CH. 15 INCENTIVES TO LIQUIDITY 203

short-term rate of interest is easily controlled by themonetary authority, both because it is not difficult toproduce a conviction that its policy will not greatlychange in the very near future, and also because thepossible loss is small compared with the running yield(unless it is approaching vanishing point). But thelong-term rate may be more recalcitrant when once ithas fallen to a level which, on the basis of past experi-ence and present expectations of future monetary policy,is considered “unsafe” by representative opinion. Forexample, in a country linked to an international goldstandard, a rate of interest lower than prevails else-where will be viewed with a justifiable lack of confi-dence; yet a domestic rate of interest dragged up to aparity with the highest rate (highest after allowing forrisk) prevailing in any country belonging to the inter-national system may be much higher than is consistentwith domestic full employment.

Thus a monetary policy which strikes publicopinion as being experimental in character or easilyliable to change may fail in its objective of greatlyreducing the long-term rate of interest, because M2may tend to increase almost without limit in responseto a reduction of r below a certain figure. The samepolicy, on the other hand, may prove easily successfulif it appeals to public opinion as being reasonable andpracticable and in the public interest, rooted in strongconviction, and promoted by an authority unlikely tobe superseded.

It might be more accurate, perhaps, to say that therate of interest is a highly conventional, rather than ahighly psychological, phenomenon. For its actualvalue is largely governed by the prevailing view as towhat its value is expected to be. Any level of interestwhich is accepted with sufficient conviction as likely tobe durable will be durable; subject, of course, in achanging society to fluctuations for all kinds of reasonsround the expected normal. In particular, when M1