Prosperity and Depression.pdf

Nattire and Causes of the C:JclePart IIWe have seen that a most important-and, we may say, verydisturbing-consequence of systems in which stability of theexchanges is no longer regarded as axiomatic is to be found in theextensive and irregular capital movements to which such systemsgive rise. By" irregular capital movements'" we mean movementswhich are not induced by differences in the interest rate anddo not therefore necessarily proceed from the rich countries to thepoor countries, but on the contrary (so to say)" up-stream ",andwhatis perhaps the most disturbing feature of all-are subjectto rapid fluctuations and abrupt changes ofdirection.Naturally, there are different degrees of uncertainty as to thefurore of the exchanges. Different people will react to a prospectivechange in the exchange rate with different intensity. Inthe case of small countries where exchange transactions are familiar,or populations (e.g., in Central Europe) where the memory ofdrastic depreciation of the currency is still fresh, a slight changeor the danger of such a change will mean more, and will inducea more violent reaction, than in other countries. Furthermore, theeffect of changes in the exchange rate on international capitalmovements frequently cannot be separated from other factorsoften alternative to changes in the exchange rate, such astransfer moratoria, partial defaults and the like. Therefore, sofar as the details and the magnitude of the reaction are concerned,it is impossible to generalise : each case must be considered on itsown merits. In a general way, we can only say that unstableexchanges unquestionably hamper normal international lending.They are one of the most powerful obstacles in the way of equalisationof interest rates between countries. The irregular capitalmovements to which they give rise introduce an erratic factorwlUch may considerably disturb the cyclical movement, giving itsometimes a quite unexpected turn.After these general considerations, we shall now discuss two problems: (I) the consequences· on the business cycle of a defL...ute act ofdevaluation-thatis, ofa deliberate and substantial change ofthe exchangerate, and (2.) certain peculiarities (not to say paradoxes) arisingunder a system of" free exchanges "-thatis, under a system wherethe exchanges are allowed to vary with the variations of supply anddemand in the market and no attempt is .made to keep them stable.