154 + MODERN MONETARY SYSTEMS 
provoke a rise in prices closely bound up with the exchange 
movement. In Germany, for instance, when a fall in the 
mark was threatening, the crowd, which through previous 
experience was alive to the connection between the two 
phenomena, rushed to the shops and so helped to provoke 
the rise which it feared. More than this, when, as a result 
of progressive depreciation, nobody knows what the 
currency is going to be worth from one day to another; 
when trade operations have to be based not on the pre- 
vious cost of production but on a cost of replacement 
which is unknown, and contracts are therefore drawn up 
in terms of gold and foreign currencies, and prices vary 
with the rate of the dollar, the connection between price 
movements and the exchange becomes exceedingly close.? 
And so there is no certain conclusion to be drawn from a 
fairly general correspondence between the rate of exchange 
and the respective purchasing powers of a currency on the 
internal and external markets? 
It is true that, for the reasons given above, the exchange 
may be more or less affected by the purchasing power 
parity ; but by its reaction on internal prices it alters in 
turn and more certainly the purchasing power parity itself; 
this may be enough to explain the approximate corre- 
spondence. Moreover, it is probable that zo the extent to 
which this correspondence is not quite complete, or rather in so 
far as the rise in internal prices falls short of the loss on 
exchange, the discrepancies in purchasing power will tend 
to bring the balance of payments and the exchange itself 
into equilibrium; but it is improbable that these discrepancies 
can have their full effect, since an unfavourable exchange will 
tend to provoke a rise in internal prices.’ 
1 As we have seen above, it even happens in certain circumstances that 
the internal depreciation finally overtakes the loss on exchange. 
2 A detailed analysis of the relation between price and exchange curves 
shows that a correspondence between the respective variations of internal 
prices and rates of exchange in the countries in question is too frequent to 
allow of a mere coincidence. See on this subject the instructive article by 
M. Olivier in the “Revue d’économie politique” of July 1922, and Mr. 
Keynes’ article in the first number of the Manchester Guardian series, 
entitled, “The Reconstruction of Europe.” 
3 In an article already quoted (“La circulation, le change et les prix,”