190 THE GENERAL THEORY OF EMPLOYMENT BK. IV

Professor Pigou, conformably with his other tacit assumptions,leads us (in his Economics of Welfare) to infer that the unit ofwaiting is the same as the unit of current investment and that thereward of waiting is quasi-rent, and practically never mentionsinterest,—which is as it should be. Nevertheless these writersare not dealing with a non-monetary economy (if there is sucha thing). They quite clearly presume that money is used andthat there is a banking system. Moreover, the rate of interestscarcely plays a larger part in Professor Pigou’s IndustrialFluctuations (which is mainly a study of fluctuations in themarginal efficiency of capital) or in his Theory of Unemployment(which is mainly a study of what determines changes in thevolume of employment, assuming that there is no involuntaryunemployment) than in his Economics of Welfare.

II

The following from his Principles of Political Economy (p. 511)puts the substance of Ricardo’s theory of the Rate of Interest:

“The interest of money is not regulated by the rate at whichthe Bank will lend, whether it be 5, 3 or 2 per cent, but by therate of profit which can be made by the employment of capital,and which is totally independent of the quantity or of the valueof money. Whether the Bank lent one million, ten millions,or a hundred millions, they would not permanently alter themarket rate of interest; they would alter only the value of themoney which they thus issued. In one case, ten or twenty timesmore money might be required to carry on the same businessthan what might be required in the other. The applicationsto the Bank for money, then, depend on the comparison betweenthe rate of profits that may be made by the employment of it, andthe rate at which they are willing to lend it. If they charge lessthan the market rate of interest, there is no amount of moneywhich they might not lend;—if they charge more than that rate,none but spendthrifts and prodigals would be found to borrowof them.”

This is so clear-cut that it affords a better starting-point fora discussion than the phrases of later writers who, without reallydeparting from the essence of the Ricardian doctrine, are never-theless sufficiently uncomfortable about it to seek refuge inhaziness. The above is, of course, as always with Ricardo, tobe interpreted as a long-period doctrine, with the emphasis onthe word “permanently” half-way through the passage; and itis interesting to consider the assumptions required to validate it.