Most people imagine that the rate of interest is a technical phenomenon, concerning only money lenders or borrowers. Of explicit or contract interest this is in a measure true; but interest may be implicit as well as explicit. It is impli[pli]cit in every price. If we invest in a bond, for instance, the price that we pay for the bond carries with it the implication of a rate of interest, — that is, the rate we expect to realize on the investment. When a man buys stocks instead of bonds, or even a house or a piece of land, the same element of implicit interest enters into the transaction. He cannot even buy a piano or an overcoat or a hat without « discounting » the value of the use which he expects to make of that particular article. The rate of interest, then, is not a narrow technical phenomenon. It touches the daily life of us all.

Concerning the verbal definition of the rate of interest, there is no dispute; but concerning its nature and its causes, which I propose to discuss, there are numerous and conflicting theories.

By definition, the rate of interest is the price of capital in terms of income, when both capital and income are measured in terms of the same unit, as, for instance, of money ; or, what amounts to the same thing, the rate of interest is the excess above par which has to be paid for this year’s money in terms of next year’s money.