Do interest rate changes and tight money have other effects?
Yes. Consider what happens when the Government is restricting money and credit. Firms find loans difficult to obtain and investment tumbles. Small business is especially hard hit because the larger firms tend to have their credit needs catered to first. Further, when investment falls, firms which produce machinery or build factories find their orders slumping and lay off workers while cutting their own orders for goods. The economy pays for high interest in incomes not earned and in output not produced. 16. What is the “efficiency cost” of high interest? When investment is cut by high interest two things happen. (1) Business does not take as much advantage of the new, more efficient tools to produce goods as it might. (2) Industry slows down the rate of expansion of the total output capacity of the country’s factories. The result of these twin effects is that tomorrow’s workers work with less efficient machinery and fewer machines than they might. Having fewer and less efficient tools,
