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 January
 1, 1900, a capital is worth $10,000, and during the year
1900 this capital yields an income worth $500, the valuereturn
 is five per cent per annum for that year. If the income
 is perpetual and flows at a uniform rate, the valuereturn
 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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