After carefully analyzing the effect of manipulating interest rates on a) point-to point production and consumption costs, b) inventory costs in the case of more or less rapid production turnovers, and c) project costs in the case of long-term point-to-line projects, Lonergan concluded,

 … , the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates affect an adjustment.  This adjustment is not a (simple and easy) adjustment of the rate of saving to the (requirements of the) productive process but (rather a difficult adjustment) of the productive process to the rate of saving; for small increments in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dw_i.  Finally, the adjustment is delayed, and it does not deserve the name of adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

In the cases of pathological distortions of what should be a properly calibrated balances of monetary flows, changes in the distribution of income are prior to and more effective than the manipulation of interest rates.  And Smith-to-Jones interest payments circulate in the operative circuits like other operative payments – initial, transitional, and final. Still, credit money – not interest-rate changes – is the major source of the requisite expansionary money in an expanding economic process, Manipulation of microeconomic interest rates to adjust the economic process betrays a lack of a scientific understanding of how the objective economic process actually works.

In the creative-destructive economy of a finite world, particular expansionar capital spending surges, then slows, and eventually exhausts its opportunities.  Therefore, the associated non-consumption incomes – i.e. savings (or pure surplus incomes for investment and expansion) plus credit money, which are devoted to investment expenditures must surge, then slow, and eventually flatten out.  In a finite world the rates of saving plus borrowing – for expansion of transactions – must change in conformity with the changing requirements and opportunities of the evolutionary productive process.

The reader has, no doubt, been deluged with news about the Central Bank’s manipulation of interest rates to manage the economy.  In the following excerpt, the reader should understand and engrave in his mind the phrase “factors that are prior to changing [1] interest rates and more effective.”  To wit:

The purpose of this section is to inquire into the manner in which the rate of saving w is adjusted to the phases of the pure cycle of the productive process.  Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

We wish to learn the elements of effective management of the economy.  Thus, if manipulation of interest rates might be double-edged and possibly counter-productive, we must get a grasp of the “factors that are prior to changing interest rates and more effective.”  To that end, we divide incomes into many tiers or strata of groups of people having certain levels of income.  We symbolize basic (consumption) income as follows:

I’ = Σ w_in_iy_{i  [CWL 15, 134]}

where i represents any group, w represents the fraction of total income directed to basic income, n represents the number of members of the group, and y represents the aggregate (basic plus surplus) income of the average member per interval.

And we symbolize the change in basic income as

dI’ = Σ(w_idn_i +  n_idw_iy_i + dw_id n_i)

Therefore, recognizing the correlations of levels of basic or surplus incomes with the surges and taperings with which they are concomitant, and calling any movement up or down the tiers due to higher or lower incomes a “migration,”

Evidently, then, “suitable migrations” are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving (for expansionary investment), increase the income of the rich. … to decrease the rate of saving (to expand consumption and fully utilize new capital), increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle.  It reveals that the surplus expansion is anti-egalitarian, inasmuch as that expansion postulates that increments in income go to high incomes.  But it also reveals the basic expansion to be egalitarian, for that expansion postulates that increments go to low incomes [CWL 15, 135-37]

… (And,) unless the quantity of money in circulation expands as rapidly as prices rise and, as well, as rapidly as the productive expansion of quantities requires, there will result a contraction of the process: then, instead of adjusting the rate of saving to the requirements of the productive cycle, the productive cycle is arrested to find adjustment to the rate of saving. [CWL 15, 135-37]

To increase pure surplus income for investment, let people migrate upward into and within the higher-income groups; i.e. let more people enter into and rise within the series of higher-income strata. To increase consumption so as to effect a basic expansion and fully utilize new and better capital, let people migrate upward within the lower-income groups; i.e. let more people enter into and rise within the lower-income strata.  These migrations are “prior to changing interest rates and more effective.”

Traditional theory looked to shifting interest rates (to manage the economy).  The difficulty with this theory is that it overlooks the order of magnitude of the fundamental problem and lumps together a number of quite different things. [CWL 15, 141-144]

The phrase “lumps together a number of quite different things” refers to the following failures:

1. the failure of economists to identify credit money, rather than savings diminishing incomes for consumption as the normal source of a greater money supply of expansionary investment funds,
2. the failure of economists to understand and insist that the magnitudes and frequencies of money payments be concomitant in theory and practice with the magnitudes and frequencies constituting the productive process.
3. the failure to distinguish the different effects of higher or lower rates of interest on projects of different durations or frequencies,
4. the failure to understand the nature, purpose, and effect of, and to distinguish between, i) credit for production vs. ii) credit for purchasing more than has been earned, and  vs. iii) credit for gambling.

Again, more fully,

Traditional theory looked to shifting interest rates (to manage the economy).  The difficulty with this theory is that it overlooks a) the order of magnitude of the fundamental problem and b) lumps together a number of quite different things … (as for the magnitude of the problem) it would take enormous interest rates backed by all propaganda techniques at our disposal to effect the negative values of dw_i (i.e. reduction of consumption percents) that are required interval after interval as the surplus expansion proceeds; what is needed is something in the order of ‘incentives to save’ that is as rapid and as effective as the reduction of purchasing power by rising prices. … [CWL 15,  141-144]

(as for lumping together a number of quite different things) the ineptitude of the procedure arises not only from a) its inadequacy to effect a redistribution of income of the magnitude required but also from b) its effects upon the demands for money. Four types of  such demand may be distinguished: demand for basic final products; demand for surplus final products; demand for maintaining or increasing the turnover magnitudes of units of enterprise; and demand for redistributional purposes.       the effect of raising interest rates to encourage savings is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. [CWL 15, 141-144]

Rather than using procedures that are roundabout and inept, the monetary, fiscal, and entrepreneurial authorities should employ “factors that are prior to changing interest rates and more effective.”

A general operation upon the supply of money seems to be a rather roundabout and inept procedure to correct an error in distribution. [CWL15, 143]

(In a context of an assumed constant money-supply) rates of interest, when increasing, encourage saving (but discourage borrowing).  This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion. 

an artificial lowering of interest rates may (discourage saving and increase consumption, and it may) encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc. What is needed (rather than lower interest rates) is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers.   [CWL 15, 141 ftnt 198]

Manipulation of interest rates can be counterproductive.

When the rate of savings is insufficient, increasing interest rates effect an adjustment.  This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving … it does not deserve the name adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the (complimentary) name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements.[CWL 15, 144]

It is discouraging to hear winners of the Prize in Economic Sciences advocate the manipulation of interest rates as though a change in the interest rate were single-edged and cutting in only one direction with the exact desired effect. Their arguments are self-contradictory, and full of oversights and omissions.

Interest rates pertain to both lenders and borrowers.  If the Central Bank’s reducing of interest rates amounts to having one foot on the accelerator (reducing the cost of investment) and the other foot on the brake (discouraging the saving on which investment depends), it should understand and acknowledge that condition and compare the net effect of the separate, competing, contrary effects.

Again,

Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. [CWL 15, 133)

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

After carefully analyzing the effect of higher interest rates on a) point-to point production and consumption costs, b) inventory costs in the case of more or less rapid turnovers, and c) project costs in the case of long-term point-to-line projects, Lonergan concluded,

 … , the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates affect an adjustment.  This adjustment is not a (simple and easy) adjustment of the rate of saving to the (requirements of the) productive process but (rather a difficult adjustment) of the productive process to the rate of saving; for small increments in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dw_i.  Finally, the adjustment is delayed, and it does not deserve the name of adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)