RELATION TO MONEY AND PRICES

But the price of money in the sense of the rate of in-terest is a very peculiar kind of price. It is, as we know,the deviation from par of the price of present money interms of future money. It is not very analogous to theprice of wheat. The real analogy with the price of wheatis not the rate of interest but the purchasing power ofmoney. In that sense it is perfectly true that the price ofmoney is high or low with its scarcity or abundance. Butin the other sense it is not true. Moreover, as we haveseen, when the price of money, in the sense of the pur-chasing power of money, is low, that is, when the pricelevel is high, and when, therefore, presumably the quan-tity of money is large, we do not then find the rate ofinterest low, as the theory outlined above requires. On thecontrary, we find a high price level associated with a highinterest rate.

That short term interest rates vary inversely with bankreserves, however, fits in with our theory of interest asrelated to real income. A low bank reserve is, among otherthings, a symptom of a prospective general increase inthe income of the community. When business is optimis-tic, which means when future income looms large, thereis an impatient desire to discount that big future andto make it even bigger by investing present income, pro-vided the investment can be financed. Evidently the im-mediate effect is to increase bank loans and consequentlyto increase deposits. These results tend to lessen the ratioof bank reserves to liabilities. Thus the banker is led toraise his rate. It seems that the rise merely reflects hisreserve situation. But back of this situation is the de-mand for loans, and back of that something more funda-mental—the rising income stream, a period of increasingprosperity, of invention and progress, or of great financ-

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