출처: J. M. Keynes, A Treatise on Money (October 31, 1930)
자료: http://catalog.hathitrust.org/Record/007150328 ; 차례
※ 발췌 / excerpts of which: Book Ⅳ, The Dynamics of the Price-Level,
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Chapter 21. Changes due to International Disequilibrium
It is outside the scope of this book to deal thoroughly with the Theory of International Values. But there are certain brief ^prolegomena^ to such a theory, which are necessarily in place in a treatise on Money.
(1) Relative price-levels and Relative Interest-rates as Causes of Monetary Disequilibrium (p. 326)
We have seen that equilibrium in an international currency system requires that for each country its rate of foreign lending should be equal to its foreign balance. Now this involves ^two^ sets of conditions. For the rate of foreign lending depends on relative interest-rates at home and abroad; whilst the foreign balance depends on relative price-levels at home and abroad.
There is, however, a radical difference between a disequilibrium which is set up by the relative price-levels falling out of gear from a disequilibrium which is set up by the relative interest-rates falling out of gear. In the first case, the disequilibrium can be cured by a change in price-levels (or, rather, of income-levels) without any permanent change in interest-rates, though a temporary change in interest-rates will be necessary as a means of bringing about the change in income-levels. In the second case, on the other hand, the restoration of equilibrium may require not only a change in interest-rates, but also a lasing change in income-levels (and probably in price-levels). That is to say, a country's price-levels and income-levels are affected not only by changes in the price-level abroad, ^but also by changes in the interest-rate, due to a change in the demand for investment abroad relatively to the demand at home^.
(ⅰ) Let us begin with the first and simpler case, where the disturbance of equilibrium comes about solely through a change, let us say a fall, in the price-level abroad. This will result in a falling off in the foreign balance B without a corresponding change in the volume of foreign lending L with the consequence that L will exceed B and gold flows out of the country. Temporarily bank-rate must be raised; but when the process, which the sets up, towards a fall, first of prices and then of money-incomes, has been completed, the bank-rate can be safely restored to its previous level. For the conditions of equilibrium will be satisfied by a fall in Π, the price-level of output as a whole, and also in S1, L, I1, and B, below that they were measured in terms of money before prices fell abroad (though they will be unchanged in terms of purchasing power), corresponding to the fall in the foreign price-level. Apart from money-values, the new equilibrium once established will differ in no significant respect from the oldㅡthe character of production will be unchanged.[1]
B will have had to increase, which means that exports must have increased or import diminished or both; so that the necessary increase of B can only come about as a result of a fall in the price of foreign-traded goods produced at home, leading to a diversion of production, and a reduction in I1. Now at one stage of the process outlined above all three of these things will have happened. For the outflow of gold will have ^pro tanto^ raised the prices of foreign-produced goods and reduced the prices of home-produced goods, whilst the rise in the rate of interest will have diminished I1. Thus at the new point of equilibrium, the prices of all home-produced goods will have fallen relatively to the prices of all foreign-produced goods. The ^amount^ of this relative fall will dependㅡas we shall see below (p. 333)ㅡon the change in the terms of trade resulting from the physical characteristics of the productive forces at home and abroad.
As regards Π itself some of its constituents will have fallen and some will have risen. If all the articles consumed within the country enter into international trade without hindrance, then Π cannot change relatively to a similar price-level abroad. Since, however, this condition is never fulfilled in practice and, besides, most countries predominantly consume their own output, there will, as a rule, be an absolute fall in Π on balance. This is the essence of the argument. But we must now elaborate it further for reasons which will appear.
(2) The Relationships between Foreign Lending and Movements of Gold (p. 329)
The foregoing argument has implicitly assumed that B is a function of relative price-levels at home and abroad, and that is not directly a function of L. That is to say,[,]
In a controversy between Professor Ohlin and myself in the pages of the ^Economic Journal^(1929), with special reference to the German Transfer Problem, I was not able to make clear the theoretical basis underlying my view, because the analysis of the preceding chapters had not then been published. But with the aid of this analysis I can, I hope, resolve the difficulty, and show in what circumstances the facts will appear to conform Professor Ohlin's thesis and in what circumstances to the Ricardo-Taussig thesis.
There are two contingencies which we must first of all put on one side as not being relevant to the essence of the argument. There is the case where foreign lending is bound up with a contract or understanding that the proceeds shall be employed in making purchase at home, although, failing such an arrangement, they would in ordinary course have been made abroad;ㅡfor such an arrangements, apart from their being, in fact, negligible in aggregate quantity, are equivalent to subsidising the cost of the goods supplied, which is tantamount to reducing their price, at the expense of the rate of interest which might have been charged.
Secondly, there is the case where Gold Exchange Management is present in some shape or form, so that movements of foreign liquid assets take the place of movement of actual gold. We shall regard such changes as equivalent to movement of gold for the purposes of discussion.
Let us call the value of a country's market-rate of interest which would obviate gold movements (i.e. which is such that G＝0) its international-rate. (The international-rates of different members of the same currency system are, of course, not independent of one another.)
Let us begin with the case where there are only two countries, A and B, in question, thus avoiding the complications of roundabout trade.
Let us assume that we start from a position of equilibrium with G＝0 and I＝S in both countries. This means that in each country:
(The reader should remember that this does not mean, unless there is complete mobility of international lending, that the rate of interest is ^the same^ in both countries. But if there is equality between the market-rate and the international-rate in one of the countries, thenㅡwhen there are only two countries in questionㅡthere must necessarily be equality between the market-rate and the international-rate in the other country also.)
Let us then suppose that the attractions of investment increase in country A but not in country B. Two questions now arise for discussionㅡthe characteristics of the new position of equilibrium when it has been reached, and the nature of the transition from the old position of equilibrium to the new. (It will simplify the exposition, without altering the essence of the argument, if we assume that the rise which takes place in the market-rate of interest does not materially affect the rate of saving in either country.)
1. First, the Characteristics of the New Position of Equilibrium.ㅡIn each country the market-rate, the international-rate, and the natural-rate will have returned to equality with one another, but at a somewhat higher level than before, corresponding to the increased marginal attractiveness of investment to the two countries taken togetherㅡand a level, moreover, which is higher in B and lower in A than if there was no mobility of international lending; and B and L will be again equal, but with higher values than before. In other words, there will be a displacement of investment, which was previously taking place in B, in favour of increased investment in country A. What will be the effect of this displacement on the levels of money-earnings in the two countries?
There will have to be a change-over on the part of the factors of production, which were previously producing new investments in country B, to produce something else which is calculated to facilitate new investment in country A. This may come about [:]
[1] This involves certain tacit assumptions, such as that the money-earnings of the different factor of production are all changed in the same proportion.(ⅱ) Next let us suppose that the disturbance of equilibrium is due to a rise in the rate of interest abroad, whereas S and I1, at home remain the same functions of the rate of interest as before. This will result in an increase of L, with the consequence that L will exceed B and gold flows out of the country. As in the previous case, bank-rate must be raised, which retards both home investment I1 and foreign lending L, so that S exceeds I and prices Π fall. The fall of Π causes losses to entrepreneurs at the old cost of production, so that they tend to reduce the rates of money-earnings which they offer to the factors of production and eventually the first term[E/O＝1/e.W] of the Fundamental Equations falls. Meanwhile the fall of Π, occasioned initially by the fall of the second term[(I'－S)/R] of the Fundamental Equation and subsequently by the fall of the first term of the Fundamental Equation, will have served to increase B, whilst the rise of bank-rate will have abated L. The process continues until once more L＝B, when gold ceases to flow out of the country. At the new position of equilibrium[,] L is a greater proportion of S than before and S1 is a less proportion. What will have happened to Π?
