FIRST APPROXIMATION

that case it would result in an excess of demand oversupply and cause the rate to rise again.

Thus, the rate of interest registers in the market thecommon marginal rate of preference for present over fu-ture income, as determined by the supply and demand ofpresent and future income. Those who, to start with,have a high degree of impatience, strive to acquire morepresent income at the cost of future income, and thustend to raise the rate of interest. These are the borrow-ers, the spenders, the sellers of property yielding remoteincome, such as bonds and stocks. On the other hand,those who, to start with, have a low rate of preference,strive to acquire more future income at the cost of pres-ent income, and so tend to lower the rate of interest. Suchare the lenders, the savers, the investors.

Not only will the mechanism just described result in arate of interest which will clear the market for loansconnecting the present with next year, but, applied toexchanges between the present and the more remote fu-ture, it will make similar clearings. While some individ-uals may wish to exchange this year’s income for nextyear’s, others wish to exchange this year’s income forthat of the year after next, or for a portion of severalfuture years’ incomes. The rates of interest for thesevarious periods are so adjusted as to clear the marketfor each of the periods of time for which contracts aremade .

§9. Four Principles

If we retain our original assumption that every manis initially endowed with a rigidly fixed or prescribed in-come stream which can be freely bought and sold andthereby redistributed in time, the foregoing discussiongives us a complete theory of the causes which determine

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