150 MODERN MONETARY SYSTEMS 
already made his purchases, and has a certain interval 
before payment falls due, will frequently cover himself 
by purchasing the necessary foreign valuta at a rate 
depending more or less on the quantity ratio between 
supply and demand rather than on the personal desires 
and above all the appreciation of those who buy and 
sell. Moreover, on the assumption, which seems to us 
the normal one, that commodities are bought abroad 
which cannot be obtained at home, it 1s necessary to 
accept the price of the foreign seller, except that, if there 
is a choice, it is always possible to choose the most 
favourable market. 
We therefore believe, in conclusion, that Mr. Cassel’s 
theory cannot be admitted in its full force, and that only 
the following elements of it hold good. Trade between 
England and France will develop on normal lines if the 
rate of exchange reflects the parity of the respective 
purchasing powers of the two currencies. But if, for 
instance, the rate is lower than this parity—say 60 francs 
to the pound instead of s50—French purchases in England 
will tend to be restricted, and this will tend to send up the 
franc in terms of sterling; in the opposite case, English 
purchases in France will be reduced. Through such 
variations in the balance of payments the exchange will 
more or less tend to settle round about the purchasing 
power parity, in so far as a dislocated exchange depends 
on the balance of payments. And even these propositions 
must be taken as subject to subsequent observations regarding 
the effect of exchange fluctuations on internal prices and 
therefore on the purchasing power parity. 
§ 8. Hypothesis of an automatic adjustment of the exchanges. 
We are thus brought back to an older theory, which in 
our view is more consonant with the facts according to 
which exchange fluctuations tend to bring about equilibrium 
in the trade balance, and the restoration of the latter will tend 
in turn to restore the exchange. This theory has a different 
starting-point. It is assumed that, as seems most often