RELATION TO MONEY AND PRICES

in the first period the price level rises, the price change(P') is assumed to be at the rate of 5 per cent per annum.In the next period, the price level remains constant sothat price change is zero, and so on as indicated. Thelower curve shows the theoretical effects on the rate ofinterest. In the first period, it would be 5 per cent abovenormal; in the second period, normal; and so on.

One obvious result of such an ideally prompt and per-fect adjustment would undoubtedly be that money inter-est would be far more variable than it really is and thatwhen it was translated into real interest this real interestwould be comparatively steady. What we actually find,however, is the reverse—a great unsteadiness in real in-terest when compared with money interest.

Real interest, however, as shown by the dotted lineson Chart 42, changed in the opposite way to money in-terest, due to the lack of foresight and adjustment.Attention is called to the period 1852-1857 in London ,during which prices rose very fast (that is, money de-preciated) simultaneously with, and mainly because of,the great gold production. The market rate of interestaveraged 4.7 per cent, which was higher than in anysubsequent or in any previous period. Yet during thisperiod of apparently highest interest rates, lenders werereceiving, in real interest, less than nothing for theirsavings. Also in the inflation period 1914-1920, bankrates reached their highest peak, 5.2 per cent, while aver-age market rates, at 4.4 per cent, were but little lowerthan in 1852-1857. Yet in terms of real commodities thosewho saved and deposited or invested at the bank rates ormarket rates of interest were mulcted 9 to 10 per cent fortheir abstinence and sacrifices. In the following period,1920-1927, however, the savers and lenders got back more

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