100 THE UNIVERSITY OF OKLAHOMA 



the American market, their currencies will remain below par in 

 New York and will continue to fluctuate — and the fluctuation will 

 follow the trend of changes in international trade, together with 

 changes in the internal depreciation of their paper currencies. 



A mere agreement between the American government and 

 Europan governments to stabilize foreign exchange rates would 

 have no effect whatever upon the current prices of exchange bills 

 unless these governments at the same time stood ready to purchase 

 or sell foreign exchange bills at the agreed rate and assume the 

 risk of such transactions. An agreement betwen international bank- 

 ers to bring about such stabilization would in "its very nature nec- 

 essitate the purchase or sale of foreign exchange bills at the agreed 

 rates and would, under present conditions, result in the American 

 l)ank3 investing billions of dollars in European bills of exchange 

 on which they would run the risk of losing heavily. Such a 

 scheme would mean- that the American banks would make large 

 loans to Europe to enable Europe to buy an excess quantity of 

 American goods, and that they would have to run all the risk of 

 repayment of those loans, as well as the risk of further deprecia- 

 tion of European currencies. 



Professor Cassel of the University of Stockholm puts forth a 

 scheme which he designates as the "purchasing power parity" theory. 

 The principle points in his theory are as follows : 



That you will have a stable foreign exchange rate between two 

 countries if you keep the general price level vvithin each of the two 

 .countries at a fixed relation to one another. 



That is to say, if all countries had currency systems with the 

 same degree of internal depreciation all foreign exchange rates 

 between the different countries would be on a par basis. Further, 

 the way to equalize the internal purchasing power of the money 

 of one country with that of another would be by the change in the 

 quantity of money in circulation in relation to the volume of trade. 

 For example, if the internal purchasing power of the American 

 dollar was relatively greater than the internal purchasing power of 

 the German mark, the purchasing power of the American dollar 

 could be brought to the level of that of the German mark simply 

 by sufficiently increasing the quantity of money in circulation in the 

 United States. 



The serious defects in this theory of Professor Cassel's ai-e that 

 it is neither true nor practical. If the theory were true, it would 

 still be practically impossible to attain and maintain a relatively 

 constant ratio of depreciation of the currencies of the various 

 countries of the world. Such a plan would necessita'te frequent 



