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A TREATISE ON MONEY

BK. Ill

change in the market-rate of interest relatively to thenatural-rate.

(c) If the change in the market-rate of interest rela-tively to the natural-rate is due to a change in thevolume of savings, it need not be accompanied by anychange in the volume or character of output, butmerely by the existing character of output being con-tinued after this has ceased to be suitable to thechanged volume of savings. In this case the changein the quantity of money required is likely to be small.But if, as is more commonly the case, the departureof the market-rate from the natural-rate is associatedwith a change in the volume of output and employ-ment, this will involve a much more substantial changein the quantity of money—which, broadly speaking,will have to be changed in proportion to the changein the aggregate costs of production.

(d) A change in bank-rate may in itself modify thevelocities of circulation, by changing the amount ofsacrifice involved in holding balances. To the extentthat this is the case, a fall in bank-rate will decreasevelocities. On the other hand, as we shall see inVolume ii., Chapter 26, an increased briskness oftrade is likely to increase velocities. Thus a reductionof bank-rate which is associated with a stagnation oftrade may decrease velocities, but one which is associ-ated with brisk trade may serve to increase them onbalance.

(e) The reactions of a change in bank-rate on thefinancial situation will affect the volume of theFinancial Circulation, and may affect it either in thesame direction or in the opposite direction to its effecton the volume of the Industrial Circulation. 1

Bank-rate may affect the Financial Circulation intwo ways. In the first place, when—as in GreatBritain— the rate of interest allowed on savings-

1 For the distinction between the Financial Circulation and the In-dustrial Circulation, see Chapter 15 below.