NORMAL EXCHANGES 22¢ 
suffer from an exchange which did not correspond to the 
purchasing power parities if the difference were so great 
that this parity could not alter with sufficient rapidity.! 
But, if circumstances allow, the rate of exchange might be 
progressively raised in successive stages up to the normal 
par. For itis the object of stabilisation not to fix at one blow an 
invariable rate of exchange, but in the first place to protect the 
exchange from violent fluctuations and above all from any 
further depreciation and in the end to put the country concerned 
in a position to govern its own exchange. 
The question arises whether the inauguration of this 
rational and simple system, which is really nothing but a 
modern adaptation of the gold standard systems with con- 
vertible paper, requires preliminary or ancillary measures 
such as the reduction of the note issue or the centralisation 
of exchange operations. 
In our opinion, the reply to this question must vary 
according to the country under consideration. Taking 
first the possibility of an immediate contraction of the 
currency, it does not seem as though this step is absolutely 
essential in a country where the volume of currency is 
appropriate to the level of prices and where proper account has 
been taken of that level in fixing the rate of stabilisation. For 
the effective use of a gold reserve does not depend, under 
a system of convertibility, on the ratio between the volume 
of gold or gold credit available and the volume of fiduciary 
currency, but on the ratio between the amount available in 
foreign currencies and the debit balance in international trade 
which has to be met. Therefore, if the volume of internal 
currency corresponding to a higher level of prices in that 
currency is much higher than the pre-war figure, the 
amount of gold necessary in order to meet international 
payments should never be fixed except in relation to gold 
prices. It may, therefore, be fairly independent of the level 
! It may indeed be feared that the purchasing power parity will alter 
much less easily with a rising than with a falling exchange. As has been 
shown above, the loss on exchange sends up internal prices and prices have 
a tendency to become stabilized at the new level in spite of factors tending 
to bring about a fall.