74

A TEEATISE ON MONEY

BE. II

two or three commodities which do not enter freelyinto international trade, and since the systems ofweighting and the grades and qualities of the selectedarticles are various, there has been just that degreeof discrepancy in the “ verifications ” to make theTheory seem prima facie interesting.

Where, on the other hand, the comparison isreally made on the basis of the Purchasing Power ofMoney in different countries, then the PurchasingPower Parity Theory of the Foreign Exchanges is notborne out by the recorded facts. I used to thinkthis Theory 1 more interesting than I think it now.It now seems to me that the really significant matterfor discussion in this connection is the much morecomplicated problem of the International Diffusion ofPrice-Levels between one country and another. Pro-fessor Cassel’s most recent applications of his theoryto current events seem to me to be vitiated by hisunderlying assumption that the terms of trade donot change; whereas the fact that they can do so—as the result, for example, of variations in the rate offoreign investment—is, as we shall see in Chapter 21,one of the greatest difficulties in the way of the main-tenance of a country’s external equilibrium.

It is evident that the common practice of pub-lishing various versions of Index-Numbers which arepopularly described as Index-Numbers of Priceswithout sufficient further qualification may bedangerously misleading. Professor Cassel himselfhas come near to being misled, in my opinion, byapplying conclusions true of a particular type ofprice-level, namely, what I have called InternationalPrice-Levels, beyond their appropriate field. At the

1 For a fuller discussion of this Theory vide my Tract on MonetaryReform, pp. 87 et seq. See also Cassel’s Money and foreign Exchange after1914, and Dr. Keilhau, Economic Journal, vol. xxxv. (1925) p. 221.