II
Letusconsiderwhatthevariouscommodity-ratesofinterestoveraperiodofsayayeararelikelytobefordifferenttypesofassets。
Sincewearetakingeachcommodityinturnasthestandard，thereturnsoneachcommoditymustbereckonedinthiscontextasbeingmeasuredintermsofitself。
Therearethreeattributeswhichdifferenttypesofassetspossessindifferentdegrees；namely，asfollows:
iSomeassetsproduceayieldoroutputq，measuredintermsofthemselves，byassistingsomeprocessofproductionorsupplyingservicestoaconsumer。
iiMostassets，exceptmoney，suffersomewastageorinvolvesomecostthroughthemerepassageoftimeapartfromanychangeintheirrelativevalue，irrespectiveoftheirbeingusedtoproduceayield；i。e。
theyinvolveacarryingcostcmeasuredintermsofthemselves。
Itdoesnotmatterforourpresentpur-
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poseexactlywherewedrawthelinebetweenthecostswhichwedeductbeforecalculatingqandthosewhichweincludeinc，sinceinwhatfollowsweshallbeexclusivelyconcernedwithq-c。
iiiFinally，thepowerofdisposaloveranassetduringaperiodmayofferapotentialconvenienceorsecurity，whichisnotequalforassetsofdifferentkinds，thoughtheassetsthemselvesareofequalinitialvalue。
Thereis，sotospeak，nothingtoshowforthisattheendoftheperiodintheshapeofoutput；yetitissomethingforwhichpeoplearereadytopaysomething。Theamountmeasuredintermsofitselfwhichtheyarewillingtopayforthepotentialconvenienceorsecuritygivenbythispowerofdisposalexclusiveofyieldorcarryingcostattachingtotheasset，weshallcallitsliquidity-premiuml。
Itfollowsthatthetotalreturnexpectedfromtheownershipofanassetoveraperiodisequaltoitsyieldminusitscarryingcostplusitsliquidity-premium，i。e。toq-cl。Thatistosay，q-clistheown-rateofinterestofanycommodity，whereq，candlaremeasuredintermsofitselfasthestandard。
Itischaracteristicofinstrumentalcapitale。g。amachineorofconsumptioncapitale。g。ahousewhichisinuse，thatitsyieldshouldnormallyexceeditscarryingcost，whilstitsliquidity-premiumisprobablynegligible；ofastockofliquidgoodsorofsurpluslaid-upinstrumentalorconsumptioncapitalthatitshouldincuracarryingcostintermsofitselfwithoutanyyieldtosetoffagainstit，theliquidity-premiuminthiscasealsobeingusuallynegligibleassoonasstocksexceedamoderatelevel，thoughcapableofbeingsigmficantinspecialcircumstances；andofmoneythatitsyieldisnilanditscarryingcostnegligible，butitsliquidity-premiumsubstantial。Differentcommoditiesmay，indeed，havedifferingdegreesofliquidity-premiumamongstthemselves，andmoneymayincursomedegreeofcarryingcosts，e。g。forsafe[Page227]PROPERTIES
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custody。Butitisanessentialdifferencebetweenmoneyandallormostotherassetsthatinthecaseofmoneyitsliquidity-premiummuchexceedsitscarryingcost，whereasinthecaseofotherassetstheircarryingcostmuchexceedstheirliquidity-premium。Letus，forpurposesofillustration，assumethatonhousestheyieldisq1andthecarryingcostandliquidity-premiumnegligible；thatonwheatthecarryingcostisc2andtheyieldandliquidity-premiumnegligible；
andthatonmoneytheliquidity-premiumisl3andtheyieldandcarryingcostnegligible。Thatistosay，q1isthehouse-rateofinterest，-c2thewheat-rateofinterest，andl3themoney-rateofinterest。
Todeterminetherelationshipsbetweentheexpectedreturnsondifferenttypesofassetswhichareconsistentwithequilibrium，wemustalsoknowwhatthechangesinrelativevaluesduringtheyearareexpectedtobe。
Takingmoneywhichneedonlybeamoneyofaccountforthispurpose，andwecouldequallywelltakewheatasourstandardofmeasurement，lettheexpectedpercentageappreciationordepreciationofhousesbea1andofwheata2。q1，-c2andl3wehavecalledtheown-ratesofinterestofhouses，wheatandmoneyintermsofthemselvesasthestandardofvalue；i。e。q1isthehouse-rateofinterestintermsofhouses，-c2isthewheat-rateofinterestintermsofwheat，andl3isthemoney-rateofinterestintermsofmoney。Itwillalsobeusefultocalla1q1，a2-c2andl3，whichstandforthesamequantitiesreducedtomoneyasthestandardofvalue，thehouse-rateofmoney-interest，thewheat-rateofmoney-interestandthemoney-rateofmoney-interestrespectively。Withthisnotationitiseasytoseethatthedemandofwealth-ownerswillbedirectedtohouses，towheatortomoney，accordingasa1q1ora2-c2orl3isgreatest。Thusinequilibriumthedemand-pricesofhousesandwheatintermsofmoneywillbesuchthatthereisnothingtochooseinthewayofadvantagebetweenthealter-
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natives；¾；i。e。a1q1，a2-c2andl3willbeequal。Thechoiceofthestandardofvaluewillmakenodifferencetothisresultbecauseashiftfromonestandardtoanotherwillchangeallthetermsequally，i。e。byanamountequaltotheexpectedrateofappreciationordepreciationofthenewstandardintermsoftheold。
Nowthoseassetsofwhichthenormalsupply-priceislessthanthedemand-pricewillbenewlyproduced；andthesewillbethoseassetsofwhichthemarginalefficiencywouldbegreateronthebasisoftheirnormalsupply-price
thantherateofinterestbothbeingmeasuredinthesamestandardofvaluewhateveritis。Asthestockoftheassets，whichbeginbyhavingamarginalefficiencyatleastequaltotherateofinterest，isincreased，theirmarginalefficiencyforreasons，sufficientlyobvious，alreadygiven
tendstofall。Thusapointwillcomeatwhichitnolongerpaystoproducethem，unlesstherateofinterestfallsparipassu。Whenthereisnoassetofwhichthemarginalefficiencyreachestherateofinterest，thefurtherproductionofcapital-assetswillcometoastandstill。
Letussupposeasamerehypothesisatthisstageoftheargument
thatthereissomeassete。g。moneyofwhichtherateofinterestisfixedordeclinesmoreslowlyasoutputincreasesthandoesanyothercommodity'srateofinterest；howisthepositionadjusted？Sincea1q1，a2-c2andl3arenecessarilyequal，andsincel3byhypothesisiseitherfixedorfallingmoreslowlythanq1or-c2，itfollowsthata1anda2mustberising。
Inotherwords，thepresentmoney-priceofeverycommodityotherthanmoneytendstofallrelativelytoitsexpectedfutureprice。Hence，ifq1and-c2continuetofall，apointcomesatwhichitisnotprofitabletoproduceanyofthecommodities，unlessthecostofproductionatsomefuturedateisexpectedtoriseabovethepresentcostbyanamountwhichwillcoverthecostofcarryingastockproducednowtothedateoftheprospectivehigherprice。
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Itisnowapparentthatourpreviousstatementtotheeffectthatitisthemoney-rateofinterestwhichsetsalimittotherateofoutput，isnotstrictlycorrect。Weshouldhavesaidthatitisthatasset'srateofinterestwhichdeclinesmostslowlyasthestockofassetsingeneralincreases，whicheventuallyknocksouttheprofitableproductionofeachoftheothers，¾；exceptinthecontingency，justmentioned，ofaspecialrelationshipbetweenthepresentandprospectivecostsofproduction。Asoutputincreases，own-ratesofinterestdeclinetolevelsatwhichoneassetafteranotherfallsbelowthestandardofprofitableproduction；¾；until，finally，oneormoreown-ratesofinterestremainatalevelwhichisabovethatofthemarginalefficiencyofanyassetwhatever。
Ifbymoneywemeanthestandardofvalue，itisclearthatitisnotnecessarilythemoney-rateofinterestwhichmakesthetrouble。
