CHAPTER XXI

SUMMARY

§1. Interest and Purchasing Power of Money

We have seen that, theoretically, the rate of interestshould be subject to both a nominal and a real variation,the nominal variation being that connected with changesin the standard of value, and the real variation being thatconnected with the other and deeper economic causes.

As to the nominal variation in the rate of interest, wefound that, theoretically, an appreciation of 1 per cent ofthe standard of value in which the rate of interest isexpressed, compared with some other standard, will re-duce the rate of interest in the former standard, comparedwith the latter, by about 1 per cent, and that, contrari-wise, a depreciation of 1 per cent will raise the rate bythat amount. Such a change in the rate of interest wouldmerely be a change in the number expressing it, and notfundamentally a real change. Yet, in actual practice, forthe very lack of this perfect theoretical adjustment, theappreciation or depreciation of the monetary standarddoes produce a real effect on the rate of interest, and thata most vicious one. This effect, in times of great changesin the purchasing power of money, is by far the greatestof all effects on the real rate of interest. This effect isdue to the fact that the money rate of interest, while itdoes change somewhat according to the theory as de-scribed in Chapters II and XIX, does not usually changeenough to fully compensate for the appreciation or de-

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