THE THEORY OF INTEREST

farming, $9000; mining, $9110; but if the rate is 4 percent, he will choose the highest from the present valuesat 4 per cent, computed from the second table. Thesepresent values now are: forestry, $13,520; farming, $12,-500; mining, $10,100.

Whatever the final outcpme of all the readjustments,it is evident that the introduction of the influence of therate of interest on the range of choice does not in anymaterial way affect the reasoning already given in regardto the determination of the rate of interest. Since therate of interest will itself fix the range of choice, it willstill be true that, once the range of choice is fixed for agiven rate of interest, the individual will choose, as be-fore, that use which has the maximum present value. Onthe basis of this choice he is then led to borrow or lendin order to modify his income stream so that his degreeof impatience may harmonize with the rate of interest.If, upon an assumed rate of interest, the borrowing andlending for different individuals actually cancel one an-other—in other words, clear the market—then the rateof interest assumed is clearly the one which solves theproblem of interest; otherwise the borrowing and lend-ing will not be in equilibrium, and some other rate of in-terest must be selected. By successively postulating dif-ferent rates of interest, and remembering that each ratecarries with it its own range of options and its own setof present values of those options, we finally obtain thatrate which will clear the market.

The rate which will clear the market, while drawinginto equality with itself all marginal impatience ratesand all marginal rates of return on cost, is the one whichsolves the problem of interest under the assumed con-ditions.

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