MONEY INTEREST AND REAL INTEREST

standard appreciates or depreciates in value in terms ofgoods—the numbers expressing the two rates of interest,one reckoned in terms of money and the other reckoned interms of goods, will be quite different. Moreover, the for-mer, or money rate, the only rate quoted in the market,will be influenced by the appreciation or depreciation.

§2. Assuming Foresight

The influence of such changes in the purchasing powerof money on the money rate of interest will be differentaccording to whether or not that change is joreseen. Ifit is not clearly foreseen, a change in the purchasingpower of money will not, at first, greatly affect the rateof interest expressed in terms of money. Instead, if thechange is in the direction of appreciation, it will injurethe debtor, because to repay the principal of his debtwill cost him more goods than either he or his creditoranticipated when the debt was contracted.

In so far as the appreciation is foreseen, any increasedburden to the debtor in the principal may be somewhatoffset by a reduction in the rate of interest. This is afact which has seldom been recognized. 1 The assumptionhas been tacitly made that contracting parties are power-less to forestall gains or losses caused by an upward ordownward movement of the monetary standard evenwhen that movement is foreseen.

It is theoretically just as possible to make allowancefor an expected change in the unit of value as it would befor an expected change in any other unit. If, by legisla-tion, the unit of length were to be changed, and itschange were set for a certain future date, contracts run-

1 A brief outline of the history and theory of appreciation and interestis given in the Appendix to Chapter V of The Rate of Interest.

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