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A TREATISE ON MONEY

BK. IV

Now, since there is generally much more reluctanceto lose gold than to receive it, this means that thelending country will often have to hear the brunt ofthe change. Only if the lending country is willing andable to take up an independent attitude towards therisk of losing gold can it throw the brunt of thechange on the borrowing country.

When, however, it is a case of an old countrylending to a new country, the necessary conditionsmay exist which will tend to ease the difficulties of thetransition for the lending country. For the foreignloan may be the consequence (and the symptom) ofa tendency of the natural-rate of interest in theborrowing country to rise relatively to that market-rate, which is dictated by conditions in the outsideworld ; and in this case the loan may be preceded andaccompanied by a rise in the rate of earnings in theborrowing country, which, in the absence of a loan,would set up a state of disequilibrium with the outsideworld. In short, the foreign loan allows an increaseof home investment relatively to home saving in theborrowing country without this development beingnipped in the bud, as it would be otherwise, by risingprices, a loss of gold, and a consequent increase inmarket-rate leading to a reaction in the volume ofhome investment. But the reader must please notethat all this only occurs if for some other reasonthere is already in existence a tendency for the natural-rate of interest in the borrowing country to rise rela-tively to the rate abroad. Thus it makes a differencewhether the loan is required to preserve the existingequilibrium in face of a spontaneously rising tide ofnew home investment or whether it involves an in-duced transition to a new equilibrium.-

If, on the other hand, the loan is due to a rise inthe market-rate of interest in the borrowing country,without there being a corresponding tendency in thenatural - rate, then we must expect a deflationary