Prosperity and Depression.pdf

AnalYsis of TheoriesPart Ithe process of contraction will be stopped or slowed down :prices will rise or, if they were falling, the fall will be arrested 01'mitigated. If the banks raise the interest rate, ceteris paribus theHow of money incomes will contract or, if it was expanding, theexpansion will be stopped or slowed down : prices will fall or,if they were rising, the rise will be arrested or mitigated. Undergiven conditions, there is one rate which keeps the price levelconstant and- another which keeps the flow of money incomesconstant. The two coincide only in a stationary economy. Ina progressive economy, the rate which stabilises the price level isbelow the rate which keeps the How of money incomes constant.Which of these two rates is called the" natural" 01' " equilibriumrate" will depend on which is thought the likelier to maintainthe equilibriu~ of the economic system. We shall see that thosewriters of the group under review, whose analysis takes accountof the difference, reserve the adjective "natural" for the ratewhich keeps the flow of money incomes constant. But for themoment we shall ignore this distinctiol1, which the writers inquestion themselves are by no means consistent in respecting.lInterestratesandprices.§ 3. THE UPSWINGAccording to the ·theory with which we aredealing, the boom is brought about by a discrepancybetween the natural and the money rate ofinterest. How this discrepancy is produced, andwhether there is any reason why it should recuragain and again in a more or less regular fashion,Ifthe money rate stands below the equili­will be discussed later.brium rate, a credit expansion will ensue. As soon as prices beginto rise, the process tends to become cumulative for the reason thatthere is a twofold causal connection between interest rates and theI Independently from Wicksell, Mr. Hawtrey introduced the notionof the "natural rate" (which he distinguished from the "profit rate")in his first book Good and Bad Trade (London, 1913). But, since hedid not use this concept in any of his later writings. we have made noreference to it in the summary of his theory. The concept of a "naturalrate" (and even the term) can be :found in earlier English economicwritings.