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A TREATISE ON MONEY

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such goods, unless their price is falling relatively totheir cost of production, or unless the demand forthem is falling off at the existing price. In what waycan a rise in bank-rate tend to bring this about ?

Upon what does the demand-price of capital-goodsdepend ? It depends on two things—on the estimatednet prospective yield from fixed capital (estimated bythe opinion of the market after such allowance asthey choose to make for the uncertainty of anticipa-tion, etc.), measured in money, and on the rate ofinterest at which this future yield is capitalised. Itfollows that the price of such goods can change foreither of two reasons—because the prospective yieldhas changed or because the rate of interest has changed.And we can pursue the analysis a step further : sincethe prospective yield must be measured for the presentpurpose in terms of money, a change in it may bedue either to a change in the real yield, its priceremaining the same, or to a change in the prospectiveprice (or money value) of the real yield.

Now a change in bank-rate is not calculated tohave any effect (except, perhaps, remotely and of thesecond order of magnitude) on the prospective realyield of fixed capital. It may conceivably affect theprospective price of the real yield, but only, as a rule,on goods the future yield of which will be spread overa comparatively short period of time and if the changeof bank-rate constitutes a new fact in itself—by throw-ing new light, for example, on the policy and intentionsof the currency authority. This conceivable effect,however, is one which we will for the present neglect.The connection between bank-rate (and, more par-ticularly, bond-rate as affected by bank-rate) and thethird influence on the price of capital-goods, namely,the rate of interest at which the prospective money-yield of fixed capital is capitalised in order to arriveat its present money-value, is, on the other hand,immediate, direct, and obvious. The connection will