CH. 13 THE GENERAL THEORY OF INTEREST 169

known that ndr will be the value in the year n of £1deferred r years from that date, we have

ndr=1dn+r/1dn;

whence it follows that the rate at which any debt can beturned into cash n years hence is given by two outof the complex of current rates of interest. If thecurrent rate of interest is positive for debts of everymaturity, it must always be more advantageous topurchase a debt than to hold cash as a store of wealth.

If, on the contrary, the future rate of interest isuncertain we cannot safely infer that ndr will prove

to be equal to 1dn+r/1dn when the time comes. Thus if

a need for liquid cash may conceivably arise beforethe expiry of n years, there is a risk of a loss beingincurred in purchasing a long-term debt and subse-quently turning it into cash, as compared with holdingcash. The actuarial profit or mathematical expectationof gain calculated in accordance with the existing pro-babilities—if it can be so calculated, which is doubtful—must be sufficient to compensate for the risk ofdisappointment.

There is, moreover, a further ground for liquidity-preference which results from the existence of un-certainty as to the future of the rate of interest, providedthat there is an organised market for dealing in debts.For different people will estimate the prospects differ-ently and anyone who differs from the predominantopinion as expressed in market quotations may have agood reason for keeping liquid resources in order toprofit, if he is right, from its turning out in due coursethat the ^1dr’s were in a mistaken relationship to oneanother.1

This is closely analogous to what we have already

1 This is the same point as I discussed in my Treatise on Money under thedesignation of the two views and the “bull-bear” position.