CHANGES IN VOLUME OF PAPER MONEY 391

the decline of transactions with foreign countries as well as within
the country, breakdown all around. This is what took place in
Germany when the issues of paper money, at first comparatively
moderate, reached the farcical dimensions of 1923. The export
bounty and the exchange dumping came to a speedy end. Quite
different conditions appeared when the paper rubbish was finally
swept away, and the newly stabilized mark system was established.
Then emerged the situation which has been considered elsewhere —
that of a stable currency, which it was designed to keep on a par
with specie, but which had the essential characteristics of a gold
exchange system.
We return to the main proposition ; namely, that depreciating
paper does not in itself lead to rates of foreign exchange that wil
stimulate either exports or imports. As with almost every general
proposition on these matters, there are cases w. «93 De regarded
as exceptions to the rule. One such played a large purt in the
paper exchanges of the post-war period. Depreciating paper may
bring about the “flight of capital.” Tnvestors may become uneas
from continued depreciation, may fear complete collaps: and may
wish to place their possessions in secure form. They will then buy
gold exchange, sending the funds to foreign banks; or may buy
foreign securities. Germans and Frenchmen during the ominous
stages bought dollar exchange, Swiss exchange, sterling exchange,
or else securities of these countries. The rates, in terms of francs
or marks for dollars, Swiss francs, pounds sterling, not only rose,
but rose more than domestic prices. And this disproportionate rise
operated tostimulate exports. A bounty arose in just the same way
as it does when governments use paper money at the outset for
meeting their own foreign engagements. I suspect that it was
operation of the latter, direct purchase of foreign exchange by
government, which played the largest part in the bounty
experienced (so long as conditions had any calculability) in Germany,
 in 1924-25, whereas it was the flight of capital that played
the more important part during the depreciation of the French
franc.
Such a flicht of capital is a natural or at least presumable