THE THEORY OF INTEREST

present rate of interest. Such a community has been ap-proximated in former years by the typical Americanarmy camp isolated in a western community in whicheach inhabitant, or family, had a prescribed income. Aseries of such hypotheses will lead us through successiveapproximations to an eventual picture of actuality.

§3. Equalization of Impatience

Under the hypothetical conditions which have beenstated for the first approximation, the rates of time pre-ference for different individuals will, by the process ofborrowing and lending, become perfectly reconciled tothe market rate of interest and to each other, for if,for any particular individual, the rate of preference dif-fers from the market rate, he will, if he can, adjust thetime shape of his income stream so as to bring hismarginal preference rate into harmony with the interestrate. A man who, for a given income stream, has a rateof preference above the market rate will sell some of hissurplus future income in return for an addition to hismeager present income, i.e., he will borrow. This willhave the effect of enhancing his want for one more dollarof future income and decreasing his want for one moredollar of present income. The process will continue untilthe rate of preference of this individual, at the margin,is equal to the rate of interest. In other words, under ourhypothesis, a person whose preference rate exceeds thecurrent rate of interest will borrow up to the point atwhich the two rates will become equal.

On the other hand, the man, whose temperament orwhose income stream or both give him a preference ratebelow the market rate, will buy future income with someof his abundant present income, i.e., he will lend. The

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