The equation of profit or loss on taking out circulation then reads:
yz + bx - xz - c = profit or loss.
But circulation taken out (b) can never be greater than the amount of money paid for the bonds (z).
If government bonds should be at par or at a discount, the nominal profit would always be just the basis interest on the bonds, less the tax and the cost of taking out circulation, or a constant advantage in the case of the 2's of 1.437 per cent. For the purpose of this discussion we will consider only the 2's of 1930.
In the regular case, then, the money paid for the bonds (z) is greater than the amount of circulation received (b). With that statement in mind we can draw certain very definite conclusions about our circulation direct from the equation we have formed; z is greater than b.
Repeating the equation in order to have it directly before us:
yz + bx - xz - c = profit or loss.
Then as the current interest rate (x) increases, if all the other quantities remain constant, the negative influence in the equation grows greater, or profit from circulation decreases. We can, then, make definitely:
STATEMENT I
If all other circumstances remain the same, circulation grows less profitable as the current money rate advances.