ABSTRACT
This chapter establishes a functional connection between the short-term rate of interest and the velocity of cash circulation. It examines the problem of substitution between a representative short-term asset, say a bill of exchange, and a representative long-term asset, say a Consol. If the Government long-term rate of borrowing is so low that nobody is prepared to lend at this rate, the Government must finance all the Budget deficit by floating debt. The short-term rate of interest is closely connected with the marginal convenience of holding cash. Indeed, if the short-term rate is higher than this marginal convenience, there is an inducement for lending additional cash; if the short-term rate is lower, it becomes profitable to withdraw from short-term assets and acquire cash. The operation of short-term lending as such involves some costs and inconveniences, or "investment costs.".
