“In the absence of a banking system we found that two distinct elements had to be taken into consideration in calculating the rate of interest. First, there was the rate which represented the actual labour-saving value of capital at the level of capitalisation reached by industry. This ratio of labour saved per annum to labour expended on first cost is a physical property of the capital actually in use, and under perfectly stable monetary conditions is equal to the market rate of interest. It may be conveniently termed the ‘natural rate.’ But, secondly, where monetary conditions are not stable, the market rate diverges from the natural rate according to the tendency of prices. When prices are rising the market rate is higher, and when falling lower, than the natural rate, and this divergence is due to the fact that the actual profits of business show under those conditions corresponding movements.This seems to be a rather different formulation of the concept from Wicksell’s own definitions.
And now, thirdly, we find that where a banking system is in operation the market rate does not even coincide with this second rate of interest, which, as it represents the true profits of business prevailing for the time being, may be called the ‘profit rate.’ The market rate is in fact the bankers’ rate, and is greater or less than the profit rate, according as the bankers wish to discourage or encourage borrowing.” (Hawtrey 1913: 65–66).
Deutscher (1997: 300) defines Hawtrey’s concept of the “natural rate” as the real rate of interest in an equilibrium state with no inflation.
Hawtrey’s third rate corresponds to the conventional “bank rate.”
Deutscher, P. 1997. “Hawtrey, Ralph George (1879–1975),” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Publishing, New York. 300–302.
Hawtrey, Ralph George. 1913. Good and Bad Trade: An Inquiry into the Causes of Trade Fluctuations. Constable, London.