MONEY INTEREST AND REAL INTEREST

near as we can practically come to any basic standard inwhich to express a real rate of interest.

But, in actual practice, it is the rate in terms of moneywith which business men deal and hereafter the rate ofinterest, unless otherwise specified, will in this book betaken to mean this money rate.

The money rate and the real rate are normally identi-cal; that is, they will, as has been said, be the same whenthe purchasing power of the dollar in terms of the cost ofliving is constant or stable. When the cost of living is notstable, the rate of interest takes the appreciation and de-preciation into account to some extent, but only slightlyand, in general, indirectly. That is, when prices are rising,the rate of interest tends to be high but not so high asit should be to compensate for the rise; and when pricesare falling, the rate of interest tends to be low, but notso low as it should be to compensate for the fall . 7

The principle of interest being relative to the standardused in loan contracts would be more in evidence if itwere customary to make loan contracts in terms of otherstandards than money. The rate is actually expressedin loan contracts in terms of money and only translatedinto terms of goods, if at all, after the contract has beenfulfilled, when it is too late to stipulate compensationsfor the rise or fall in monetary value. If the money rateof interest were perfectly adjusted to changes in thepurchasing power of money—which means, in effect, ifthose changes were perfectly and universally foreseen—

1 That the appreciation or depreciation of money does actually in-fluence the rate of interest, even though feebly, is now well recognizedby those who have given attention to the subject. See Professor Mar-shall’s testimony, Indian Currency Report, p. 169; and Johnson, Money and Currency. Boston, Ginn & Company, 1905.

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