THE THEORY OF EXCHANGE 145
cile their belief that the volume of circulation affects the
exchange with a more accurate analysis of the facts usually
represent this influence as making itself felt through the
balance of payments. An artificial increase of purchasing
power by stimulating purchases in general also stimulates
the purchase of imported commodities ; but, more than
this, it sends up internal prices and so diminishes the barrier
 which the loss on exchange might set up against imports
 and the profit which exporters derive from the sale
of bills. In a country, for instance, where the exchange has
already fallen 259, below par, as long as internal prices
have not risen to the same extent the difference between
the exchange and par will restrict imports and stimulate
exports. But if a new issue takes place which provokes a rise
in prices, the increase in the cost of production may counterbalance
 the profits which exporters were making on the
exchange and operate in favour of imports, which will
ultimately cost less than home products. And so the expansion
 of the fiduciary currency in altering the internal
purchasing power and consequently the ratio between its
internal and external purchasing power tends to throw the
balance of payments into disequilibrium and therefore to
increase the loss on exchange. Currency contraction, on
the other hand, tends to re-establish equilibrium in the
balance of payments and restore the exchange.
The significance of this explanation is bound up with
that of the Quantity Theory. Having regard therefore to
the analysis of this theory contained in a previous chapter
we shall admit that it may be applicable to cases in which
the creation of fresh purchasing power has brought about
a corresponding increase in demand which 7s ous of all proportion
 to any possible increase in production, i.e., of supply ;
hence we shall also admit that, on this assumption, inflation
 and the resulting rise in prices will restrict exports and
stimulate imports so that the balance of payments will be
thrown into disequilibrium and the loss on exchange increased—o
 the extent to which the rate of exchange is influenced
 by the balance of payments.
But still having regard to the above discussion of
the Quantity Theory, we cannot adopt the view that