ch. i 3 “ MODUS OPERANDI ” OF BANK- RATE 211

put. But with correct forecasting this should not bethe case. For—other things being equal—an all-roundreduction of the cost of production should not stimu-late anyone to increase his output, inasmuch as theaggregate incomes of consumers, which are simply theaggregate costs of production under another name,available to purchase the output, are also being re-duced to exactly the same extent. In this case interestis simply the money-rate of earnings of one of thefactors of production ; so that reducing it will notenable entrepreneurs as a body to market profitablyany more goods than before. Since entrepreneurs arenot always acquainted with such reasoning, easiercredit is, it is true, liable to provoke mistaken fore-casting. But, apart from this, the effect of easiercredit on the costs of production should be, not tostimulate production all round, but to cause a change-over from certain forms of production to other forms ;namely, from those for which interest is a relativelyunimportant cost to those for which it is a relativelyimportant cost,—which partly depends on the durationof the process of production and does not even whollycoincide with the distinction between consumption-goods and capital-goods. That is to say, the effectof easier credit on the costs of production is notcalculated in a closed system to stimulate the aggre-gate of productivity of all kinds. A fall in the rate ofinterest stimulates the production of capital-goods notbecause it decreases their cost of production but becauseit increases their demand-price.

4. It is not unusual for the stimulus to new in-vestment to come about through a lower bank-ratefirst of all affecting the financial, as distinguished fromthe industrial, situation and so sending up the price-level of existing investments (including the price-levelof working-capital, i.e. the wholesale standard). In sofar as these investments are capable of reproduction,the prices of new capital-goods (in particular) will then