RELATION TO MONEY AND PRICES

§13. Summary

We have found evidence general and specific, fromcorrelating P' with both bond yields and short term inter-est rates, that price changes do, generally and perceptibly,affect the interest rate in the direction indicated by apriori theory. But since forethought is imperfect, the ef-fects are smaller than the theory requires and lag behindprice movements, in some periods, very greatly. When theeffects of price changes upon interest rates are distributedover several years, we have found remarkably high co-efficients of correlation, thus indicating that interest ratesfollow price changes closely in degree, though rather dis-tantly in time.

The final result, partly due to foresight and partly tothe lack of it, is that price changes do after several yearsand with the intermediation of changes in profits andbusiness activity affect interest very profoundly. In fact,while the main object of this book is to show how therate of interest would behave if the purchasing power ofmoney were stable, there has never been any long periodof time during which this condition has been even ap-proximately fulfilled. When it is not fulfilled, the moneyrate of interest, and still more the real rate of interest, ismore affected by the instability of money than by thosemore fundamental and more normal causes connectedwith income impatience, and opportunity, to which thisbook is chiefly devoted.