B will have had to increase, which means that exports must have increased or import diminished or both; so that the necessary increase of B can only come about as a result of a fall in the price of foreign-traded goods produced at home, leading to a diversion of production, and a reduction in I1. Now at one stage of the process outlined above all three of these things will have happened. For the outflow of gold will have ^pro tanto^ raised the prices of foreign-produced goods and reduced the prices of home-produced goods, whilst the rise in the rate of interest will have diminished I1. Thus at the new point of equilibrium, the prices of all home-produced goods will have fallen relatively to the prices of all foreign-produced goods. The ^amount^ of this relative fall will dependㅡas we shall see below (p. 333)ㅡon the change in the terms of trade resulting from the physical characteristics of the productive forces at home and abroad.
As regards Π itself some of its constituents will have fallen and some will have risen. If all the articles consumed within the country enter into international trade without hindrance, then Π cannot change relatively to a similar price-level abroad. Since, however, this condition is never fulfilled in practice and, besides, most countries predominantly consume their own output, there will, as a rule, be an absolute fall in Π on balance. This is the essence of the argument. But we must now elaborate it further for reasons which will appear.
(2) The Relationships between Foreign Lending and Movements of Gold (p. 329)
The foregoing argument has implicitly assumed that B is a function of relative price-levels at home and abroad, and that is not directly a function of L. That is to say,[,]
- the mere fact of L's increasingㅡso we have assumedㅡdoes not influence the foreign situation, whether in respect of foreign price-levels, or in respect of the volume of foreign demand for our country's goods at a give price-level, in such a way as to increase B to the same extent that L has been increased, without any appreciable disturbance of the level of prices or of incomes at home.
- On the contrary, we have assumed that, for the most part, approximate equality between L and B is preserved, not by an increase of L directly stimulating an increase of B, but because an excess of L over B brings about either the threat or the fact of a movement of gold, which induces the Banking Authorities of the countries concerned so to alter their terms of lending as temporarily to reduce the net amount of L and ultimately to increase B (by when the temporary reduction of L will be no longer necessary) through the medium of a disturbance of the existing investment equilibrium in both countries leading to appropriate changes in relative prices at home and abroad.
- in so far as the above reasoning depends on actual movements of gold, it is in accordance with the traditional Ricardian doctrine, extended so as to cover international capital transactions of which Ricardo himself took little account, as it is expounded in relation to the facts of to-day by, for example, Professor Taussig.[1]
- But it is not quite in accordance with another traditional doctrine which was widely held in Great Britain, mainly on empirical grounds, during the 19th century, and is still held to-day. According to this view foreign lending stimulates foreign balance directly and almost automatically, and the actual movement of gold plays quite a minor part. This conclusion was, I think, based much more on British experience during the 19th century than on a priori reasoning. But recentlyㅡespecially in connection with the German Transfer Problemㅡit has been supported by argument, notably by Professor Ohlin.
[1] his ^International Trade^ (1927) ^passim^.Professor Taussig has endeavoured, in his International Trade, to put the question to the inductive test by examining a number of 19th- and early 20th-century examples drawn from the countries which have at various dates suffered an important ebb and flow in the value of L. He finds, naturally enoughㅡindeed inevitablyㅡthat B and L tend to move together. But when he comes to the question how far monetary movements have been necessary to make B obey the direction of L, the result is more inconclusive. Sometimes the facts seem to support the Ricardian view, and sometimes it is difficult to detect monetary changes on a scale sufficient to verify the essentials of the theory. Moreover, the inflow of gold may sometimes follow, instead of preceding, a rise of prices.
In a controversy between Professor Ohlin and myself in the pages of the ^Economic Journal^(1929), with special reference to the German Transfer Problem, I was not able to make clear the theoretical basis underlying my view, because the analysis of the preceding chapters had not then been published. But with the aid of this analysis I can, I hope, resolve the difficulty, and show in what circumstances the facts will appear to conform Professor Ohlin's thesis and in what circumstances to the Ricardo-Taussig thesis.
There are two contingencies which we must first of all put on one side as not being relevant to the essence of the argument. There is the case where foreign lending is bound up with a contract or understanding that the proceeds shall be employed in making purchase at home, although, failing such an arrangement, they would in ordinary course have been made abroad;ㅡfor such an arrangements, apart from their being, in fact, negligible in aggregate quantity, are equivalent to subsidising the cost of the goods supplied, which is tantamount to reducing their price, at the expense of the rate of interest which might have been charged.
Secondly, there is the case where Gold Exchange Management is present in some shape or form, so that movements of foreign liquid assets take the place of movement of actual gold. We shall regard such changes as equivalent to movement of gold for the purposes of discussion.
Let us call the value of a country's market-rate of interest which would obviate gold movements (i.e. which is such that G＝0) its international-rate. (The international-rates of different members of the same currency system are, of course, not independent of one another.)
Let us begin with the case where there are only two countries, A and B, in question, thus avoiding the complications of roundabout trade.
Let us assume that we start from a position of equilibrium with G＝0 and I＝S in both countries. This means that in each country:
Its Market-rate＝its International-rate＝its Natural-rate.
(The reader should remember that this does not mean, unless there is complete mobility of international lending, that the rate of interest is ^the same^ in both countries. But if there is equality between the market-rate and the international-rate in one of the countries, thenㅡwhen there are only two countries in questionㅡthere must necessarily be equality between the market-rate and the international-rate in the other country also.)
Let us then suppose that the attractions of investment increase in country A but not in country B. Two questions now arise for discussionㅡthe characteristics of the new position of equilibrium when it has been reached, and the nature of the transition from the old position of equilibrium to the new. (It will simplify the exposition, without altering the essence of the argument, if we assume that the rise which takes place in the market-rate of interest does not materially affect the rate of saving in either country.)
1. First, the Characteristics of the New Position of Equilibrium.ㅡIn each country the market-rate, the international-rate, and the natural-rate will have returned to equality with one another, but at a somewhat higher level than before, corresponding to the increased marginal attractiveness of investment to the two countries taken togetherㅡand a level, moreover, which is higher in B and lower in A than if there was no mobility of international lending; and B and L will be again equal, but with higher values than before. In other words, there will be a displacement of investment, which was previously taking place in B, in favour of increased investment in country A. What will be the effect of this displacement on the levels of money-earnings in the two countries?
There will have to be a change-over on the part of the factors of production, which were previously producing new investments in country B, to produce something else which is calculated to facilitate new investment in country A. This may come about [:]
- by the factors in B producing goods previously imported from A, thus releasing factors in A to produce for investment in A,
- or by factors in B producing goods for export to A which were previously produced in A, thus releasing factors in A to produce for investment in A,
- or by factors in B producing goods for export to A, which can be directly utilised for the purpose of the additional new investment which is now taking place in A.
