CHAPTER III

SOME COMMON PITFALLS§1. Introduction

In the last chapter we saw that the figure expressingthe rate of interest depends on the standard of value inwhich present and future goods are expressed, and we sawhow the rate of interest in one standard (such as thestandard of real income) is to be derived from the rate ofinterest in any other standard (such as the actual mone-tary standard).

This translation of the rate of interest from one stan-dard into another does not determine the rate of interestin any standard whatever; for it assumes that the rate insome one standard is already known, and merely enablesus, on the basis of this known rate, to calculate the ratesin other standards. The case is somewhat similar to theconversion of temperature from the Fahrenheit systeminto the Centigrade system. By such conversion we cancalculate the Centigrade temperature, but only on cra-dition that we already know the Fahrenheit temperature.The formula connecting the two does not enable us, inthe least, to find out how hot or cold the weather is.

While the deviations of the money rate of interest fromthe real rate are of tremendous practical importance, theymay be regarded as belonging more to the problem ofmoney than to the problem of interest, and, in the chap-ters which follow, these deviations will, unless other-

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