The violence of exchange-rate fluctuations in countries which in the past, have had unregulated markets for foreign exchange has frequently led to the conjecture that a system of market exchange rates may be inherently unstable. The condition of stability, of course, is that: a rise in the price of foreign currency shall reduce the excess demand for such foreign exchange. The relation of this condition to elasticities of demand for imports and elasticities of supply of exports has been investigated in considerable detail by Alfred M a r s h a 1, Mrs. Joan R o b i n s o n, C. W. B i c k e r d i k e, A. J. B r o w n, and others. All of the investigators have considered a world economy consisting of only two countries, and the conclusions they reached are as follows: (1) If exports are produced under constant price both at home and abroad, stability requires that the sum of the important demand elasticities at home and abroad must exceed unity. (2) If the elasticity of supply of exports is zero at home and abroad, the exchange market is always stable regardless of the demand elasticities. (3) In the intermediate case, stability requires that y1y2(e1-fe2+1) + e,e2(ql +2-1) shall be positive, where Yl and Yq2 are import demand elasticities at home and abroad and where e1 and e2 are export supply elasticities. Brown considers an additional complication in which each country's exports consist partly of imported materials, and concludes that the presence of such imported materials increases the stability of the market. It is easily shown, however, that this conclusion is incorrect. If exports are produced at constant supply price, the condition of stability, after allowing for imported raw materials, is: r +'r2y2 > 1 where Yi and y2 are elasticities of demand for imports of finished goods, and where r1 andr2 are the' ratios of the value of exports retained by domestic producers to the total value of exports. Since these ratios are less than unity, and will be considerably less than unity if imported materials comprise a large part of the cost of exports, it follows. that the exchange market may be unstable even when q1 + 112 exceeds unity. If exchange markets are 'stable as of given supply and demand schedules, the possibility still remains that they may be made unstable