OH. 21

INTERNATIONAL DISEQUILIBRIUM

335

goods which the other can produce with physicalefficiency.

This alteration in the terms of trade may some-times be very small, as, for example, when GreatBritain made loans for railway developments abroadduring the’ nineteenth century, and was herself theonly efficient producer of much of the materials re-quired for these new investments. Nor does it followthat the new situation is necessarily disadvantageousto country B on balance. For, as a set-off against thedeterioration in the terms of trade, B has three pos-sible sources of gain, namely, the higher rate of intereston part of her savings, a subsequent reversal of thechange in the terms of trade when the interest on thenew loans is being remitted or when the new loans areultimately paid off, and a possible future cheapeningas a result of the new investment of the cost of goodswhich she is in the habit of purchasing from A.

But in some circumstances, on the other hand, thechange in the terms of trade adversely to B may besubstantial; and this is particularly likely if A putsa high tariff on B’s goods, and if B is not capable ofsupplying directly the materials required by the newinvestment in A.

The change in the terms of trade is also likely tobe large in the short period, when there is a suddenchange in the relative attractions of lending at homeand abroad, because the factors of production requiretime if they are to effect a change-over in the characterof their activities without serious loss of efficiency. Itis for this reason that the so-called “ flight ” from acurrency can be so disastrous—that is to say, thesituation which arises when, for some reason, there isan overpowering motive to a country’s nationals tolend their resources abroad. There were some re-markable examples in the post-War period of theextraordinary effect on the terms of trade over theshort period, of a sudden distrust, leading to a sudden