Reflections on the Pure Theory of Money of Mr. J. M. Keynes (continued)

Abstract

TOWARDS the end of his summary of the argument contained in those sections of the Treatise which were discussed in the first part of this article, Mr. Keynes writes: If the banking system controls the terms of credit in such a way that savings are equal to the value of new investment, then the average price-level of output as a whole is stable and corresponds to the average rate of remuneration of the factors of production. If the terms of credit are easier than this equilibrium level, prices will rise, profits will be made. . . . And if the terms of credit are stiffer than the equilibrium level, prices will fall, losses will be made. . . . Booms or slumps are simply the expression of the results of an oscillation of the terms of credit about their equilibrium position.2 This brings us to the first and, in many respects, the most important question we have to consider in this second article, viz. Mr. Keynes' theory of the Bank Rate. The fundamental concept, upon which his analysis of this subject is based, is Wicksell's idea of a natural, or equilibrium, rate of interest, i.e. the rate at which the amount of new investment corresponds to the amount of current savings-a definition of Wicksell's concept on which, probably, all his followers would agree. Indeed, when reading Mr. Keynes' exposition, any student brought up on Wicksell's teaching will find himself on what appears to be quite familiar ground until, his suspicions having been aroused by the conclusions, he discovers that, behind