If this change-over in the character of production can be effected without any loss of efficiency, e.g. if country B can produce goods, previously produced in A, to sell in B or in A, as the case may be, at the same price as before, without any reduction in money-earnings of the factors of production as compared with what they were getting in their previous employment or any loss to the entrepreneurs, then there is no reason why rates of money-earnings in the two countries should be any different in the new position of equilibrium from what they were in the old. In so far as country B is specifically efficient in the direct production of materials for the new investment-goods required for the use in A, there may well be not only no loss of efficiency as compared with producing these goods in A, but actually a gain of efficiency; and in this case, so far from money-earnings in B falling relatively to those in A, they might, in conceivable circumstances, actually rise as a result of the increased attractiveness of kinds of investment in A, which can only be efficiently supplied by factor of production in B. If, on the other hand, the investment-goods in A have to be produced by factors of production in A, which factors are made available by being released from producing goods hitherto exported to B or henceforward imported from B, then the presumption is the other way round; for it is unlikely that A would have previously exported the goods in question to B or refrained from importing them unless there was some gain in doing so. [※ 그전에 B에 수출하던 상품을 수출했거나 B로부터 수입할 수 있는 상품을 수입하지 않았던 것은 그만한 이익이 있었기 때문일 것이다. 따라서 B에 수출하던 상품의 수출이 중단되고 수입하지 않던 상품을 수입하게 되는 상황이 되면,] Thus, generally speaking, money-rates of earnings in B will have to fall relatively to money-rates of earnings in A in the new position of equilibrium as compared with the old. [1]
Now the amount of the alteration in the terms of trade between A and B, due to the increased attractiveness of investment in A, is independent of the character of the transition and of the means by which it is brought about. It depends on non-monetary factorsㅡon physical facts and capacities, and on the elasticities of demand in each of the two countries for goods which the other can produce with physical efficiency.
This alteration in the terms of trade may sometimes be very small, as, for example, when Great Britain made loans for railway developments abroad during the 19th century, and was herself the only efficient producer of much of the materials required for these new investments. Nor does it follow that the new situation is necessarily disadvantageous to country B on balance. For, as a set-off against the deterioration in the terms of trade, B has three possible sources of gain, namely, the higher rate of interest on part of her savings, a subsequent reversal of the change in the terms of trade when the interest on the new loans is being remitted or when the new loans are ultimately paid off, and a possible future cheapening as a result of the new investment of the costs of goods which she is in the habit of purchasing from A.
But in some circumstances, on the other hand, the change in the terms of trade adversely to B may be substantial; and this is particularly likely if A puts a high tariff on B's goods, and ig B is not capable of supplying directly the materials required by the new investment in A.
The change in the terms of trade is also likely to be large in the short period, when there is a ^sudden^ change in the relative attractions of lending at home and abroad, because the factors of production require time if they are to effect a change-over in the character of their activities without serious loss of efficiency. It is for this reason that the so-called "flight" from a currency can be so disastrousㅡthat is to say, the situation which arises when, for some reason, there is an overpowering motive to a country's nationals to lend their resources abroad. There were some remarkable examples in the post-War period of the extraordinary effect on the terms of trade over the short period, of a sudden distrust, leading to a sudden change in the relative attractions of lending at home and abroad.
The neglect to allow for the effect of changes in the terms of trade is, perhaps, the most unsatisfactory characteristics of Prof. Cassel's Purchasing Power Parity Theory of the Foreign Exchanges. For this not only upsets the validity of his conclusions over the long period, but renders them even more deceptive over the short period, whenever the short period is characterised by a sharp change in the attractions of foreign lending.
2. Second, the Characteristic of the Transition.ㅡWe have seen that the international-rate cannot return to equality with the natural-rate in ^both^ countries until an appropriate change has taken place in the ^relative^ rates of money-earnings in the two countries. But this relative change could come about either by one country bearing the whole brunt of change by modifying its own absolute rate, leaving the absolute rate of the other country unchanged, or by the two sharing the burden of change.
If each of the countries is determined to keep a quantity of gold reserves, which bears a constant proportion of the level of its money-income, the share of the change to be borne by each is predetermined, the major part of the change being borne by the smaller of the two countries. But if the countries are prepared to allow some variation in this proportion (and the changes which actually occur as the result of increased foreign investment would generally involve only an ^small^ change in the proportion of gold reserves to total income, even if no gold at all moves from one country to the other), then the proportionate sharing between the two countries of the burden of the change in absolute rates of earnings is indeterminate, and depends on the course of event and on the policies of the two central banks during the period of transition.
To illustrate this let us take the extreme cases. Let us suppose that country A has no objection to receiving more gold, and fixes its market-rate at an equality with its natural-rate regardless of the policy of country B, but that country B is reluctant to lose gold and keeps its market-rate at an equality with its international-rate (which latter largely depends, of course, on the market-rate fixed by country A). In this case country A suffers no period of inequality between its market-rate, its natural-rate, and its international-rate, and no alteration in its stock of gold, and there is, therefore, no need for any alteration in its rate of earnings. Thus the whole brunt of the change is thrown on the rate of earnings in country B, which will be forced, in order to retain it gold, to keep its market-rate above its natural-rate until the process of deflation thereby set up has brought its rate of earnings down to the necessary extent.
If, on the other hand, country B is prepared to lose any amount of gold rather than raise it market-rate above its natural-rate, then it is country A which will have to bear the brunt of the change by undergoing an inflation until its rate of money-earnings has been raised to the necessary extent relatively to the rate in country B, which will have remained constant throughout.
The amount of the flow of gold between the countries, if any, is, in a sense, quite non-essential to the process. For the same results can be brought about by the potentiality of a flow of gold as by the actuality. The amount of absolute change in rates of earnings in A and B depends on the policies of the central banks of the two countries as to the relationships which they respectively maintain between their natural-rate and their market-rate. The one whose policy is most dependent of the policy of the other, and keeps its market-rate nearest to its natural-rate throughout the transition, will suffer lest absolute change in its rate of earnings.
Now, since there is generally much more reluctance to lose gold than to receive it, this means that the lending country will often have to bear the brunt of the change. Only if the lending country is willing and able to take up an independent attitude towards the risk of losing gold can it throw the brunt of the change on the borrowing country.
When, however, it is a case of an old country lending to a new country, the necessary conditions may exist which will tend to ease the difficulties of the transition for the lending country. For the foreign loan may be the consequence (and the symptom) of a tendency of the natural-rate of interest in the borrowing country to rise relatively to that market-rate, which is dictated by conditions in the outside world; and in this case the loan may be preceded and accompanied by a rise in the rate of earnings in the borrowing country, which, in the absence of a loan, would set up a state of disequilibrium with the outside world. In short, the foreign loan allows an increase of home investment relatively to home saving in the borrowing country ^without^ this development being nipped in the bud, as it would otherwise, by rising prices, a loss of gold, and a consequent increase in market-rate leading to a reaction in the volume of home investment. But the reader must please note that all this only occurs if for some other reason there is already in existence a tendency for the natural-rate of interest in the borrowing country to rise relatively to the rate abroad. Thus it makes a difference whether the loan is required to preserve the existing equilibrium in face of a spontaneously rising tide of new home investment or whether it involves an induced transition to a new equilibrium.
If, on the other hand, the loan is due to a rise in the market-rate of interest in the borrowing country, without there being a corresponding tendency in the natural-rate, then we must expect a deflationary effect on the lending country unless it can afford to allow substantial gold-movements to ensue. Such a situation may be due to deliberate policy on the part of the banking authority of the borrowing country, because they wish to increase their stock of gold. Or they may have been forced into it for one reason or another as a result of the character of their banking system, e.g. the loan may be due to a rising market-rate of interest in the borrowing country due, not to a rising natural-rate, but to meet the increasing requirements of the financial circulation. For example, the change in the value of L between the United States and the rest of the world in 1928-29 was probably due more to financial factors in the United States, which were increasing the requirements of the financial circulation, than to investment factors; whereas, if dear money in the United States had been due to a rising natural-rate of interest in that country relatively to other countries, the dear money policy need not have occasioned any serious embarrassment to the rest of the world or have depressed world-prices for commodities, since there would have been a concurrent tendency for it to be accompanied by a foreign balance increasingly unfavourable to America.
