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A TREATISE ON MONEY

BK. HI

on changes of bank-rate as affecting the level of themarket-rate of interest relatively to the natural-rate,rather than on changes in the quantity of money, is this.Given associated changes in the total quantity of moneyand in the effective level of bank-rate respectively, itis via, the latter that the ultimate modification in thepurchasing power of money is generated, looking atthe problem dynamically. The order of events is notthat a change of bank-rate affects the price-level be-cause, in order to make the new bank-rate effective, thequantity of money has to be altered. It is, rather, theother way round. A change in the quantity of moneyaffects the price-level in the first instance, because,other things being equal, this means a bank-rate whichwill change the market-rate of interest relatively tothe natural-rate ; and it is only through the complexmovements thus set up that a new equilibrium posi-tion is eventually reached, with a price-level corre-sponding to the new quantity of money.

If we start from a position of equilibrium, then—provided that efficiency-earnings are stable—the con-dition for the continued stability of price-levels is thatthe total volume of money should vary in such a waythat the effect of the corresponding volume of banklending on the market-rate of interest is to keep thevalue of new investment at an equality with currentsaving.