RELATION TO MONEY AND PRICES

or offset the effect of changes in the price level, thuscausing the real interest rate to remain unchanged atthe normal rate.

The following table shows that the standard deviationfrom the mean is far greater for the computed real rateof interest than for the actual rate of interest.

Table 14

Standard Deviations oj Money Interest and Real Interest

Number ofPeriods

Standard Deviations

Market Interest

ComputedReal Interest

London . .

11

.62

6.1

8

1.07

8.5

7

.73

5.0

Calcutta.

11

.57

7.5

5

.69

7.0

This table shows that the real rate of interest in termsof commodities is from seven to thirteen times as variableas the market rate of interest expressed in terms ofmoney. This means that men are unable or unwilling toadjust at all accurately and promptly the money interestrates to changed price levels. Negative real interest couldscarcely occur if contracts were made in a compositecommodity standard. The erratic behavior of real interestis evidently a trick played on the money market by the“money illusion” when contracts are made in unstablemoney. The computed real rate of interest was minus7.4 per cent in New York in the period 1860-1865 andwas still lower during 1915-1920. The rate was nearlyminus 100 per cent in Germany during the period of mostrapid inflation.

Another symptom of the same imperfection of ad-

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