Prosperity and Depression.pdf

Chap. 12.International Aspects of Business CyclesSo long as we adhere strictly to the assumptionDeceniralised that perfect mobility of investible funds impliesbanking with 100% equalisation of interest rates, we do not raisemobility of any basically new problem if we proceed to assumecapital. that the issue of money in each area is effected byindependent institutions. Each area has its owncentral bank; but the money such banks issue is expressed in thesame units and is accepted everywhere. All of these. banks areforced to pursue the same policy. If one.ofthem charges a lowerrate for discounts than the others, it will be overwhelmed by anincrease in demand diverted from all the others. Either its rate willhaye to be raised again, or else the other banks will have to followsuit by lowering theirs in order to retain their customers. Supplyconditions for investible funds will still remain the,same everywhere,and it will be impossible for one country separately to effect a localexpansion or contraction by a manipulation ofthe supply offunds.Differences in prosperity between countries can only come fromthe demand side. (An artificial increase in demand can of coursebe brought about for any particular country by State intervention--e.g., by State borrowing for public works. Whether and to.what extent the ensuing boom will be localised will in such casedepend on the localisation of resources, transport cost and theflow of purchasing power--that is) on the way in which the flowofnew money is distributed by the successive recipients as betweenhome goods and import goods.)The problem remains of how the terms of lending, which mustbe the same for all the banks of issue, are determined.! Severalsystems are conceivable. The system which is the most importantin practice is to make the determining factor some ratio-notnecessarily constant-of the note circulation to a gold reserve.If the gold-reserve ratio of anyone of these banks falls to a levelwhich is considered as the lower limit, it will restrict lending. But,since we still assume perfect mobility of capital, the effect of thiswill be that borrowers· are diverted to other banks, and that thereis merely a redistribution of borrowers as between the different1 The same problem arises in a 56 spaceless" economy, if there areseveral banks of issue, or in a U cashless" economy (as imagined by somewriters) where the circulating medium consists solely of bank deposits.