CH. 13
deposits is largely governed by bank-rate (being fixedin many cases in a definite relationship to bank-rate),the volume of the former may sometimes tend to riseand fall with the level of the latter. More important,however, is its effect on what in Chapter 15 we shallcall the “bear” position. We shall see there thatan investment boom is likely to be associated withreduced requirements for money in the FinancialCirculation in its early stages, but with increasedrequirements in the later stages.
(/) If there is an investment boom at home, as-sociated with a sharp rise in the natural-rate of interest,the market-rate may fall behind the natural-rate andyet at the same time rise absolutely. This absoluterise in the market-rate may, if it is a rise relatively tomarket-rates abroad, have in the first instance a morepronounced effect on L, the volume of foreign lending,than the investment boom is having on B, the amountof the foreign balance ; with the result that gold mayflow into the country and so provide fodder for therise of price at home consequent on the market-rate ofinterest not keeping pace with the natural-rate.
It appears, therefore, that the demand for moneyunder (a) will be at first small, and that the totaldemand for money under (a) and (c) can sometimesbe met wholly or in part, especially at first, bychanges in true velocities under ( d ), by diminishedrequirements in the financial circulation under (e), orby gold imports under (/).
Thus the total requirements of the monetary cir-culation are not associated in any stable or invariablemanner either with the level of bank-rate and itsinfluence on the rate of investment or with the levelof prices ; so that we shall be misled if we lay muchstress on the changes in the total quantity of moneywhen we are trying to trace the causation and thestages of a transition.
But the fundamental reason for laying the stress