Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIbe reversed-as it will be, e.g.) in the case of seasonal movements.In that case there will be a movement outof A values (money, debtsand bonds) into D values. This flow of funds will run counter tothe initial transfer of demand and will to some extent obviate a fallin D's money. It will also produce an import surplus in D. Theresult-in accordance with familiar gold-standard experience-willtherefore be that the transference of demand stimulates business inthe country to which the demand is transferred, and depresses it inthe country from which the demand is transferred. The role ofgoldmovements is thus taken over by speculative capital movements.It is, however, clear that things. -may take an entirely differentturn, and ,that the- gold-standard reactions may be, not reproduced,but reversed under free exchanges. People in D may becomefearful of their currency's falling still lower. In that case,capital movements from D to A will set in, and D's·currency willbe depressed still more. The result, as explained above, will bethat D, the country which lost the trade in the first instance, willbe stimulated by the export of capital, while depression will spreadin the country which originally gained the trade.Capitalmovementsinduced bythe ryele.In the foregoing pages, we have assumed a capitalm0vement to take place however occasioned,and have investigated its influence on thegeneral economic situation and the cyclical fluctuationsin the two countries concerned. But thecyclical variations themselves are likely to give rise to capitalmovements which in tum will react on the cycle in those countries.An analysis of these reciprocal influences leads us to reconsidera case discussed a few pages earlier. l Arguing under the assumptionthat no capital movements were taking place, we therereached the conclusion that, under the ·system of free exchange,the most important channels through which prosperity and depressionspread from country to country are blocked. This resultmust now be modified through the application of our analysisof the consequences of capital movements.Suppose that a boom flares up in country D because newinvestment opportunities have appeared~ If this attracts foreignI See above, page 446.