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A TKEATISE ON MONEY

bk. m

keep will be based on experience, but can, of course, bevaried witbin fairly wide limits without muck risk ofinconvenience. When the rate of interest goes up he willbe anxious to reduce his indebtedness, so far as he can,without incurring serious inconvenience. He can reducehis indebtedness if he can reduce his stocks of goods, andhe can reduce his stocks of goods by merely delayingreplenishment when they are sold. But the orders re-ceived by manufacturers come from the dealers who wantto replenish their stocks. Consequently the manufacturerswill at once find that they are receiving fewer and smallerorders. The money which the dealers would otherwise havebeen using to pay the manufacturer for goods, they are usingto extinguish their indebtedness to their bankers. . . .That is to say, he (the manufacturer) experiences aslackening of demand, and in order to relieve the resultingrestriction of output he lowers prices so far as the exist-ing expenses of production will permit. This lowering ofprices will enable the dealers to lower retail prices, ameasure which would ordinarily stimulate demand. Butin the meanwhile the reduction of stocks by the dealersand the restriction of output by the producers will havebeen accompanied by a diminution of indebtedness ofboth producers and dealers to the banks, and this diminu-tion of the bankers’ assets will have been accompanied bya diminution in their liabilities, i.e. in the supply of creditmoney. The balances of money in the hands of the publicare therefore decreasing, and the superstructure of in-comes erected thereon is simultaneously shrinking.”

Now, I believe this to be a very incomplete accountof the normal modus operandi of a higher bank-rate. It relies, let the reader observe, exclusively onthe increased costs of business resulting from dearermoney. Mr. Hawtrey admits that these additionalcosts will be too small materially to affect the manu-facturer, but assumes without investigation that theydo materially affect the trader. He does not base hisargument on the arousing of an expectation of fallingprice-levels in the minds of the dealers, and he makesthe diminution of the supply of credit money the lastevent in his causal train. Yet probably the question