THE THEORY OF EXCHANGE 127
has done so. Thus, for instance, the dollar was quoted at
15 francs at a time when the average price index in France
stood at about 300 ;! or an increase of 2009, and a corre-
sponding decrease in the purchasing power of the
currency.
In this case the notion that an exchange crisis is a
consequence of a depreciation may, although it is badly
formulated, have some meaning. The loss on exchange
must be understood as being due to the internal deprecia-
tion of the currency, or, in other words, to the decline of
its purchasing power within the country, as expressed by
the rise in prices. This is a statement which deserves
examination.
Finally, this internal depreciation may itself be attri-
buted to an expansion of the currency, and in this case
the statement that “the exchange crisis proceeds from the
depreciation of the national currency” conveys, though
quite incorrectly, a proposition which is in itself worth
discussing, viz., that the loss on exchange, or in other
words the decrease in exchange value of the national
currency in relation to foreign currencies, is due in the
last analysis to an abnormal expansion of the national
monetary circulation.
But this proposition, once it is clearly and correctly
stated, and once it emerges from the ambiguity of an in-
accurate expression, may deserve to be discussed, but it only
seems evident because it has not been sufficiently analysed.
By a theoretical process the Quantity Theory has been
transported into the field of exchanges, just as the theory
itself has been constructed by a theoretical application
of the law of supply and demand, as the result of observa-
tions in a closed market ; hence there arose a belief that a
currency, depreciated on account of its being in excess or of
low grade, must necessarily suffer a loss on exchange ; and
so internal depreciation in relation to internal prices and
loss on exchange or depreciation in relation to a foreign
currency came to be regarded as one and the same
1 Taking as a basic index 100 corresponding to prices in 1913 when the
dollar stood at about § francs.
