THE THEORY OF INTEREST

will mean that the rate of interest may under certain cir-cumstances be zero (i.e., non-existent), or even negative,so that, in such a case, future goods would command apremium over present. After these general principles havebeen established a special study will then be in order todiscover why the rate of interest is, in actual experience,almost never zero or negative.

We noted, in Chapter II, that when gold, or any otherdurable commodity capable of being stored or kept with-out cost, is the standard of comparison, the rate of inter-est in terms of that standard cannot fall below zero. Doesthe reason why interest is, in general experience, posi-tive rather than negative lie entirely in human nature?Or does it lie partly in the income stream? These specialquestions can best be answered after we have found thegeneral principles by which the rate of interest, be itpositive, negative, or zero, is determined.

4. Interest and Price Theory

The preference of any individual for early over de-ferred income depends upon his present as compared withhis prospective income and corresponds to the ordinarytheory of prices, which recognizes that the marginal wantfor any article depends upon the quantity of that articleavailable. Both propositions are fundamental in theirrespective spheres.

The relationship of these problems, and others, may beschematized roughly as shown in Chart 4 which follows.

In this chart A and B represent present prices of enjoy-able goods, and A' and B' prices of future enjoyablegoods. A and A ' refer to different years in the same place,say New York; B and B ' are similar except that they re-late to a different place, say London .

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