Prosperity and Depression.pdf

Chap. 12. International Aspects of Bllsiness Cycles 441This presumption does not hold good of capital movementsmotivated by the desire to profit by, or to avoid losses from,expected exchange movements. It is even likely to be reversed ifthe movement of funds assumes large proportions. The potentialextent of such cc abnormal" capital movements, when people arethoroughly scared, is much larger than any cc normal" capitalmovement could be; and they may expose the capital-exportingcountry to a much more serious drain of gold than is likely todevelop in a short period of time from an adverse movement inthe trade balance. Consequently, the funds will in all probabilitytend to move from a country with a high rate of interest to onewith a low rate.This in itself would render probable the view that the capitalmovement is· deflationary: but, in addition, there is the attitude ofthe receiving country to the extraord1nary import of capital tobe taken into account. .It will be realised· that funds of thisnature are liable to be withdrawn as· quickly as they appear.Banks with which foreign balances are deposited regard them as"bad" or "hot" money, and will not re-Iend more than a relativelysmall proportion ofthem. Ifthe banks are incautious, the centralbank will probably realise that the increase in its gold reserveoccasioned by the afflux of foreign funds is liable to disappear atshort notice, and will refrain from expanding central-bankmoney accordingly. Thus) while the flow of funds will causea considerable reduction in investment in the countries fromwhich it comes, it will be largely sterilised in those to which itgoes.We tuIn now to the discussion ofan eJttreme caseFree in our scale of. possible relationships between theexchanges. currencies of different countries-viz., the casewhere the different national currencies are completelyindependent of one another. This is the exact oppositeof a completely unified world· monetary system. This system ofU free exchanges ", as we may call it, gives rise to a number ofpeculiarreaetions, which s~d in sharp contrast to our familiargold-standard experience. It is not suggested that such a systemhas ever existed in a pure form. It is nevertheless· instructive toenquire into its probable consequences : first, because there are