THE THEORY OF INTEREST

and error. To find the rate of interest on which the mar-ket will finally settle, let us try successively a numberof different rates. First, let us suppose a rate of 5 per cent.This rate will determine the choice between options foreach individual. The land owner formerly supposed will,as we have seen, choose C, the mining use, because thepresent value of the income so obtained ($9110) exceedsthe present values of the rival uses. Every other individ-ual in the market, in like manner, will select that particu-lar use for his capital which will give him the maximumpresent worth. With these choices made, the different in-dividuals will then enter the market of loans or sales,desiring to modify the time shapes of their incomestreams to suit their particular desires.

As a result of all these choices, the total amount whichall the would-be lenders are willing to lend at 5 per centout of this year’s instalment of their chosen incomestream will be perfectly definite, and likewise the totalamount which all the would-be borrowers are willing totake. This we saw in the preceding chapter. In otherwords, the demand and supply of loans for the presentyear, at the given rate of interest, 5 per cent, will both bedefinite quantities. Should it happen that the supply ofloans exceeds the demand, it would follow that 5 per centcould not be the correct solution of the rate of interest,for it would be too high to clear the market.

In that case, let us try again; suppose a rate of 4 percent. Following the same reasoning as before, we now findthat the land owner will select the forestry opportunityfor his land because the present value ($11,300) of theincome from forestry—now reckoned at 4 per cent—willexceed that of the two rival income possibilities. Othercapitalists will likewise select their best option from

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