Thus in the case where the responsibility lies with financial, rather than with investment, factors in the borrowing country, the gold movements will tend to continue orㅡto avoid thisㅡthe market-rate of interest will have to be raised in the rest of the world to a level in excess of the natural-rate, with the result of causing the rate of investment to fall below that of saving everywhere and so establishing a regime of Profit Deflation. This serves to illustrate the way in which Profit Deflations (and similarly Inflations) tend to spread sympathetically from one member of an international system to another; and this may occur without any material movement of gold, if the other members are not able or willing to let their stocks of gold fall to any great extent, the effort to keep their gold necessarily involving them in a sympathetic deflation. It will also occur, in spite of a material movement of gold, if the country which initiates the movement is able to absorb large quantities of gold without being compelled to bring its market-rate down to equilibrium with its natural-rate. [1]
I have said enough to indicate the nature of the process and of the argument. It is evident that many illustrations could be given. For example, a lending country, which is not willing to lose much gold and whose rate of earnings is not sensitive to deflationary forces, may suffer a long and painful transition between one position of equilibrium and another. But it would lead me too far into the intricacies of the theory of international trade, which would fill a book in itself, if I were to purse the matter further. I must leave the reader to carry on the line of thought for himself, if it interest him.
Perhaps, however, I may be allowed, in parenthesis, to apply the above to my discussion with Professor Ohlin about the German Transfer Problem in the ^Economic Journal^(1929). The payment of Reparations by Germany operates in the year in which it takes place, much in the same way as a compulsory process of foreign investment of equal amount, except that Germany will not enjoy the cumulative off-sets in subsequent years which foreign investment affords, and the investment does not correspond to a spontaneous change abroad, such as would lead directly to a demand for Germany's exports. Now I conceive Professor Ohlin's standpoint to have been, that, given an appropriate credit policy in the receiving countries, the new equilibrium could be brought about without throwing on Germany the brunt of any change whatever in her current rate of earnings, and without any movement of gold.
This is quite true. Such a thing is not theoretically impossible. But I contend that it is highly improbable in the conditions of the actual problem, and that to establish the opposite, Professor Ohlin must explore more fully the conditions which have been satisfied before his conclusions can hold good.
To begin with, this line of argument is quite irrelevant to the amount of change which will be required in the terms of trade, and therefore in the ^relative^ rates of earnings in Germany and elsewhere and in the rate of German real wages. It is only concerned with the question whether this relative change will be brought about mainly by an absolute fall in the rate of money-wages in Germany, or mainly by an absolute rise in the rate of money-wages elsewhere. Now it would be difficult to find a case where the conditions for the former alternative to be probable are better fulfilled. For Germany is not in a position to part with enough gold to have a sensible effect on the credit policies of the rest of the world, there is no pre-existing tendency for the natural-rate of interest in the recipient countries to rise relatively to the natural-rate in Germany, and she is not in a position to resort to the expedient of regulating the rate of growth of her foreign investment to suit the rate at which relative money-earnings can be adjusted (or rather she only can do this by increasing her own borrowing from abroad, which is a more difficult task than diminishing her own lending would be). I conclude that, ^if^ the payment of Reparations involves a substantial change in the terms of trade (which depends not on monetary considerations but on physical facts relating to the nature of the productive forces of Germany and the rest of the world), then it will probably be necessary to force down the rate of money-earnings in Germany by means o a painful (and perhaps impracticable) process of deflation. It will be necessary to qualify this, only if the rest of the world, deliberately or by a fortunate coincidence, encourage tendencies leading to an income inflation with the result of easing the practical difficulties of Germany's problem of reaching a relative adjustment, or if new extraneous conditions come to pass which naturally lead the rest of the world towards a high level of money-incomes.
Borrowing from the now familiar terminology of the German Reparations Problem, we might use similar language in the general case, meaning by the "Transfer Problem" the problem of transition which occurs when there is a change in the locality where investment takes place. Thus, when international equilibrium (i.e. the equality of the international-rate of interest in every country with its natural-rate) requires a change in the relative rates of earnings in different countries, the amount of the absolute change in the rate of earnings in each country depends, in general on the two following factors;
(1) The ^total^ amount of the relative change required. This depends on what degree of difficulty and what loss of efficiency is involved in the change-over of production from goods required for a particular kind of investment in one place to a different kind of investment in another place, i.e. the amount of necessary change in the terms of trade.
(2) The ^proportion^ of the total amount of the relative change which has to fall on each country. This depends on the policy and comparative skill and strength to support changes in its proportion of gold to circulating money possessed by each of the central banks respectively.
(3) The Net National Advantages of Foreign Investment (p. 343)
We have seen that, when a change in the terms of trade occurs as a concomitant of increased foreign investment, this is due to the factors of production in the lending country having to change over to a kind of output in which they are less effective (having regard both to technical efficiency and to the various elasticities of demand involved) relatively to the factors of production in the borrowing country, than they were in respect o the output which they were producing before the change-over. That is to say, their marginal efficiency is reduced for obtaining foreign-trade products by exchange. This means that the terms of exchange alter to their disadvantage, not only in respect of that part of their foreign trade which corresponds to the ^increased^ volume of foreign investment, but over the whole field of their foreign tradeㅡassuming, of course, competitive conditions. Since, in accordance with our definitions, we measure the output of the factors which are working to exchange exports for imports by the quantity of imports which are obtainable in exchange, it follows that the total output of the factors of production in the lending country is reduced by an amount corresponding to the loss involved in giving more exports for a given quantity of imports or in replacing goods previously imported by goods produced at home.
In the new position of equilibrium actual rates of money-earnings will be reduced and real earnings will also be reduced, though to a less extent. But real efficiency-earnings will be unchanged, since in a position of equilibrium efficiency-earnings in terms of money and the price-level must necessarily have changed in the same proportion. In other words, E/(O.Π), the rate of real efficiency-earnings, will be unchanged; but O, the output, and E/Π, the actual real earnings of the factors of production, will both be reduced and in the same proportion, corresponding to the loss of efficiency of the factors of production in their new situation as compared with their efficiency in the old.
On the other hand, the efficiency of capital engaged in foreign investment is increased by reason of the higher rate of interest earned. Whether on balance there is a national gain or loss as a result of the increased proportion of investment abroad depends on a comparison between the prospective gain of increased future income from foreign investment and of improved terms of trade when this income is being paid and the immediate loss occasioned by the deterioration in terms of trade whilst the foreign investment is taking place; i.e. on the elasticity of demand for investment at home in terms of the rate of interest and the elasticity of the world's demand for our goods and our demand for theirs.
( p. 344 ...)
(4) The Awkwardness of Changes due to International Factors (p. 346)
The importance of the foregoing discussion is this. A mere change in the demand-schedule of borrowers abroad is capable, without any change in the monetary situation proper, of setting up a disequilibrium in the existing level of money-income at home. If borrowers abroad are ready and able to offer better terms than before, whilst the demand-schedule of borrowers at home is unchanged, this means that foreign lending is increased. Consequently gold will flow until money-earnings have fallen sufficiently, relatively to similar earnings abroad (which may be rising a little as a result of the movement of gold), for the foreign balance also to be correspondingly increased. [※ foreign lending이 늘어난 만큼 foreign balance가 늘어나려면 국외 화폐소득에 비해 국내 화폐소득이 충분히 떨어질 때까지 금이 유출될 것이다.] The extent to which real incomes will fall at home will depend partly on the elasticity of demand for loans on the part of home borrowers and partly on the elasticity of the world's demand for out country's exports, and of our country's demand for its imports. If the demands of home investment are elastic and the foreign trade position is inelastic, the troubles and inconveniences of transition may be great great.
In an old country, especially one in which the population has ceased to expand rapidly, the rate of interest at which borrowers for home investment are able to absorb home savings must necessarily decline. Meanwhile the new countries the rate will be maintained, and as these countries get over their early pioneer difficulties, the estimated risks of lending to themㅡprovided they are careful about their reputation as borrowersㅡwill decline.
