Prosperity and Depression.pdf

444 Nature and Causes of the Cycle Part IITransfer ofdemandunder" freeexchanges"•We may, however, get round this difficulty(which is probably of no practical importance) byrelaxing our assumptions a little, so as to allow ofsome private or official transactions with the objectof preventing these short-term fluctuations. Suppose,then, that there are no capital movements atall other than those involved by the ephemeral transactions justmentioned. In these circumstances, a switch-over of demandfrom country D to country A occurs 1 by reason (say) of a changein the ta.ste of the consumers in A and / or D, or the introductionof a new tariff in A, or a rise in cost of production in an exportindustry of D, or a reduction in cost in a competing industryin A. In the assumed conditions, the value of D's currencymust fall relatively to that of A's currency. The farther it fallsthe cheaper will D goods·become in tetms of A's currency andrelati~ely to A goods. If the elasticity of demand for imports interms ofthe local currency can be assumed to be greater than unityboth in A and in D, D will spend less Dmoney on imports from Aand A will spend more A money onimports from D. The rate ofexchange will be such as to equilibrate the value ofD's import(A'sexports) and A's imports (D's exports). Thus, the more elastic thereciprocal demand of A and D for each other's products, the lessthe need for D's currency to fall in value relatively to A's currency.1What will be the consequence of this' change on the internalsituation in A and D? Under the system of " free exchanges ",there is no flow of money between countries. D's bankingsystem is not any less liquid, or A's any more liquid, in consequenceof the change in demand than before. There is thus no reasonfor a change in the supply ofinvestible funds in the two countries.Nor is it clear how the demand for investible funds will be affected.The initial transfer of demand meant greater profitability in theI We call the two countries A and D in order to keep in mind that Ais the country the currency of which will appreciate, and D the countrythe currency of which will deprecia'te.• If we suppose the two countries to have close trading' connections,with competing industries and potential export and import capacity,we may safely assume an elasticity greater than unity. This is still truerof one country vis-a.-vis the rest of the world.