CH. 13
we are assuming that the Banking System workswholly by modifying its terms of lending and not byvarying its attitude towards individual borrowers orby any form of rationing loans. This is for the sakeof simplicity ; for it is not difficult to adapt thegeneral argument to the case where the rate of in-vestment is partly determined (usually to quite asecondary extent) by the rationing policy of theBanking System as well as by its terms of lending.
(iv.) The Function of Bank-rate in relation toExternal Equilibrium
There remains the function of Bank-rate as ameans of preserving external equilibrium, even atthe cost of upsetting internal equilibrium.
We have seen in Chapter 11 (v.) that to a CentralBanff, which adheres to an international gold standard -(or to any objective standard other than the purchas-ing power of money itself), the problem of currencymanagement presents itself not as a problem of keep-ing I = S, but as a problem of keeping B = L, where Bis the value of the Foreign Balance and L the valueof Foreign Lending, as defined in Chapter 9 (iv.). Itdeems it its business to take steps to cause B to exceedL, to cause L to exceed B, or to keep them equal toone another, according as it wishes to increase its goldreserve, to diminish it, or to maintain it unchanged.But although the problem presents itself to theCentral Bank as one of keeping B=L, its nationaleconomic system will not in fact be able to maintainits equilibrium unless at the same time I = S. Thusthe conditions for equilibrium in an internationalsystem are that we should simultaneously have
I = S, and B = L.
It happens, however, that the Bank ’s recognisedinstrument for achieving the desired relationship be-