Wecouldnotgetoutofourdifficultiesassomehavesupposedmerelybydecreeingthatwheatorhousesshallbethestandardofvalueinsteadofgoldorsterling。For，itnowappearsthatthesamedifficultieswillensueiftherecontinuestoexistanyassetofwhichtheown-rateofinterestisreluctanttodeclineasoutputincreases。Itmaybe，forexample，thatgoldwillcontinuetofillthisr6leinacountrywhichhasgoneovertoaninconvertiblepaperstandard。
III
Inattributing，therefore，apeculiarsignificancetothemoney-rateofinterest，wehavebeentacitlyassumingthatthekindofmoneytowhichweareaccustomedhassomespecialcharacteristicswhichleadtoitsown-rateofinterestintermsofitselfasstandardbeingmorereluctanttofallasthestockofassetsingeneralincreasesthantheown-ratesofinterestofanyotherassetsintermsofthemselves。Isthisassumptionjustified？
Reflectionshows，Ithink，thatthefollowingpeculiarities，which[Page230]THE
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commonlycharacterisemoneyasweknowit，arecapableofjustifyingit。Totheextentthattheestablishedstandardofvaluehasthesepeculiarities，thesummarystatement，thatitisthemoney-rateofinterestwhichisthesignificantrateofinterest，willholdgood。
iThefirstcharacteristicwhichtendstowardstheaboveconclusionisthefactthatmoneyhas，bothinthelongandintheshortperiod，azero，oratanyrateaverysmall，elasticityofproduction，sofarasthepowerofprivateenterpriseisconcerned，asdistinctfromthemonetaryauthority；¾；elasticityofproduction[
120]meaning，inthiscontext，theresponseofthequantityoflabourappliedtoproducingittoariseinthequantityoflabourwhichaunitofitwillcommand。Money，thatistosay，cannotbereadilyproduced；¾；labourcannotbeturnedonatwillbyentrepreneurstoproducemoneyinincreasingquantitiesasitspricerisesintermsofthewage-unit。Inthecaseofaninconvertiblemanagedcurrencythisconditionisstrictlysatisfied。
Butinthecaseofagold-standardcurrencyitisalsoapproximatelyso，inthesensethatthemaximumproportionaladditiontothequantityoflabourwhichcanbethusemployedisverysmall，exceptindeedinacountryofwhichgold-miningisthemajorindustry。
Now，inthecaseofassetshavinganelasticityofproduction，thereasonwhyweassumedtheirown-rateofinteresttodeclinewasbecauseweassumedthestockofthemtoincreaseastheresultofahigherrateofoutput。
Inthecaseofmoney，however¾；postponing，forthemoment，ourconsiderationoftheeffectsofreducingthewage-unitorofadeliberateincreaseinitssupplybythemonetaryauthority¾；thesupplyisfixed。Thusthecharacteristicthatmoneycannotbereadilyproducedbylabourgivesatoncesomeprimafaciepresumptionfortheviewthatitsown-rateofinterestwillberelativelyreluctanttofall；whereasifmoneycouldbegrownlikeacropormanufactured[Page231]PROPERTIES
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likeamotor-car，depressionswouldbeavoidedormitigatedbecause，ifthepriceofotherassetswastendingtofallintermsofmoney，morelabourwouldbedivertedintotheproductionofmoney；¾；asweseetobethecaseingold-miningcountries，thoughfortheworldasawholethemaximumdiversioninthiswayisalmostnegligible。
iiObviously，however，theaboveconditionissatisfied，notonlybymoney，butbyallpurerent-factors，theproductionofwhichiscompletelyinelastic。Asecondcondition，therefore，isrequiredtodistinguishmoneyfromotherrentelements。
Theseconddifferentiaofmoneyisthatithasanelasticityofsubstitutionequal，ornearlyequal，tozerowhichmeansthatastheexchangevalueofmoneyrisesthereisnotendencytosubstitutesomeotherfactorforit；¾；except，perhaps，tosometriflingextent，wherethemoney-commodityisalsousedinmanufactureorthearts。Thisfollowsfromthepeculiarityofmoneythatirsutilityissolelyderivedfromitsexchange-value，sothatthetworiseandfallparipassu，withtheresultthatastheexchangevalueofmoneyrisesthereisnomotiveortendency，asinthecaseofrent-factors，tosubstitutesomeotherfactorforit。
Thus，notonlyisitimpossibletoturnmorelabourontoproducingmoneywhenitslabour-pricerises，butmoneyisabottomlesssinkforpurchasingpower，whenthedemandforitincreases，sincethereisnovalueforitatwhichdemandisdiverted¾；asinthecaseofotherrent-factors¾；soastoslopoverintoademandforotherthings。
Theonlyqualificationtothisariseswhentheriseinthevalueofmoneyleadstouncertaintyastothefuturemaintenanceofthisrise；inwhichevent，a1anda2areincreased，whichistantamounttoanincreaseinthecommodity-ratesofmoney-interestandis，therefore，stimulatingtotheoutputofotherassets。
iiiThirdly，wemustconsiderwhetherthesecon-
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clusionsareupsetbythefactthat，eventhoughthequantityofmoneycannotbeincreasedbydivertinglabourintopro4ucingit，neverthelessanassumptionthatitseffectivesupplyisrigidlyfixedwouldbeinaccurate。
Inparticular，areductionofthewage-unitwillreleasecashfromitsotherusesforthesatisfactionoftheliquidity-motive；whilst，inadditiontothis，asmoney-valuesfall，thestockofmoneywillbearahigherproportiontothetotalwealthofthecommunity。
Itisnotpossibletodisputeonpurelytheoreticalgroundsthatthisreactionmightbecapableofallowinganadequatedeclineinthemoney-rateofinterest。Thereare，however，severalreasons，whichtakenincombinationareofcompellingforce，whyinaneconomyofthetypetowhichweareaccustomeditisveryprobablethatthemoney-rateofinterestwilloftenprovereluctanttodeclineadequately:
aWehavetoallow，firstofall，forthereactionsofafallinthewage-unitonthemarginalefficienciesofotherassetsintermsofmoney；¾；foritisthedifferencebetweentheseandthemoney-rateofinterestwithwhichweareconcerned。
Iftheeffectofthefallinthewage-unitistoproduceanexpectationthatitwillsubsequentlyriseagain，theresultwillbewhollyfavourable。
If，onthecontrary，theeffectistoproduceanexpectationofafurtherfall，thereactiononthemarginalefficiencyofcapitalmayoffsetthedeclineintherateofinterest。[121]
bThefactthatwagestendtobestickyintermsofmoney，themoney-wagebeingmorestablethantherealwage，tendstolimitthereadinessofthewage-unittofallintermsofmoney。Moreover，ifthiswerenotso，thepositionmightbeworseratherthanbetter；because，ifmoney-wagesweretofalleasily，thismightoftentendtocreateanexpectationofafurtherfallwithunfavourablereactionsonthemarginalefficiencyofcapital。
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Furthermore，ifwagesweretobefixedintermsofsomeothercommodity，e。g。wheat，itisimprobablethattheywouldcontinuetobesticky。Itisbecauseofmoney'sothercharacteristics¾；those，especially，whichmakeitliquid¾；thatwages，whenfixedintermsofit，tendtobesticky。[122]
cThirdly，wecometowhatisthemostfundamentalconsiderationinthiscontext，namely，thecharacteristicsofmoneywhichsatisfyliquidity-preference。
For，incertaincircumstancessuchaswilloftenoccur，thesewillcausetherateofinteresttobeinsensitive，particularlybelowacertainfigure，[123]eventoasubstantialincreaseinthequantityofmoneyinproportiontootherformsofwealth。Inotherwords，beyondacertainpointmoney'syieldfromliquiditydoesnotfallinresponsetoanincreaseinitsquantitytoanythingapproachingtheextenttowhichtheyieldfromothertypesofassetsfallswhentheirquantityiscomparablyincreased。
