CHAPTER 13

THE GENERAL THEORY OF THE RATE OF Interest

I

We have shown in Chapter 11 that, whilst there areforces causing the rate of investment to rise or fall soas to keep the marginal efficiency of capital equal tothe rate of interest, yet the marginal efficiency of capitalis, in itself, a different thing from the ruling rate ofinterest. The schedule of the marginal efficiency ofcapital may be said to govern the terms on whichloanable funds are demanded for the purpose of newinvestment; whilst the rate of interest governs the termson which funds are being currently supplied. Tocomplete our theory, therefore, we need to know whatdetermines the rate of interest.

In Chapter 14 and its Appendix we shall considerthe answers to this question which have been givenhitherto. Broadly speaking, we shall find that theymake the rate of interest to depend on the interactionof the schedule of the marginal efficiency of capitalwith the psychological propensity to save. But thenotion that the rate of interest is the balancing factorwhich brings the demand for saving in the shape ofnew investment forthcoming at a given rate of interestinto equality with the supply of saving which resultsat that rate of interest from the community’s psycho-logical propensity to save, breaks down as soon as weperceive that it is impossible to deduce the rate ofinterest merely from a knowledge of these two factors.

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