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A TREATISE ON MONEY

BK. XV

braically consistent for a time with more than one set ofconsequences. A change in the quantity of money willchange the rate of investment; the change in the rateof investment will bring with it profit or loss ; and thestimulus of profit or loss, if carried far enough andcontinued long enough, will change sooner or later theaverage rate of earnings ; and at long last the changein individual rates of earnings will again conform ap-propriately to the change in the average rate of earn-ings, instead of being dispersed inequitably about theaverage as they will be at first and perhaps for a periodof years. But there is no necessity for these adjust-ments to come about at once.

Since neither economists nor bankers have beenquite clear in their minds as to the character of thecausal process through which a reduction in the quan-tity of money leads eventually to a new equilibrium ata lower level of money-earnings and of prices, theyhave been apt to contemplate a deflation too light-heartedly. Bankers are over-encouraged by the com-parative ease with which they bring prices down, andt h i nk that the job is already done when only the firstand easiest step has been accomplished ; and they arethen taken by surprise at the protracted period of un-employment and business losses which ensues beforethe money-earnings per unit of output are adjusted tothe new equilibrium. For economists have tended tooverlook both the 'possibility of a short-period diver-gence between prices and efficiency-wages and the im-possibility of a long-period divergence between them.We are often told (e.g.) that a rise of bank-rate causesprices to fall, which “ makes a country a good one tobuy in and a bad one to sell in ”, etc., etc. We are nottold that a rise of bank-rate causes wages to fall. Butif not, what is to happen to entrepreneurs and toemployment ? And if so, what is the nature of thetransition from high bank-rate to low prices and fromlow prices to low wages ?