Prosperity and Depression.pdf

Chap. ;The Over-investment Theoriesin which this is true must be bome in mind. If many countriespursue this policy at the same time, the stimulating influence islost. In the long run, the rais41g oftariffwalls impairs the nationaldividends of all the countries involved.! .Indirect effects (e.g., oncapital movements) may prevent even tJ:1e immediate stimulationafforded by protectionist measures. Finally, an improvement inthe balance of payments can always be utilised as a means ofincreasing the· gold and foreign-exchange reserve in lieu ofexpanding the circulation.While intemation~ influences are capable of stimulating ofretarding a process of expansion or contraction, they may alsoarrest and reverse it-that is to say, intemational forces may starta revival or precipitate a crisis and depression in a country.Under the gold standard, the monetaryThe gold authorities are obliged, if the country is losingstandard. gold, to put the brake On expansion. Gold mayBow out either because the country has expandedmore rapidly than other countries and prices are getting outoflinewith those in the rest ofthe world, or because other countries havestarted to contract or because there is a movement ofcapital (whichmay have been brought about by a great variety of causes), orbecause of a crop failure which necessitates increased imports orreduces exports, etc. Instead ofcontracting, a country may chooseto leave the gold standard. If this is not thought safe, as being~e1y to lead to a flight of capital, resort may be had to exchangecontrol. Thus, innumerable possibilities may arise, which cannot allbe worked outat this point: butthey can easily be analysed inthe wayindicated, althQugh it may be extremely difficult to foresee in anygiven case the outcome of the many forces and reactions involved.The fact that a crisis and depression or a revival is broughtabout in one way or another by " international forces" in no way,therefore, invalidates the theory ofthe business cycl~ even thoughthe theory has been elaborated without taking into account theseinternational complications.1 Therefore, the statement made iIJ. the text is perfectly compatiblewith the free..trade argument. The qualifications made should besufficient to exclude protectionist measures from the arsenal of a rationaldepression policy.