CH. 21

INTERNATIONAL DISEQUILIBRIUM

357

world during the years immediately following theWar, before the general return to the Gold Standard in 1924-29.

When a disparity between B, the Foreign Balance,and L, the volume of Foreign Lending, cannot be curedby allowing gold to move, the pressure on the foreignexchanges must obviously alter the rates between ourown country and the rest of the world to whateverdegree is necessary to cause the disparity to disappear.In short, the operative machinery for the preservationof external equilibrium is no longer, primarily, achange in bank-rate, but a change in the rates offoreign exchange. Bank-rate remains as a secondaryinstrument for external equilibrium and as a primaryinstrument for internal equilibrium. But the characterof transitions due to external disturbances is consider-ably modified, compared with what has been describedabove on the assumption of an International Standard.

For the effect of a change in the rates of foreignexchange, though similar in a sense to that of a changein bank-rate, works—as we shall see —the other wayround. It also brings into operation at once certainforces which are entirely absent, in the first instanceat least, when a change of bank-rate is employed as ameans of restoring equilibrium. The chief differencesbetween the foreign-exchange method and the bank-rate method can be classified as follows :

(1) Let us call goods, which are capable of enteringinto foreign trade within the contemplated range offoreign-exchange rate changes, whether as imports oras exports, foreign-trade goods, including in this cate-gory goods which do not actually enter into foreigntrade but are used at home, if they are the same inkind as foreign-trade goods in the above sense. Nowan increase in B is the same thing as an increase inthe surplus home-production of foreign-trade goods,meaning by surplus home-production the excess of thehome-production of such goods over the home-utilisa-