Prosperity and Depression.pdf

34 AnalYsis of Theories Part IThese relationships have been· expounded systematically by KNUTWICKSELL ; his theory, outlined below, is the basis of theexplanation of the business cycle which follows. 1 It should beadded that, in what follows, we shall leave international complicationsfor the moment out of account and disregard the fact that achange in the interest rate in one country will influence the flowof credit from and to other countries. These complications caneasily be inttoduced into the picture later. For the present, wepresuppose a closed economy.WICKSELL distinguishes between the "moneyNatural rate rate" or actual "market rate of interest" asand money rate influenced by the policy of the banks (and otherofinterest. monetary factors) on the one hand and the" natural rate ofinterest" on the other. The latteris delined by WICKSBLL as cc that rate at which the demandfor loan ca.pi~al just equals the supply of savings ".1 If the bankslower the market rate below this natural or, as it should· perhapsmore correctly be called, equilibrium rate, the demand for creditwill rise and exceed the available amount ofsavings, and the supplyof credit must be supplemented by bank credit created ad hotthatis, by infladon. If, on the other hand, the rate is 'raised abovethe equilibrium level, the demand for credit will fall, some portionof the total saving will not be used, and credit will be liquidated1 Interest and Prices, London, 1936, tran$lated from the German,Geldzins und Gutet''Pt'eise, Jena, 1898 ; Lect'Ut'es on Political Economy,London, 1934, Vol. II, translated from the Swedish: "The Inlluence· ofthe Rate of Interest on Prices", Economi& ]Of/,rKal, June 1907. On theevolution of Wicksell's theory, see the eJtCellent introduction by ProfessorB. Ohlin to Intet'est ana Prices. Compare also the elaboration ofWicksell's theory by recent Swedish writers as summarised in ProfessorG. Myrdal's paper "Der Gleichgewichtsbegriff als Instrument der geldtheoretischenAnalyse " in Beit,age .rut' GeldtheOt'ie, ed. by Hayek, 1933,and E. Lundberg, Studies in tke Theot''Y QI Economic Expansion, ~ondon,1937. Some aspects of the theory and their history have been discllssedat great length by A. W. Marget, Ths Tke(w'Y 01 Pt'ices, Vol. I, Ch. VII-X.In Vol. II, which has not yet appeared, the discussion \\Till be continued.I VOt'lesungen ubeY Nationalokonomis, Vol. II, page 220. It ispossible to trace in Wicksell's writings an alternative definition of thenatural rate-viz., as that rate which would prevail in a barter economywhere loans are made in natu,a. This conception presents, however,great theoretical difficulties. We shall therefore disregard it.