THE THEORY OF INTEREST

opposite direction. Within limits, a fall in the rate ofinterest may and often does produce a rise in prices andin business activity almost immediately. This effect maybe continued for many months until increased pricesagain become dominant and pull the interest rate upagain.

In so far as the rate of interest is cause and the pricemovements are effect, the correspondence is just theopposite of that which occurs in so far as the price move-ments are cause and the interest movements effect.

It is outside the scope of this treatise, which has todo only with things which affect the theory of the rateof interest, to attempt to explain fully all the very com-plicated relations connecting interest and business. Thestudies completed or in progress in my office show someinteresting results which I hope to publish later.

It is unfortunate that many students in this field seemto take it for granted that there is one and only onedefinite cycle, or that the cycle is controlled by one andonly one definite influence. I have been accused of in-consistency for presenting several seemingly incompatibletheories concerning the business cycle. As a matter offact, I have never as yet studied the so-called businesscycle as a whole. I have only studied a few of its elementsor aspects. 23

§12. Interest Rates and Bank Reserves

That there is a relationship between bank reserves andthe rate of bank discount is perhaps self-evident. Everybanker and business man is familiar with it. J. P. Nor-

” For instance, Our Unstable Dollar and the So-Called BusinessCycle, Journal of the American Statistical Association, June, 1925,pp. 179-202.

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