Inthisconnectionthelowornegligiblecarrying-costsofmoneyplayanessentialpart。Forifitscarryingcostswerematerial，theywouldoffsettheeffectofexpectationsastotheprospectivevalueofmoneyatfuturedates。Thereadinessofthepublictoincreasetheirstockofmoneyinresponsetoacomparativelysmallstimulusisduetotheadvantagesofliquidityrealorsupposedhavingnooffsettocontendwithintheshapeofcarrying-costsmountingsteeplywiththelapseoftime。Inthecaseofacommodityotherthanmoneyamodeststockofitmayoffersomeconveniencetousersofthecommodity。Buteventhoughalargerstockmighthavesomeattractionsasrepresentingastoreofwealthofstablevalue，thiswouldbeoffsetbyitscarrying-costsintheshapeofstorage，wastage，etc。
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Hence，afteracertainpointisreached，thereisnecessarilyalossinholdingagreaterstock。
Inthecaseofmoney，however，this，aswehaveseen，isnotso，¾；andforavarietyofreasons，namely，thosewhichconstitutemoneyasbeing，intheestimationofthepublic，parexcellence'liquid'。Thusthosereformers，wholookforaremedybycreatingartificialcarrying-costsformoneythroughthedeviceofrequiringlegal-tendercurrencytobeperiodicallystampedataprescribedcostinordertoretainitsqualityasmoney，orinanalogousways，havebeenontherighttrack；andthepracticalvalueoftheirproposalsdeservesconsideration。
Thesignificanceofthemoney-rateofinterestarises，therefore，outofthecombinationofthecharacteristicsthat，throughtheworkingoftheliquidity-motive，thisrateofinterestmaybesomewhatunresponsivetoachangeintheproportionwhichthequantityofmoneybearstootherformsofwealthmeasuredinmoney，andthatmoneyhasormayhavezeroornegligibleelasticitiesbothofproductionandofsubstitution。Thefirstconditionmeansthatdemandmaybepredominantlydirectedtomoney，thesecondthatwhenthisoccurslabourcannotbeemployedinproducingmoremoney，andthethirdthatthereisnomitigationatanypointthroughsomeotherfactorbeingcapable，ifitissufficientlycheap，ofdoingmoney'sdutyequallywell。Theonlyrelief¾；apartfromchangesinthemarginalefficiencyofcapital¾；cancomesolongasthepropensitytowardsliquidityisunchangedfromanincreaseinthequantityofmoney，or¾；whichisformallythesamething¾；ariseinthevalueofmoneywhichenablesagivenquantitytoprovideincreasedmoney-services。
Thusariseinthemoney-rateofinterestretardstheoutputofalltheobjectsofwhichtheproductioniselasticwithoutbeingcapableofstimulatingtheoutputofmoneytheproductionofwhichis，byhypothesis，[Page235]PROPERTIES
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perfectlyinelastic。Themoney-rateofinterest，bysettingthepaceforalltheothercommodity-ratesofinterest，holdsbackinvestmentintheproductionoftheseothercommoditieswithoutbeingcapableofstimulatinginvestmentfortheproductionofmoney，whichbyhypothesiscannotbeproduced。
Moreover，owingtotheelasticityofdemandforliquidcashintermsofdebts，asmallchangeintheconditionsgoverningthisdemandmaynotmuchalterthemoney-rateofinterest，whilstapartfromofficialactionitisalsoimpracticable，owingtotheinelasticityoftheproductionofmoney，fornaturalforcestobringthemoney-rateofinterestdownbyaffectingthesupplyside。Inthecaseofanordinarycommodity，theinelasticityofthedemandforliquidstocksofitwouldenablesmallchangesonthedemandsidetobringitsrateofinterestupordownwitharush，whilsttheelasticityofitssupplywouldalsotendtopreventahighpremiumonspotoverforwarddelivery。Thuswithothercommoditieslefttothemselves，'naturalforces，'i。e。theordinaryforcesofthemarket，wouldtendtobringtheirrateofinterestdownuntiltheemergenceoffullemploymenthadbroughtaboutforcommoditiesgenerallytheinelasticityofsupplywhichwehavepostulatedasanormalcharacteristicofmoney。Thusintheabsenceofmoneyandintheabsence¾；wemust，ofcourse，alsosuppose¾；ofanyothercommoditywiththeassumedcharacteristicsofmoney，theratesofinterestwouldonlyreachequilibriumwhenthereisfullemployment。Unemploymentdevelops，thatistosay，becausepeoplewantthemoon；¾；mencannotbeemployedwhentheobjectofdesirei。e。moneyissomethingwhichcannotbeproducedandthedemandforwhichcannotbereadilychokedoff。Thereisnoremedybuttopersuadethepublicthatgreencheeseispracticallythesamethingandtohaveagreencheesefactoryi。e。acentralbankunderpubliccontrol。
Itisinterestingtonoticethatthecharacteristic[Page236]THE
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whichhasbeentraditionallysupposedtorendergoldespeciallysuitableforuseasthestandardofvalue，namely，itsinelasticityofsupply，turnsouttobepreciselythecharacteristicwhichisatthebottomofthetrouble。
Ourconclusioncanbestatedinthemostgeneralformtakingthepropensitytoconsumeasgivenasfollows。Nofurtherincreaseintherateofinvestmentispossiblewhenthegreatestamongsttheown-ratesofown-interestofallavailableassetsisequaltothegreatestamongstthemarginalefficienciesofallassets，measuredintermsoftheassetwhoseown-rateofown-interestisgreatest。
Inapositionoffullemploymentthisconditionisnecessarilysatisfied。
Butitmayalsobesatisfiedbeforefullemploymentisreached，ifthereexistssomeasset，havingzeroorrelativelysmallelasticitiesofproductionandsubstitution，[124]whoserateofinterestdeclinesmoreclosely，asoutputincreases，thanthemarginalefficienciesofcapital-assetsmeasuredintermsofit。
IV
Wehaveshownabovethatforacommoditytobethestandardofvalueisnotasufficientconditionforthatcommodity'srateofinteresttobethesignificantrateofinterest。Itis，however，interestingtoconsiderhowfarthosecharacteristicsofmoneyasweknowit，whichmakethemoney-rateofinterestthesignificantrate，areboundupwithmoneybeingthestandardinwhichdebtsandwagesareusuallyfixed。Thematterrequiresconsiderationundertwoaspects。
Inthefirstplace，thefactthatcontractsarefixed，andwagesareusuallysomewhatstable，intermsofmoneyunquestionablyplaysalargepartinattractingtomoneysohighaliquidity-premium。Theconveni-
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enceofholdingassetsinthesamestandardasthatinwhichfutureliabilitiesmayfalldueandinastandardintermsofwhichthefuturecostoflivingisexpectedtoberelativelystable，isobvious。Atthesametimetheexpectationofrelativestabilityinthefuturemoney-costofoutputmightnotbeentertainedwithmuchconfidenceifthestandardofvaluewereacommoditywithahighelasticityofproduction。Moreover，thelowcarrying-costsofmoneyasweknowitplayquiteaslargeapartasahighliquidity-premiuminmakingthemoney-rateofinterestthesignificantrate。Forwhatmattersisthedifferencebetweentheliquidity-premiumandthecarrying-costs；andinthecaseofmostcommodities，otherthansuchassetsasgoldandsilverandbank-notes，thecarrying-costsareatleastashighastheliquidity-premiumordinarilyattachingtothestandardinwhichcontractsandwagesarefixed，sothat，eveniftheliquidity-premiumnowattachingtoe。g。sterling-moneyweretobetransferredtoe。g。
wheat，thewheat-rateofinterestwouldstillbeunlikelytoriseabovezero。Itremainsthecase，therefore，that，whilstthefactofcontractsandwagesbeingfixedintermsofmoneyconsiderablyenhancesthesignificanceofthemoney-rateofinterest，thiscircumstanceis，nevertheless，probablyinsufficientbyitselftoproducetheobservedcharacteristicsofthemoney-rateofinterest。
