THE THEORY OF INTEREST

hermits, in which there existed no mutual lending andborrowing, individuals would be independent of eachother. But, among ourselves who have access to a com-mon loan market, borrowing and lending do, at least, tendto bring into equality the marginal rates of impatiencein different minds. Absolute equality is not reached evenamong those making use of such a market; but this isbecause of the limitations of the market and, in par-ticular, because of the risk element. This element will beconsidered in the third approximation, but for simplicityof exposition is omitted in the first two approximations.

Here we shall assume a perfectly competitive market,one in which each individual is so small a factor as tohave, singly, no perceptible influence on the rate of in-terest, and in which there is no limitation on the amountof lending and borrowing other than that caused by therate of interest itself. The would-be borrower is thussupposed to be able to obtain as large or small a loan ashe wishes at the market price—the rate of interest. He isnot cut down to $5,000 when he is willing to borrow$100,000, merely because he cannot furnish enough col-lateral security or a satisfactory endorser. He can buy aloan as he can buy sugar, as much or as little as hepleases, if he will pay the price.

In the actual world, of course, no such perfect marketexists. While many people in New York City can obtainas large loans as they wish, there are thousands who areunable to obtain any at all. The price of a loan is paidnot in the present, as the price of sugar is paid, but in thefuture. What the lender gets when he makes the loan isnot payment but a promise of payment, and the futurebeing always uncertain he needs some sort of assurancethat this promise will be kept. We are assuming in the

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