DEAR OR CHEAP MONEY?
[To THE EDITOR or THE, " SPECTATOR."] Sus.,—Permit me to disagree with Professor Cassel and with "Ohlooker." After I have provided for my necessities (say, for the year), I have a surplus which I can either " save " or "spend." The higher the• rate• of interest; the more I shall be induced to save. To- " spend" the surplus means to spend it on non-necessary articles which are consumed. To "save" it means to spend it on houses, mills, machinery, and so forth, i.e., on productive capital. Whatever form "investment" takes this is the outcome, The rate of interest will depend on the scarcity of capital,. e.g., of houses.: the more they are needed the higher the return. that can be obtained from their use, and the higher the- interest that can be offered and will be offered. As the demand for capital is satisfied the rate of interest drops till it ceases to induce the average investor to' save. At present the need of capital- is very great, and the market rate of interest is high. The official rate must be the same unless it is to cease to have any relation to reality.
Professor Cassel says, "Now if the rate •of interest had been raised . . . and the sum spent on house-building had been in consequence thereof reduced. . . ." The case is just the contrary. The same cause that reduced house-building would also reduce the rate of interest : they go together.
Again, he says, " If a sum of a hundred millions is spent • . . on extensive house-building, nearly all the money dis- tributed will be turned into purchasing power." The old fallacy is here in an inverted form. The man in the street supposes that he who " spends " provides purchasing power,
and that he who " saves " does not. What really happens is that, as we have seen, both he who " spends" and he who " saves ' spend equally : the one spends his money on un- necessary clothes, ptcturest, food and pleasures; and the other on houses, mills and machinery. There is no difference in the purchasing power created; there is only a difference in the class of people set to work, and in the ultimate destination of the work done. The need of an impoverished community Is to accumulate capital. Robinson Cruses did not eat up all his stores in order to keep down hie prices; he economised them and bent all his energies to save capital, i.e., to clear a patch and build a boat. And that he had no money is nothing to the point, for money is the antithesis of capital, and the more it can be kept out of these inquiries the better they fare.
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