THE THEORY OF INTEREST

wise specified, be disregarded. The reader may, therefore,in this theoretical study keep to the hypothesis that themonetary unit remains unchanged in purchasing power,with the result that the money rate of interest and thereal rate coincide. That is to say, the rate of interest isassumed to be at once the premium on this year’s moneyin terms of next year’s and the same premium on thisyear’s real income in terms of next year’s.

This premium, that is, the terms of exchange of thisyear’s income and next year’s, may be said to depend, inbrief, on the relative supply and demand of those twoportions of the income stream; and this statement maybe interpreted as including almost the entire impatienceand investment opportunity theory of this book. But, likemany brief statements, this supply and demand statementis crude and inadequate. Crude and inadequate notionsbeset this subject and some of them are so common andtreacherous that it seems worth while, before proceedingwith further analysis, to examine these notions in orderto avoid falling into their pitfalls.

To say that the rate of interest is fixed by supply anddemand is merely to state, not to solve the problem . 1Every competitive price is fixed by supply and demand.The real problem is to analyze the particular supply anddemand forces operative in determining the rate of in-terest.

Nor are we greatly enlightened by saying that in onesense the rate of interest is the price of money. For it is

1 In Chapters XI and XII supply and demand curves will be derivedfrom the principles of impatience and opportunity. It will also be shownthat impatience is not to be associated with demand to the exclusionof supply, nor opportunity with supply rather than demand, nor vice

versa.

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