158

A TREATISE ON MONEY

BK. Ill

incomes of individuals shall be reduced ;—the onlyalteration which it has a power to order relates to theterms of lending. It is, therefore, via the alterationof the terms of lending that the change in the situationis initiated ;—this alteration affects the attractive-ness of producing capital-goods, which disturbs therate of investment relatively to that of saving, whichupsets the rate of profits for producers of consump-tion-goods, thus causing entrepreneurs to modify theaverage level of their offers to the factors of produc-tion, and so finally achieving the ultimate objectiveof changing the level of money-incomes. This is notthe only conceivable way of bringing about the result,but it is the only way which is, in fact, normally inuse in most countries of the modern world.

Thus—generally speaking—every change towards anew equilibrium price-level is initiated by a departureof profits from zero ; and the significance of the aboveanalysis lies in the demonstration that this conditionof equilibrium comes to the same thing as (1) theequality of Savings and the value of Investment,and (2) the equality of the “ market-rate ” and the“ natural-rate ” of interest.

If, therefore, the banking system can regulate theamount which it lends in such a way that the market-rate of interest is equal to the natural-rate, thenthe value of investment will be equal to the volumeof saving, total profits will be zero, the price of out-put, as a whole, will be at an equilibrium level, andthere will be a motive moving productive resourcesbetween the production of consumption-goods and theproduction of capital-goods unless or until the pur-chasing power of money is also at an equilibrium level.The condition for the stability of purchasing power is,therefore, that the banking system should behave inthis way and according to this criterion; though wemay have to concede that this is not always practic-able over short periods, since for short periods the