Previously, we have abandoned the assumption of independence of monetary systems and focused on the analysis of organized stabilization mechanism. First in points. 19-22 studied the stabilization mechanism based on the "orthodox" gold standard, with legally guaranteed the purchase and sale of gold, and then in paragraphs. 23-25 ​​We have analyzed the mechanism of "modernized" the gold standard when buying and selling gold and foreign currency is transferred to the jurisdiction of currency stabilization fund.
Rejection of the assumption that there is a specially designed mechanism of stabilization of the currency does not mean a return to floating exchange rates and even more so - to the completely independent currencies. First, stabilization may be the result of continuing efforts to peg carried by commercial banks and foreign exchange dealers. Secondly, short-term foreign currency movements, reflected in the balance sheets of banks, regardless of whether it is fixed or floating rate, usually lead to changes in the monetary circulation in the country, devaluing himself the criterion of "independence" of the currency.
Targeted efforts to stabilize the part of commercial banks and currency dealers may be motivated by overt or covert agreements between them, or their common faith in the stability of currency values, or, finally, that the most plausible, their confidence in the fact that there is a stabilization mechanism or organized hidden, neafishiruemaya stabilization policy of the financial authorities. This last motive is just such a situation makes it possible, when the actual exchange rate stabilization is achieved through the purchase and sale of foreign exchange by commercial banks and dealers in the absence of any kind had a real (but present in the mind of market participants), the stabilization mechanism, organized by the authorities.

Until we had to deal with such sources of supply and demand of foreign currency, as trade in goods, exchange services, long-term investment and unrequited payments, without touching the international movements of gold and short-term capital movements, had every reason to say that our analysis applies to "an independent currency."
But as soon as the international movement of gold (or other monetary metals) and short-term capital movements (between banks) become sources of supply and demand of foreign currency, our analysis should be extended to such a system in which the effective circulation of money within the country can no longer be independent of international transactions. Cash inflow / outflow of gold, as well as the acquisition of funds and placing them in accounts in foreign banks, leading to changes in the currency of the country. The meaning of the gold standard is that we introduce the institutions that guarantee the purchase and sale of gold and foreign currency in the accounts in foreign banks, according to a strictly fixed prices.
Leaving aside the movement of money in bank accounts in different countries, and engage first movement of gold between countries that have agreed in advance (this is our condition), and at what price they will buy metal from each other. This condition - the establishment of the gold standard, supported by both countries - at the same time means that, for some, it is a certain exchange rate becomes completely elastic supply of foreign currency, and at another, a lower exchange rate - endlessly elastic demand for it.

So far we have considered the trade of goods as the sole source of supply and demand of foreign currency. Imports of goods was the main source of demand, and exports - the main source of supply. Now we have to include consideration of unilateral payments and long-term capital movements. However, while leaving aside services (invisible services), the movement of gold and short-term capital movements.
Let us imagine that our country has made a series of large payments to a foreign country, and it created a demand for foreign currency that is not associated with our need to import. The reason for such payments may be overseas investment, the settlement of old debts, war reparations and something else in the same way. To obtain the value of the aggregate demand for foreign currency, we should sum up all the payments of this type with the demand for currency from commercial importers. (Later we will discuss the question of why the demand for imports is not the same thing as the demand for traded goods.)
The purpose of payments, of course, is that they should influence the elasticity of demand for foreign currency. If the payments on pre-contract or by the requirements expressed in our own currency, they involve the use of a fixed amount of our currency to purchase foreign currency on it. Then the demand for foreign currency for these purposes will have a unit elasticity, ie the demand curve represents the equilateral hyperbola. If we are talking about are not subject to deferred payments under contracts or requirements (obligations), concluded in foreign currency (so you need to buy a definite quantity of the currency), while the demand for it, providing coverage of these payments will have a zero elasticity, ie . demand curve is a vertical line, at least to the point (a point on the graph), while growth rates for foreign currency will not exceed the trust to the debtor or his ability to pay in your own currency.
In case of investments in a foreign country the amount of payment is not fixed in any currency. Regardless of changes in expectations due to changes in exchange rates, we can almost certainly say that the elasticity of demand for foreign currency when it is used for long-term investment abroad is definitely greater than zero (positive), and perhaps even greater than unity.