Thesecondpointtobeconsideredismoresubtle。Thenormalexpectationthatthevalueofoutputwillbemorestableintermsofmoneythanintermsofanyothercommodity，dependsofcourse，notonwagesbeingarrangedintermsofmoney，butonwagesbeingrelativelystickyintermsofmoney。What，then，wouldthepositionbeifwageswereexpectedtobemorestickyi。e。morestableintermsofsomeoneormorecommoditiesotherthanmoney，thanintermsofmoneyitself？Suchanexpectationrequires，notonlythatthecostsofthecommodityinquestionareexpectedtoberelativelyconstantintermsofthewage-unitfor[Page238]THE
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agreaterorsmallerscaleofoutputbothintheshortandinthelongperiod，butalsothatanysurplusoverthecurrentdemandatcost-pricecanbetakenintostockwithoutcost，i。e。thatitsliquidity-premiumexceedsitscarrying-costsfor，otherwise，sincethereisnohopeofprofitfromahigherprice，thecarryingofastockmustnecessarilyinvolvealoss。
Ifacommoditycanbefoundtosatisfytheseconditions，then，assuredly，itmightbesetupasarivaltomoney。Thusitisnotlogicallyimpossiblethatthereshouldbeacommodityintermsofwhichthevalueofoutputisexpectedtobemorestablethanintermsofmoney。Butitdoesnotseemprobablethatanysuchcommodityexists。
Iconclude，therefore，thatthecommodity，intermsofwhichwagesareexpectedtobemoststicky，cannotbeonewhoseelasticityofproductionisnotleast，andforwhichtheexcessofcarrying-costsoverliquidity-premiumisnotleast。Inotherwords，theexpectationofarelativestickinessofwagesintermsofmoneyisacorollaryoftheexcessofliquidity-premiumovercarrying-costsbeinggreaterformoneythanforanyotherasset。
Thusweseethatthevariouscharacteristics，whichcombinetomakethemoney-rateofinterestsignificant，interactwithoneanotherinacumulativefashion。Thefactthatmoneyhaslowelasticitiesofproductionandsubstitutionandlowcarrying-coststendstoraisetheexpectationthatmoney-wageswillberelativelystable；andthisexpectationenhancesmoney'sliquidity-premiumandpreventstheexceptionalcorrelationbetweenthemoney-rateofinterestandthemarginalefficienciesofotherassetswhichmight，ifitcouldexist，robthemoney-rateofinterestofitssting。
ProfessorPigouwithothershasbeenaccustomedtoassumethatthereisapresumptioninfavourofrealwagesbeingmorestablethanmoney-wages。
Butthiscouldonlybethecaseiftherewereapresumptionin[Page239]PROPERTIES
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favourofstabilityofemployment。Moreover，thereisalsothedifficultythatwage-goodshaveahighcarrying-cost。If，indeed，someattemptweremadetostabiliserealwagesbyfixingwagesintermsofwage-goods，theeffectcouldonlybetocauseaviolentoscillationofmoney-prices。Foreverysmallfluctuationinthepropensitytoconsumeandtheinducementtoinvestwouldcausemoney-pricestorushviolentlybetweenzeroandinfinity。
Thatmoney-wagesshouldbemorestablethanrealwagesisaconditionofthesystempossessinginherentstability。Thustheattributionofrelativestabilitytorealwagesisnotmerelyamistakeinfactandexperience。
Itisalsoamistakeinlogic，ifwearesupposingthatthesysteminviewisstable，inthesensethatsmallchangesinthepropensitytoconsumeandtheinducementtoinvestdonotproduceviolenteffectsonprices。
V
Asafootnotetotheabove，itmaybeworthemphasisingwhathasbeenalreadystatedabove，namely，that'liquidity'and'carrying-costs'arebothamatterofdegree；andthatitisonlyinhavingtheformerhighrelativelytothelatterthatthepeculiarityof'money'consists。
Consider，forexample，aneconomyinwhichthereisnoassetforwhichtheliquidity-premiumisalwaysinexcessofthecarrying-costs；whichisthebestdefinitionIcangiveofaso-called'non-monetary'economy。
Thereexistsnothing，thatistosay，butparticularconsumablesandparticularcapitalequipmentsmoreorlessdifferentiatedaccordingtothecharacteroftheconsumableswhichtheycanyieldup，orassisttoyieldup，overagreaterorashorterperiodoftime；allofwhich，unlikecash，deteriorateorinvolveexpense，iftheyarekeptinstock，toavalueinexcessofanyliquidity-premiumwhichmayattachtothem。
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Insuchaneconomycapitalequipmentswilldifferfromoneanothera
inthevarietyoftheconsumablesintheproductionofwhichtheyarecapableofassisting，binthestabilityofvalueoftheiroutputinthesenseinwhichthevalueofbreadismorestablethroughtimethanthevalueoffashionablenovelties，andcintherapiditywithwhichthewealthembodiedinthemcanbecome'liquid'，inthesenseofproducingoutput，theproceedsofwhichcanbere-embodiedifdesiredinquiteadifferentform。
Theownersofwealthwillthenweighthelackof'liquidity'ofdifferentcapitalequipmentsintheabovesenseasamediuminwhichtoholdwealthagainstthebestavailableactuarialestimateoftheirprospectiveyieldsafterallowingforrisk。Theliquidity-premium，itwillbeobserved，ispartlysimilartotherisk-premium，butpartlydifferent；¾；thedifferencecorrespondingtothedifferencebetweenthebestestimateswecanmakeofprobabilitiesandtheconfidencewithwhichwemakethem。[
125]Whenweweredealing，inearlierchapters，withtheestimationofprospectiveyield，wedidnotenterintodetailastohowtheestimationismade:andtoavoidcomplicatingtheargument，wedidnotdistinguishdifferencesinliquidityfromdifferencesinriskproper。Itisevident，however，thatincalculatingtheown-rateofinterestwemustallowforboth。
Thereis，clearly，noabsolutestandardof'liquidity'butmerelyascaleofliquidity¾；avaryingpremiumofwhichaccounthastobetaken，inadditiontotheyieldofuseandthecarrying-costs，inestimatingthecomparativeattractionsofholdingdifferentformsofwealth。Theconceptionofwhatcontributesto'liquidity'isapartlyvagueone，changingfromtimetotimeanddependingonsocialpracticesandinstitutions。Theorderofpreferenceinthemindsofownersofwealthinwhichatanygiventimetheyexpresstheirfeelingsaboutliquidityis，however，definiteandisallwerequire[Page241]PROPERTIES
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forouranalysisofthebehaviouroftheeconomicsystem。
Itmaybethatincertainhistoricenvironmentsthepossessionoflandhasbeencharacterisedbyahighliquidity-premiuminthemindsofownersofwealth；andsincelandresemblesmoneyinthatitselasticitiesofproductionandsubstitutionmaybeverylow，[126]itisconceivablethattherehavebeenoccasionsinhistoryinwhichthedesiretoholdlandhasplayedthesamerô；leinkeepinguptherateofinterestattoohighalevelwhichmoneyhasplayedinrecenttimes。Itisdifficulttotracethisinfluencequantitativelyowingtotheabsenceofaforwardpriceforlandintermsofitselfwhichisstrictlycomparablewiththerateofinterestonamoneydebt。Wehave，however，somethingwhichhas，attimes，beencloselyanalogous，intheshapeofhighratesofinterestonmortgages。[127]Thehighratesofinterestfrommortgagesonland，oftenexceedingtheprobablenetyieldfromcultivatingtheland，havebeenafamiliarfeatureofmanyagriculturaleconomies。Usurylawshavebeendirectedprimarilyagainstencumbrancesofthischaracter。Andrightlyso。Forinearliersocialorganisationwherelong-termbondsinthemodernsensewerenon-existent，thecompetitionofahighinterest-rateonmortgagesmaywellhavehadthesameeffectinretardingthegrowthofwealthfromcurrentinvestmentinnewlyproducedcapital-assets，ashighinterestratesonlong-termdebtshavehadinmorerecenttimes。
