Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIwhich compete with imports will benefit. Their demand for investiblefunds will rise, or cease to fall off, or cease to fall off so rapidly;and this will have favourable repercussions on other trades. Thefact that imported raw material rise in price in terms ofthe domesticcurrency is unlikely to nullify altogether the benefits referred to.So far as these raw materials enter into export goods, their rise inprice will offset only a part of the export premium afforded by thedepreciation of the currency. So far as they are used for domesticpurposes, the adverse influence may possibly be more potent.Devaluation has a favourable effect, not only on the demand for,but also on the supply of) investible funds. The augmentationin the supply is due to the increased gold reserve resulting, notmerely from the improvement in the balance oftrade, but also fromthe marking-up of the value of the existing reserve in.terms of thelocal currency. If there was a pressure on the gold reserve ofthecentral bank, it will be lessened or removed; and so an obstacleto recovery may be eliminated.For similar reasons, in so far as the influences on exports andimports ofgoods and services are concerned, the effect ofa variationin the exchange rate on the A country or countries will tend to bedepressing.What will be the influence on the world as aInfluencewhole ? Will the combined effect on both the Don the worldand the A countries be expansionary ordeflationary ?as a whole.So far as the influence exerted through the supplyof investible funds is concerned, it is poss~ble to make somegeneralisations. If, as is likely, the devaluation takes placeunder the pressure of a declining gold supply, and if· the Acountries have an ample gold reserve,. the combined effectwill be expansionary. The result will be an alleviation in the Dcountries and- no particular" tightness" in the A countries. Iftheroles ofthe two groups are changed, the result will be the opposite.We may also put it this way. The result wilt be expansionary ifthe devaluation constitutes a movement towards an " internationalequilibrium ",.and deflationary ifit leads away from equilibriumthecriterion for an international equilibrium being the absenceof persistent gold movements and of abnormal capital movementsmotivated by an anticipation of a fall or rise in the exchange rate.