§1. Interest Rates and Values of Goods

HAVING completed the exposition of the theory of the causation and determination of the rate of interest which is most acceptable to me, it now remains to show how this theory fits into a complete system of economic theory and what results must flow from its acceptance.

Interest plays a central rôle in the theory of value and prices and in the theory of distribution. The rate of interest is fundamental and indispensable in the determination of the value (or prices) of wealth, property, and services.

As was shown in Chapter I, the price of any good is equal to the discounted value of its expected future service, including disservices as negative services. If the value of these services remains the same, a rise or fall in the rate of interest will consequently cause a fall or rise respectively in the value of all the wealth or property. The extent of this fall or rise will be the greater the further into the future the services of wealth extend. Thus, land values from which services are expected to accrue uniformly and indefinitely will be practically doubled if the rate of interest is halved, or halved if the rate of interest is doubled. The value of dwellings and other goods of definitely limited durability will fall less than half if interest rates double, and will rise to less than Edition: current; Page: [326] double if interest is halved. Fluctuations in the value of furniture will be even less extensive, clothing still less, and very perishable commodities like fruit will not be sensibly affected in price by a variation in the rate of interest. In all the foregoing cases it is, of course, assumed that the expected services remain unchanged.