THE THEORY OF INTEREST

annum to be quoted as an expression of the current mar-ket, whether the quotation be in print or a verbal quota-tion in a broker’s or banker’s office, it seems proper tocall it in a broad sense a rate of interest. Even whenconfined to such market rates, and excluding exceptionalor individual rates, the rate of interest ceases to be theideal, imaginary, single-valued magnitude hitherto as-sumed and takes on the myriad forms which we find inactual business transactions.

As indicated, this profuse variety is brought aboutchiefly by the introduction of risks of various sorts. Therate on call money is affected by the chance of the loanbeing “called” by the lender, or the sudden reduction ofthe total of such loans outstanding and the raising of therate for those remaining. The rate on a loan-shark’s loanis high because of the risk of non-payment by the bor-rower; the rate on a debenture and the rate on a secondpreferred stock of a moribund corporation are affected bythe risk of inadequate corporate assets in event of liquida-tion ; the rate on a government bond of a nation at war isaffected by the chance of that nation’s defeat; the rate ofdividends on common stock is affected by the risks of thebusiness; and so on in an infinite number of different cases.

§2. Relations Between the Various Rates

No very satisfactory theoretical treatment of thegeneral relations between interest and risk has yet beenworked out. But for practical purposes, a good usage is tolimit the term “interest” to fairly safe loans and stapleor standard market quotations and to designate by someother term, such as dividends or profits, the other lesscertain and less standardized rates. Another usage is toreckon as net profits or net losses the difference between

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