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|393||THE “IMPATIENCE THEORY„ OF INTEREST|
with a descending income already has a high income without being compelled to wait for it. With him there is little reason for impatience; there is nothing to be impatient for; on the contrary, the future does not look at all inviting. He will therefore strive to save from his present abundance to provide for coming needs.
V. The determination of the Rate of Interest.
The question now arises, will not the rates of impatience of different individuals be very different, and if so, what relation do these different rates have to the rate of interest? It might seem at first that the rates of impatience would differ widely. In a nation of hermits, without any mutual lending and borrowing, this would be true; the rate of impatience of individuals would diverge widely, and there would be no common market rate of interest. It is modern society’s habit of borrowing and lending that tends to bring into equality the rates of impatience in different minds, and it is only because of the limitations of the loan market that absolute equality is not reached.
The chief practical limitation to lending is due to the risk involved, and to the difficulty or impossibility of obtaining the security necessary to eliminate or reduce that risk. Those who are most willing to borrow are oftentimes those who are least able to give security. It will then happen that these persons, kShut off from the loan market, experience a higher rate of impatience than the rate of interest ruling in that market. If they can contract loans at all, it will be only through the pawnshop or other high-rate agencies.
But for the moment let us assume a perfect market, in which the element of risk is entirely lacking. We assume that all individuals are initially possessed of fore-known income streams, and are free to exchange any parts of them so that present income may be exchanged for future income. This exchange may be effected by borrowing or lending, by buying and selling wealth or property and by changing the uses to which capital is put.
Under these conditions, the rates of impatience for different individuals will be perfectly equalized. Borrowing and