Pagina:Scientia - Vol. IX.djvu/389

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But why should there be this excess! Why should not a dollar to-day exchange on even terms for a dollar next year? And what principles determine the amount of excess? These questions are among the most perplexing with which economic science has had to deal, and for two thousand years economists have been trying to solve the riddle winch they represent.

The theory of interest here briefly presented is that more fully contained in my book The Rate of Interest.1 It may be called for short, the « Impatience » Theory of Interest.

First of all let us note the relation of interest to money. Among the earliest fallacies concerning the rate of interest was that it depends on the amount of money in circulation. In particular, this fallacious theory held that plentiful money makes the rate of interest low. We commonly speak of interest as the « price of money », and when the trade journals tell us that « money is easy » in Wall Street, or Lombard Street, their meaning is that interest is low, and low because it is easy to borrow money. Or, we are told that « the money market is tight », meaning that it is hard to borrow money. Probably the great majority of unthinking business men still believe that interest is low when money is plentiful, and high when money is scarce. We often hear the argument that the present high cost of living cannot be due to any plentifulness of money, because if money were really plentiful, it would be « cheap », meaning that the rate of interest would be low, whereas it is fairly high, and therefore, it is argued, money must be scarce.

The fallacy consists in overlooking the fact that plentiful money raises the demand for loans just as much as it raises the supply. If money becomes more abundant, prices will rise and if prices rise, any intending borrower will need to borrow more money in order to purchase the same amount of goods.

That the relative abundance of money has, under normal circumstances, no influence on the rate of interest, has been well known to those versed in this subject ever since the days of Locke; yet the opposite belief still prevails among many intelligent people. One reason for this error is found in the experience and usages of banks. If his reserves are

  1. Macmillan, New York and London, Co., publish, 1907.