II

INFLATION AND DEFLATION

127

It is the bond market that would be principallyaffected by a British Government loan.

Now anything which served to diminish thevolume of foreign issues would be welcomed bythe Bank of England at the present time for itsown sake. The exchange position is uncom-fortable and precarious; the recent rise in bank-rate is proof of that. A diminution of foreigninvestment would ease the strain on the ex-changes. Why, it is only a year or two sincethe Bank of England , with this end in view,was maintaining a semi-official embargo onforeign issues. The embargo was a crude in-strument, suitable only for temporary use, andwe do not suggest its renewal. But the needwhich that embargo was designed to supply stillremains, if in a less acute degree. In relationto our less favourable balance of foreign trade,we are investing abroad dangerously much; andwe are investing abroad to this dangerous extentpartly because there are insufficient outlets forour savings at home.

It follows, therefore, that a policy of capitalexpenditure, in so far as it might go beyondthe mere absorption of deflationary slack, wouldserve mainly to divert to home developmentsavings which now find their way abroad, andthat this would be a welcome result in theinterests of the Bank of England .

It has been objected that if we lend lessabroad, our exports will fall off. We see noreason to anticipate this. Immediately, as wehave said, the reduction in net foreign lending