336 THE GENERAL THEORY OF EMPLOYMENT bk. vi

Now, if the wage-unit is somewhat stable and notliable to spontaneous changes of significant magnitude(a condition which is almost always satisfied), if thestate of liquidity-preference is somewhat stable, takenas an average of its short-period fluctuations, and ifbanking conventions are'also stable, the rate of interestwill tend to be governed by the quantity of the preciousmetals, measured in terms of the wage-unit, availableto satisfy the community’s desire for liquidity. At thesame time, in an age in which substantial foreign loansand the outright ownership of wealth located abroadare scarcely practicable, increases and decreases in thequantity of the precious metals will largely depend onwhether the balance of trade is favourable or unfavour-able.

Thus, as it happens, a preoccupation on the partof the authorities with a favourable balance of tradeserved both purposes; and was, furthermore, the onlyavailable means of promoting them. At a time whenthe authorities had no direct control over the domesticrate of interest or the other inducements to home in-vestment, measures to increase the favourable balanceof trade were the only direct means at their disposalfor increasing foreign investment; and, at the sametime, the effect of a favourable balance of trade on theinflux of the precious metals was their only indirectmeans of reducing the domestic rate of interest and soincreasing the inducement to home investment.

There are, however, two limitations on the successof this policy which must not be overlooked. If thedomestic rate of interest falls so low that the volume ofinvestment is sufficiently stimulated to raise employ-ment to a level which breaks through some of thecritical points at which the wage-unit rises, the increasein the domestic level of costs will begin to react un-favourably on the balance of foreign trade, so that theeffort to increase the latter will have overreached anddefeated itself. Again, if the domestic rate of interest