International Short-Term Capital Movements.

Abstract

IN recent discussions movements of short-term capital between countries have generally been referred to as a source of disturbance and instability. On the other hand, it has been recognised in the past that temporary loans can play a useful part in offsetting short-period fluctuations in a country's international balance and in smoothing the effects of more permanent changes; in fact, it has long been an important part of bank-rate policy to encourage these capital flows in appropriate circumstances. It seems to be clear at the outset, therefore, that the effects of international short-term capital movements must vary according to the attendant circumstances. The purpose of the present paper is to relate the different cases in which these short-term capital movements occur to their different effects. This involves a classification of the movements, but since our interest is centred in their effects, I shall endeavour to distinguish the different cases which actually occur from this point of view, rather than to build up a complete classification by the method of logical division. I shall not dwell much on the fact that a country which incurs considerable net short-term indebtedness to foreigners is exposed to the danger of embarrassment through sudden demands for repayment; for apart from its obviousness, this effect is common to most of the cases which we have to consider. The one exception that comes to mind is the case in which a country borrows abroad in order to purchase raw materials for her export industries. The kind of effect to which I wish to direct attention is the influence of the capital movements on incomes, prices and the circulation of money in the countries concerned-that is, in inducing