THE THEORY OF INTEREST

United States data give r’s of -f- 0.695 without lag, and-+- 0.876 with i lagged one year. Even when a cubic trendis eliminated for 1898-1924 the r’s still remain signifi-cantly high, namely, without lagging, r = + 0.794 andwith i lagged one year r = 0.790. For the United States without lagging, r = + 0.525 and with i lagged one yearr = + 0.769.

The elimination of the secular trends from the com-parisons makes the relationship of i and P depend solelyupon the similarity of fluctuations in the shorter orcyclical periods. Even without Hamlet the play proves tobe astonishingly informing and interesting. It is quitedefinitely demonstrated that, in times of marked pricechanges, as in the World War period, the effects of pricemovements are felt rather quickly upon the rates of inter-est, even in the case of long term bond yields.

§10. Relations of Prices and Interest Interpreted

The studies of P, P' and P' in relation to i have broughtout four relationships:

(1) The rate of interest tends generally to be highduring a rising price level and low during a falling pricelevel;

(2) The rate of interest lags behind P' so that oftenthe relationship is obscured when direct comparison ismade;

(3) The rate of interest correlates very markedly withP', representing the distributed effect of lag. For recentyears in Great Britain , the close relationship is indicatedby r — + 0.98 when i is lagged and the effects of P' aredistributed over 28 years;

(4) The rate of interest tends definitely to be highwith a high price level and low with a low price level.

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