IN TERMS OF FORMULAS

infers that it disproves the existence of the other half.The illusion of their apparent incompatibility is solelydue to the failure to formulate the problem literally andto count the formulas thus formulated.

The other corollary is that such a formulation re-veals the necessity of positing a theoretically separaterate of interest for each separate period of time, or to putthe same thing in more practical terms, to recognize thedivergence between the rate for short terms and longterms. This divergence is not merely due to an imperfectmarket and therefore theoretically subject to annihilationby arbitrage transactions, as Bohm-Bawerk, for instance,seemed to think. They are definitely and normally dis-tinct and due to the endless variety in the conformationsof income streams. No amount of mere price arbitrage 6could erase these differences.

Thus, there should always be, theoretically, a separatemarket rate of interest for each successive year. Since,in practice, no loan contracts are made in advance sothat there are no market quotations for a rate of interestconnecting, for example, one year in the future with twoyears in the future, we never encounter such separateyear to year rates. We do, however, have such rates im-plicitly in long term loans. The rate of interest on a longterm loan is virtually an average 0 of the separate rates

6 It is true, of course, that the attempt to make an individual’s incomestream more even by trading one time-portion of it for another tendsto even up the various rates of interest pertaining to various timeperiods. But this is not price arbitrage and not properly to be calledarbitrage at all, being more analogous to the partial geographic equali-zation of freight charges in the price of wheat by international trade thanto the equalization by arbitrage of wheat prices in the same market atthe same time.

“The nature of this average has been expressed in Appreciation andInterest, pp. 26 to 29, and The Rate oj Interest, pp. 369 to 373. It is

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