I leave it to the reader to work out in detail what a pickle a country might get into if a higher rate of interest abroad than can be earned at home leads to most of its savings being lent abroad, whilst at the same time there are tariffs abroad against most of its exports and a tendency to raise these tariff from time to time to balance the gradually rising level of costs in the protected countries due to the outflow of the gold from the lending country.
Let him take, for example, as his imaginary case, a Great Britain where neither the government nor individuals are prepared to invest at home at higher rate of interest than 5%, and a socialised Australia where the government is ready to develop at 6%, both on a gold standard and with complete mobility of lending between the two; let him suppose further that this imaginary Australia has a sliding-scale tariff on most British goods based on the difference between the costs of production in the two countries, and that in this imaginary Great Britain wages are virtually fixed in terms of money; and let him complete his imaginary picture by supposing a Thrift Campaign in Great Britain which raises savings to an unusual proportion of the national income, or, alternatively a government ruled by financial virtue which taxes heavily in order to raise to a high figure the Sinking Fund for the extinction of National Debt.[1]
All this, we must repeat, is subject to the assumption of a high degree of mobility of international lending. Where this does not exist, disequilibria due to changes in price-levels abroad may be more sudden and disagreeable than where it does exist (for changes in Bank-rate will not avail to break the impact) ; but, on the other hand, disequilibria due to changes in interest-rates abroad will be of secondary importance. Moreover, even when there is a fairly high degree of mobility of lending over long periods, our country need not necessarily subject itselfㅡunless there are other counterbalancing advantages to be gainedㅡto a high degree of short-period mobility of international lending. If short-period mobility is absent, then short-period changes in interest-rates abroad need occasion no serious inconvenience. Methods of damping down an excessive short-period mobility of international lending will be discussed in Vol. II Book VII Chapter 36.
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The seriousness of the changes which are set up as the result of International Disequilibrium lies partly in the ^inevitability^. If we are dealing with a closed system, so that there is only the condition of internal equilibrium to fulfil, an appropriate banking policy is always capable of preventing any serious disturbance to the ^status quo^ from developing at all. If the rate of creation of credit is so regulated as to avoid Profit Inflation, there will be no reason for the Purchasing Power of Money and the money-rate of efficiency earnings ever to be upset. But when the condition of external equilibrium must also be fulfilled, then there will be no banking policy capable of avoiding disturbance to the internal system.
This is dueㅡquite apart from changes in the value of the international standardㅡto the lack of uniformity between home and abroad in respect of the demand schedules of borrowers. These schedules, for home and foreign borrowers respectively, can and do change differently from one another. When this happens, the existing rate of foreign lending is upset. Unless, therefore, a country is prepared to accept from time to time large quantities of gold and at other times to part with large quantities without modifying the terms and volume of lending at homeㅡand in any case this cannot continue indefinitelyㅡchanges in foreign conditions are bound to set up disequilibria in home conditions. If, moreover, there is a high degree of mobility of foreign lending, a low degree of mobility of home wage-rates, an inelasticity in the demand-schedule for our country's exports and a high elasticity in the demand for borrowing for home investment, then the transition from one position of internal equilibrium to another required by the necessity for preserving external equilibrium may be difficult, dilatory and painful.
Even where a change in Bank-rate is only required as a temporary corrective to the rate of foreign lending, so as to preserve external equilibrium, it cannot be prevented from reacting on the rate of home lending, and, thereforeㅡover a period too short to effect the establishment of a lower wage-levelㅡon the volume of output and employment. Thus, what we have claimed in Chapter 13 as a virtue in Bank-rate regarded as an instrument for restoring long-period equilibriumㅡnamely, that it works ^both^ ways, tending to decrease foreign lending and also to increase the foreign balanceㅡbecomes a vice, or at least an awkwardness, when we use it to check foreign lending, the excessiveness of which may be due to temporary causes without having any wish to go through the painful readjustment of the wage-structure which must precede a material increase of the foreign balance. Since the influence of Bank-rate on foreign lending is both quick in taking effect and easy to understand, whereas its influence on the internal situation is slower in operation and difficult to analyse, the awkwardness of handling such a double-edged weapon is being but slowly realised.
(5) The Same Phenomena under Gold-Exchange Management (p. 350)
The virtue of gold movements under an old-fashioned international gold standard, not merely as an expedient, but as a stimulus towards the restoration of international equilibrium, has been rightly extolled as lying in their ^double^ effectㅡboth on the country losing gold and on the country receiving gold, so that the two countries ^share^ the brunt of any necessary change. For just as the loss of gold stimulates a country to raise its interest rates at once and to lower its costs of production later on, so the receipt of gold has the opposite effect. Now, since L, the volume of foreign lending, depends on ^relative^ interest rates at home and abroad, and B, the amount of the foreign balance, depends on ^relative^ price-levels at home and abroad, this is important. For it means that the whole brunt of the change is not thrown on our own country; the flow of gold means that other countries are stimulated to meet us half-way.
But what if our Central Bank keeps its reserves, not in the form of actual gold, but in the form of liquid resources at a foreign financial centre? Does a change in the volume of such resources also operate for the restoration of equilibrium in a reciprocal fashion? Some critics of the methods of Gold-Exchange Managementㅡthough applauding them as a means of economising the demand for gold in the reserves of Central Banksㅡhave argued that movements of liquid resources, other than gold, do not operate in reciprocal fashion, and that this is a very serious objection to the methods in question. When Central Bank A, which keeps liquid reserves in the country of Central Bank B, begins to draw on these reserves in order to maintain the parity of its exchanges, it is under the same motive, as if it were losing gold, to alter the terms of lending within its own country. But Central Bank Bㅡso the argument runsㅡis under no such motive; for nothing has happened in country B to affect the terms of lending, since nothing is altered except the ownership of certain liquid resources.
Before we can say if there is a satisfactory answer to this criticism, we must probe into the whole matter somewhat more deeply. If Central Bank B is mainly influenced by the ratio of its gold-reserve to its liabilities, then it is clearly true that a change in the volume of foreign balances held within its system has no more ^immediate^ effect on its own behavour than a change in the volume of net foreign lending (for that is what it amounts to) for any other cause. Again, a change in the volume of foreign balances will not, unless A's balances are held in the form of demand-deposits with Central Bank B, ^force the hand^ of Central Bank B to act in a manner which in its own unfettered judgment is prejudicial to the interests of its own internal equilibrium, in the way in which a movement of actual gold may force its hand. So in this case, it would seem, the charge of there being no reciprocal action is justified.
If, on the other hand, ( .... p. 352
[1] Professor Taussig has, in his International Trade, collected a good deal of evidence to show that fact bears out this theory. That is to say, when foreign investment is increasing, the terms of trade turn against the lending country and in favour of the borrowing, wages falling in the former and rising in the latterㅡin his terminology the gross and net barter terms of trade tend to move in the same direction. Professor Taussig is, I think, a little too ready to assume that exports and imports adjust themselves to the other factors in the situation, rather thanㅡin partㅡthe other way round. But his treatment of the influence of international investment on the price-levels in different countries is far in advance of any other discussion of the subject.This is usually expressed by saying that there will be a change in the “terms of trade” between the countries, adverse to country B. The change in terms of trade is measured by the proportionate change in the price of goods exported by B relatively to the proportionate change in the price of goods imported. This ratio will not be equal to the ratio of the proportionate change in average rates of actual earning in B to that in A, except in so far as there is internal mobility of the factors of production within a country, so that their rates of remuneration in domestic-trade industries are the same as in international-trade industries. Perhaps we should add that, of course, the changes in real earnings will not be so great as the changes in money-earnings, and also that the less the importance of foreign trade in a country's economy the less will be the change in real earnings.
