Current economic theory is permeated by the notion that the purchasing power of money or consumption standard, the wholesale standard, the international standard, etc., etc., whilst doubtless theoretically distinct, all come to much the same thing in practice. It is the prevalence of this belief which explains the common habit of using such index numbers as Sauerbeck's and the Economist's to measure the movements of price levels generally, and, in recent times, the illegitimate extension of the purchasing power parity theory of the foreign exchanges to the purchasing power of money from its legitimate application to the international standard. I do not believe that Great Britain would have returned in 1925 to the gold standard at the pre-war parity if it had not been for the habit of regarding the wholesale standard as a satisfactory indicator of general purchasing power.

This notion has flourished under a combination of influences. In the first place the influence of the ‘normal’ theory of value has encouraged a readiness to ascribe to actual conditions the attributes of ‘a perfect market’. It is argued that in stable conditions different price levels stand in defined relationships to one another, and that, if these relationships are temporarily disturbed, nevertheless forces will be set up tending to restore the former relationships rapidly.