198 ESSAYS IN PERSUASION part

existing standard appeared seriously incompat-ible with the stability of prices.

Indeed, it is doubtful whether the pre-warsystem for regulating the international flow ofgold would have been capable of dealing withsuch large or sudden divergencies between theprice levels of different countries as have oc-curred lately. The fault of the pre-war regime,under which the rates of exchange between acountry and the outside world were fixed, andthe internal price level had to adjust itselfthereto (i.e. was chiefly governed by externalinfluences), was that it was too slow and in-sensitive in its mode of operation. The fault ofthe post-war regime, under which the pricelevel mainly depends on internal influences (i.e.internal currency and credit policy) and therates of exchange with the outside world haveto adjust themselves thereto, is that it is toorapid in its effect and over-sensitive, with theresult that it may act violently for merely tran-sitory causes. Nevertheless, when the fluctua-tions are large and sudden, a quick reaction isnecessary for the maintenance of equilibrium;and the necessity for quick reaction has beenone of the factors which have rendered the pre-war method inapplicable to post-war conditions,and have made every one nervous of proclaim-ing a final fixation of the exchange.

A fluctuating exchange means that relativeprices can be knocked about by the most fleetinginfluences of politics and of sentiment, and bythe periodic pressure of seasonal trades. But