Now the amount of the alteration in the terms of trade between A and B, due to the increased attractiveness of investment in A, is independent of the character of the transition and of the means by which it is brought about. It depends on non-monetary factorsㅡon physical facts and capacities, and on the elasticities of demand in each of the two countries for goods which the other can produce with physical efficiency.
This alteration in the terms of trade may sometimes be very small, as, for example, when Great Britain made loans for railway developments abroad during the 19th century, and was herself the only efficient producer of much of the materials required for these new investments. Nor does it follow that the new situation is necessarily disadvantageous to country B on balance. For, as a set-off against the deterioration in the terms of trade, B has three possible sources of gain, namely, the higher rate of interest on part of her savings, a subsequent reversal of the change in the terms of trade when the interest on the new loans is being remitted or when the new loans are ultimately paid off, and a possible future cheapening as a result of the new investment of the costs of goods which she is in the habit of purchasing from A.
But in some circumstances, on the other hand, the change in the terms of trade adversely to B may be substantial; and this is particularly likely if A puts a high tariff on B's goods, and ig B is not capable of supplying directly the materials required by the new investment in A.
The change in the terms of trade is also likely to be large in the short period, when there is a ^sudden^ change in the relative attractions of lending at home and abroad, because the factors of production require time if they are to effect a change-over in the character of their activities without serious loss of efficiency. It is for this reason that the so-called "flight" from a currency can be so disastrousㅡthat is to say, the situation which arises when, for some reason, there is an overpowering motive to a country's nationals to lend their resources abroad. There were some remarkable examples in the post-War period of the extraordinary effect on the terms of trade over the short period, of a sudden distrust, leading to a sudden change in the relative attractions of lending at home and abroad.
The neglect to allow for the effect of changes in the terms of trade is, perhaps, the most unsatisfactory characteristics of Prof. Cassel's Purchasing Power Parity Theory of the Foreign Exchanges. For this not only upsets the validity of his conclusions over the long period, but renders them even more deceptive over the short period, whenever the short period is characterised by a sharp change in the attractions of foreign lending.
2. Second, the Characteristic of the Transition.ㅡWe have seen that the international-rate cannot return to equality with the natural-rate in ^both^ countries until an appropriate change has taken place in the ^relative^ rates of money-earnings in the two countries. But this relative change could come about either by one country bearing the whole brunt of change by modifying its own absolute rate, leaving the absolute rate of the other country unchanged, or by the two sharing the burden of change.
If each of the countries is determined to keep a quantity of gold reserves, which bears a constant proportion of the level of its money-income, the share of the change to be borne by each is predetermined, the major part of the change being borne by the smaller of the two countries. But if the countries are prepared to allow some variation in this proportion (and the changes which actually occur as the result of increased foreign investment would generally involve only an ^small^ change in the proportion of gold reserves to total income, even if no gold at all moves from one country to the other), then the proportionate sharing between the two countries of the burden of the change in absolute rates of earnings is indeterminate, and depends on the course of event and on the policies of the two central banks during the period of transition.
To illustrate this let us take the extreme cases. Let us suppose that country A has no objection to receiving more gold, and fixes its market-rate at an equality with its natural-rate regardless of the policy of country B, but that country B is reluctant to lose gold and keeps its market-rate at an equality with its international-rate (which latter largely depends, of course, on the market-rate fixed by country A). In this case country A suffers no period of inequality between its market-rate, its natural-rate, and its international-rate, and no alteration in its stock of gold, and there is, therefore, no need for any alteration in its rate of earnings. Thus the whole brunt of the change is thrown on the rate of earnings in country B, which will be forced, in order to retain it gold, to keep its market-rate above its natural-rate until the process of deflation thereby set up has brought its rate of earnings down to the necessary extent.
If, on the other hand, country B is prepared to lose any amount of gold rather than raise it market-rate above its natural-rate, then it is country A which will have to bear the brunt of the change by undergoing an inflation until its rate of money-earnings has been raised to the necessary extent relatively to the rate in country B, which will have remained constant throughout.
The amount of the flow of gold between the countries, if any, is, in a sense, quite non-essential to the process. For the same results can be brought about by the potentiality of a flow of gold as by the actuality. The amount of absolute change in rates of earnings in A and B depends on the policies of the central banks of the two countries as to the relationships which they respectively maintain between their natural-rate and their market-rate. The one whose policy is most dependent of the policy of the other, and keeps its market-rate nearest to its natural-rate throughout the transition, will suffer lest absolute change in its rate of earnings.
Now, since there is generally much more reluctance to lose gold than to receive it, this means that the lending country will often have to bear the brunt of the change. Only if the lending country is willing and able to take up an independent attitude towards the risk of losing gold can it throw the brunt of the change on the borrowing country.
When, however, it is a case of an old country lending to a new country, the necessary conditions may exist which will tend to ease the difficulties of the transition for the lending country. For the foreign loan may be the consequence (and the symptom) of a tendency of the natural-rate of interest in the borrowing country to rise relatively to that market-rate, which is dictated by conditions in the outside world; and in this case the loan may be preceded and accompanied by a rise in the rate of earnings in the borrowing country, which, in the absence of a loan, would set up a state of disequilibrium with the outside world. In short, the foreign loan allows an increase of home investment relatively to home saving in the borrowing country ^without^ this development being nipped in the bud, as it would otherwise, by rising prices, a loss of gold, and a consequent increase in market-rate leading to a reaction in the volume of home investment. But the reader must please note that all this only occurs if for some other reason there is already in existence a tendency for the natural-rate of interest in the borrowing country to rise relatively to the rate abroad. Thus it makes a difference whether the loan is required to preserve the existing equilibrium in face of a spontaneously rising tide of new home investment or whether it involves an induced transition to a new equilibrium.
If, on the other hand, the loan is due to a rise in the market-rate of interest in the borrowing country, without there being a corresponding tendency in the natural-rate, then we must expect a deflationary effect on the lending country unless it can afford to allow substantial gold-movements to ensue. Such a situation may be due to deliberate policy on the part of the banking authority of the borrowing country, because they wish to increase their stock of gold. Or they may have been forced into it for one reason or another as a result of the character of their banking system, e.g. the loan may be due to a rising market-rate of interest in the borrowing country due, not to a rising natural-rate, but to meet the increasing requirements of the financial circulation. For example, the change in the value of L between the United States and the rest of the world in 1928-29 was probably due more to financial factors in the United States, which were increasing the requirements of the financial circulation, than to investment factors; whereas, if dear money in the United States had been due to a rising natural-rate of interest in that country relatively to other countries, the dear money policy need not have occasioned any serious embarrassment to the rest of the world or have depressed world-prices for commodities, since there would have been a concurrent tendency for it to be accompanied by a foreign balance increasingly unfavourable to America.
Thus in the case where the responsibility lies with financial, rather than with investment, factors in the borrowing country, the gold movements will tend to continue orㅡto avoid thisㅡthe market-rate of interest will have to be raised in the rest of the world to a level in excess of the natural-rate, with the result of causing the rate of investment to fall below that of saving everywhere and so establishing a regime of Profit Deflation. This serves to illustrate the way in which Profit Deflations (and similarly Inflations) tend to spread sympathetically from one member of an international system to another; and this may occur without any material movement of gold, if the other members are not able or willing to let their stocks of gold fall to any great extent, the effort to keep their gold necessarily involving them in a sympathetic deflation. It will also occur, in spite of a material movement of gold, if the country which initiates the movement is able to absorb large quantities of gold without being compelled to bring its market-rate down to equilibrium with its natural-rate. [1]
I have said enough to indicate the nature of the process and of the argument. It is evident that many illustrations could be given. For example, a lending country, which is not willing to lose much gold and whose rate of earnings is not sensitive to deflationary forces, may suffer a long and painful transition between one position of equilibrium and another. But it would lead me too far into the intricacies of the theory of international trade, which would fill a book in itself, if I were to purse the matter further. I must leave the reader to carry on the line of thought for himself, if it interest him.
