CHAPTER 24
THE RATES OF INTEREST

FOR what purpose do the banks use their powers to influence the interest rates? In reality policy is imposed upon them by monetary authorities, but we are conducting the argument on the assumption that they are operating according to certain rules without specifying the manner in which they are compelled to do so.1


MONETARY POLICY

When the entrepreneurs are keen and eager to accumulate, they may be attempting to carry out investment on such a scale as to push the economy up to the inflation barrier. In particular, this may occur when a strong boom is superimposed upon a long-period scarcity of labour.

The barrier is not an abrupt precipice but rather a mountain range approached through undulating foothills. A rate of accumulation involving both a high demand for labour and a high rate of profit sets up a tendency for money-wage rates to rise faster than productivity, so that prices rise and the pressure to raise money wages is increased. If this process goes on slowly, with occasional interruptions and relapses, it does not undermine the conventional belief in the stability of the purchasing power of money 2 which is a necessity (or at least an important convenience) for the smooth operation of the economy. But if it speeds up too far it threatens to disrupt the monetary system. The most important rule of

____________________
1
We are also omitting the extremely important aspects of monetary policy that arise from the fact that monetary authorities are national and are largely concerned with international transactions (see below, p. 283).
2
Cf. above, p. 25.

-237-

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