148 MODERN MONETARY SYSTEMS
§ 7. The search for a limit to the fluctuations of abnormal ex-
changes; discussion of the theory of Purchasing Power
Pariry.
There are, however, certain authors who have attempted
to discover the norm which determines the rates of ex-
change once they have moved outside the gold points, and
who, believing that they have discovered that norm, have
thought that they have also discovered a force tending
towards equilibrium which will automatically restore
unstable exchanges and ultimately enable them to be
stabilised.
According to this theory, the movement of the exchange
once it has passed outside the gold points is governed by
the ratio between the respective purchasing powers of the
currencies which are to be exchanged ; the ratio should be
such that each of these currencies, after being converted
into foreign currencies, retains substantially the same pur-
chasing power as it had at home. This view, which has
been set forth in various publications by the Swedish
economist Cassel, should certainly not be rejected without
a further examination. The argument is easily summar-
ised. If, for instance, prices have doubled in England, thus
showing that sterling has lost half its purchasing power,
and if they have increased fourfold in France, thus show-
ing that the purchasing power of the franc is only one-
quarter of what it was before the war, the exchange be-
tween sterling and francs ought to stand at about 50 francs
as compared with 25 francs in normal times. For in the
opinion of this author a Frenchman who pays 50 francs
for one pound sterling but who obtains with each pound
double the quantity of goods which he could obtain in
France for 25 francs can go on buying in England without
disadvantage. Conversely, an Englishman who obtains
for 25 francs in France half the quantity of goods which
he would obtain in England for one pound sterling can
nevertheless go on buying in France because he will
henceforward obtain so instead of 2§ francs for each