Perhaps, however, I may be allowed, in parenthesis, to apply the above to my discussion with Professor Ohlin about the German Transfer Problem in the ^Economic Journal^(1929). The payment of Reparations by Germany operates in the year in which it takes place, much in the same way as a compulsory process of foreign investment of equal amount, except that Germany will not enjoy the cumulative off-sets in subsequent years which foreign investment affords, and the investment does not correspond to a spontaneous change abroad, such as would lead directly to a demand for Germany's exports. Now I conceive Professor Ohlin's standpoint to have been, that, given an appropriate credit policy in the receiving countries, the new equilibrium could be brought about without throwing on Germany the brunt of any change whatever in her current rate of earnings, and without any movement of gold.
This is quite true. Such a thing is not theoretically impossible. But I contend that it is highly improbable in the conditions of the actual problem, and that to establish the opposite, Professor Ohlin must explore more fully the conditions which have been satisfied before his conclusions can hold good.
To begin with, this line of argument is quite irrelevant to the amount of change which will be required in the terms of trade, and therefore in the ^relative^ rates of earnings in Germany and elsewhere and in the rate of German real wages. It is only concerned with the question whether this relative change will be brought about mainly by an absolute fall in the rate of money-wages in Germany, or mainly by an absolute rise in the rate of money-wages elsewhere. Now it would be difficult to find a case where the conditions for the former alternative to be probable are better fulfilled. For Germany is not in a position to part with enough gold to have a sensible effect on the credit policies of the rest of the world, there is no pre-existing tendency for the natural-rate of interest in the recipient countries to rise relatively to the natural-rate in Germany, and she is not in a position to resort to the expedient of regulating the rate of growth of her foreign investment to suit the rate at which relative money-earnings can be adjusted (or rather she only can do this by increasing her own borrowing from abroad, which is a more difficult task than diminishing her own lending would be). I conclude that, ^if^ the payment of Reparations involves a substantial change in the terms of trade (which depends not on monetary considerations but on physical facts relating to the nature of the productive forces of Germany and the rest of the world), then it will probably be necessary to force down the rate of money-earnings in Germany by means o a painful (and perhaps impracticable) process of deflation. It will be necessary to qualify this, only if the rest of the world, deliberately or by a fortunate coincidence, encourage tendencies leading to an income inflation with the result of easing the practical difficulties of Germany's problem of reaching a relative adjustment, or if new extraneous conditions come to pass which naturally lead the rest of the world towards a high level of money-incomes.
Borrowing from the now familiar terminology of the German Reparations Problem, we might use similar language in the general case, meaning by the "Transfer Problem" the problem of transition which occurs when there is a change in the locality where investment takes place. Thus, when international equilibrium (i.e. the equality of the international-rate of interest in every country with its natural-rate) requires a change in the relative rates of earnings in different countries, the amount of the absolute change in the rate of earnings in each country depends, in general on the two following factors;
(1) The ^total^ amount of the relative change required. This depends on what degree of difficulty and what loss of efficiency is involved in the change-over of production from goods required for a particular kind of investment in one place to a different kind of investment in another place, i.e. the amount of necessary change in the terms of trade.
(2) The ^proportion^ of the total amount of the relative change which has to fall on each country. This depends on the policy and comparative skill and strength to support changes in its proportion of gold to circulating money possessed by each of the central banks respectively.
(3) The Net National Advantages of Foreign Investment (p. 343)
We have seen that, when a change in the terms of trade occurs as a concomitant of increased foreign investment, this is due to the factors of production in the lending country having to change over to a kind of output in which they are less effective (having regard both to technical efficiency and to the various elasticities of demand involved) relatively to the factors of production in the borrowing country, than they were in respect o the output which they were producing before the change-over. That is to say, their marginal efficiency is reduced for obtaining foreign-trade products by exchange. This means that the terms of exchange alter to their disadvantage, not only in respect of that part of their foreign trade which corresponds to the ^increased^ volume of foreign investment, but over the whole field of their foreign tradeㅡassuming, of course, competitive conditions. Since, in accordance with our definitions, we measure the output of the factors which are working to exchange exports for imports by the quantity of imports which are obtainable in exchange, it follows that the total output of the factors of production in the lending country is reduced by an amount corresponding to the loss involved in giving more exports for a given quantity of imports or in replacing goods previously imported by goods produced at home.
In the new position of equilibrium actual rates of money-earnings will be reduced and real earnings will also be reduced, though to a less extent. But real efficiency-earnings will be unchanged, since in a position of equilibrium efficiency-earnings in terms of money and the price-level must necessarily have changed in the same proportion. In other words, E/(O.Π), the rate of real efficiency-earnings, will be unchanged; but O, the output, and E/Π, the actual real earnings of the factors of production, will both be reduced and in the same proportion, corresponding to the loss of efficiency of the factors of production in their new situation as compared with their efficiency in the old.
On the other hand, the efficiency of capital engaged in foreign investment is increased by reason of the higher rate of interest earned. Whether on balance there is a national gain or loss as a result of the increased proportion of investment abroad depends on a comparison between the prospective gain of increased future income from foreign investment and of improved terms of trade when this income is being paid and the immediate loss occasioned by the deterioration in terms of trade whilst the foreign investment is taking place; i.e. on the elasticity of demand for investment at home in terms of the rate of interest and the elasticity of the world's demand for our goods and our demand for theirs.
( p. 344 ...)
(4) The Awkwardness of Changes due to International Factors (p. 346)
※ 케인슥 1930년 9월 Committee of Economist 의장으로 이 경제학자들에게 제출한 문서에서 설정한 가상적 상황과 일치하는 주제{{
The importance of the foregoing discussion is this. A mere change in the demand-schedule of borrowers abroad is capable, without any change in the monetary situation proper, of setting up a disequilibrium in the existing level of money-income at home. If borrowers abroad are ready and able to offer better terms than before, whilst the demand-schedule of borrowers at home is unchanged, this means that foreign lending is increased. Consequently gold will flow until money-earnings have fallen sufficiently, relatively to similar earnings abroad (which may be rising a little as a result of the movement of gold), for the foreign balance also to be correspondingly increased. [※ foreign lending이 늘어난 만큼 foreign balance가 늘어나려면 국외 화폐소득에 비해 국내 화폐소득이 충분히 떨어질 때까지 금이 유출될 것이다.] The extent to which real incomes will fall at home will depend partly on the elasticity of demand for loans on the part of home borrowers and partly on the elasticity of the world's demand for out country's exports, and of our country's demand for its imports. If the demands of home investment are elastic and the foreign trade position is inelastic, the troubles and inconveniences of transition may be great great.
p. 346
At present public opinionㅡin Great Britain at leastㅡis chiefly coloured by memories of 19th-century experience, when for various reasons the adverse reaction of foreign investment on the level of money-incomes at home was probably at a minimum. The significance of the above in the different circumstances of to-day in relation to the national benefits of a high degree of mobility for international loans is, as yet, scarcely appreciated.In an old country, especially one in which the population has ceased to expand rapidly, the rate of interest at which borrowers for home investment are able to absorb home savings must necessarily decline. Meanwhile the new countries the rate will be maintained, and as these countries get over their early pioneer difficulties, the estimated risks of lending to themㅡprovided they are careful about their reputation as borrowersㅡwill decline.
