THE THEORY OF INTEREST

justment is the fact that the adjustment is very slow.When prices begin to rise, money interest is scarcely af-fected. It requires the cumulative effect of a long rise,or of a marked rise in prices, to produce a definite ad-vance in the interest rate. If there were no “money illu-sion” and if adjustments of interest were perfect, un-hindered by any failure to foresee future changes in thepurchasing power of money or by custom or law or anyother impediment, we should have found a very differentset of facts.

§6. Interest Rates and Rates oj Price Change

The roughness of the comparisons between interestrates and price levels thus far made impels to furtherstudy of this important problem. For these more rigor-ous comparisons, the statistics of prices and of bondyields in Great Britain and the United States have beentaken, being the only reliable statistics ready at handwhich permit of long trend comparisons.

Since the theory being investigated is that interestrates move in the opposite direction to changes in thevalue of money, that is, in the same direction as pricechanges, the first analysis made is the same as thatalready made by rougher methods, the comparison ofprice changes with interest rates.

For the rate of change of prices, the customary linkrelative expression was at first used in a preliminary studyof quarterly United States data for the period 1890-1904. But to ensure full comparability with my relatedstudies of several years ago on price changes and tradevariations, the symmetrical expression P' (rate of pricechange per annum) is used throughout. The precise der-ivation of P' is given in my paper, Our Unstable Dollar

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