204

A TEEATISE ON MONEY

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same direction. For issue houses will be inclined to“ protect” the price of their recently previous issues—which may not have been wholly digested by per-manent investors at the date when the bank-rate ischanged—by damping down the rate of new issues,both in their own interest and in that of their clientele.That is to say, it will be abnormally difficult (if bank-rate has recently risen) or abnormally easy (if it hasrecently fallen) for new borrowers to float their waresat a price approximating to the prices quoted in themarket for existing loans ; so that market quotationsare not at all times an equally good index of the easewith which new borrowers for investment purposescan be accommodated. Thus changes in bank-rate arecalculated in the actual conditions of the contemporarycapital-market to have a decided effect on the rate atwhich producers of capital-goods will be able to findbuyers for their products at a satisfactory price, evenif the change in the rate is believed to be a short-period fluctuation; and all the more so, for otherand more obvious reasons, if the change is expectedto last.

At least this will be the case unless the rise inthe market-rate of interest ( i.e. bank-rate and bond-rate) is compensated by a simultaneous rise, for otherreasons, in the estimated prospective yield of fixedcapital. Only if the higher rate of interest merelyoffsets market optimism about the prospective yieldof new fixed capital, will the change be without directeffect on the output of capital goods.

Thus, generally speaking (i.e. unless the change inbank-rate happens to be balanced by other con-temporary changes), we may expect the direct andprimary effects of a rise of bank-rate to be a fall inthe price of fixed capital and, therefore, in P', theprice-level of investment-goods, and an increase ofsaving—of which the former is more likely to bequantitatively important than the latter.