The Influence of the Rate of Interest on Prices - Excerpt

 

"[...] According to the general opinion of economists, the interest on money is regulated in the long run by the profit on capital which in its turn is determined by the productivity and relative abundance or real capital, or, in the terms of modern political economy, by its marginal productivity. […]

 

This question deserves very careful consideration, and, in fact its proper analysis will take us a long way towards solving the whole problem.

 

Interest on money and profit on capital are note the same thing, nor are they connected with each other ; if they were, they could not differ at all, or could only differ a certain amount at every time. There is no doubt some connecting link between them, but the proper nature and extent of this connection is not so very easy to define[…].

 

What becomes of the connecting link between interest and profit ? In my opinion there is no such link, except precisely the effect on prices, which would be caused by their difference. When interest i slow in proporition to the existing rate of profit, and if, as I take it, the prices thereby rise, then, of course trade will require more sovereigns and bank-notes, and therefore the sums lent will not all come back to the bank, but part of tehm will remain in the boxes and purses of the public; in consequenc, the bank reserves will melt away while the amount of their liabilities very has increased, which will force the to raise their rate of interest[...]."

 

Author(s): Knut Wicksell
Source: The Economic Journal, Vol. 17, No. 66 (Jun., 1907), pp. 213-220 

Published by: Wiley on behalf of the Royal Economic Society