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A TREATISE ON MONEY

BK. Ill

rise in sympathy. This is a matter to which we shallreturn later on.

5. As we have hinted above, a change in bank-rate may itself alter the natural-rate of interest in theopposite direction to that in which bank-rate has beenchanged, by altering expectations as to the futurecourse of prices. For example, if bank-rate falls, thistends to raise the natural-rate of interest, if it arousesexpectations of a tendency towards rising prices, thusincreasing the attractiveness of investment in termsof money. This is an extra reason, in the first instance,for expecting a fall of bank-rate to stimulate invest-ment relatively to saving. But it is a reason whichwill probably produce a reaction a little later on afterprices have risen, whereas this will not be so with arise in the natural-rate of interest due to other causesthan monetary expectations.

6. If we assume that the lending of money takesplace according to the principles of a perfect market,it is evident that, given the demand-schedule of bor-rowers, the effective bank-rate and. bond-rate mustuniquely determine the production of capital-goods andhence, generally speaking, the volume of investment.So far, however, as bank loans are concerned, lendingdoes not —in Great Britain at least—take place accord-ing to the principles of a perfect market. There is aptto be an unsatisfied fringe of borrowers, the size ofwhich can be expanded or contracted, so that bankscan influence the volume of investment by expandingor contracting the volume of their loans, without therebeing necessarily any change in the level of bank-rate, in the demand-schedule of borrowers, or in thevolume of lending otherwise than through the banks.This phenomenon is capable, when it exists, of havinggreat practical importance. We shall discuss thepractical conditions which are likely to lead to itsexistence, its limitations and the use which can bemade of it in Volume ii., Chapter 37. Meanwhile