indeed, the importation of any article is proof conclusive that the importer thinks that the monetary costs of an article would be higher in the importing than in the exporting country.  See further, ch. 15, secs. 11 and 13 (note).]