John Maynard Keynes*
We have seen that, if rates of exchange were absolutely fixed, so that it cost nothing to exchange the money of one country into the money of another, exactly the same rate of interest would always prevail in both countries for loans of the same type and believed to offer the same security. If such conditions were to prevail between all countries, each change occurring anywhere in the conditions of borrowing and lending would be reflected by a change in the Bank-rate and Bond-rate everywhere. Every puff of wind, that is to say, would travel round the world without resistance. If its force were spread over a large area, it would, of course, be less than if it were boxed up within a small area. If, on the other hand, most countries were to erect wind-screens of greater or less effectiveness, then any country which remained exposed would, unless it were large relatively to the rest of the world, be subjected to perpetual instability.
If, therefore, a country adopts an international standard, it is a question just how international it wishes to be-just how sensitive to every international change. The device which we have now to consider is expressly directed towards damping down this sensitiveness without departing from effective conformity with an international standard.
A loan in terms of one currency is not identical with a loan in terms of another, even when both broadly conform to the same international standard, unless the currencies are interchangeable without cost and at a rate which is known for certain beforehand. If there is an element of expense or
* A Treatise on Money, Volume II: The Applied Theory of Money, London, Macmillan, 1930, pp. 319-31. Reproduced courtesy of Macmillan Ltd.