MONEY INTEREST AND REAL INTEREST

terest would obviously have exceeded % per cent. Itwas stated, after the World War, that an American bank-ing firm, when asked by a German concern for a loan inmarks, offered to lend at 100 per cent per annum. Theoffer was rejected—fortunately for the American firmwhich, as it turned out, would actually have lost, andlost heavily, because the subsequent rapid depreciationof the mark far exceeded the compensatory effect of evenso high an interest rate.

The exact theoretical relation between the rates of in-terest measured in any two diverging standards of valueand the rate of foreseen appreciation or depreciation ofone of these two standards relatively to the other hasbeen developed by me with many numerical illustra-tions in a special monograph 3 and also in my first bookon interest. 4 The two rates of interest in the two diverg-ing standards will, in a perfect adjustment, differ fromeach other by an amount equal to the rate of divergencebetween the two standards. 5 Thus, in order to compensatefor every one per cent of appreciation or depreciation,one point would be subtracted from, or added to, the rateof interest; that is, an interest rate of 5 per cent wouldbecome 4 per cent, or 6 per cent, respectively.

3 Appreciation and Interest, Publications of the American EconomicAssociation, Third Series, Vol. XI, No. 4, Aug., 1896, pp. 331-442.

4 The Rate of Interest, Appendix to Chapter V.

'This is strictly true only when the rate of interest in each standardis reckoned momently, or continuously. If, as in practice, the rate isreckoned quarterly, semi-annually, or annually, this equation is slightlyaltered. For the mathematical demonstration of this proposition, seeAppendix to Sec. 3, Chapter V, of The Rate of Interest . For the sig-nificance of “continuous reckoning,” see The Nature of Capital andIncome, Chapter XII; also Appendix to Sec. 12 of Chapter XIII.