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Thattheworldafterseveralmillenniaofsteadyindividualsaving，issopoorasitisinaccumulatedcapital-assets，istobeexplained，inmyopinion，neitherbytheimprovidentpropensitiesofmankind，norevenbythedestructionofwar，butbythehighliquidity-premiumsformerlyattachingtotheownershipoflandandnowattachingtomoney。IdifferinthisfromtheolderviewasexpressedbyMarshallwithanunusualdogmaticforceinhisPrinciplesofEconomics，p。581:Everyoneisawarethattheaccumulationofwealthisheldincheck，andtherateofinterestsofarsustained，bythepreferencewhichthegreatmassofhumanityhaveforpresentoverdeferredgratifications，or，inotherwords，bytheirunwillingnessto'wait'。VI
InmyTreatiseonMoneyIdefinedwhatpurportedtobeauniquerateofinterest，whichIcalledthenaturalrateofinterest¾；namely，therateofinterestwhich，intheterminologyofmyTreatise，preservedequalitybetweentherateofsavingastheredefinedandtherateofinvestment。IbelievedthistobeadevelopmentandclarificationofWicksell's'naturalrateofinterest'，whichwas，accordingtohim，theratewhichwouldpreservethestabilityofsome，notquiteclearlyspecified，price-level。
Ihad，however，overlookedthefactthatinanygivensocietythereis，onthisdefinition，adifferentnaturalrateofinterestforeachhypotheticallevelofemployment。And，similarly，foreveryrateofinterestthereisalevelofemploymentforwhichthatrateisthe'natural'
rate，inthesensethatthesystemwillbeinequilibriumwiththatrateofinterestandthatlevelofemployment。Thusitwasamistaketospeakofthenaturalrateofinterestortosuggestthattheabovedefinitionwouldyieldauniquevaluefortherateofinterestirrespectiveofthelevelofemployment。Ihad[Page243]PROPERTIES
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notthenunderstoodthat，incertainconditions，thesystemcouldbeinequilibriumwithlessthanfullemployment。
Iamnownolongeroftheopinionthattheconceptofa'natural'rateofinterest，whichpreviouslyseemedtomeamostpromisingidea，hasanythingveryusefulorsignificanttocontributetoouranalysis。Itismerelytherateofinterestwhichwillpreservethestatusquo；and，ingeneral，wehavenopredominantinterestinthestatusquoassuch。
Ifthereisanysuchrateofinterest，whichisuniqueandsignificant，itmustbetheratewhichwemighttermtheneutralrateofinterest，[128]namely，thenaturalrateintheabovesensewhichisconsistentwithfullemployment，giventheotherparametersofthesystem；
thoughthisratemightbebetterdescribed，perhaps，astheoptimumrate。
Theneutralrateofinterestcanbemorestrictlydefinedastherateofinterestwhichprevailsinequilibriumwhenoutputandemploymentaresuchthattheelasticityofemploymentasawholeiszero。[129]
Theabovegivesus，onceagain，theanswertothequestionastowhattacitassumptionisrequiredtomakesenseoftheclassicaltheoryoftherateofinterest。Thistheoryassumeseitherthattheactualrateofinterestisalwaysequaltotheneutralrateofinterestinthesenseinwhichwehavejustdefinedthelatter，oralternativelythattheactualrateofinterestisalwaysequaltotherateofinterestwhichwillmaintainemploymentatsomespecifiedconstantlevel。Ifthetraditionaltheoryisthusinterpreted，thereislittleornothinginitspracticalconclusionstowhichweneedtakeexception。Theclassicaltheoryassumesthatthebankingauthorityornaturalforcescausethemarket-rateofinterestto[Page244]THE
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satisfyoneorotheroftheaboveconditions；anditinvestigateswhatlawswillgoverntheapplicationandrewardsofthecommunity'sproductiveresourcessubjecttothisassumption。Withthislimitationinforce，thevolumeofoutputdependssolelyontheassumedconstantlevelofemploymentinconjunctionwiththecurrentequipmentandtechnique；andwearesafelyensconcedinaRicardianworld。PropertiesofInterestandMoney[Page222]
Chapter17
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I
Itseems，then，thattherateofinterestonmoneyplaysapeculiarpartinsettingalimittothelevelofemployment，sinceitsetsastandardtowhichthemarginalefficiencyofacapital-assetmustattainifitistobenewlyproduced。Thatthisshouldbeso，is，atfirstsight，mostperplexing。Itisnaturaltoenquirewhereinthepeculiarityofmoneyliesasdistinctfromotherassets，whetheritisonlymoneywhichhasarateofinterest，andwhatwouldhappeninanon-monetaryeconomy。Untilwehaveansweredthesequestions，thefullsignificanceofourtheorywillnotbeclear。
Themoney-rateofinterest¾；wemayremindthereader¾；isnothingmorethanthepercentageexcessofasumofmoneycontractedforforwarddelivery，e。g。ayearhence，overwhatwemaycallthe'spot'orcashpriceofthesumthuscontractedforforwarddelivery。Itwouldseem，therefore，thatforeverykindofcapital-assettheremustbeananalogueoftherateofinterestonmoney。Forthereisadefinitequantityofe。g。wheattobedeliveredayearhencewhichhasthesameexchangevalueto-dayas100
quartersofwheatfor'spot'delivery。Iftheformerquantityis105quarters，wemaysaythatthewheat-rateofinterestis5percentperannum；andifjtis95quarters，thatitisminus5percentperannum。Thusforeverydurablecommoditywehavearateofinterestintermsofitself；¾；a[Page223]PROPERTIES
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wheat-rateofinterest，acopper-rateofinterest，ahouse-rateofinterest，evenasteel-plant-rateofinterest。
Thedifferencebetweenthe'future'and'spot'contractsforacommodity，suchaswheat，whicharequotedinthemarket，bearsadefiniterelationtothewheat-rateofinterest，but，sincethefuturecontractisquotedintermsofmoneyforforwarddeliveryandnotintermsofwheatforspotdelivery，italsobringsinthemoney-rateofinterest。Theexactrelationshipisasfollows:
Letussupposethatthespotpriceofwheatis£；100per100quarters，thatthepriceofthe'future'contractforwheatfordeliveryayearhenceis£；107per100quarters，andthatthemoney-rateofinterestis5percent；whatisthewheat-rateofinterest？£；100spotwillbuy£；105forforwarddelivery，and£；105forforwarddeliverywillbuy105/107×；100=98quartersforforwarddelivery。Alternatively£；100spotwillbuy100quartersofwheatforspotdelivery。Thus100quartersofwheatforspotdeliverywillbuy98quartersforforwarddelivery。Itfollowsthatthewheat-rateofinterestisminus2
percentperannum。[119]
Itfollowsfromthisthatthereisnoreasonwhytheirratesofinterestshouldbethesamefordifferentcommodities，¾；whythewheat-rateofinterestshouldbeequaltothecopper-rateofinterest。
Fortherelationbetweenthe'spot'and'future'contracts，asquotedinthemarket，isnotoriouslydifferentfordifferentcommodities。This，weshallfind，willleadustotheclueweareseeking。Foritmaybethatitisthegreatestoftheown-ratesofinterestaswemaycallthemwhichrulestheroostbecauseitisthegreatestoftheseratesthatthemarginalefficiencyofacapital-assetmustattainifitistobenewlyproduced；andthattherearereasonswhyitisthemoney-rateofinterestwhichisoftenthegreatestbecause，asweshallfind，certain[Page224]THE
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forces，whichoperatetoreducetheown-ratesofinterestofotherassets，donotoperateinthecaseofmoney。
Itmaybeaddedthat，justastherearedifferingcommodity-ratesofinterestatanytime，soalsoexchangedealersarefamiliarwiththefactthattherateofinterestisnoteventhesameintermsoftwodifferentmoneys，e。g。sterlinganddollars。Forherealsothedifferencebetweenthe'spot'and'future'contractsforaforeignmoneyintermsofsterlingarenot，asarule，thesamefordifferentforeignmoneys。
