156 MODERN MONETARY SYSTEMS
disparity which, on a certain theory, ought to re-establish
equilibrium by stopping imports and stimulating exports.
On the contrary, this disparity has been reduced to a
minimum by an immediate rise in internal prices. It is
therefore perfectly clear that if throughout these wide
fluctuations the ratio between internal and external prices
remains somewhere in the neighbourhood of purchasing
power parity, this is not due to any virtue in the purchasing
power parity whereby it can restrict the exchange fluctuations,
but it is because the internal purchasing power has felt the
effect of these fluctuations whatever they may be.
In short, it hardly seems possible to admit Mr. Cassel’s
argument that the exchange cannot move far from
purchasing power parity because bills would not find
purchasers at any other rate. A study of monetary
phenomena merely seems to confirm the idea, which is at
once old and new, that there is a reciprocal relation between
the rate of exchange and the balance of payments, and
that the return of the balance of payments to equilibrium
will more or less tend to regulate the exchange. It may
therefore be admitted that the effect of the disparity
between purchasing powers is such as to restore the
exchange, more or less, without any previous alteration
in the currency; but it must be added that the purchas-
ing power parity itself alters with the exchange. And so
in the last analysis there does not appear to be any certain
and constant factor which will bring the balance of pay-
ments into equilibrium, nor is there any limit to the
fluctuations of an exchange which is no longer restricted
by the gold points or by an equivalent convertibility.
§ 10. The necessary conditions for a return to normal
exchanges.
Having studied the circumstances in which an exchange
crisis will arise and the conditions in which abnormal
exchanges develop, we must now complete this sketch of
a theory of exchange by inquiring how a return to a stable
exchange can be effected.
