THE THEORY OF INTEREST

market price, say, of sugar, as fixed, and adjusts his mar-ginal utility, or desirability, to it; whereas, for the entiregroup of persons forming the market, the adjustment isthe other way around, the price of sugar conforming toits marginal desirability to the consumer. 6 In the sameway, while for the individual the rate of interest deter-mines the degree of impatience, for society the degreesof impatience of the aggregate of individuals determine,or help to determine, the rate of interest. The rate ofinterest is equal to the degree of impatience upon whichthe whole community may concur in order that themarket of loans may be exactly cleared.

To put the matter in figures: Suppose that at the outsetthe rate of interest is arbitrarily set very high, say, 20per cent. There will be relatively few borrowers and manywould-be lenders, so that the total extent to whichwould-be lenders are willing to reduce their incomestreams for the present year for the sake of a much largerfuture income will be, say, 100 million dollars; whereas,the extent to which would-be borrowers are willing toincrease their income streams in the present at the highprice of 20 per cent will be only, say, one million. Undersuch conditions the demand for loans is far short of thesupply and the rate of interest will therefore go down.At an interest rate of 10 per cent the lenders may offer50 millions, and the borrowers bid for 20 millions. Thereis still an excess of supply over demand, and interest mustneeds fall further. At 5 per cent we may suppose the mar-ket cleared, borrowers and lenders being willing to takeor give respectively 30 millions. In like manner it canbe shown that the rate would not fall below this, as in

6 See my Mathematical Investigations in the Theory of Value andPrices.

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