After 1929 it was the sturdy middle classes, and not just the lumpen proletariat, who were down and out. It was not all that unfashionable or disrepu… - Paul Samuelson

My mind is ever toying with economic ideas and relationships. Great novelists and poets have reported occasional abandonment by their muse. The well runs dry, permanently or on occasion. Mine has been a better luck. As I have written elsewhere, there is a vast inventory of topics and problems floating in the back of my mind. More perhaps than I shall ever have occasion to write up for publication. A result that I notice in statistical mechanics may someday help resolve a problem in finance.

The general method involved may be very simply stated. In cases where the equilibrium values of our variables can be regarded as the solutions of an extremum (maximum or minimum) problem, it is often possible regardless of the number of variables involved to determine unambiguously the qualitative behavior of our solution values in respect to changes of parameters.

In the preface to the reissue of Risk, Uncertainty and Profit, Frank Knight makes the penetrating observation that under the conditions envisaged above the velocity of circulation would become infinite and so would the price level. This is perhaps an over-dramatic way of saying that nobody would hold money, and it would become a free good to go into the category of shell and other things which once served as money. We should expect too that it would not only pass out of circulation, but it would cease to be used as a conventional numeraire in terms of which prices are expressed. Interest bearing money would emerge. Of course, the above does not happen in real life, precisely because uncertainty, contingency needs, non-synchronization of revenues and outlay, transaction frictions, etc., etc., all are with us. But the abstract special case analyzed above should warn us against the facile assumption that the average levels of the structure of interest rates are determined solely or primarily by these differential factors. At times they are primary, and at other times, such as the twenties in this country, they may not be. As a generalization I should hazard the hypothesis that they are likely to be of great importance in an economy in which there is a “quasi-zero" rate of interest. I think by this hypothesis one can explain many of the anomalies of the United States money market in the thirties.