BEFORE the war, the second of the two questions asked in the last chapter could have been answered approximately at once. There was then never any

uncertainty as to what the rates of exchange between the principal European countries and the United States would be, apart from quite minor fluctuations. The rates only moved slightly on one side or the other of a fixed point. The reason for this steadiness was that there existed an international currency. The exchange value of the currencies of the various countries in terms of this common international currency determined their exchange value in terms of each other. This international currency was gold. 1 The use of gold as an international currency determined, within narrow limits, the rates at which currencies were exchanged. The war destroyed this international currency and it is not likely to be reconstituted for an indefinite period. The gold exchange values of most of the currencies are to-day purely theoretical, and offer no guide to. the actual rates which obtain. Nevertheless, it is necessary to examine in detail the part which gold played in exchange matters,

for the whole of our existing exchange machinery was built up on the assumption that actual rates would deviate only very little from the theoretical gold exchange value. It is because that assumption is no longer true that the machinery, which before the war worked excellently, to-day works unevenly. The understanding of modern conditions of international finance is intimately bound up with a knowledge of their recent history, which has made them what they are. It is necessary to emphasize this, for otherwise the following chapters on Mint Pars and Gold Points, dealing, as they do, with conditions which have in large part passed away, may seem superfluous. But the knowledge contained in them is essential to the understanding of inflation, depreciated exchanges, a return to the gold standard, the importance of the dollar rate, stabilization, etc., in fact, to the understanding of all modern exchange problems.