THE THEORY OF EXCHANGE 133
problem arises indirectly because only a part of the
circulation is international in character.!
We shall return to the logical consequences of this
statement, and only note for the moment that those
exchange phenomena which are most difficult to explain
and which have the most serious effect are those which
occur as between countries not possessing the same kind of
currency, lead to irregular and violent fluctuations, and
sometimes end in the unlimited depreciation of one
national currency in relation to foreign currencies.
N 3. Abnormal exchanges ; the essential test is instability—
the ultimate cause is inconvertibility of the internal cir-
culation.
In a country which had previously enjoyed regular ex-
changes with a group of others, an exchange crisis generally
shows itself at first in a decrease in the value (or deprecia-
tion) of the national currency in relation to foreign cur-
rencies, this decline taking place more or less continuously
in the course of irregular fluctuations. But it may happen
that a stable parity disappears through an appreciation of
the national currency. This has happened in certain coun-
tries with a silver currency, and especially in British India
where, after the exchanges had been perfectly stable for
twenty years under the system of the gold exchange stan-
dard, at a rate of 164. to the rupee, the latter rose above
this rate owing to a rise in the price of silver and a fall in
sterling and because it was impossible in practice to pre-
vent the export of rupees, which were now worth more
than 16d. in silver content. The same process took place
during the war in Sweden, as the prohibition to import
gold had cut off the Swedish gold currency from others
and prevented it from being increased by the minting of
foreign gold. But these are exceptional cases and the idea
of abnormal exchanges is usually bound up with that of
depreciation. It should be remembered, however, that the
1 In France, even before the war, paper and silver made up about half
the total volume of currency and the proportion was considerably higher
in many other countries.
