Prosperity and Depression.pdf

Nature and Causes of the CyclePart IItends to be lower should not turn to investments in the othercountry. There will be a complete equalisation of the rate ofinterest; and capital will eventually be transferred in the shape ofconsumers' goods and luxuries. Short of the quite extreme casewhere there is no exchange of goods or services whatsoever (acase which need not detain us here), imperfect mobility of goodsdoes not directly reduce the mobility of capital. It cannot,however, be denied that, indirectly, increasing restrictions on themovement of goods and services tend to restrict the movement of 'capital, and render foreign investment more and more risky. Ifthe volume oftrade between two countries is large, and ifthere aremany actual and potential export and import goods, the repercussionsof the transfer of a ,given amount ofinvestible funds (moneycapital) will be slight. A mild expansion in one country relativelyto the other 1 will suffice to produce an export surplus from thecapital-exporting country. If, on the other hand, the volumeoftrade is comparatively small, the movement ofthe same amountof money capital will produce a more violent expansion, andprobably a sharp rise of prices, in the one count.ry·, and contractionand a sharp fall of prices in the other country. The samething can be expressed by saying that, where the volume of trade islarge and the economic connections are close between two countries,the money which flows out of one country to seek investment inthe other will soon find its way back through increased exportsor reduced imports. If the volume of trade is small, it willnot return so quickly. The slump .in the capital-exportingcountry may drive up the interest rate and thereby remove, atleast for the moment, the incentive for the migration of capital.But it may also incite a flight of capital and precipitatethe crisis.In the extreme case where no mo'Vement of goods or servicesis possible, a transfer of money capital will be wholly inflationary1 There need not in all cases be an absolute contraction in the capitalexportingcountry. A slowing-doWn. of the expansion may be sufficient.There are also cases conceivable w'here no contraction-not even a relativeone-is required from the capital-exporting country-e.g., ifthe proceedsof the loan are spent directly on goods of that ~ountry~