- Consequently the old country will tend to lend abroad an ever-growing proportion of its total savings. This will be partly cared for by the interest on its previous foreign lending.
- But for the rest its costs of production must fall so as to stimulate its exports and increase its favourable balance on trading account.
- If there is a resistance to this fall, gold will flow, bank-rate will rise and unemployment become chronic.
I leave it to the reader to work out in detail what a pickle a country might get into if a higher rate of interest abroad than can be earned at home leads to most of its savings being lent abroad, whilst at the same time there are tariffs abroad against most of its exports and a tendency to raise these tariff from time to time to balance the gradually rising level of costs in the protected countries due to the outflow of the gold from the lending country.
Let him take, for example, as his imaginary case, a Great Britain where neither the government nor individuals are prepared to invest at home at higher rate of interest than 5%, and a socialised Australia where the government is ready to develop at 6%, both on a gold standard and with complete mobility of lending between the two; let him suppose further that this imaginary Australia has a sliding-scale tariff on most British goods based on the difference between the costs of production in the two countries, and that in this imaginary Great Britain wages are virtually fixed in terms of money; and let him complete his imaginary picture by supposing a Thrift Campaign in Great Britain which raises savings to an unusual proportion of the national income, or, alternatively a government ruled by financial virtue which taxes heavily in order to raise to a high figure the Sinking Fund for the extinction of National Debt.[1]
[1] The reader will readily perceive that in writing the above I have partly in mind the position of Great Britain in 1929-30. I should, therefore, add that, whilst I regard the relative attractiveness of foreign lending as a serious aggravation of the difficulties, I do not regard this factor as so important a cause of the disequilibrium between Foreign Lending and Foreign Balance as the factors decreasing the volume of the latter, due to the failure to deflate earnings and costs of production in as great a degree as the international value of sterling had been raised in the period ending in 1925. The actual situation was due to the combination of a tendency for foreign lending to increase, for long-period external reasons over which we had little control, with a tendency for the foreign balance to decrease as a short-period result of our post-War monetary policy.Or let him take the case in which the Currency Authorities of the countries to which gold flows so manage their currency systems that the inflow of gold is not allowed to have any effect on their bank-rates or their volume of money.
All this, we must repeat, is subject to the assumption of a high degree of mobility of international lending. Where this does not exist, disequilibria due to changes in price-levels abroad may be more sudden and disagreeable than where it does exist (for changes in Bank-rate will not avail to break the impact) ; but, on the other hand, disequilibria due to changes in interest-rates abroad will be of secondary importance. Moreover, even when there is a fairly high degree of mobility of lending over long periods, our country need not necessarily subject itselfㅡunless there are other counterbalancing advantages to be gainedㅡto a high degree of short-period mobility of international lending. If short-period mobility is absent, then short-period changes in interest-rates abroad need occasion no serious inconvenience. Methods of damping down an excessive short-period mobility of international lending will be discussed in Vol. II Book VII Chapter 36.
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p. 349
The seriousness of the changes which are set up as the result of International Disequilibrium lies partly in the ^inevitability^. If we are dealing with a closed system, so that there is only the condition of internal equilibrium to fulfil, an appropriate banking policy is always capable of preventing any serious disturbance to the ^status quo^ from developing at all. If the rate of creation of credit is so regulated as to avoid Profit Inflation, there will be no reason for the Purchasing Power of Money and the money-rate of efficiency earnings ever to be upset. But when the condition of external equilibrium must also be fulfilled, then there will be no banking policy capable of avoiding disturbance to the internal system.
This is dueㅡquite apart from changes in the value of the international standardㅡto the lack of uniformity between home and abroad in respect of the demand schedules of borrowers. These schedules, for home and foreign borrowers respectively, can and do change differently from one another. When this happens, the existing rate of foreign lending is upset. Unless, therefore, a country is prepared to accept from time to time large quantities of gold and at other times to part with large quantities without modifying the terms and volume of lending at homeㅡand in any case this cannot continue indefinitelyㅡchanges in foreign conditions are bound to set up disequilibria in home conditions. If, moreover, there is a high degree of mobility of foreign lending, a low degree of mobility of home wage-rates, an inelasticity in the demand-schedule for our country's exports and a high elasticity in the demand for borrowing for home investment, then the transition from one position of internal equilibrium to another required by the necessity for preserving external equilibrium may be difficult, dilatory and painful.
Even where a change in Bank-rate is only required as a temporary corrective to the rate of foreign lending, so as to preserve external equilibrium, it cannot be prevented from reacting on the rate of home lending, and, thereforeㅡover a period too short to effect the establishment of a lower wage-levelㅡon the volume of output and employment. Thus, what we have claimed in Chapter 13 as a virtue in Bank-rate regarded as an instrument for restoring long-period equilibriumㅡnamely, that it works ^both^ ways, tending to decrease foreign lending and also to increase the foreign balanceㅡbecomes a vice, or at least an awkwardness, when we use it to check foreign lending, the excessiveness of which may be due to temporary causes without having any wish to go through the painful readjustment of the wage-structure which must precede a material increase of the foreign balance. Since the influence of Bank-rate on foreign lending is both quick in taking effect and easy to understand, whereas its influence on the internal situation is slower in operation and difficult to analyse, the awkwardness of handling such a double-edged weapon is being but slowly realised.
(5) The Same Phenomena under Gold-Exchange Management (p. 350)
The virtue of gold movements under an old-fashioned international gold standard, not merely as an expedient, but as a stimulus towards the restoration of international equilibrium, has been rightly extolled as lying in their ^double^ effectㅡboth on the country losing gold and on the country receiving gold, so that the two countries ^share^ the brunt of any necessary change. For just as the loss of gold stimulates a country to raise its interest rates at once and to lower its costs of production later on, so the receipt of gold has the opposite effect. Now, since L, the volume of foreign lending, depends on ^relative^ interest rates at home and abroad, and B, the amount of the foreign balance, depends on ^relative^ price-levels at home and abroad, this is important. For it means that the whole brunt of the change is not thrown on our own country; the flow of gold means that other countries are stimulated to meet us half-way.
But what if our Central Bank keeps its reserves, not in the form of actual gold, but in the form of liquid resources at a foreign financial centre? Does a change in the volume of such resources also operate for the restoration of equilibrium in a reciprocal fashion? Some critics of the methods of Gold-Exchange Managementㅡthough applauding them as a means of economising the demand for gold in the reserves of Central Banksㅡhave argued that movements of liquid resources, other than gold, do not operate in reciprocal fashion, and that this is a very serious objection to the methods in question. When Central Bank A, which keeps liquid reserves in the country of Central Bank B, begins to draw on these reserves in order to maintain the parity of its exchanges, it is under the same motive, as if it were losing gold, to alter the terms of lending within its own country. But Central Bank Bㅡso the argument runsㅡis under no such motive; for nothing has happened in country B to affect the terms of lending, since nothing is altered except the ownership of certain liquid resources.
Before we can say if there is a satisfactory answer to this criticism, we must probe into the whole matter somewhat more deeply. If Central Bank B is mainly influenced by the ratio of its gold-reserve to its liabilities, then it is clearly true that a change in the volume of foreign balances held within its system has no more ^immediate^ effect on its own behavour than a change in the volume of net foreign lending (for that is what it amounts to) for any other cause. Again, a change in the volume of foreign balances will not, unless A's balances are held in the form of demand-deposits with Central Bank B, ^force the hand^ of Central Bank B to act in a manner which in its own unfettered judgment is prejudicial to the interests of its own internal equilibrium, in the way in which a movement of actual gold may force its hand. So in this case, it would seem, the charge of there being no reciprocal action is justified.
If, on the other hand, ( .... p. 352
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