THE MONETARY CRISIS 75 
It would also be somewhat rash to attempt to establish 
too definitely a relation between British post-war monetary 
policy and the rise in sterling. For if exchange phenomena 
are particularly susceptible of scientific treatment when they 
can be explained by the existence, combination or disappear- 
ance of gold or silver points or by any other definitely ascertain- 
able condition for convertibility, it is, on the contrary, danger- 
ous to attempt to explain by reference to the theory fluctuations 
in the exchange rate of an inconvertible currency when it is 
exposed to all the risks and caprices of speculation. It is a 
piece of rather crude observation that the maximum fall 
in sterling happened at the end of 1920, when the note 
issue also reached its maximum, and that it began rising 
from that date onwards, while the note issue contracted, 
but at a faster rate. The improvement in sterling also 
coincides from 1921 onwards with an improvement in the 
Trade Balance, which, it is true, had shown its greatest 
deficit not in 1920 (373 million £) but in 1919 (669 
million £). But the initial improvement in the Trade Balance 
and the exchange cannot be attributed to the fall in prices, 
supposed to have been the result of a process of deflation, 
which incidentally had not occurred at the time. Moreover, 
although the improvement in the exchange coincided 
with a fall in internal prices, its effect on the Trade 
Balance could only be to counteract the fall. For, with 
most European currencies continuing to depreciate, pur- 
chases in sterling became more and more burdensome for 
foreign buyers in spite of the fall in prices in Great 
Britain. 
It therefore seems very difficult to try to prove that 
there is a sort of physical relation of cause and effect 
between deflation, the fall in prices, the improvement in 
the Trade Balance and the improvement in the value of 
sterling in terms of dollars. In the first place, the events 
did not occur in the chronological order which is appropriate 
to the connection commonly supposed to exist between them, the 
improvement in the balance of trade preceding the fall in 
prices, and the latter having begun before deflation set in. 
Secondly, many other factors may explain the fall in 
prices, the improvement in the Trade Balance, a possible