The Influence of the Rate of Interest on Prices

T_ thesis which I humbly submit to criticism is this. If, other things remaining the same, the leading banks of the world were to lower their rate of interest, say 1 per cent. below its ordinary level, and keep it so for some years, then the prices of all commodities would rise and rise and rise without any limit whatever; on the contrary, if the leading banks were to raise their rate of interest, say 1 per cent. above its normal level, and keep it so for some years, then all prices would ]_U and fall and fall without any limit except Zero. Now this proposition cannot be proved directly by experience, because the fact required in its hypothesis never happens. The supposition was that the banks were to lower or raise their interest, other _l_ings remaining Lhe same, but that, of course, the banks never do; why, indeed, should they? Other things remaining the same, the bank-rate is sure to remain the same too, or if, by any chance, e.g._ by mistake, it were altered, it would very soon come round to its proper level. My thesis is, therefore, only an abstract statement, and somebody, perhaps, will ask : what is the use of it then? But I venture to assert that it may be of very great use all the same. Everybody knows the statement of Newton that, if the attraction of the sun were suddenly to cease, then the planets would leave their orbits in the tangential direction ; this, too, of course, is only an abstract proposition, because the solar attraction never ceases, but it is most useful nevertheless; indeed, it is the very corner-stone of celestial mechanics; and in the same way I believe that the thesis here propounded, if proved to be true, will turn out to be the corner-stone of the mechanics of prices, or rather one of its corner-stones, the influence of the supply of precious metals