CHAPTER XIX

THE RELATION OF INTEREST TO MONEY AND

PRICES

§1. Price Changes and Interest Rates

No problem in economics has been more hotly debatedthan that of the various relations of price levels to inter-est rates. These problems are of such vital importancethat I have gone to much trouble and expense to havesuch data as could be found compiled, compared, andanalyzed. The principal result of these comparisons aregiven in this chapter.

The general theory of the relationship between therate of interest and the buying power of money was sum-marized in Chapter II. The main object of this chapteris to ascertain to what extent, if at all, a change in thegeneral price level actually affects the market rates ofinterest.

Since the theory of Chapter II presupposes foresight,the question arises at the outset: How is it possible fora borrower or lender to foresee variations in the generalprice level with the resultant increase or decrease in thebuying power of his money? A change in the value ofmoney is hard to determine. Few business men have anyclear ideas about it. If we ask a merchant whether or nothe takes account of appreciation or depreciation of moneyvalues, he will say he never heard of it, that “a dollar is adollar!” In his mind, other things may change in termsof money, but money itself does not change. Most people

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