THE THEORY OF INTEREST

to borrow or lend in the loan market. We purposely ex-cluded that possibility for the moment and went aheadas if the man were shut off from the loan market com-pletely, so that any investment must be out of his ownincome and not be made with borrowed money. Were thisthe case (as in practice it often is) Chart 37 wouldcorrectly represent the result of the individual’s shift.It would be a one-way shift, entirely along the Oppor-tunity line.

But if now we return to the hypothesis of a perfectloan market, accessible to all concerned and to any ex-tent desired, then Chart 37 does not fully picture ourproblem because it fails to take account of the fact thatthe individual not only can shift along the Opportunityline, but can also shift along a Market line by borrow-ing and lending. That is, he now has two “can” lines,both the Market line of Chapter X and the Opportunityline of this chapter.

Chart 38 pictures the double movement of Individual 1.Starting at O x , he moves along the Opportunity lineto P x where the Opportunity line becomes tangent tothe M line, then along the M line to Q x where the Mline becomes tangent to a W x line. That is, the fixedrate of interest will cause the individual so to shiftthat the marginal rate of return over cost (investmentopportunity rate and the marginal rate of time pref-erence (degree of impatience) will, each of them, beequal to the market rate of interest. Chart 38 depictsIndividual 1 ’s adjustment of his rate of investmentopportunity and his degree of impatience to the marketrate of interest. The rate of interest is, as always, repre-sented in the slope of the M line, and the rate of returnover cost is represented in the slope at P x of the O x line.

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