Prosperity and Depression.pdf

43° Nature and Causes of the Cycle Part ITBy mentioning the possibility of a variation inDifferent the exchange ratios between the various currencies,national however, we introduce a new factor of considerablemoney units. importance into our analysis. This we must nowinvestigate more closely. So far we have assumedthat there i$ the same money in all countries. We shall nowsuppose that each country has a money of its own-dollar, poundsterling, franc, etc.-which within its frontiers is everywhereacceptable as payment for goods and services, taxes, etc., but is notnormally acceptable outside these frontiers.So long as we assume these currencies to be closely linked by acommon standard which involves a constant exchange ratio betweenthese currencies, and so long as we assume that no questionarises in any quarter as to the stability ofthese exchange rates, andthat nobody anticipates the possibility ofa variation in these rates,no new problems of any importance are raised by the introductionof a variety of national monetary units.A new element ofgreat importance, however, is introduced intothe analysis when the possibility arises ofvariations in the exchangeratios between the different currencies. 1 It is not even necessarythat such exchange variations should actually take place. Themere anticipation or apprehension of exchange variations willsuffice to give rise to speculative movements of capital from onecurrency to another. People will naturally prefer to hold money(and claims expressed in money) which is expected to appreciatethan to hold money (and claims expressed in money) which isexpected to depreciate. The "movement of capital will probablyaffect also the equities ofthe two countries, as well as the bonds, unlessthereis somereason toexpect that a relative rise in dividends willtake place in the country whose currency is expected to depreciate.S ~ Ii Speculation on foreign exchange, like all specula-~GUfia ~n tion, plays a double role. It may have a tendencyon t.; orell!!' either to offset or to accentuate disturbancesex&. anges. arising from other sources. If it is believed thatno change will take place in the exchange rates, short-term1 This new elementclearly may arise without the previous introductionof a variety of national monetary units. But it would seem convenientto introduce it together with the latter.