216 MODERN MONETARY SYSTEMS 
observations. But it is necessary to see exactly how far it 
goes. In the first place when exchange fluctuations do not 
0 beyond the gold points they are too small to have any 
appreciable effect on current commercial transactions and 
could hardly produce a recoveryin the balance of payments 
except in so far as they might stimulate arbitration on real 
estate or Stock Exchange securities or on temporary 
capital deposits—transactions which do not take place as 
between all markets but only as between certain large 
international centres. 
When such fluctuations go outside the gold points, their 
effect on the trade balance appears to be much greater. 
We already know, however, that this effect only takes place 
in so far as the rise in internal prices does not counterbalance the 
exporters’ profit on exchange and the importers’ loss on ex- 
change, in other words, so long as the purchasing power 
parity has not been restored. Moreover—and this appears 
to us to be a fact of capital importance—the premium 
which an exporter obtains through the difference between 
the cost of production and the price in national currency 
at which he will sell his bill payable abroad is likely to be 
divided with the foreign importers. Thereupon the increase 
of exports by weight can no longer be reflected in a corresponding 
increase in value. The value of exports may therefore fall 
below that of imports merely owing to the depreciation of the 
exchange. Moreover, the whole idea of an automatic equili- 
brium due to monetary factors presupposes that exchange 
rates are governed by the balance of payments or even by 
the trade balance, which, properly speaking, is the real 
factor taken into account by these theories. But if the 
balance of payments, i.e., the balance of debts and credits 
falling due at any given date, does indeed appear to be the 
determining factor in fixing the rate of exchange so long 
as the latter remains within the gold points and specula- 
tion is thus relegated to the background, #is same factor 
of ten loses its importance when the exchanges are disturbed and 
are subject to the forecasts, impulses and panics of the 
wildest speculation. An examination of exchange fluctua- 
tions since the war will show the importance of this obser-