THE THEORY OF INTEREST

rates of time preference are all brought into conformitywith the market rate of interest.

In practice, of course, the adjustments are never per-fect and, in particular, the income stream is never asmooth curve, such as it is here for convenience repre-sented.

In practice, also, loans are effected under the guise ofmoney. We do not confessedly borrow and lend real in-comes, but money and credit. Yet money—that universalmedium in practice and universal stumbling-block intheory—merely represents real income, or capitalized realincome. A hundred dollars mean the power to secureincome,—any income the present value of which is $100.When, therefore, a person borrows $100 today and re-turns $105 next year, in actual fact he secures the title to$100 worth of income—immediately future, perhaps—and parts with the title to $105 worth of income a yearlater. Every loan contract, or any other contract imply-ing interest, involves, at bottom, a modification of incomestreams, the usual and chief modification being as to timeshape.

One reason why we often forget that a money loanrepresents real income is that it represents so manypossible varieties of real income. A fund of money isusually the capitalization not simply of one particularfuture program, or lay-out, of income but of a large num-ber of optional income streams, and is not restricted, asin the first approximation, here considered, to a simpleincome stream and its modification by loans or theirequivalent.

We may distinguish six principal types of individualsin a loan market—three borrowing types and three lend-ing types. The first type of borrower (Chart 7) is sup-

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