328

A TREATISE ON MONEY

BK. IV

retards both home investment I x and foreign lendingL, so that S exceeds I and prices n fall. The fall of IIcauses losses to entrepreneurs at the old cost of produc-tion, so that they tend to reduce the rates of money-earnings which they offer to the factors of productionand eventually the first term of the FundamentalEquation falls. Meanwhile the fall of n, occasionedinitially by the fall of the second term and sub-sequently by the fall of the first term of the Funda-mental Equation, will have served to increase B, whilstthe rise of bank-rate will have abated L. The processcontinues until once more L = B, when gold ceases toflow out of the country. At the new position of equi-librium L is a greater proportion of S than beforeand S x is a less proportion. What will have happenedto IT ?

B will have had to increase, which means thatexports must have increased or imports diminished orboth ; so that the necessary increase of B can onlycome about as a result of a fall in the price of foreign-trade goods produced at home, leading to a diversionof production, and a reduction in I x . Now at onestage of the process outlined above all three of thesethings will have happened. For the outflow of goldwill have pro tanto raised the prices of foreign-producedgoods and reduced the prices of home-produced goods,whilst the rise in the rate of interest will have dimin-ished I x . Thus at the new point of equilibrium, theprices of all home-produced goods will have fallenrelatively to the prices of all foreign-produced goods.The amount of this relative fall will depend—as weshall see below (p. 333)—on the change in the terms oftrade resulting from the physical characteristics of theproductive forces at home and abroad.

As regards H itself some of its constituents willhave fallen and some will have risen. If all thearticles consumed within the country enter into in-ternational trade without hindrance, then IT cannot