144 MODERN MONETARY SYSTEMS
behind the immediate cause, viz., the disappearance of the
export gold point, an ultimate cause in the fiduciary cir-
culation. Now the arguments for stating that the volume
of the circulation may give rise to an exchange crisis may
be valid when we are looking for factors which affect the
rate in the case of an exchange already dislocated, i.e.,
which may aggravate or mitigate an existing loss on ex-
change. Apart from the explanation which merely con-
sists in confusing external with internal depreciation, the
most crude notion on which the belief in a constant rela-
tion between exchange and currency variations can be
based is the following. Paper currency only has value in
so far as it is secured on the metal currency, which is in the
nature of a commodity ; and the rate of exchange depends
upon the ratio between this security and the note issue.
But it has been observed that by a curious rebound
a paper currency often falls faster than it expands,
and that therefore it is more heavily secured the more
it loses its value. If the mark circulation is raised
from 40—400 milliards while the metal holding remains
constant at one milliard of gold marks, this holding at a
rate corresponding to 25 gold pfennigs may be adequate
cover for 4 milliards of paper marks or one-tenth of the
total issue ; the proportion of cover remains the same with
a circulation of 400 milliards if the exchange does not fall
below a rate corresponding to 25 gold pfennigs, but it
rises if the exchange falls lower.
Indeed, it is by no means impossible that the amount of
the security—a theoretical security so long as the notes are
inconvertible—may have some influence on the minds of
certain more or less inexperienced speculators. But if the
metallic cover be considered as a commodity and more
simply as a currency which has some value abroad, it be-
comes difficult to see how the agio can depend for any
considerable length of time upon the ratio between the
amount of fiduciary currency and the amount of a metal
currency which cannot be put to any use.!
Therefore modern economists who are anxious to recon-
1 Hence it is useless to expect a progressive contraction of the fiduciary
circulation to provoke a corresponding improvement in the exchange.
