OH. 13
same thing as the first strand of thought mentionedabove, namely that the level of Bank-rate deter-mines the volume of bank-money and hence the price-level. But I think that there was more than this inWicksell ’s own thought, though obscurely presentedin his book.
Wicksell conceives of the existence of a “ naturalrate of interest ”, which he defines as being the ratewhich is “ neutral ” in its effect on the prices of goods,tending neither to raise nor to lower them, and addsthat this must be the same rate as would obtain if ina non-monetary economy all lending was in the formof actual materials . 1 It follows that if the actual rateof interest is lower than this prices will have a risingtendency, and conversely if the actual rate is higher . 2It follows, further, that so long as the money-rate ofinterest is kept below the natural-rate of interest,prices will continue to rise—and without limit . 3 It isnot necessary for this result, namely the cumulativerise of prices, that the money-rate should fall shortof the natural-rate by an ever-increasing difference ;it is enough that it should be, and remain, below it.
Whilst Wicksell ’s expressions cannot be justified asthey stand and must seem unconvincing (as they haveto Professor Cassel) without further development, theycan be interpreted in close accordance with the Funda-mental Equation of this Treatise. For if we defineWicksell ’s natural-rate of interest as the rate at whichSaving and the value of Investment are in equilibrium
1 Geldzins und Giiterpreise, p. 93.
2 Wicksell also used the term “ real ” interest in the above sense. Butthe “ natural ” rate of interest as defined above is on no account to beconfused with Irving Fisher ’s “ real ” rate of interest, namely the money-rate corrected by reference to any change in the value of money betweenthe loan’s being advanced and its being repaid. Cf. Hayek , Geldtheorieund Konjunkturtheorie, pp. 124-25.
3 Though this will involve—which Wicksell does not bring out—a con-tinual rise in the rate of money-earnings, but one which is never quitesufficient to wipe out profits ; and this rise will require, in turn, to be fedby a continual increase in the quantity of money.