CH. 22

NOTES ON THE TRADE CYCLE

323

Nor was there over-investment in the sense that thestandard and equipment of housing was so high thateveryone, assuming full employment, had all he wantedat a rate which would no more than cover the replace-ment cost, without any allowance for interest, over thelife of the house; and that transport, public services andagricultural improvement had been carried to a pointwhere further additions could not reasonably be ex-pected to yield even their replacement cost. Quite thecontrary. It would be absurd to assert of the UnitedStates in 1929 the existence of over-investment in thestrict sense. The true state of affairs was of a differentcharacter. New investment during the previous fiveyears had been, indeed, on so enormous a scale in theaggregate that the prospective yield of further additionswas, coolly considered, falling rapidly. Correct fore-sight would have brought down the marginal efficiencyof capital to an unprecedentedly low figure; so thatthe “boom” could not have continued on a sound basisexcept with a very low long-term rate of interest, andan avoidance of misdirected investment in the particulardirections which were in danger of being over-exploited.In fact, the rate of interest was high enough to deternew investment except in those particular directionswhich were under the influence of speculative excite-ment and, therefore, in special danger of being over-exploited ; and a rate of interest, high enough to over-come the speculative excitement, would have checked,at the same time, every kind of reasonable new invest-ment. Thus an increase in the rate of interest, as aremedy for the state of affairs arising out of a prolongedperiod of abnormally heavy new investment, belongs tothe species of remedy which cures the disease by killingthe patient.

It is, indeed, very possible that the prolongation ofapproximately full employment over a period of yearswould be associated in countries so wealthy as GreatBritain or the United States with a volume of new