Prosperity and Depression.pdf

218 Ana(ysr.f Of 'fbeor;tJ' Part I'its stimulating effect is conditioned by its having previouslydepressed the interest rate. lApart from terminological innovations, the real contributionbrought by Mr. KEYNES' General Theory of Interest would seem toconsist, as we have seen, of the proposition that hoarding is afunction of the rate of interest. This does not of course meanthat factors other than the rate of interest may not also exert aninfluence as strong as that of the interest rate on the amount ofinactive balances. In other words, even in the short run, shifts ofthe liquidity-preference schedule may be at least as important asmovements along the curve. 2Besides and in addition to the general empiricalInfinite assumption about" demand for idle cash balances "elasticity (propensity to hoard), there is a more specificof deJnand assurrlption about the shape of that demand curvejor idle (liquidity-preference schedule proper) which frequentlyplays an important role in Mr. KEYNES'balances.theory. This more specific assumption constitutesMr. KEYNES' " special theory", as Dr. HICKS has aptly called it.This assumption is to the effect that, for low interest rates," say 20/0 " (page 202.), the demand for idle balances (" demand forliquidity") becomes more and more elastic and, at a rate wellabove zero, absolutely elastic-that is, insatiable. In technicalparlance, the interest-elasticity ofthe demand for liquidity becomes1 SOlne economists, however, have interpreted Mr. !{eynes' theory tomean that an increase in the quantity of money could operate on theeconomic system only via the rate of interest. For examplt, Mrs. J.Robinson, in a review of Professor Bresciani-Turroni's Economics ofI nflation, remarks: " The author assumes that an increase in the quantityof money was the root caus~ of the inflation [in Germany, in 1919­1923]. But this view it is impossible to accept. An increase in thequantity of money no doubt has a tendency to raise prices, for it leads toa reduction in the interest rate, which stinlulates investment and discouragessaving, and so leads to an increase in activity. But there isno evidence whatever that events in Germany followed this sequence"(italics not in the original). Econ01nic Journal, Vol. 48, 1938, page 509.2 The same difficulties have to be faced by any two-dimensionalanalytical apparatus when applied to such a complex phenomenon asthe demand for idle balances and the rate of interest. Compare on thisI.loint M. Millikan, loco cit" pages 254 et seq.