F.—ECONOMIC SCIENCE AND STATISTICS 115 
it is evident that if exports do not balance imports there will be a flow of 
gold from one country to others. This flow will only cease when a true 
equation has been established.® 
It will be clear from the statements already made that if all countries 
employ gold, and only gold, as currency, each must accept the wage and 
price average or level dictated by the price average of international goods, 
and that this will be determined by the gold supply in relation to the 
demand. If the gold supply is x the price average will be half as high 
as if the supply were 2x, for in making such a comparison we may assume 
the rapidity of circulation to be the same in the two cases. Sucha currency 
therefore imposes a discipline upon each country ; it must march in step 
with the others. If one country found a gold mine within its boundaries, 
issued currency to the amount of the new supply and raised wages and 
prices to the extent of the new available currency, exports of other com- 
modities would fall and imports increase, with the result that the gold 
would flow out until a new equilibrium was reached at a correspondingly 
higher international price average. During the intermediate stages the 
industries supplying international commodities would be depressed 
in the country possessing the new gold mine, and correspondingly 
more active in other countries. This change in the state of trade 
would be the active force that would restore the new state of 
equilibrium. 
It will also be evident that the same results will follow if, instead of 
using gold as currency, each country employs paper representing gold, 
pound for pound, or dollar for dollar, so that any variation in the supply 
of gold is automatically followed by a variation in the supply of paper 
currency. Nor is the case altered if gold represents not a hundred per 
cent. but x per cent. of the paper currency. For it is clear that a given 
variation in the supply of gold is followed, automatically, by a similar 
percentage variation in the supply of currency. Moreover, it is obvious 
that the smaller the percentage gold reserve (that is to say, the greater 
the economy in the use of gold) the higher the price average of inter- 
national goods and the wage and price average within each country. But 
it remains true that each country is subjected to the discipline to which 
I have referred. 
Provided one condition is satisfied, the case is not altered if, instead 
of merely employing paper currency the supply of which is automatically 
adjusted to the supply of gold, a country also employs means of payment, 
such as the cheque, the supply of which may vary independently of the 
supply of gold. The condition is that the country remains on the gold 
standard. The gold standard is a legal enactment to the effect that the 
- legal tender of a country shall be convertible on demand into a specified 
3 In the complex economic system which I shall consider at a later stage, 
exchange equilibrium between two or more countries may be defined in either 
of two ways, namely, a rate of exchange which maintains a balance of payments 
and a rate which represents equivalence of price levels. These are not necessarily 
identical. In a changing world they are not even likely to be identical. Failure 
to distinguish between the two, and to state in which sense equilibrium is being 
employed, has clouded much recent controversy. 