Noweachofthesecommoditystandardsoffersusthesamefacilityasmoneyformeasuringthemarginalefficiencyofcapital。Forwecantakeanycommoditywechoose，e。g。wheat；calculatethewheat-valueoftheprospectiveyieldsofanycapitalasset；andtherateofdiscountwhichmakesthepresentvalueofthisseriesofwheatannuitiesequaltothepresentsupplypriceoftheassetintermsofwheatgivesusthemarginalefficiencyoftheassetintermsofwheat。Ifnochangeisexpectedintherelativevalueoftwoalternativestandards，thenthemarginalefficiencyofacapital-assetwillbethesameinwhicheverofthetwostandardsitismeasured，sincethenumeratoranddenominatorofthefractionwhichleadsuptothemarginalefficiencywillbechangedinthesameproportion。If，however，oneofthealternativestandardsisexpectedtochangeinvalueintermsoftheother，themarginalefficienciesofcapital-assetswillbechangedbythesamepercentage，accordingtowhichstandardtheyaremeasuredin。Toillustratethisletustakethesimplestcasewherewheat，oneofthealternativestandards，isexpectedtoappreciateatasteadyrateofapercentperannumintermsofmoney；themarginalefficiencyofanasset，whichisxpercentintermsofmoney，willthenbex-apercentintermsofwheat。Sincethemarginalefficienciesofallcapital-assetswillbealteredbythesameamount，itfollowsthattheirorderofmagnitudewillbethesameirrespectiveofthestandardwhichisselected。
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Ifthereweresomecompositecommoditywhichcouldberegardedstrictlyspeakingasrepresentative，wecouldregardtherateofinterestandthemarginalefficiencyofcapitalintermsofthiscommodityasbeing，inasense，uniquelytherateofinterestandthemarginalefficiencyofcapital。Butthereare，ofcourse，thesameobstaclesinthewayofthisastherearetosettingupauniquestandardofvalue。
Sofar，therefore，themoney-rateofinteresthasnouniquenesscomparedwithotherratesofinterest，butisonpreciselythesamefooting。Wherein，then，liesthepeculiarityofthemoney-rateofinterestwhichgivesitthepredominatingpracticalimportanceattributedtoitintheprecedingchapters？Whyshouldthevolumeofoutputandemploymentbemoreintimatelyboundupwiththemoney-rateofinterestthanwiththewheat-rateofinterestorthehouse-rateofinterest？
II
Letusconsiderwhatthevariouscommodity-ratesofinterestoveraperiodofsayayeararelikelytobefordifferenttypesofassets。
Sincewearetakingeachcommodityinturnasthestandard，thereturnsoneachcommoditymustbereckonedinthiscontextasbeingmeasuredintermsofitself。
Therearethreeattributeswhichdifferenttypesofassetspossessindifferentdegrees；namely，asfollows:
iSomeassetsproduceayieldoroutputq，measuredintermsofthemselves，byassistingsomeprocessofproductionorsupplyingservicestoaconsumer。
iiMostassets，exceptmoney，suffersomewastageorinvolvesomecostthroughthemerepassageoftimeapartfromanychangeintheirrelativevalue，irrespectiveoftheirbeingusedtoproduceayield；i。e。
theyinvolveacarryingcostcmeasuredintermsofthemselves。
Itdoesnotmatterforourpresentpur-
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poseexactlywherewedrawthelinebetweenthecostswhichwedeductbeforecalculatingqandthosewhichweincludeinc，sinceinwhatfollowsweshallbeexclusivelyconcernedwithq-c。
iiiFinally，thepowerofdisposaloveranassetduringaperiodmayofferapotentialconvenienceorsecurity，whichisnotequalforassetsofdifferentkinds，thoughtheassetsthemselvesareofequalinitialvalue。
Thereis，sotospeak，nothingtoshowforthisattheendoftheperiodintheshapeofoutput；yetitissomethingforwhichpeoplearereadytopaysomething。Theamountmeasuredintermsofitselfwhichtheyarewillingtopayforthepotentialconvenienceorsecuritygivenbythispowerofdisposalexclusiveofyieldorcarryingcostattachingtotheasset，weshallcallitsliquidity-premiuml。
Itfollowsthatthetotalreturnexpectedfromtheownershipofanassetoveraperiodisequaltoitsyieldminusitscarryingcostplusitsliquidity-premium，i。e。toq-cl。Thatistosay，q-clistheown-rateofinterestofanycommodity，whereq，candlaremeasuredintermsofitselfasthestandard。
Itischaracteristicofinstrumentalcapitale。g。amachineorofconsumptioncapitale。g。ahousewhichisinuse，thatitsyieldshouldnormallyexceeditscarryingcost，whilstitsliquidity-premiumisprobablynegligible；ofastockofliquidgoodsorofsurpluslaid-upinstrumentalorconsumptioncapitalthatitshouldincuracarryingcostintermsofitselfwithoutanyyieldtosetoffagainstit，theliquidity-premiuminthiscasealsobeingusuallynegligibleassoonasstocksexceedamoderatelevel，thoughcapableofbeingsigmficantinspecialcircumstances；andofmoneythatitsyieldisnilanditscarryingcostnegligible，butitsliquidity-premiumsubstantial。Differentcommoditiesmay，indeed，havedifferingdegreesofliquidity-premiumamongstthemselves，andmoneymayincursomedegreeofcarryingcosts，e。g。forsafe[Page227]PROPERTIES
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custody。Butitisanessentialdifferencebetweenmoneyandallormostotherassetsthatinthecaseofmoneyitsliquidity-premiummuchexceedsitscarryingcost，whereasinthecaseofotherassetstheircarryingcostmuchexceedstheirliquidity-premium。Letus，forpurposesofillustration，assumethatonhousestheyieldisq1andthecarryingcostandliquidity-premiumnegligible；thatonwheatthecarryingcostisc2andtheyieldandliquidity-premiumnegligible；
andthatonmoneytheliquidity-premiumisl3andtheyieldandcarryingcostnegligible。Thatistosay，q1isthehouse-rateofinterest，-c2thewheat-rateofinterest，andl3themoney-rateofinterest。
Todeterminetherelationshipsbetweentheexpectedreturnsondifferenttypesofassetswhichareconsistentwithequilibrium，wemustalsoknowwhatthechangesinrelativevaluesduringtheyearareexpectedtobe。
Takingmoneywhichneedonlybeamoneyofaccountforthispurpose，andwecouldequallywelltakewheatasourstandardofmeasurement，lettheexpectedpercentageappreciationordepreciationofhousesbea1andofwheata2。q1，-c2andl3wehavecalledtheown-ratesofinterestofhouses，wheatandmoneyintermsofthemselvesasthestandardofvalue；i。e。q1isthehouse-rateofinterestintermsofhouses，-c2isthewheat-rateofinterestintermsofwheat，andl3isthemoney-rateofinterestintermsofmoney。Itwillalsobeusefultocalla1q1，a2-c2andl3，whichstandforthesamequantitiesreducedtomoneyasthestandardofvalue，thehouse-rateofmoney-interest，thewheat-rateofmoney-interestandthemoney-rateofmoney-interestrespectively。Withthisnotationitiseasytoseethatthedemandofwealth-ownerswillbedirectedtohouses，towheatortomoney，accordingasa1q1ora2-c2orl3isgreatest。Thusinequilibriumthedemand-pricesofhousesandwheatintermsofmoneywillbesuchthatthereisnothingtochooseinthewayofadvantagebetweenthealter-
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natives；¾；i。e。a1q1，a2-c2andl3willbeequal。Thechoiceofthestandardofvaluewillmakenodifferencetothisresultbecauseashiftfromonestandardtoanotherwillchangeallthetermsequally，i。e。byanamountequaltotheexpectedrateofappreciationordepreciationofthenewstandardintermsoftheold。
Nowthoseassetsofwhichthenormalsupply-priceislessthanthedemand-pricewillbenewlyproduced；andthesewillbethoseassetsofwhichthemarginalefficiencywouldbegreateronthebasisoftheirnormalsupply-price
