THE THEORY OF INTEREST

market values balance at the moment when the futureloans or other modifications are planned and decidedupon. The fact of risk means that later there may bea wide discrepancy between the actual realization and theoriginal expectation. In liquidation there may be defaultor bankruptcy. When the case is not one of a loan con-tract, but relates merely to the difference in incomestreams of two kinds of property bought and sold, thediscrepancy between what was expected and what is ac-tually realized may be still wider. Only viewed in thepresent is the estimated value of the future return stillthe equivalent of the estimated cost.

We thus see that, instead of the series of simple equali-ties which we found to hold true in the vacuum case, soto speak, where risk was absent, we have only a tendencytoward equalities, interfered with by the limitations ofthe loan market, and which, therefore, result in a series ofinequalities. Rates of interest, rates of preference, andrates of return over cost are only ideally, not really, equal.

We conclude by summarizing in the accompanyingtable the interest-determining conditions not simply forthe third approximation but for all three of our three suc-cessive approximations (distinguished by the numerals1 , 2 , 3 ).

In this summary tabulation the “Principles as toInvestment Opportunity” are formally inserted, underthe first approximation, in order to complete the cor-respondence with the other two approximations, but ofcourse they merely re-express the hypothesis under whichthe first approximation was made. They are thereforebracketed, since only the remaining four conditions areof real significance for the first approximation.

The first and second approximations were, of course,

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