THE THEORY OF EXCHANGE 145 
cile their belief that the volume of circulation affects the 
exchange with a more accurate analysis of the facts usually 
represent this influence as making itself felt through the 
balance of payments. An artificial increase of purchasing 
power by stimulating purchases in general also stimulates 
the purchase of imported commodities ; but, more than 
this, it sends up internal prices and so diminishes the bar- 
rier which the loss on exchange might set up against im- 
ports and the profit which exporters derive from the sale 
of bills. In a country, for instance, where the exchange has 
already fallen 259, below par, as long as internal prices 
have not risen to the same extent the difference between 
the exchange and par will restrict imports and stimulate 
exports. But if a new issue takes place which provokes a rise 
in prices, the increase in the cost of production may coun- 
terbalance the profits which exporters were making on the 
exchange and operate in favour of imports, which will 
ultimately cost less than home products. And so the ex- 
pansion of the fiduciary currency in altering the internal 
purchasing power and consequently the ratio between its 
internal and external purchasing power tends to throw the 
balance of payments into disequilibrium and therefore to 
increase the loss on exchange. Currency contraction, on 
the other hand, tends to re-establish equilibrium in the 
balance of payments and restore the exchange. 
The significance of this explanation is bound up with 
that of the Quantity Theory. Having regard therefore to 
the analysis of this theory contained in a previous chapter 
we shall admit that it may be applicable to cases in which 
the creation of fresh purchasing power has brought about 
a corresponding increase in demand which 7s ous of all pro- 
portion to any possible increase in production, i.e., of supply ; 
hence we shall also admit that, on this assumption, infla- 
tion and the resulting rise in prices will restrict exports and 
stimulate imports so that the balance of payments will be 
thrown into disequilibrium and the loss on exchange in- 
creased—o the extent to which the rate of exchange is in- 
fluenced by the balance of payments. 
But still having regard to the above discussion of 
the Quantity Theory, we cannot adopt the view that