THE THEORY OF INTEREST

stabilizing principles which for many years have beensuggested by Wicksell , Cassel, and other economists.

Even these efforts, while in the end they save us fromprice convulsions and real-interest convulsions, neverthe-less themselves involve a slight interference with thenatural effects of the income situation. The rediscountrate, when raised, restricts credit and stops price infla-tion; and when lowered, liberates credit and stops pricedeflation. As the effect, in either case, tends to be cumu-lative as long as the slight artificial raising or loweringis in force, the interference with the normal course ofevents need only be slight, almost negligible. It wouldnot be surprising if a difference of one half of 1 per centfrom an ideally normal rate should prove usually suffi-cient. Maintained sufficiently long, this deviation from anormal interest rate may prevent a very abnormal devia-tion in our monetary standard.

Some slight interferences are inherent in any suchbanking system, not only as an incident to the supremelyimportant function of preventing inflation and deflation,but also as a necessary price to pay for the very existenceof a banking system. In order to maintain a liquid con-dition and to avoid risk of bankruptcy, each bank mustoccasionally put its loan policy out of line with the idealrequirements of the income situation.

But, as we gradually perfect our banking techniqueand policies, we shall get closer and closer to a conditionin which the rate of interest as a whole will reflect theincome influences discussed in this book. The money rateand the real rate will become substantially the same,and any action of the banker which can be called aninterference with, rather than a registering of, funda-mental economic conditions will become almost negligible.

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