The nature of capital and income

Bibliographic data

Monograph

Identifikator:: 102659555X

URN:: urn:nbn:de:zbw-retromon-82920

Document type:: Monograph

Author:: Fisher, Irving http://d-nb.info/gnd/118533541

Title:: The nature of capital and income

Place of publication:: New York

Publisher:: The Macmillan Company

Year of publication:: 1923

Scope:: XXI, 427 Seiten

Digitisation:: 2019

Collection:: Economics Books

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Chapter

Document type:: Monograph

Structure type:: Chapter

Title:: Part III. Capital and income

Collection:: Economics Books

Sec. 4] CONCEPT OF RATE OF INTEREST 195 if a man borrows $100 to-day and agrees to pay it back with interest at 49% in one year, we may conceive of him as having sold a perpetual annuity of $4 a year for $100, and at the same time as having bound himself to buy it back for $100 at the end of one year. The combined result of these operations amounts to an exchange of $100 this year for $104 next year. It is possible to use such a simple exchange between this year’s and next year’s money, as the basis of an entirely new definition of the rate of interest, and one which is independent of the idea of an annuity. When $100 to-day is exchanged for $104 next year, the ratio of exchange between the two sums is }§¢. This ratio is not, of course, itself the rate of interest; the rate of interest is the excess, or premium, of 1%, above unity. In other words, the rate of interest is the premium, or “agio,” above par of this year’s dollars in terms of next year’s dollars. Such a concept of interest may be called the premium con- cept, whereas the concept hitherto employed, or the price of capital in terms of an annuity, may be called the price con- cept of the rate of interest. To say that the rate of interest in the price sense is four per cent means that the price of $100 of capital is $4 of income per annum forever. To say that the rate of interest in the premium sense is four per cent means that the price of $100 of one year’s goods is $104 of the next year’s goods. The premium concept of the rate of interest has been so much emphasized, notably by Bohm-Bawerk, that it seems advisable to repeat briefly, with respect to it, the dis- tinetions as to annual, semi-annual, quarterly, ete., reckon- ing. Let us suppose that $100 to-day is worth $102 six months hence. The rate of interest in the premium sense is here 2 per cent for the six months’ interval, and is said to be “4 per cent per annum payable or reckoned semi-an- nually.” Tt will be evident, however, that this is a little higher rate than 4 per cent per annum reckoned annually. Let us suppose that at the end of six months, at which time

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