CHAPTER XII 
CONCEPT OF RATE OF INTEREST 
§1 
From the last chapter we obtained the concept of 
value-return. This may be explicitly defined as the ratio 
of the value of the income which flows from a specified 
capital during a specified interval of time, to the value of 
that capital at a specified point of time. Thus, if on Janu- 
ary 1, 1900, a capital is worth $10,000, and during the year 
1900 this capital yields an income worth $500, the value- 
return is five per cent per annum for that year. If the in- 
come is perpetual and flows at a uniform rate, the value- 
return is called the rate of interest realized on the capital. In 
other words, the rate of interest is, briefly stated, the ratio 
between income and capital. As business men say, the rate 
of interest is the “ price of money,” or the “price of capital.” 
This very common usage is based on the thought that any 
capital sum is the equivalent of some annuity. The usage 
has been needlessly condemned by economists on the 
ground that a different meaning should be assigned to the 
expression “price of money,” viz. its “purchasing power’ 
over goods in general. But the objection is not well 
founded, for it is evident that “ purchasing power” includes 
not only purchasing power over a stock of goods but also 
purchasing power over a flow of income. If $100 will buy 
a perpetual annuity of $6 a year in Japan, while In England 
it will buy one of only $3 a year, the purchasing power of 
capital over income is six per cent in Japan, and only half as 
much in England. A millionaire in the first country will be 
able to command an income of $60,000 without trenching on 
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