THE THEORY OF INTEREST

the rate of interest, or rather, the rates of interest, therebeing, theoretically, a separate rate for each time period.These rates of interest would, under these circumstances,be fully determined by the following four principles, towhich all the magnitudes in the problem of interest mustconform:

THE TWO IMPATIENCE PRINCIPLESA. Empirical Principle

The rate of time preference or degree of impatience ofeach individual depends upon his income stream.

B. Principle of Maximum Desirability

Through the alterations in the income streams pro-duced by loans or sales, the marginal degrees of impa-tience for all individuals in the market are brought intoequality with each other and with the market rate ofinterest.

This condition B is equivalent to another, namely,that each individual exchanges present against futureincome, or vice versa, at the market rate of interest upto the point of the maximum total desirability of theforms of income available to him.

THE TWO MARKET PRINCIPLESA. Principle of Clearing the Market

The market rate of interest will be such as will justclear the market, that is, will make the loans and borrow-ings or, more generally expressed, purchases and sales ofincome equal for each period of time.

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