CH. 19

CHANGES IN MONEY-WAGES

263

advantage is not offset by a change in tariffs, quotas,etc. The greater strength of the traditional belief inthe efficacy of a reduction in money-wages as a meansof increasing employment in Great Britain , as com-pared with the United States , is probably attributableto the latter being, comparatively with ourselves, a closedsystem.

(3) In the case of an unclosed system, a reductionof money-wages, though it increases the favourablebalance of trade, is likely to worsen the terms of trade.Thus there will be a reduction in real incomes, exceptin the case of the newly employed, which may tend toincrease the propensity to consume.

(4) If the reduction of money-wages is expectedto be a reduction relatively to money-wages in the future ,the change will be favourable to investment, becauseas we have seen above, it will increase the marginalefficiency of capital; whilst for the same reason it maybe favourable to consumption. If, on the other hand,the reduction leads to the expectation, or even to theserious possibility, of a further wage-reduction in pros-pect, it will have precisely the opposite effect. For itwill diminish the marginal efficiency of capital and willlead to the postponement both of investment and ofconsumption.

(5) The reduction in the wages-bill, accompaniedby some reduction in prices and in money-incomesgenerally, will diminish the need for cash for incomeand business purposes; and it will therefore reduce protanto the schedule of liquidity-preference for the com-munity as a whole. Cet. par. this will reduce the rateof interest and thus prove favourable to investment.In this case, however, the effect of expectation concern-ing the future will be of an opposite tendency to thosejust considered under (4). For, if wages and pricesare expected to rise again later on, the favourable re-action will be much less pronounced in the case of long-term loans than in that of short-term loans. If, more-