CH. 14 THE CLASSICAL THEORY OF INTEREST 177

Appendix I. (III.) of his éléments d’Économic pure , where he deals with “l’échange d’épargnes contre capitaux neufs”, argues expressly that, corresponding to each possible rate of interest, there is a sum which individuals will save and also a sum which they will invest in new capital assets, that these two aggregates tend to equality with one another, and that the rate of interest is the variable which brings them to equality; so that the rate of interest is fixed at the point where saving, which represents the supply of new capital, is equal to the demand for it. Thus he is strictly in the classical tradition.

Certainly the ordinary man—banker, civil servant or politician—brought up on the traditional theory, and the trained economist also, has carried away with him the idea that whenever an individual performs an act of saving he has done something which automatically brings down the rate of interest, that this automatically stimulates the output of capital, and that the fall in the rate of interest is just so much as is necessary to stimulate the output of capital to an extent which is equal to the increment of saving; and, further, that this is a self- regulatory process of adjustment which takes place without the necessity for any special intervention or grandmotherly care on the part of the monetary authority. Similarly—and this is an even more general belief, even to-day—each additional act of investment will necessarily raise the rate of interest, if it is not offset by a change in the readiness to save.

Now the analysis of the previous chapters will have made it plain that this account of the matter must be erroneous. In tracing to its source the reason for the difference of opinion, let us, however, begin with the matters which are agreed.

Unlike the neo-classical school, who believe that saving and investment can be actually unequal, the classical school proper has accepted the view that they are equal. Marshall, for example, surely believed,

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