208

A TREATISE ON MONEY

bk. m

employment, then monetary equilibrium will continueto require the indefinite prolongation of chronic un-employment.

Thus it is only when what I have called the con-summation of the process has been achieved, namely,the reduction of the rate of efficiency-earnings, that atrue equilibrium will be re-established.

The third factor, referred to above, which is alsocapable of bringing immediate relief, operates whenthe increase in the rate of interest is an increaserelatively to rates abroad. For in this event therewill be a reduction in the rate of foreign lending whichwill strengthen our country’s gold position. But thisalso is incapable, as we shall see in the next sectionof this chapter and in more detail in Chapter 21,of restoring a true equilibrium, unless it is ultimatelyaccompanied by a change in the rate of earnings.

There has been no more harmful confusion withinthe field of monetary practice, than the belief thatbank-rate has done its work when it has produced afall in the price-level, irrespective of whether this isdue to selling at a loss or to a decline in the costs ofproduction, i.e. irrespective of whether the deflationwhich it has produced is a Profit Deflation or an IncomeDeflation. 1

Perhaps this discussion has been urmecessarilydetailed and meticulous. The long and short of it isas follows :

1. Such changes in bank-rate, as cause the market-rate of interest to diverge from the natural-rate,have a direct effect, which is likely to be significant,on the profits of the producers of capital-goods andon their rate of production, partly by changing thedemand-price for such goods and partly by influencingintending purchasers of such goods to postpone or

1 For a classical example of this confusion, see Report of the Committeeon the Currency and Bank of England Note Issues (Cmd. 2393, 1925)—thereport on the strength of which Great Britain committed herself to a returnin that year to the pre-War parity of the gold standard.