Prosperity and Depression.pdf

Chap. 12 International Aspects of Business Cycles 449capital, the·. expansionary stimulus is. at once transmitted to theother (capital-exporting) countries, while the expansion is hamperedin the country D, where the stimulation first arose.! If, on theother hand, the expansion in D is brought about or fostered bya cheap-money policy and if thereby capital is driven out of thecountry D (to take advantage of the higher interest rates abroad),the expansion in D is still further intensified by the outwardcapital movement. The outside world, instead of basking inthe rays of prosperity cast by D, feels a chilling wind from thatquarter and may even be thrown into a vicious spiral of deflation. 2It would not be difficult to construct other cases and to analysethem along the lines indicated. But the general conclusionalready stands out clearly: our previous result that under freeexchanges the cyclical movement in different countries is independentneeds modification if capital moves freely. It is, however,not quite correct to say without qualification (as has· sometimes 8been said) that capital movements tend to reproduce gold-standardconditions. On the contrary, they may produce exactly the oppositeresult from whatwe would expect under an international goldI It is impossible in this case to decide on general grounds whetherD's currency will appreciateordepreciate, because there are two conflictingforces at work. The inflow of capital tends to push up the value of D'smoney, the rise in prices and incomes tends to depress it. We mayperhaps suppose that' the first factor is likely to exert its influence first,so that the currency will appreciate. The result is, however, in prin~ipleindependent from the direction in which the exchange rate moves.Compare next footnote.I It should be noted that this is not because D's currency has fallenin value, but because of the export of capital from D. The same resultthat prosperity in one country spreads depression to others could obta4'twith theD currencyappreciating. Suppose the present case is complicatedby a fortuitous shift in demand from A- to D-goods, strong enough toover-compensate the influence on the exchanges exerted by the capitaloutflow from D, so that D's currency actuallyappreciates. It follows fromour preceding analysis that, abstracting from fortuitous circumstanceswhich may work out either way, this shift in demand is neutral; it doesnot· tend to stimulate the country to which demand has shifted and todepress the other from which it was drawn ·away. It goes withoutsaying, however, that exchange fluctuations may become relevant byinducing speculative capital movements. Unfortunately, there is nopossibility of telling in general which way these speculative capitalmovements will go.I Ct., e.g., Whale, loco cit.