STABILITY OF THE EXCHANGE STANDARD 555
neglected to give prominence to another and the most vital re commendation of the Committee, in which it is observed :* “ But all the benefits proposed by this Mode of Remedies would be of little Avail and very limited Duration if it (i.e. Bank of Ireland) did not promise at the same time to cure the Depreciation of Paper in Ireland by diminishing its over issue .” Indeed, so great was the stress laid on the limitation of issue that when Parnell, in his resolution in the House of Commons on the reform of the Irish currency, regretted the non-adoption of the recommendations of the Committee,† Thornton in his reply pointed out that nothing would help to stabilize Irish exchange so long as the vital condition laid down by the Committee was disregarded. The recent experience in pegging the exchanges well illustrates the importance of that vital condition. Pegging the exchange is primarily a device to prevent the external value of the currency falling along with its internal value. The way in which pegging effects this divorce is important to note.‡ The primary effect of the peg is to permit the purchases of foreign goods by procuring foreign currency for home currency at a fixed price, which is higher than would be the case if it were determined by the general purchasing power parity of the two currencies. By enabling people to buy foreign goods with foreign currency obtained at a cheaper price the peg virtually raises foreign prices more to the level of the home prices, so that if the exchange is stable it is not because there is a peg, but because the price-levels in the two countries have reached a new equilibrium. Essentially the exchange is stable because it is an artificial purchasingpower parity. Whether it will continue to be so depends upon the movements in the home prices. If the home prices rise more than the rise brought about by the peg in the foreign prices the mechanism must break. It is from this point of view that the condition laid down by the Irish Committee on exchange regarding the limitation on issue must be held as one of vital character. In omiting to advert to that condition the Indian currency contradicts what is best in that Report of the Irish Committee.
The reason why Mr. Lindsay paid no attention to the question of limitation in setting up his exchange standard is largely that, notwithstanding the great reputation he has achieved as
- Report, p. 16. Italics not in the original.
† See Hansard Parliamentary Debates, Vol. XIV, pp. 75-91.
‡ Cf. the succinct statement by T. E. Gregory, Foreign Exchanges, p. 85.