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CH. 17 PROPERTIES OF INTEREST AND MONEY

not then understood that, in certain conditions, thesystem could be in equilibrium with less than fullemployment.

I am now no longer of the opinion that the conceptof a “natural” rate of interest, which previously seemedto me a most promising idea, has anything very usefulor significant to contribute to our analysis. It is merelythe rate of interest which will preserve the status quo\and, in general, we have no predominant interest in thestatus quo as such.

If there is any such rate of interest, which is uniqueand significant, it must be the rate which we mightterm the neutral rate of interest , 1 namely, the naturalrate in the above sense which is consistent with fullemployment, given the other parameters of the system;though this rate might be better described, perhaps, asthe optimum rate.

The neutral rate of interest can be more strictlydefined as the rate of interest which prevails in equi-librium when output and employment are such that theelasticity of employment as a whole is zero . 2

The above gives us, once again, the answer to thequestion as to what tacit assumption is required to makesense of the classical theory of the rate of interest.This theory assumes either that the actual rate of interestis always equal to the neutral rate of interest in the sensein which we have just defined the latter, or alternativelythat the actual rate of interest is always equal to the rateof interest which will maintain employment at somespecified constant level. If the traditional theory isthus interpreted, there is little or nothing in its practicalconclusions to which we need take exception. Theclassical theory assumes that the banking authority ornatural forces cause the market-rate of interest to

1 This definition does not correspond to any of the various definitions ofneutral money given by recent writers; though it may, perhaps, have somerelation to the objective which these writers have had in mind.

2 Cf. Chapter 20 below.