THE THEORY OF INTEREST

all the preceding comparisons of price levels and interestrates is to discover what precise relation obtains betweeninterest rates and prices in the long run. It is like givingthe play of Hamlet without Hamlet to eliminate thesecular trends of i and P from a study of long term rela-tionships in which these very secular trends are mostimportant and often dominant influences.

However, to anticipate possible criticisms and errors,the results of eliminating secular trends of prices andinterest rates have been studied. These additional studiesare also made for another and more important purpose,namely, to discover whether or not the shorter so-calledcyclical movements of prices influence long-term interestrates in the same way as the long secular price movementshave been shown to do. For simplicity, least squarestraight line and parabola trends were used. These willanswer sufficiently the present purpose. In addition, acubic trend was applied to the yearly data for the UnitedStates for the period 1900 to 1927 and to the British datafor the corresponding period.

Charts 54, 55, and 56 show the curves of price levelsand interest rates in Great Britain for the period 1820-1924 with straight line trends and parabolic trendsplotted, while Chart 57 shows the corresponding curvesfor the United States for the period 1900-1927.

The results, after eliminating these secular trends, areinteresting and amazing. The correlation coefficients withstraight line trends eliminated are naturally smaller thanwhen these trends are included, but they are still signifi-cantly high except for the period 1865-1897 in GreatBritain. In the majority of cases, the characteristic lagof about a year of interest rates behind prices gives thehighest correlation.

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