CHAPTER II

MONEY INTEREST AND REAL INTEREST§1. Introduction

p At the close of the preceding chapter, the rate of in-terest was described as the percentage premium on pres-ent goods over future goods of the same kind. Does thekind of goods affect the premium? This important ques-tion—usually overlooked—may well engage our attentionat the very outset. The number, or figure, expressing therate of interest in terms of money does depend upon themonetary standard employed.

It is perfectly true, as is often pointed out, that whena man lends $100 this year in order to obtain $105 nextyear, he is really sacrificing not $100 in literal moneybut one hundred dollars’ worth of other goods such asfood, clothing, shelter, or pleasure trips, in order to ob-tain, next year, not $105 in literal money, but one hun-dred and five dollars’ worth of other goods. But this factdoes not remove the money factor from our problem. Themoney factor affects the rate of interest in many ways.The one here considered is that which occurs through achange in the value of the monetary standard.

If the monetary standard were always stable with refer-ence to goods, the rate of interest, reckoned in terms ofmoney, would be the same as if reckoned in terms ofgoods. When, however, money and goods change withreference to each other—in other words, when the money

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