thantherateofinterestbothbeingmeasuredinthesamestandardofvaluewhateveritis。Asthestockoftheassets，whichbeginbyhavingamarginalefficiencyatleastequaltotherateofinterest，isincreased，theirmarginalefficiencyforreasons，sufficientlyobvious，alreadygiven
tendstofall。Thusapointwillcomeatwhichitnolongerpaystoproducethem，unlesstherateofinterestfallsparipassu。Whenthereisnoassetofwhichthemarginalefficiencyreachestherateofinterest，thefurtherproductionofcapital-assetswillcometoastandstill。
Letussupposeasamerehypothesisatthisstageoftheargument
thatthereissomeassete。g。moneyofwhichtherateofinterestisfixedordeclinesmoreslowlyasoutputincreasesthandoesanyothercommodity'srateofinterest；howisthepositionadjusted？Sincea1q1，a2-c2andl3arenecessarilyequal，andsincel3byhypothesisiseitherfixedorfallingmoreslowlythanq1or-c2，itfollowsthata1anda2mustberising。
Inotherwords，thepresentmoney-priceofeverycommodityotherthanmoneytendstofallrelativelytoitsexpectedfutureprice。Hence，ifq1and-c2continuetofall，apointcomesatwhichitisnotprofitabletoproduceanyofthecommodities，unlessthecostofproductionatsomefuturedateisexpectedtoriseabovethepresentcostbyanamountwhichwillcoverthecostofcarryingastockproducednowtothedateoftheprospectivehigherprice。
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Itisnowapparentthatourpreviousstatementtotheeffectthatitisthemoney-rateofinterestwhichsetsalimittotherateofoutput，isnotstrictlycorrect。Weshouldhavesaidthatitisthatasset'srateofinterestwhichdeclinesmostslowlyasthestockofassetsingeneralincreases，whicheventuallyknocksouttheprofitableproductionofeachoftheothers，¾；exceptinthecontingency，justmentioned，ofaspecialrelationshipbetweenthepresentandprospectivecostsofproduction。Asoutputincreases，own-ratesofinterestdeclinetolevelsatwhichoneassetafteranotherfallsbelowthestandardofprofitableproduction；¾；until，finally，oneormoreown-ratesofinterestremainatalevelwhichisabovethatofthemarginalefficiencyofanyassetwhatever。
Ifbymoneywemeanthestandardofvalue，itisclearthatitisnotnecessarilythemoney-rateofinterestwhichmakesthetrouble。
Wecouldnotgetoutofourdifficultiesassomehavesupposedmerelybydecreeingthatwheatorhousesshallbethestandardofvalueinsteadofgoldorsterling。For，itnowappearsthatthesamedifficultieswillensueiftherecontinuestoexistanyassetofwhichtheown-rateofinterestisreluctanttodeclineasoutputincreases。Itmaybe，forexample，thatgoldwillcontinuetofillthisr6leinacountrywhichhasgoneovertoaninconvertiblepaperstandard。
III
Inattributing，therefore，apeculiarsignificancetothemoney-rateofinterest，wehavebeentacitlyassumingthatthekindofmoneytowhichweareaccustomedhassomespecialcharacteristicswhichleadtoitsown-rateofinterestintermsofitselfasstandardbeingmorereluctanttofallasthestockofassetsingeneralincreasesthantheown-ratesofinterestofanyotherassetsintermsofthemselves。Isthisassumptionjustified？
Reflectionshows，Ithink，thatthefollowingpeculiarities，which[Page230]THE
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commonlycharacterisemoneyasweknowit，arecapableofjustifyingit。Totheextentthattheestablishedstandardofvaluehasthesepeculiarities，thesummarystatement，thatitisthemoney-rateofinterestwhichisthesignificantrateofinterest，willholdgood。
iThefirstcharacteristicwhichtendstowardstheaboveconclusionisthefactthatmoneyhas，bothinthelongandintheshortperiod，azero，oratanyrateaverysmall，elasticityofproduction，sofarasthepowerofprivateenterpriseisconcerned，asdistinctfromthemonetaryauthority；¾；elasticityofproduction[
120]meaning，inthiscontext，theresponseofthequantityoflabourappliedtoproducingittoariseinthequantityoflabourwhichaunitofitwillcommand。Money，thatistosay，cannotbereadilyproduced；¾；labourcannotbeturnedonatwillbyentrepreneurstoproducemoneyinincreasingquantitiesasitspricerisesintermsofthewage-unit。Inthecaseofaninconvertiblemanagedcurrencythisconditionisstrictlysatisfied。
Butinthecaseofagold-standardcurrencyitisalsoapproximatelyso，inthesensethatthemaximumproportionaladditiontothequantityoflabourwhichcanbethusemployedisverysmall，exceptindeedinacountryofwhichgold-miningisthemajorindustry。
Now，inthecaseofassetshavinganelasticityofproduction，thereasonwhyweassumedtheirown-rateofinteresttodeclinewasbecauseweassumedthestockofthemtoincreaseastheresultofahigherrateofoutput。
Inthecaseofmoney，however¾；postponing，forthemoment，ourconsiderationoftheeffectsofreducingthewage-unitorofadeliberateincreaseinitssupplybythemonetaryauthority¾；thesupplyisfixed。Thusthecharacteristicthatmoneycannotbereadilyproducedbylabourgivesatoncesomeprimafaciepresumptionfortheviewthatitsown-rateofinterestwillberelativelyreluctanttofall；whereasifmoneycouldbegrownlikeacropormanufactured[Page231]PROPERTIES
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likeamotor-car，depressionswouldbeavoidedormitigatedbecause，ifthepriceofotherassetswastendingtofallintermsofmoney，morelabourwouldbedivertedintotheproductionofmoney；¾；asweseetobethecaseingold-miningcountries，thoughfortheworldasawholethemaximumdiversioninthiswayisalmostnegligible。
iiObviously，however，theaboveconditionissatisfied，notonlybymoney，butbyallpurerent-factors，theproductionofwhichiscompletelyinelastic。Asecondcondition，therefore，isrequiredtodistinguishmoneyfromotherrentelements。
Theseconddifferentiaofmoneyisthatithasanelasticityofsubstitutionequal，ornearlyequal，tozerowhichmeansthatastheexchangevalueofmoneyrisesthereisnotendencytosubstitutesomeotherfactorforit；¾；except，perhaps，tosometriflingextent，wherethemoney-commodityisalsousedinmanufactureorthearts。Thisfollowsfromthepeculiarityofmoneythatirsutilityissolelyderivedfromitsexchange-value，sothatthetworiseandfallparipassu，withtheresultthatastheexchangevalueofmoneyrisesthereisnomotiveortendency，asinthecaseofrent-factors，tosubstitutesomeotherfactorforit。
Thus，notonlyisitimpossibletoturnmorelabourontoproducingmoneywhenitslabour-pricerises，butmoneyisabottomlesssinkforpurchasingpower，whenthedemandforitincreases，sincethereisnovalueforitatwhichdemandisdiverted¾；asinthecaseofotherrent-factors¾；soastoslopoverintoademandforotherthings。
Theonlyqualificationtothisariseswhentheriseinthevalueofmoneyleadstouncertaintyastothefuturemaintenanceofthisrise；inwhichevent，a1anda2areincreased，whichistantamounttoanincreaseinthecommodity-ratesofmoney-interestandis，therefore，stimulatingtotheoutputofotherassets。
iiiThirdly，wemustconsiderwhetherthesecon-
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clusionsareupsetbythefactthat，eventhoughthequantityofmoneycannotbeincreasedbydivertinglabourintopro4ucingit，neverthelessanassumptionthatitseffectivesupplyisrigidlyfixedwouldbeinaccurate。
Inparticular，areductionofthewage-unitwillreleasecashfromitsotherusesforthesatisfactionoftheliquidity-motive；whilst，inadditiontothis，asmoney-valuesfall，thestockofmoneywillbearahigherproportiontothetotalwealthofthecommunity。
Itisnotpossibletodisputeonpurelytheoreticalgroundsthatthisreactionmightbecapableofallowinganadequatedeclineinthemoney-rateofinterest。Thereare，however，severalreasons，whichtakenincombinationareofcompellingforce，whyinaneconomyofthetypetowhichweareaccustomeditisveryprobablethatthemoney-rateofinterestwilloftenprovereluctanttodeclineadequately:
