ch. 17 CHANGES DUE TO MONETARY FACTORS 273

It may be considered a defect that the CentralBanking Authority has in most modern economicsystems no means of acting directly on the first termof the Fundamental Equation—that it cannot directlyinfluence the level of efficiency-earnings. In BolshevistKussia or in Fascist Italy it may be possible by decreeto change the money-rate of efficiency-earnings over-night. But no such method is available in the systemsof Capitalistic Individualism which prevail in mostof the rest of the world. It was not open to the BritishTreasury when at the time of the return to the GoldStandard the Standard of Value was by its decreeraised 10 per cent to decree at the same time thatefficiency-earnings should be reduced all round by10 per cent. On the contrary, the first term of theequation can only be influenced indirectly—raised bystimulating entrepreneurs with abundant credit andabnormal profits, lowered by depressing them withrestricted credit and abnormal losses. When bank-rate is raised, not in the interests of equilibrium to keepthe second term from rising, but in order to bring thefirst term down, this means that the object of the higherbank-rate is to involve entrepreneurs in losses and thefactors of production in unemployment, for only inthis way can the money-rates of efficiency-earnings bereduced. It is not reasonable, therefore, to complainwhen these results ensue.

Thus there is a vital difference between a change inbank-rate which is intended to prevent a Profit Infla-tion (or Deflation) and one which is intended to causean Income Deflation (or Inflation) ; for the formeroperates to preserve equilibrium by adjusting themarket-rate of interest to the natural-rate, whereasthe latter operates via disequilibrium by forciblydivorcing the market-rate from the natural-rate.

For these reasons our existing monetary mechanism,whilst capable of being used efficiently—as we shall see—for the avoidance or mitigation of credit fluctuations,

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