Studying elasticity the offer and demand represents a basis of the theory of exchange rates. And as at the made assumptions commodity import essentially lags behind demand for foreign currency, and commodity export in the same way lags behind the foreign currency offer, we should address to conditions of internal demand and the external offer as they see to our importers, and to conditions of external demand and the internal offer as they see to exporters.
Let's begin with the foreign currency offer, i.e. from our export of goods. Than growth (falling) of export when it is caused by some growth (falling) of the price of foreign currency is defined?
The modern point of view on this subject underlines a role of economic regulators, and in this plan for the first place it is necessary to put import restriction. If the foreign states enter quotas on all possible articles of import and if these quotas are completely chosen, then, obviously, any growth of the price of foreign currency can't lead to increase in our export, and consequently, and to growth of demand for foreign currency. Elasticity of foreign demand for our export, or, otherwise, elasticity of the offer of foreign currency, after achievement of certain level becomes equal to zero (or even negative). Below this level the currency offer won't be absolutely inelastic as our exporters can keep a little below a limiting mark on quotas. Below this line there will be still a sufficient number of articles on which quotas for import of the foreign states won't be settled that will allow our exporters to swim freely in this open space, raising or lowering the prices depending on that, grows or the price for foreign currency falls.
The role of tariffs is ambiguous. If the certain quantity of the goods can be sold at the established size of tariffs and the given exchange rate, to sell the goods more, the prices for foreign currency should raise and, hence, it will make such goods more cheaply for the foreign buyer. If in the price of the goods bought by non-residents paid in their own currency, the considerable share is made by special import duties growth (or falling) the prices of their currency will lead very small in percentage terms to decrease (or to increase) the prices of the import goods. In that case foreign demand for our export becomes insensitive to exchange rate changes. The role of tariffs is similar to that which is played by expenses on transportation and distribution of the goods abroad: the above these expenses, the demand is less sensitive to exchange rate fluctuations.

Excessive specialization has led to that the methods developed in the economic theory, appear absolutely unknown in applied sections of economy. Courses and textbooks on such sections, as "Money and banks", "Business cycles", "International trade", "Transport", "the Municipal enterprises", etc., — here examples of a similar state of affairs. The beginning student of economic faculty only is surprised, what for it spends so much time for such absolutely "useless" subjects, as "the cost Theory" which don't find any application in studied by it after special courses.
One of the purposes of present article consists just in showing, how the elementary analysis based on curves of supply and demand, can be used with success in the exchange rate theory. The material presented here is the reduced statement of substantive provisions теории1. In the textbook and at reading of a course the statement followed sate with a great number of examples, to dress, so to say, abstraction in a real dress.
Let's not hide also other purpose of the given publication — to equip the theory of an exchange rate with the results received in monetary economy. It, on the one hand, practice of stabilization funds (exchange stabilization funds) and new, and is possible, the updated old economic doctrines — with другой2. Both that and another — achievements of last years that forces to copy all theory of an exchange rate anew almost. Such attempt also will be made in following sections of this article.
In section And the circuit diagram and the certain simplified model of supply and demand in the currency market, and in section In — those factors which define elasticity of supply and demand in a case when transaction arise exclusively as a result of an exchange of the goods between two countries with independent currencies is considered. Then, in section With, for the same countries we analyze influence on an exchange rate of movements of the capital, unilateral payments and payments for services. In section D the concept of the gold standard as in old, traditional is entered, and in the newest formulations and causes and effects of an overflowing of gold between two countries are discussed. At last, section Е is devoted the situation analysis when in the currency market start to prove a private sector (private pegging) and speculative motives, especially in connection with a difference of interest rates.