APPENDIX TO CHAPTER 14

APPENDIX ON THE RATE OF INTEREST IN MARSHALL’S“PRIN-

CIPLES OF ECONOMICS”, RICARDO’S “PRINCIPLES OFPOLITICAL ECONOMY”, AND ELSEWHERE

I

THERE is no consecutive discussion of the rate of interest inthe works of Marshall, Edgeworth or Professor Pigou ,-nothing more than a few obiter dicta. Apart from thepassage already quoted above(p. 139) the only importantclues to Marshall’s position on the rate of interest are tobe found in his Principles of Economics(6th edn.), Book VI.p. 534 and p. 593, the gist of which is given by the followingquotations:

“Interest, being the price paid for the use of capital in anymarket, tends towards an equilibrium level such that the aggre-gate demand for capital in that market, at that rate of interest,is equal to the aggregate stock 1 forthcoming there at that rate.If the market, which we are considering, is a small one— say asingle town, or a single trade in a progressive country- an in-creased demand for capital in it will be promptly met by anincreased supply drawn from surrounding districts or trades.But if we are considering the whole world, or even the wholeof a large country, as one market for capital, we cannot regard theaggregate supply of it as altered quickly and to a considerableextent by a change in the rate of interest. For the general fundof capital is the product of labour and waiting; and the extra

1 It is to be noticed that Marshall uses the word“capital” not“money”and the word“stock” not“loans”; yet interest is a payment for borrowingmoney, and“demand for capital” in this context should mean“demand forloans of money for the purpose of buying a stock of capital- goods”. Butthe equality between the stock of capital- goods offered and the stock de-manded will be brought about by the prices of capital- goods, not by the rateof interest. It is equality between the demand and supply of loans of money,i.e. of debts, which is brought about by the rate of interest.

186