Dr. Hayek on Money and Capital – by Sraffa
If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any one moment as many “natural” rates of interest as there are commodities, though they would not be “equilibrium” rates. The “arbitrary” action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) “arbitrarily changed” the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate.
Money and Capital: A Reply – by Hayek
I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many “natural” rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest. There can, for example, be very little doubt that the “natural” rate of interest on a loan of strawberries from July to January will even be negative, while for loans of most other commodities over the same period it will be positive.
Let us take Mr. Sraffa’s case in which the farmers “arbitrarily changed” the quantity of wheat produced – which I understand, from what follows, to mean that they, for example, so increased the supply of wheat that its price fell below its cost of production and, as a consequence of its temporary abundance, loans of wheat were made at a much lower rate of interest than loans of other commodities. But would that fall in the rate of interest on wheat-loans cause anyone to start roundabout processes of production for which the available subsistence fund is not sufficient ? There is no reason whatever to assume this. In so far as people live on wheat, they will actually be provided with food for a longer period; and in so far as the lower price of wheat will induce people to eat more of it – instead of something else – these other goods will also be available for a longer period of time, and interest in terms of these goods will also fall. The effects will be just the same as if a corresponding amount of wheat had been saved, and when, as a consequence of the fall in the price of wheat, its output falls again, the accumulation of capital made possible by the surplus of wheat will supply cease.