The causes which are likely to bring about such a situation remain to be considered. Under what conditions will the demand for the additional capital required to complete a given capital structure drive up the rate of interest to a figure very much higher than the rate which is compatible with the permanent maintenance of that structure? In principle the answer is surely clear. Anything which will lead people to expect a lower rate of interest, or a larger supply of investible funds, than will actually exist when the time comes for their utilization, will in the way we have suggested force interest rates to rise much higher than would have been the case if people had not expected such a low rate. But, while it is true that an unexpected decrease in the rate of saving, or an unforeseen appearance of a new demand for capital a new invention for instance may bring about such a situation, the most important cause practically of such false expectations probably is a temporary increase in the supply of such funds through credit expansion at a rate which cannot be maintained. In this case, the increased quantity of current investment will induce people to expect investment to continue at a similar rate for some time, and in consequence to invest now in a form which requires for its successful completion further investment at a similar rate.1 It is not so much the quantity of current investment but the direction it takes the type of capital goods being produced which determines the amount of future investment required if the current investments are to be successfully in corporated in the structure of production. But it is the amount of investment made possible by the current supply of funds which determines expectations about the future rate of investment and thereby the form that the current investment will be given. We can now see the justification for the somewhat paradoxical form in which the main thesis of this article was originally stated. An increase in the rate of investment, or the quantity of capital goods, may have the effect of raising rather than lowering the rate of interest, if this increase has given rise to the expectation of a greater future supply of investible funds than is actually forth coming.
If this proposition is correct, and if its as sumptions are empirically justified, this means that much of the purely monetary analysis of the trade cycle now current is built on very in sufficient foundations. If it is correct, the common assumption that the expected return on investment, or the "marginal efficiency of capital” can be treated as a simple decreasing function of the quantity of capital goods in existence, or of the current rate of investment, will have to be abandoned, and with it much of the argument based on the supposed tendency of the "marginal efficiency of capital" to fall more rapidly than the money rate of interest. If past investment is often found to make further investment more rather than less profitable, this would also mean that the rise of the rate of interest towards the end of a boom which so many authors believe can be explained only by monetary factors affecting the supply of loan able funds can be adequately explained
by real factors affecting the demand. It shows, moreover, that a purely monetary analysis, which runs in terms of mere rates of investment without analyzing the concrete structure of these investments and the influence which monetary factors can have on this real structure of production, is bound to neglect some of the most significant elements in the picture. And, perhaps, it also explains why a careful analysis of the time structure of production {not in terms of an "average" period of production) is a necessary basis for a satisfactory analysis of the trade cycle.
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