aWehavetoallow，firstofall，forthereactionsofafallinthewage-unitonthemarginalefficienciesofotherassetsintermsofmoney；¾；foritisthedifferencebetweentheseandthemoney-rateofinterestwithwhichweareconcerned。
Iftheeffectofthefallinthewage-unitistoproduceanexpectationthatitwillsubsequentlyriseagain，theresultwillbewhollyfavourable。
If，onthecontrary，theeffectistoproduceanexpectationofafurtherfall，thereactiononthemarginalefficiencyofcapitalmayoffsetthedeclineintherateofinterest。[121]
bThefactthatwagestendtobestickyintermsofmoney，themoney-wagebeingmorestablethantherealwage，tendstolimitthereadinessofthewage-unittofallintermsofmoney。Moreover，ifthiswerenotso，thepositionmightbeworseratherthanbetter；because，ifmoney-wagesweretofalleasily，thismightoftentendtocreateanexpectationofafurtherfallwithunfavourablereactionsonthemarginalefficiencyofcapital。
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Furthermore，ifwagesweretobefixedintermsofsomeothercommodity，e。g。wheat，itisimprobablethattheywouldcontinuetobesticky。Itisbecauseofmoney'sothercharacteristics¾；those，especially，whichmakeitliquid¾；thatwages，whenfixedintermsofit，tendtobesticky。[122]
cThirdly，wecometowhatisthemostfundamentalconsiderationinthiscontext，namely，thecharacteristicsofmoneywhichsatisfyliquidity-preference。
For，incertaincircumstancessuchaswilloftenoccur，thesewillcausetherateofinteresttobeinsensitive，particularlybelowacertainfigure，[123]eventoasubstantialincreaseinthequantityofmoneyinproportiontootherformsofwealth。Inotherwords，beyondacertainpointmoney'syieldfromliquiditydoesnotfallinresponsetoanincreaseinitsquantitytoanythingapproachingtheextenttowhichtheyieldfromothertypesofassetsfallswhentheirquantityiscomparablyincreased。
Inthisconnectionthelowornegligiblecarrying-costsofmoneyplayanessentialpart。Forifitscarryingcostswerematerial，theywouldoffsettheeffectofexpectationsastotheprospectivevalueofmoneyatfuturedates。Thereadinessofthepublictoincreasetheirstockofmoneyinresponsetoacomparativelysmallstimulusisduetotheadvantagesofliquidityrealorsupposedhavingnooffsettocontendwithintheshapeofcarrying-costsmountingsteeplywiththelapseoftime。Inthecaseofacommodityotherthanmoneyamodeststockofitmayoffersomeconveniencetousersofthecommodity。Buteventhoughalargerstockmighthavesomeattractionsasrepresentingastoreofwealthofstablevalue，thiswouldbeoffsetbyitscarrying-costsintheshapeofstorage，wastage，etc。
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Hence，afteracertainpointisreached，thereisnecessarilyalossinholdingagreaterstock。
Inthecaseofmoney，however，this，aswehaveseen，isnotso，¾；andforavarietyofreasons，namely，thosewhichconstitutemoneyasbeing，intheestimationofthepublic，parexcellence'liquid'。Thusthosereformers，wholookforaremedybycreatingartificialcarrying-costsformoneythroughthedeviceofrequiringlegal-tendercurrencytobeperiodicallystampedataprescribedcostinordertoretainitsqualityasmoney，orinanalogousways，havebeenontherighttrack；andthepracticalvalueoftheirproposalsdeservesconsideration。
Thesignificanceofthemoney-rateofinterestarises，therefore，outofthecombinationofthecharacteristicsthat，throughtheworkingoftheliquidity-motive，thisrateofinterestmaybesomewhatunresponsivetoachangeintheproportionwhichthequantityofmoneybearstootherformsofwealthmeasuredinmoney，andthatmoneyhasormayhavezeroornegligibleelasticitiesbothofproductionandofsubstitution。Thefirstconditionmeansthatdemandmaybepredominantlydirectedtomoney，thesecondthatwhenthisoccurslabourcannotbeemployedinproducingmoremoney，andthethirdthatthereisnomitigationatanypointthroughsomeotherfactorbeingcapable，ifitissufficientlycheap，ofdoingmoney'sdutyequallywell。Theonlyrelief¾；apartfromchangesinthemarginalefficiencyofcapital¾；cancomesolongasthepropensitytowardsliquidityisunchangedfromanincreaseinthequantityofmoney，or¾；whichisformallythesamething¾；ariseinthevalueofmoneywhichenablesagivenquantitytoprovideincreasedmoney-services。
Thusariseinthemoney-rateofinterestretardstheoutputofalltheobjectsofwhichtheproductioniselasticwithoutbeingcapableofstimulatingtheoutputofmoneytheproductionofwhichis，byhypothesis，[Page235]PROPERTIES
OFINTERESTANDMONEY
perfectlyinelastic。Themoney-rateofinterest，bysettingthepaceforalltheothercommodity-ratesofinterest，holdsbackinvestmentintheproductionoftheseothercommoditieswithoutbeingcapableofstimulatinginvestmentfortheproductionofmoney，whichbyhypothesiscannotbeproduced。
Moreover，owingtotheelasticityofdemandforliquidcashintermsofdebts，asmallchangeintheconditionsgoverningthisdemandmaynotmuchalterthemoney-rateofinterest，whilstapartfromofficialactionitisalsoimpracticable，owingtotheinelasticityoftheproductionofmoney，fornaturalforcestobringthemoney-rateofinterestdownbyaffectingthesupplyside。Inthecaseofanordinarycommodity，theinelasticityofthedemandforliquidstocksofitwouldenablesmallchangesonthedemandsidetobringitsrateofinterestupordownwitharush，whilsttheelasticityofitssupplywouldalsotendtopreventahighpremiumonspotoverforwarddelivery。Thuswithothercommoditieslefttothemselves，'naturalforces，'i。e。theordinaryforcesofthemarket，wouldtendtobringtheirrateofinterestdownuntiltheemergenceoffullemploymenthadbroughtaboutforcommoditiesgenerallytheinelasticityofsupplywhichwehavepostulatedasanormalcharacteristicofmoney。Thusintheabsenceofmoneyandintheabsence¾；wemust，ofcourse，alsosuppose¾；ofanyothercommoditywiththeassumedcharacteristicsofmoney，theratesofinterestwouldonlyreachequilibriumwhenthereisfullemployment。Unemploymentdevelops，thatistosay，becausepeoplewantthemoon；¾；mencannotbeemployedwhentheobjectofdesirei。e。moneyissomethingwhichcannotbeproducedandthedemandforwhichcannotbereadilychokedoff。Thereisnoremedybuttopersuadethepublicthatgreencheeseispracticallythesamethingandtohaveagreencheesefactoryi。e。acentralbankunderpubliccontrol。
Itisinterestingtonoticethatthecharacteristic[Page236]THE
GENERALTHEORYOFEMPLOYMENT
whichhasbeentraditionallysupposedtorendergoldespeciallysuitableforuseasthestandardofvalue，namely，itsinelasticityofsupply，turnsouttobepreciselythecharacteristicwhichisatthebottomofthetrouble。
Ourconclusioncanbestatedinthemostgeneralformtakingthepropensitytoconsumeasgivenasfollows。Nofurtherincreaseintherateofinvestmentispossiblewhenthegreatestamongsttheown-ratesofown-interestofallavailableassetsisequaltothegreatestamongstthemarginalefficienciesofallassets，measuredintermsoftheassetwhoseown-rateofown-interestisgreatest。
Inapositionoffullemploymentthisconditionisnecessarilysatisfied。
Butitmayalsobesatisfiedbeforefullemploymentisreached，ifthereexistssomeasset，havingzeroorrelativelysmallelasticitiesofproductionandsubstitution，[124]whoserateofinterestdeclinesmoreclosely，asoutputincreases，thanthemarginalefficienciesofcapital-assetsmeasuredintermsofit。