BK. IV APPENDIX TO CHAPTER 14 191

Once again the assumption required is the usual classical assumption, that there is always full employment; so that, assuming no change in the supply curve of labour in terms of product, there is only one possible level of employment in long- period equilibrium. On this assumption with the usual ceteris paribus , i.e. no change in psychological propensities and expecta- tions other than those arising out of a change in the quantity of money, the Ricardian theory is valid, in the sense that on these suppositions there is only one rate of interest which will be compatible with full employment in the long period. Ricardo and his successors overlook the fact that even in the long period the volume of employment is not necessarily full but is capable of varying, and that to every banking policy there corresponds a different long-period level of employment; so that there are a number of positions of long-period equilibrium correspond- ing to different conceivable interest policies on the part of the monetary authority.

If Ricardo had been content to present his argument solely as applying to any given quantity of money created by the mone- tary authority, it would still have been correct on the assumption of flexible money-wages. If, that is to say, Ricardo had argued that it would make no permanent alteration to the rate of interest whether the quantity of money was fixed by the monetary authority at ten millions or at a hundred millions, his conclusion would hold. But if by the policy of the monetary authority we mean the terms on which it will increase or decrease the quantity of money, i.e. the rate of interest at which it will, either by a change in the volume of discounts or by open-market opera- tions, increase or decrease its assets—which is what Ricardo expressly does mean in the above quotation—then it is not the case either that the policy of the monetary authority is nugatory or that only one policy is compatible with long-period equi- librium; though in the extreme case where money-wages are assumed to fall without limit in face of involuntary unemploy- ment through a futile competition for employment between the unemployed labourers, there will, it is true, be only two possible long-period positions—full employment and the level of employment corresponding to the rate of interest at which liquidity-preference becomes absolute (in the event of this being less than full employment). Assuming flexible money- wages, the quantity of money as such is, indeed, nugatory in the long period; but the terms on which the monetary authority will change the quantity of money enters as a real determinant into the economic scheme.