BK. IV APPENDIX TO CHAPTER 14 189

in fact fail of their purpose through misdirection into wastefuluses.”1

Professor Pigou’s only significant reference to what deter-mines the rate of interest is, I think, to be found in his IndustrialFluctuations (1st edn.), pp. 251-3, where he controverts the viewthat the rate of interest, being determined by the general con-ditions of demand and supply of real capital, lies outside thecentral or any other bank’s control. Against this view heargues that: “When bankers create more credit for business men,they make, in their interest, subject to the explanations givenin chapter xiii. of part i.,2 a forced levy of real things from thepublic, thus increasing the stream of real capital available forthem, and causing a fall in the real rate of interest on long andshort loans alike. It is true, in short, that the bankers’ rate formoney is bound by a mechanical tie to the real rate of intereston long loans; but it is not true that this real rate is determinedby conditions wholly outside bankers’ control.”

My running comments on the above have been made in thefootnotes. The perplexity which I find in Marshall’s accountof the matter is fundamentally due, I think, to the incursion ofthe concept “interest”, which belongs to a monetary economy,into a treatise which takes no account of money. “Interest”has really no business to turn up at all in Marshall’s Principlesof Economics ,—it belongs to another branch of the subject.

1 We are not told in this passage whether net savings would or would notbe equal to the increment of capital, if we were to ignore misdirected invest-ment but were to take account of “temporary accumulations of unusedclaims upon services in the form of bank-money**. But in IndustrialFluctuations (p. 22) Prof. Pigou makes it clear that such accumulations haveno effect on what he calls “real savings**.

2 This reference (op. cit . pp. 129-134) contains Prof. Pigou’s view as tothe amount by which a new credit creation by the banks increases the streamof real capital available for entrepreneurs. In effect he attempts to deduct“from the floating credit handed over to business men through credit crea-tions the floating capital which would have been contributed in other waysif the banks had not been there”. After these deductions have been made,the argument is one of deep obscurity. To begin with, the rentiers havean income of 1500, of which they consume 500 and save 1000; the act ofcredit creation reduces their income to 1300, of which they consume 500 — xand save 800 + x; and x , Prof. Pigou concludes, represents the net increaseof capital made available by the act of credit creation. Is the entrepreneurs’income supposed to be swollen by the amount which they borrow from thebanks (after making the above deductions)? Or is it swollen by the amount,i.e. 200, by which the rentiers’ income is reduced? In either case, are theysupposed to save the whole of it? Is the increased investment equal to thecredit creations minus the deductions? Or is it equal to x? The argumentseems to stop just where it should begin.