World economy a collection of national economies

What we too glibly call "world economy" is really only a collection of national economies, each with a money that cannot normally be freely spent outside its frontier. Consequently, in order that peoples of these various countries may do business with each other on something other than a barter basis, they have gradually devised foreign exchange instruments and foreign exchange markets in which they may exchange with each other the money claims arising out of international trade. This elaborate foreign exchange system cannot create foreign exchange instruments to a greater value than the sum of all international transactions (including borrowings and specie movements) within a given period. Hence it follows that the people of one country can convert the claims they have on the rest of the world into their own currency only to the value of the claims the rest of the world has on them.

Under specie-standard (say, gold-standard) conditions, lack of equivalence in the money value of the claims of the people of one country on the rest of the world and of the rest of the world on them will result in offsetting movements of specie or shortterm funds which will lead to corrective changes in the balance of payments. Under paper-standard conditions lack of equivalence between the international debits and credits of a country will result in one or another of other forms of corrective, the commonest being fluctuations in exchange rates with consequent changes in "visible" and "invisible" trade.