RELATION TO MONEY AND PRICES

above charts are in striking contrast to the results pre-viously obtained from correlating P' directly with i. Theassumption that a change in prices occurring during oneyear exhausts its influence upon interest rates in the sameyear or in another single year is shown to be quite wrong,as might be expected. Our first correlations seemed to in-dicate that the relationship between P' and i is eithervery slight or obscured by other factors. But when wemake the much more reasonable supposition that pricechanges do not exhaust their effects in a single year butmanifest their influence with diminishing intensity, overlong periods which vary in length with the conditions,we find a very significant relationship, especially in theperiod which includes the World War, when prices weresubject to violent fluctuations.

The British figures for 1820-1864 give the lowest cor-relations of any included in this study. These low figuresare possibly due in part to the less accurate price indexesin those early years. It is noteworthy that the correla-tion coefficients are distinctly lower for the United States in the period 1900-1927 than they are for Great Britain inthe period 1898-1924. It is also interesting that for GreatBritain in 1898-1924, the highest value of r (+ 0.980) isreached when effects of price changes are assumed to bespread over 28 years or for a weighted average of 9.3years, while for the United States the highest r (+' 0.857)is for a distribution of the influence due to price changesover 20 years or a weighted average of 6.7 years.

Chart 48 shows graphically the smoothing effect of dis-tributing the influence of P' over various periods.

By assuming a distribution of effect of price changesover several years according to the form described above,the relationship between price changes and interest rates

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