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A TREATISE ON MONEY

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namely that a higher bank-rate would raise prices, ifonly for the very plausible reason that it would raisecosts of production ; but such an expectation couldnot persist if in fact, apart from the expectation,higher bank-rate was not calculated to raise prices.And even if the expectation did persist, the realisationof it would not. At any rate, I do not imagine thatthose who advance this explanation mean that theeffect of higher bank-rate is traceable to a psycho-logical mistake on the part of the business world.They mean rather that, because higher bank-rate does,quite apart from any expectations, actually tendtowards lower prices, the business world “ discounts ”this tendency, so that it realises itself in terms of theprice-level sooner, and perhaps in a more extremedegree, than it would otherwise. Thus the fact thatthe result is correctly anticipated is not in itself thereason, and does not help us to discover the reason,why the result follows.

I hope the reader will not feel that I have spent toomuch time on matters which are mainly of historicalinterest. But Bank-rate being a question about whichthe truth has long been confusedly and incompletelyknown, a history of opinion is of more value as anintroduction to a constructive theory than it wouldbe if progress had been made by well-defined stages.

(ii.) The General Theory of Bank-rate.

It is convenient to mean by “ Bank-rate ” in thissection of this chapter the effective rate for lendingand borrowing which prevails in the market, i.e. notnecessarily the official published rate of the CentralBank at which it will discount three months’ bills of aspecified type, but the complex of interest rateseffective in the market at any time for the borrowingand lending of money for short periods. If a change