Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIan increase in the banks' holdings of s~curities. If the bill market,in B is well known internationally, the cheapness of discountingthere may lead to an afflux of exporters from A and elsewheredesirous of benefiting by the low discount rates. Similarly,the high prices of bonds in B, due to bank purchases, may makeit easier for other countrie~ to float new issues in B, and in additionmay induce holders of B bonds to exchange them for bonds ofother countries. The reverse process will take place in A. Inthis way, a part of the money which leaves A on current accountwill " leak" back on capital account, without, however, completelynullifying the favourable effect on the supply of credit availableto borrowers in B or the unfavourable effect in A.It may be a permissible'simplification of the situation to supposethat there is a, world-market for long-term bonds and shares, butthat working capital has to be provided by each nation fromnational sources. We may suppose that, in the case of twocountries A and B, opportunities for the absorption of long-termfunds are opened up, in A, whether such opportunities arise inconnection with real investment or with the phenomena of astock-exchange boom. The result in either case is a flow ofloanable funds from B to A, which may exceed the adverse tradingbalance that A will probably develop as.incomes in:A rise. Now,if all sections of the capital, market 'were international in scope,business-men in B would suffer from the rise in interest ratesconsequent on the rise in the demand by A for loanable funds,and would gain by the increased demand for B goods in A. Inthe circumstances of the supposed case, however, they will sufferan additional handicap in that the flow of money from B to A willinduce the banks in B to restrict credit, and may render the supplyof working capital in B, scarcer than it is in A.Cyclicalchangesin themobilityof capital.Even'in the case of those sections of the capitalmarket which are comparatively international inscope, the degree of internationalism depends uponfactors---such as the policies of Governments andthe state of confidence of individuals-which varywith the times. It may be possible to make thegeneralisation that during the downswing of theworld business cycle, when the confidence of investors is at a low