THE CONTROL OF PRICES THROUGH THE RATE OF INVESTMENT

The banking system has no direct control over the prices of individual commodities or over the rates of money earnings of the factors of production. Nor has it, in reality, any direct control over the quantity of money; for it is characteristic of modern systems that the central bank is ready to buy for money at a stipulated rate of discount any quantity of securities of certain approved types.

Thus—in spite of the qualifications which we shall have to introduce later in respect of the so-called ‘open-market’ operations of central banks—it is broadly true to say that the governor of the whole system is the rate of discount. For this is the only factor which is directly subject to the will and fiat of the central authority, so that it is from this that induced changes in all other factors must flow.

This means, in substance, that the control of prices is exercised in the contemporary world through the control of the rate of investment. There is nothing that the central authority can do, whether it operates by means of the bank rate or by means of open-market dealings, except to influence the rate of investment. But our fundamental equation has shown that, if the rate of investment can be influenced at will, then this can be brought in as a balancing factor to affect in any required degree, first of all the price level of output as a whole, and, finally, as a response to the effect of prices on profits, the rate of money earnings of the factors of production.