THE THEORY OF INTEREST

at the rate of 10 per cent, and that the rate of interestexpressed in terms of goods is not high, but only about 5per cent.

We thus need to distinguish between interest expressedin terms of money and interest expressed in terms ofother goods. But no two forms of goods can be expectedto maintain an absolutely constant price ratio towardeach other. There are, therefore, theoretically just asmany rates of interest expressed in terms of goods asthere are kinds of goods diverging from one another invalue.

Is there, then, no absolute standard of value in termsof which real interest should be expressed? Real income,a composite of consumption goods and services, in otherwords, a cost of living index in accordance with the prin-ciples set forth in Chapter I, affords a practical objectivestandard. By means of such an index number we maytranslate the nominal, or money rate of interest, into agoods rate or real rate of interest, just as we translatemoney wages into real wages. The cost of living playsthe same role in both cases although the process of trans-lating is somewhat different and more complicated inthe case of interest from what it is in the case of wages,for the reason that interest involves two points of time,instead of only one; so that we must translate frommoney into goods not only in the present, when themoney is borrowed, but also in the future, when it is re-paid.

Income is the most fundamental factor in our economiclives. The derivation of the value of every durable agentor good involves the discounting or capitalizing of incomeas one of the steps. Consequently, a rate of interest interms of fundamental income itself would seem to come as

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