CH. 13
home investment,—with the result that the higherbank - rate diminishes I x , the volume of home in-vestment. Consequently total investment falls belowcurrent savings (assuming that there was previouslyequilibrium), so that prices and profits, and ultimatelyearnings, fall, which has the effect of increasing B,because it reduces the costs of production in terms ofmoney relatively to the corresponding costs abroad. Onboth accounts, therefore, B and L are brought nearertogether, until in the new position of equilibrium theyare again equal.
Thus, where the evil to be cured was an excess ofL over B leading to an export of gold, the increaseof bank-rate will have done its work when B and L,continually approaching one another, have regainedequality. Or rather, in practice, the high bank-ratewill quickly diminish L, even to the extent of bringingit below B; but, nevertheless, it will not be safe torelax it until it has had time to increase B, by whenit will be practicable to keep B and L at an approxi-mate equality without so high a bank-rate; and ifthe original reason for disequilibrium between B andL was a change in price-levels and not in interest-rates abroad, with a bank-rate no higher than thatwhich existed before—at the beginning of our story—the bank-rate was raised.
At the new level of equilibrium we shall once again
have P =
M x Yi
0
and I = S.
But we shall also have B=L.
For since B moves in the opposite direction to P andP in the opposite direction to L - B, whilst L movesin the opposite direction to bank-rate, for every valueof bank-rate there is a value of P at which B = L;and since S moves in the same direction as bank-rateand I moves in the opposite direction, there is alwaysa value of bank-rate for which I = S. Consequentlythere is always a pair of values of bank-rate and of Pat which both I = S and B = L.