CH. 21

INTERNATIONAL DISEQUILIBRIUM

339

effect on the lending country unless it can afford toallow substantial gold-movements to ensue. Such asituation may be due to deliberate policy on the partof the banking authority of the borrowing country,because they wish to increase their stock of gold. Orthey may have been forced into it for one reason oranother as a result of the character of their bankingsystem, e.g. the loan may be due to a rising market-rate of interest in the borrowing country due, notto a rising natural-rate, but to meet the increasingrequirements of the financial circulation. For ex-ample, the change in the value of L between theUnited States and the rest of the world in 1928-29was probably due more to financial factors in theUnited States, which were increasing the requirementsof the financial circulation, than to investment factors;whereas, if dear money in the United States had beendue to a rising natural-rate of interest in that countryrelatively to other countries, the dear money policyneed not have occasioned any serious embarrassmentto the rest of the world or have depressed world-pricesfor commodities, since there would have been a con-current tendency for it to be accompanied by a foreignbalance increasingly unfavourable to America.

Thus in the case where the responsibility lies withfinancial, rather than with investment, factors in theborrowing country, the gold movements will tendto continue or—to avoid this—the market-rate ofinterest will have to be raised in the rest of the worldto a level in excess of the natural-rate, with the resultof causing the rate of investment to fall below that ofsaving everywhere and so establishing a regime ofProfit Deflation. This serves to illustrate the way inwhich Profit Deflations (and similarly Inflations) tendto spread sympathetically from one member of aninternational system to another ; and this may occurwithout any material movement of gold, if the othermembers are not able or willing to let their stocks of