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A TREATISE ON MONEY

BK. IV

sensitiveness of L to changes in the relative rates ofinterest at home and abroad ; thirdly, in the introduc-tion of a new means of influencing L other thanchanges in relative rates of interest (namely, changesin the rates of foreign exchange); and fourthly, in itsbeing possible to have a change in the rate of foreigninvestment without a change in the average level ofmoney-incomes.

I am not concerned in this chapter to weigh upfinally the practical advantages of an internationalstandard and of a local standard respectively—a topicwhich properly belongs to Volume ii., where I shall infact propose something of a compromise between thetwo. But the most significant difference between them—wherever the advantage may lie on balance—seemsto me to be as follows.

With a local standard the dilemma, which some-times faces a Central Bank , that it may be impossibleto preserve both internal equilibrium and externalequilibrium at the same time, presents itself muchless acutely. If the Central Bank is free to vary boththe rate of foreign exchange and its market-rate ofinterest, applying appropriate doses of each at theright moment, there is much less risk of the loss ofwealth and output due to the prevalence of generalunemployment. For direct changes in the price offoreign-trade goods can be largely substituted for un-employment as the first link in the causal chain wherebyexternal equilibrium is preserved and restored. Itsdisadvantage is to be found in the diminished mobilitythat it means (if that is a disadvantage) for foreignlending.

It is evident that no general answer can be givento the question where the balance of advantage lies.It depends partly on the relative importance of foreign-trade industries in our country’s national economy.But not entirely. For it also depends on whether thepotential fluctuations in the volume of foreign lending,