A Tract on Monetary Reform: Chapter III - II. The Theory of Purchasing Power Parity

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The Quantity Theory deals with the purchasing power or commodity-value of a given national currency. We come now to the relative value of two distinct national currencies,—that is to say, to the theory of the Foreign Exchanges. When the currencies of the world were nearly all on a gold basis, their relative value (i.e. the exchanges) depended on the actual amount of gold metal in a unit of each, with minor adjustments for the cost of transferring the metal from place to place. When this common measure has ceased to be effective and we have instead a number of independent systems of inconvertible paper, what basic fact determines the rates at which units of the different currencies exchange for one another? The explanation is to be found in the doctrine, as old in itself as Ricardo, with which Professor Cassel has lately familiarised the public under the name of “Purchasing Power Parity.”