Old-fashioned advocates of sound money have laid too much emphasis on the need of keeping _n_ and _r_ steady, and have argued as if this policy by itself would produce the right results. So far from this being so, steadiness of _n_ and _r_, when _k_ and _k´_ are not steady, is bound to lead to unsteadiness of the price level. Cyclical fluctuations are characterised, not primarily by changes in _n_ or _r_, but by changes in _k_ and _k´_. It follows that they can only be cured if we are ready deliberately to increase and decrease _n_ and _r_, when symptoms of movement are showing in the values of _k_ and _k´_. I am being led, however, into a large subject beyond my immediate purpose, and am anticipating also the topic of Chapter V. These hints will serve, nevertheless, to indicate to the reader what a long way we may be led by an understanding of the implications of the simple Quantity equation with which we started. II. _The Theory of Purchasing Power Parity._ 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.”[26] [26] This term was first introduced into economic literature in an article contributed by Prof. Cassel to the _Economic Journal_, December 1918. For Prof. Cassel’s considered opinions on the whole question, see his _Money and Foreign Exchange after 1914_ (1922). The theory, as distinct from the name, is essentially Ricardo’s.