THE THEORY OF EXCHANGE 157 
Certain modern economists, at the head of whom it is 
right to place Mr. Cassel, have tried to find the solution of 
this problem in the theory of the purchasing power parity. 
Starting with the idea that the exchange should settle at a 
rate such that the internal purchasing power of the 
currency in question and its external purchasing power, 
once it has been transformed into foreign currency, should 
be approximately equal, they try to find a method of 
supporting the internal purchasing power of the currency, 
and naturally discover it in the Quantity Theory. In the 
views of these authors, the secret of stabilising exchanges 
consists in regulating the circulation in such a way that a 
currency will have a given internal purchasing power in 
order to obtain a parity which will produce the required 
rate of exchange. Now this theory implies in the first place 
the adoption of the Quantity Theory in the form which we 
believe to be untenable, i.e. implying a continuous and 
consistent effect of the volume of currency on prices, 
however small the variations in volume may be. Again, it 
attributes a virtue to the maintenance of purchasing power 
parity which the preceding remarks will not allow us to 
admit. For we have observed that in certain cases—the 
very ones in which we are promised a favourable result— 
the exchange rate, far from being restricted by the purchas- 
ing power parity, modifies it by sending up internal 
prices; an event which cannot be forestalled by limiting 
the circulation, and which doubtless cannot afterwards 
be counteracted by contraction. In our opinion, nothing 
is more futile than to attempt to withhold the volume of 
currency required by a rise in prices, once the latter has 
occurred as the result of an exchange movement.3 
The part of this Quantity Theory which, in our opinion, 
ought to be remembered is in the first place that when 
the time comes to return to a stable exchange it is impor- 
1 See preceding chapter. 
2 N.B. in particular the case of Czechoslovakia. 
3 In such circumstances private individuals will have recourse to their 
capital in order to meet the lack of currency, and an increase in various 
clearing operations will be used in order to meet the shortage.