CH. 21

INTERNATIONAL DISEQUILIBRIUM

351

country losing gold and on the country receiving gold,so that the two countries share the brunt of anynecessary change. For just as the loss of gold stimu-lates a country to raise its interest rates at once andto lower its costs of production later on, so the receiptof gold has the opposite effect. Now, since L, thevolume of foreign lending, depends on relative interestrates at home and abroad, and B, the amount of theforeign balance, depends on relative price-levels athome and abroad, this is important. For it meansthat the whole brunt of the change is not thrown onour own country ; the flow of gold means that othercountries are stimulated to meet us half-way.

But what if our Central Bank keeps its reserves,not in the form of actual gold, but in the form ofliquid resources at a foreign financial centre ? Doesa change in the volume of such resources also operatefor the restoration of equilibrium in a reciprocalfashion ? Some critics of the methods of Gold-ExchangeManagement—though applauding them as a means ofeconomising the demand for gold in the reserves ofCentral Banks —have argued that movements of liquidresources, other than gold, do not operate in reciprocalfashion, and that this is a very serious objection to themethods in question. When Central Bank A, whichkeeps liquid reserves in the country of Central Bank B,begins to draw on these reserves in order to maintainthe parity of its exchanges, it is under the samemotive, as if it were losing gold, to alter the terms oflending within its own country. But Central Bank B—so the argument runs—is under no such motive ;for nothing has happened in country B to affect theterms of lending, since nothing is altered except theownership of certain liquid resources.

Before we can say if there is a satisfactory answerto this criticism, we must probe into the wholematter somewhat more deeply. If Central Bank B ismainly influenced by the ratio of its gold-reserve to