CH. 13
requirements of the financial circulation. A changein bank-rate will have an effect, initially or subse-quently, on all of these, and through them on price-levels. But its effect on these different factors willneither be in the same proportion on all of them ata given moment, nor in the same proportion on anyone of them at different stages of a transition ; sothat it is not useful to say that a change in bank-ratechanges price-levels because it is associated withchanges in the quantity of bank-money—especiallyif this statement carries any suggestion that theprice-levels will change more or less in the sameproportion as the change in the quantity of bank-money.
In particular, we may note the following points :(a) We have already seen that a rise in prices, whichis due to an increase in the rate of earnings, willrequire a larger quantity of bank-money to supportit than an equal rise which is due to the emergenceof profits. Thus, as increased profits are graduallytransmuted into increased earnings (in the manner tobe examined in great detail in Book IV.), a largerand larger quantity of money is required ;—which ispart of the explanation of the cyclical character ofsome types of monetary fluctuation, inasmuch as aquantity of money which is adequate to support arise of prices due to the second term of the Funda-mental Equation is inadequate to support an equalrise due to the first term, with the result that as thefirst term increases, a reaction in prices becomes in-evitable through lack of enough money to “ finance ”them.
(b) If there is a change in the natural-rate ofinterest, the same bank-rate as before will require, ifit is to be effective, to be associated with a changedquantity of money. Thus it is not, strictly speaking,a change in bank-rate as such which needs to beassociated with a changed quantity of money, but a