THE THEORY OF INTEREST

interest is already fixed for the individual by the marketformed by others. How did they fix it? Have we beggedthe whole question?

Only a few steps are now required to finish the wholemarket picture. It is true that we assumed a fixed 10 percent rate in order to see how an individual would shifthis income position to harmonize his individual degreeof impatience with that, to him, fixed rate. Nevertheless,each individual, even if unconsciously, helps to make themarket rate by the very act of shifting his income situa-tion from a P position to a Q position.

This statement will be clear if we ask ourselves whatwould happen were we to suppose the “fixed” market rateto have been fixed too high, or too low. If we imagine themarket rate to be very high, say 25 per cent, then, thebulk of individuals would try to lend and few would wantto borrow. The aggregate of loans thus offered wouldexceed the demand and the interest rate would fall. Con-versely, if the rate were too low, demand would exceedsupply and the rate would rise. Since the total sums ac-tually lent must equal, in the aggregate, those borrowed,the horizontal displacements of all the Q’s in one directionmust equal that of all the other Q’s in the other direction.Some Q’s, those of borrowers, are to the right of thecorresponding P’s. Others are at the left. As a group, theyare neither. The average Q has the same longitude as theaverage P. The same is true as to latitude. In short, thegeometric “center of gravity” of all the Q’s must coincidewith that of all the P’s, in order that the loan market maybe cleared.

In other words, while the market rate, as represented bythe divergence of slope of the Market line, always seemsfixed to the individual adjusting his income situation to

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