128 MODERN MONETARY SYSTEMS 
phenomenon, to which was attributed instinctively and 
almost automatically the cause which seemed most 
general and most logical. 
Now external depreciation, which the theory of ex- 
changes attempts to explain, and internal depreciation are 
two phenomena which may be related and may even 
affect each other ; and it will be one of the main objects 
of the theory of exchanges to show the connection 
between them. But at the present time they are essentially 
distinct phenomena ; for they present themselves and are 
measured by the observation of different sets of facts— 
rates of exchange, on the one hand, average fluctuations 
of internal prices on the other. Moreover, the curves 
which they describe are distinct and the difference 
between these curves constitutes, as we shall see later on, 
the most important factor in constructing the theory of 
the exchanges and its corollaries. 
§ 2. The theory and mechanism of exchange. 
The crude notions of money, goods and quantity will 
not suffice to explain exchange phenomena. 
In the first place, we must take into account some 
essential elements in the practical work of exchange 
brokers, study the conditions of the exchange market, and 
discover what factors are susceptible in different circum- 
stances of influencing it. The rate of exchange expresses the 
value of a national monetary unit such as the franc in relation 
t0 a foreign monetary unit such as the pound sterling or the 
1 M. Rist, in a revue of an earlier work (“‘Traité élémentaire d’économie 
politique”) has already criticised the author for having stated that internal 
depreciation and external depreciation are distinct phenomena. The above 
remarks make it unnecessary to reply to this criticism, which could not be 
admitted as valid without disavowing the very meanings of the terms used 
and the significance of the ideas expressed therein. Moreover, to avoid 
confusing these two phenomena with one another is by no means equivalent 
to denying that they are often connected. It is surprising that the dis- 
tinction which emerges from the plain observation of facts should be 
denied by an author who appears to believe in the stabilising effect of 
fluctuations in exchange rates on the balance of payments, whereas this 
effect presupposes a substantial difference between internal depreciation 
and loss on exchange.