unresolved How, according to the classical theory, did the rate of interest bring “supply and demand for savings” into equilibrium? And how does Keynes’ general theory differ?
The influence of this factor on the rate of spending out of a given income is open to a good deal of doubt. For the classical theory of the rate of interest, which was based on the idea that the rate of interest was the factor which brought the supply and demand for savings into equilibrium, it was convenient to suppose that expenditure on consumption is cet. par. negatively sensitive to changes in the rate of interest, so that any rise in the rate of interest would appreciably diminish consumption. It has long been recognised, however, that the total effect of changes in the rate ofinterest on the readiness to spend on present consumption is complex and uncertain, being dependent on conflicting tendencies, since some of the subjective motives towards saving will be more easily satisfied if the rate of interest rises, whilst others will be weakened. Over a long period substantial changes in the rate of interest probably tend to modify social habits considerably, thus affecting the subjective propensity to spend—though in which direction it would be hard to say, except in the light of actual experience. The usual type of short-period fluctuation in the rate of interest is not likely, however, to have much direct influence on spending either way.