142 THE GENERAL THEORY OF EMPLOYMENT BK. IV

marginal efficiency of capital, i.e. the investmentdemand-schedule; and the expectation of a rise in thevalue of money is depressing, because it lowers theschedule of the marginal efficiency of capital.

This is the truth which lies behind Professor IrvingFisher’s theory of what he originally called “Apprecia-tion and Interest”—the distinction between the moneyrate of interest and the real rate of interest where thelatter is equal to the former after correction for changesin the value of money. It is difficult to make sense ofthis theory as stated, because it is not clear whether thechange in the value of money is or is not assumed to beforeseen. There is no escape from the dilemma that,if it is not foreseen, there will be no effect on currentaffairs; whilst, if it is foreseen, the prices of existinggoods will be forthwith so adjusted that the advantagesof holding money and of holding goods are againequalised, and it will be too late for holders of moneyto gain or to suffer a change in the rate of interest whichwill offset the prospective change during the period ofthe loan in the value of the money lent. For thedilemma is not successfully escaped by ProfessorPigou’s expedient of supposing that the prospectivechange in the value of money is foreseen by one set ofpeople but not foreseen by another.

The mistake lies in supposing that it is the rate ofinterest on which prospective changes in the value ofmoney will directly react, instead of the marginalefficiency of a given stock of capital. The prices ofexisting assets will always adjust themselves to changesin expectation concerning the prospective value ofmoney. The significance of such changes in expecta-tion lies in their effect on the readiness to produce newassets through their reaction on the marginal efficiencyof capital. The stimulating effect of the expectationof higher prices is due, not to its raising the rate ofinterest (that would be a paradoxical way of stimulatingoutput—in so far as the rate of interest rises, the