352

A TREATISE ON MONEY

BK. IV

its liabilities, then it is clearly true that a change inthe volume of foreign balances held within its systemhas no more immediate effect on its own behaviourthan a change in the volume of net foreign lending(for that is what it amounts to) for any other cause.Again, a change in the volume of foreign balanceswill not, unless A’s balances are held in the form ofdemand-deposits with Central Bank B, force the handof Central Bank B to act in a manner which in itsown unfettered judgment is prejudicial to the interestsof its own internal equilibrium, in the way in whicha movement of actual gold may force its hand. Soin this case, it would seem, the charge of there beingno reciprocal action is justified.

If, on the other hand, Central Bank B is in thehabit of regarding a movement of actual gold, notprimarily as a disease but mainly in the light of asymptom of the existing or prospective relationshipbetween the incentives to foreign lending and theincentives governing the amount of the foreign balance,then a movement of liquid balances by Central Bank Ato or from B may be just as important and significanta symptom as if Central Bank A were moving actualgold from or to B ; and there is, therefore, just asmuch reason for Central Bank B to be influenced bythe one as by the other in the determination of itsmonetary policy. But at this point we must pause amoment to notice that an increase of the balances offoreign Central Banks in the hands of Central Bank B is, on the above supposition, equivalent to a loss ofgold by Central Bank B. If, therefore, Central Bank B is to treat the movements of the balances of foreignCentral Banks exactly as if they were movements ofgold, it will ( e.g .) have to raise its bank-rate when theforeign balances in its hands are increasing, and willhave to persist in this policy until it has attracted anamount of gold equal to the increment of the balancesof the foreign Central Banks or, by attracting the re-