RELATION TO MONEY AND PRICES

on the farmer of the deflation of 1920 are now, in 1929,sufficiently acute to make farm relief a pressing politicalproblem and that these economic effects may be expectedto persist for many years to come. A further probableexplanation of the surprising length of time by whichthe rate of interest lags behind price change is that be-tween price changes and interest rates a third factorintervenes. This is business, as exemplified or measuredby the volume of trade. It is influenced by price changeand influences in turn the rate of interest.

§8. Interest Rates and Price Indexes

Thus far we have considered the relation of changesin the price level and interest rates. It remains to studythe relations of the price levels themselves to interestrates. The same basic data are used as in the precedingsections, but we now correlate the price indexes directlywith the interest rates in Great Britain and the UnitedStates.

Chart 52 shows the British long term interest rates(bond yields) plotted with the wholesale price index forthe years 1820-1924.

It is apparent that the P curve and the i curve, asplotted, conform very closely. Furthermore, lagging in-terest rates one year gives the highest obtainable degreeof correspondence. The corresponding data for the UnitedStates, plotted on Chart 57 below without lagging i,shows the same close relationship between P and i.

On Chart 53 are plotted the curves of the correlationcoefficients computed for P and i for Great Britain andthe United States .

The r’s for the whole period 1820-1924 for Great Brit-ain are not shown on Chart 53 since they reveal nothing

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