OH. 21

INTERNATIONAL DISEQUILIBRIUM

361

(3) Furthermore, fluctuations in the volume ofshort-period lending, in so far as they are dependenton comparatively small differences between the ratesof interest at home and abroad, will come to play amuch smaller part in our country’s internal economy.For there will come into existence another factorgoverning L, namely, the expectations which are en-tertained as to the prospective course of the foreignexchanges. This is so familiar a feature—as theresult of post-War experience—that I need not ex-patiate on it. If the fluctuations in the foreign ex-changes are expected to be short-period oscillationsabout a slowly moving norm, every excess or defectof L relatively to B will, as soon as it has had timeto affect the foreign exchanges, tend to bring intooperation corrective forces. For the prospect of profitor loss when the foreign loan is repaid will alwaystend to move L in what, from the standpoint ofpreserving external equilibrium, will be the desireddirection. 1 But if a change in the foreign exchangesis believed to be a foretaste of a progressive andcumulative change in the same direction, then theeffect will be to aggravate the disequilibrium and tomove L in the opposite of the desired direction.

Let us in what follows neglect the case of a localfiat money, which has no objective standard and is atthe mercy of impotent or misguided management;and let us assume, rather, that the management ofthe local money is governed in the long run by somesort of criterion of the internal stability of money-values.

On this assumption the salient differences betweenthe behaviour of such a monetary system and that ofa system under the International Standard is to befound, first, in a more immediate sensitiveness of Bto external changes ; secondly, in a more delayed

1 We shall examine the technique of this in greater detail in Vol. ii.Bb. VII. Chapter 36.