Prosperity and Depression.pdf

Chap. 12International Aspects oj" Business Cyclesin the one country and del;lationary in the other; 1 but even in thiscase the transfer is not impossible, although it is difficult to see howan equalisation in the rate ofinterest can be permanently achieved,unless one believes the interest rate can be permariently lowered bymonetary inflation or permanently raised by deflation.We may sum up as follows. The smaller the volume of tradethe more violentwill be the inflation in·the borrowing, and deflationin the lending, country consequent upon the movement ofa certainsum of money capital, or, if exchanges are allowed to vary, themore violent will be the fluctuations in the exchange rate. If thisdevelopment does not directly check the tendency of capital tomigrate, it will at least affo~d incentives to State interventions suchas transfer moratoria and the like, and is for this reason indirectlyfatal to foreign investment.So much for this digression. We return to theThe reasons main theme. As everybody knows, equalisation offor differences interest between different countries is not the typicalin interest situation we find in the real world. What we findrates. is, on the contrary, a persistence of discrepancies,sometimes of a very high order of magnitude.The mobility ofcapital is usually far from being complete. Peopletend to invest their money at home in local land, physical capital,property rights, debts and so on, even though the rate of interestwhich can be earned,is much lower than that to be obtained byequivalent· investtnents abroad. The reasons for this are ratherobvious. Partly they are, so to speak, of· a physical nature.Transport costs and costs of communication place obstacles inthe way of that personal supervision which is usually necessaryto obtain the highest income from investment in physical capital,while they enhance the.difficulty of obtaining that first-handknowledge ofthe business and political situation in other countrieswhich is necessary to dissipate uncertainties in regard to businesspropositions and the value of equities. But, on the whole, thebarriers to international lending and investment are less physicalthan political, social and institutional. Ignorance of foreigntongues, inadequacy of legal protection, risk of transfer restriction1 Ct. Iversen, loco cit., page 47.