THE THEORY OF INTEREST

ence of 2 per cent, he will become a lender instead of aborrower. He will be willing to lend $100 of this year’sincome for $102 of next year’s. As he can lend at 5 percent when he would do so at 2, he “jumps at the chance,”and invests, not $100 only, but another and another. Buthis present income, being drawn upon by the process, isnow more highly esteemed by him than before, andhis future income, being supplemented, is less highlyesteemed; and under the influence of successive addi-tions to the sums lent, his rate of preference for thepresent will keep rising until, at the margin, it will equalthe market rate of interest.

In such an ideal loan market, therefore, where everyindividual could freely borrow or lend, the rates of pre-ference or impatience for present over future income forall the different individuals would become, at the margin,exactly equal to each other and to the rate of interest.

§4. Altering Income by Loans

To illustrate this reasoning by a chart, let us supposethe income stream to be represented as in Chart 5, andthat the possessor wishes to obtain, by borrowing, a smallitem X' of immediately ensuing income in return for asomewhat larger item X" later on, X" being the amountof X' at interest. By such a loan he modifies his incomestream from ABCD to EBD. But this change will evi-dently produce a change in his time preference. If therate of time preference corresponding to the incomestream represented by the unbroken line is 10 per cent,the rate of preference corresponding to the broken linewill be somewhat less, say, 8 per cent. If the market rateof interest is 5 per cent, it is evident that the person willproceed to still further borrowing. By repeating the opera-

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