Money as a Medium Exchange Barter Trading is too Clumsy Large-Scale Production requires a Medium of Exchange Recognition and measurement of changes in the value of money. Classification of Money Stabilization of the Price Level The Value of Money or General Level of Prices Where The Unit of Account is a Fixed Quantity of Bullion, Uncoined or Coined. The value of money or general level of prices where the unit of account is a coin of which the issue is limited. The value of money or general level of prices where the unit of account is a bank-note or currency note. Causes of Change in the General Price Level Possible Occasions of Inflation Ways of Dealing with Risk: Transfer To Specialists Choice Criteria Under Risk Hedging The origin and the functions of money Money, when its use has grown habitual The early history of money Currency in the hunting state Currency in the pastoral state Articles of ornament as currency Currency in the agriculture state Manufactured and miscellaneous articles as currency The invention of coining Qualities of the material of money Utility and value Protability Indestructibility Homogeneity Divisibility Stability of value Cognisability Legal Tender The Greenbacks - The Fluctuating Premium on Gold The Greenbacks - The Effects of Greenbacks Upon Wages Rent - Urban Rents Rent - Farm Rents Interest and Loan Capital Purchasing Power of the Principal of Loans The Rate of Interest Profits Profits in Agriculture Statistical Evidence Regarding Profits The Production and Consumption of Wealth Production Consumption Cost of the Civil War Greenbacks and Expenditures The Greenbacks and Receipts Contraction and Inflation of the Legal Tenders Passage of the Resumption Act The Struggle for Resumption The Purchasing Power of the Dollar Measurement of Changes in the Purchasing Power of Dollar Results of Changes in the General Price Level Buying Problems of the Consumer What is Good Buying? The Principles of Foreign Exchange The General Price Level Price Policies Price Flexibility Price Leadership Price Discrimination Special Pricing Practices Postage Stamp System Policy Implications

The subject of exchange divides itself into two parts, foreign exchange and domestic exchange. The first concerns itself with payments between different countries, and the second with payments between places within the home country. Inasmuch political boundaries do not limit the operation of economic laws, the fundamental economic principles that govern foreign exchange are the same as those that govern domestic exchange. Persons familiar with foreign exchange, therefore, will have no difficulty in understanding domestic exchange. Although a few comments on domestic exchange will be made in this chapter, the chief concern here will be with foreign exchange. Further consideration of the subject of domestic exchange will be given later under the discussion of the clearing and collection system of the Federal Reserve banks. The subject of foreign exchange itself may be divided into two parts: first, exchange between countries on the same standard; and, second, exchange between countries on different standards. In this chapter we shall study these two general types of foreign exchange in their order, including in the discussion of exchange between countries on the same standard certain general facts and principles that apply to both. EXCHANGE BETWEEN COUNTRIES ON THE SAME STANDARD CLASSES OF GOODS IN FOREIGN TRADE Importers must pay for what they buy abroad, and exporters must be paid for what they sell abroad. It is in making these payments that the foreign exchange business functions. From the standpoint of foreign exchange, five broad classes of exports and imports may be distinguished, which may be designated as: commodities, securities, services, treasure and travel. (1) Commodities (using the term in its narrower meaning) covers agricultural, forestry, mineral and animal products and manufactures. These comprise the bulk of the so-called "visible" items of foreign trade and, aside from "treasure," are the only items included in the usual statistics of imports and exports. (2) Securities. As here used, the term covers stocks, bonds, debentures, long-time notes and the various kinds of short-time notes, government treasury bills, certificates of indebtedness and acceptances which are bought and sold in the international markets. Interest figures large in this item; so, also, do dividends. Most of these securities represent physical goods. (3) Services. Services are important items in foreign trade.  Such services were imports for the United States and exports for the foreign countries rendering them, as truly as would have been the shipment to American merchants of an equivalent value in English woolen goods or Colombian coffee. An important service which England exports is marine insurance; another one is certain banking services rendered foreigners by England's great international banking houses. When American engineers render professional services in South America worth a million dollars, those services are as truly exports from the United States that must be paid for by South Americans as are shipments of a million dollars' worth of locomotives. Some of their compensation will be received by the engineers while they are in South America and used up by them for expenses incurred there; but the greater part will probably be remitted by them to the home land. Under this head comes one of the principal items in our so-called "invisible trade"; namely, a substantial part of the services of recent. There are millions of immigrants in the United States who remit funds back home every year. They give labor services in the United States, for which they receive a wage compensation. Much of this compensation, however, they do not use up in the United States, but send home to dependents or for their own saving and investment. The value of their services over and above the part they consume and retain in the United States is, from the standpoint of foreign exchange, an American import from their respective home countries, which we must pay for by some kind of export. (4) Travel. The fourth type of export and import arises from international travel. If an Englishman should receive from a French dealer a case of wine worth two thousand Euro, it would clearly be an import for England and an export for France of a value of approximately two thousand Euro. In some way or other a remittance of this amount would have to be made from England to France. Suppose, however, that the Englishman, who, we will assume, has been in the habit of importing a case of this wine every year, spends a vacation this year in Paris, buys his case of wine there and consumes it there. It would not then figure in the import statistics of England or the export statistics of France; but, from the standpoint of foreign exchange it would be equivalent to a shipment of a case of wine from France to England (less shipping charges, etc.). It would require payment by the Englishman as truly as if he imported it into England and, since he is assumed to be on a vacation in France and therefore to be rendering the French people no equivalent economic services, the means of payment would have to come directly or indirectly from England. These are American imports "headed off," as it were, and consumed without getting here. From the standpoint of foreign exchange, they are important items of importation for the United States and of exportation for foreign countries. Europeans traveling in the United States give rise to similar exports by the United States and imports by Europe, but this item is relatively small. In some countries, as, for example, Switzerland and Egypt, where the tourist travel is large, one of the principal items of export consists of goods and services consumed by foreign travelers. (5) Treasure. Gold and silver bullion constitute the principal items under this head; in fact, the only items under the term "treasure" as that term is usually employed in trade statistics. Gold and silver are commodities as truly as are the goods mentioned in the first group and, like them, move from the cheaper market to the dearer market under the impetus of the same fundamental economic forces. They are referred to separately because they are the world's principal standard money metals and, as such, perform functions worthy of special consideration.   MEANS OF PAYMENT Obviously, every export is also an import and every import an export. They are the same thing viewed from opposite angles. In every case of foreign trade, under normally functioning business, the exporter must be paid for the goods exported and the importer must pay for them. How are these payments made and received? The answer in its simplest form can best be given by limiting ourselves for the time being to the trade between two places, say, New York City and London, and by inquiring concerning the various methods that might be used, bearing in mind that in actual practice the major part of these payments are effected in a very small number of ways. If payments were made directly in gold, vast quantities of gold would be continually in transit, ships carrying gold from New York to London passing ships carrying gold from London to New York. The expenses by way of interest during time of transit, packing, cartage, freight, insurance and abrasion would be very large. Because this method of making payments in gold is so expensive, merchants in international trade many centuries ago devised methods of making payment through the machinery of written bills of exchange; and later, when the cable and the radio came into operation, also through the use of "cable and radio bills of exchange" or transfers. This is a refined form of barter and requires the shipment of relatively little gold.