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A TREATISE ON MONEY

BE. Ill

upset of relative earnings in the two categories ofproduction). The process will, indeed, have been essen-tially similar to what must needs occur every daywhen changes in relative conditions of demand andsupply require some sort of shift and turnover inthe character of production ;—nothing will have oc-curred calculated to disturb profits or earnings as awhole.

But if the change in the market-rate does notexactly correspond to a change in the natural-rate,what will be the tertiary effects of the rise of bank-rate which we have been considering ? The declinein the rate of investment will cause a fall in P addi-tional to any fall caused by the increase of savings,since there will be a reduction in the incomes ofthe producers of investment-goods available for thepurchase of liquid consumption-goods, as necessarilyfollows from the Fundamental Equation.

At this stage, therefore, we have a fall both in Pand in P', consequent losses to all classes of entre-preneurs, and a resulting diminution in the volume ofemployment which they offer to the factors of produc-tion at the existing rates of earnings. Thus a stateof unemployment may be expected to ensue, and tocontinue, until the rise in bank-rate is reversed or, bya chance, something happens to alter the natural-rateof interest so as to bring it back to equality with thenew market-rate.

Moreover, the longer this state of affairs continues,the greater is the volume of unemployment likely tobe. For, at first, entrepreneurs may continue to offeremployment on the old terms, even though it involvesthem in losses, partly because they are tied up withlong-period contracts with the factors of productionwhich they cannot quickly get out of, and partlybecause it will be worth while, so long as they hopeand believe that the period of loss will be fairly short,to avoid the expenses of closing down and starting up