ch. 21 INTERNATIONAL DISEQUILIBRIUM 329

change relatively to a similar price-level abroad.Since, however, this condition is never fulfilled inpractice and, besides, most countries predominantlyconsume their own output, there will, as a rule, be anabsolute fall in II on balance. This is the essence ofthe argument. But we must now elaborate it further,for reasons which will appear.

(ii.) The Relationships between Foreign Lending andMovements of Gold

The foregoing argument has implicitly assumed thatB is a function of relative price-levels at home andabroad, and that it is not directly a function of L.That is to say, the mere fact of L’s increasing—so wehave assumed—does not influence the foreign situa-tion, whether in respect of foreign price-levels, or inrespect of the volume of the foreign demand for ourcountry’s goods at a given price-level, in such a wayas to increase B to the same extent that L has beenincreased, without any appreciable disturbance of thelevel of prices or of incomes at home. On the contrary,we have assumed that, for the most part, approximateequality between L and B is preserved, not by anincrease of L directly stimulating an increase of B,but because an excess of L over B brings about eitherthe threat or the fact of a movement of gold, whichinduces the Banking Authorities of the countries con-cerned so to alter their terms of lending as temporarilyto reduce the net amount of L and ultimately toincrease B (by when the temporary reduction of Lwill be no longer necessary) through the medium ofa disturbance of the existing investment equilibriumin both countries leading to appropriate changes inrelative prices at home and abroad.

Now, in so far as the above reasoning depends onactual movements of gold, it is in accordance withthe traditional Ricardian doctrine, extended so as