Prosperity and Depression.pdf

Chap. 12International Aspects of Business CyclesWe turn now to the second question-that· is,Tendency to to the effects of a certain degree of localisation ofdamp down investment, credit, and banking. They can belocal booms most clearly brought out by supposing the tendencyand depressions. towards localisation to be so strong as absolutelyto prohibit lending and investment outside regionalor national boundaries. In such circumstances, the general worldmarket for capital (or investible funds) will be divided up geograpWcallyor nationally into watertight compartments. In eachcountry, a different interest rate-or scale of rates-will prevail,determined by the local demand for funds and the local supply.The local supply will depend, among other things, on thesupply of money in the country, on the basis of which we maysuppose a more or less developed credit structure to have beenerected. What will be the conseque.t:lce of such an arrangementon the length and amplitude of cycles in the different countries?Here, again, the answer cannot be contained in a singleformula.On the one hand, localisation of credit tends to damp downlocal booms and depressions. Suppose a local boom flares upbecause,e.g., the demand for the export goods of the area in questionhas risen or because ofa purely internal stimulus to investment.With an international capital market in operation, funds may insuch case be drawn from the whole world. The interest rate willrise much less quickly than it would, were only local funds available.A local depression may also be alleviated or shortened byimperfect mobility of capital. When the demand for investiblefunds is at a low ebb, the fact that such funds cannot leave thecountry will so reduce the rate ofinterest that the chances ofrevivalare improved.On the other hand, there are a number of reser­Reservations. varions to tWs principle. While a boom, like afire, is more easily extinguished where the supplyof inflammable material is restricted, it may be that the causes ofthe fire provide at the same time the inflammable material. Ifthe boom is caused by a rise in foreign demand, the influx ofmoney will increase the supply of investible funds as well as thedemand, and may, under a regime of localised credit, depress the