CHAPTER 21

CHANGES DUE TO INTERNATIONAL DISEQUILIBRIUM

It is outside the scope of this book to deal thoroughlywith the Theory of International Values. But thereare certain brief prolegomena to such a theory, whichare necessarily in place in a treatise on Money.

(i.) Relative Price-levels and Relative Interest-ratesas Causes of Monetary Disequilibrium

We have seen that equilibrium in an internationalcurrency system requires that for each country itsrate of foreign lending should be equal to its foreignbalance. Now this involves two sets of conditions.For the rate of foreign lending depends on relativeinterest-rates at home and. abroad ; whilst the foreignbalance depends on relative price-levels at home andabroad.

There is, however, a radical difference between a dis-equilibrium which is set up by the relative price-levelsfalling out of gear from a disequilibrium which is set upby the relative interest-rates falling out of gear. Inthe first case, the disequilibrium can be cured by achange in price-levels (or, rather, of income-levels)without any permanent change in interest-rates,though a temporary change in interest-rates will benecessary as a means of bringing about the change inincome-levels. In the second case, on the other hand,the restoration of equilibrium may require not only a

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