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A TREATISE ON MONEY

BK. Ill

tween B and L is the instrument of bank-rate—justas it would be if I = S was its sole objective. For theinstrument of Bank-rate has been found by experienceto influence the movement of gold into and out ofa country’s reserves, a rise of bank-rate increasingB - L and a fall diminishing it. Now changes ofbank-rate which are aimed at preserving equilibriumbetween B and L may be expected to exercise a dis-turbing effect in the first instance on the equilibriumbetween I and S. But we shall see that—apart fromthe difficulties of the transition—there is always alevel of bank-rate which is compatible in the longrun both with the equilibrium of B and L and alsowith that of I and S. What is the complete theoreticalexplanation of the phenomenon ? When we under-stand that, we shall have reached the kernel of themodus operandi of bank-rate as the instrument ofcontrol in the modem world of an international goldstandard.

We shall see that the extraordinary efficacy ofbank-rate for effecting the above is due to the factthat it produces two reactions, one of them on Land the other on B, both in the right direction—one of them quick in action but not so durable, theother slow in action but calculated to establish gradu-ally a new long-period equilibrium. Thus Bank-rateis both an expedient and a solution. It supplies boththe temporary pick-me-up and the permanent cure—provided we ignore the malaise which may intervenebetween the pick-me-up and the cure.

The detailed theory of this matter we will postponeto Chapter 21. But the essence of the matter can beset out briefly. Raising the bank-rate obviously hasthe effect of diminishing L, the net amount of lendingto foreigners. But it has no direct influence in thedirection of increasing B. On the other hand, justas the dearer money discourages foreign borrowers,so also it discourages borrowers for the purposes of