A Study of Interest and Capital

THE aim of this paper is to study the determinatioon and interdependence of the rates of interest yielded by different kinds of securities. The complexity of the subject makes it necessary to divide it into three parts. In Part I we make an attempt to determine the price and rate of output of securities in a general way; and as securities are a commodity of which large stocks are always extant, we shall begin with a short discussion on the general theory of supply and demand of commodities of which large stocks are usually held, and so derive the price of securities in analogy with ordinary supply and demand analysis. It will be seen that in this way we arrive at a theory of interest rates which is fundamentally a generalisation of Mr. Keynes' liquidity preference theory for any number of securities. In Part II we shall analyse the several criteria according to which securities differ from each other. This will lead us to a more complete understanding of the interdependence of different rates of interest and to a new explanation of the relative movements of longand short-term rates. In Part III we shall restate the theory in a slightly different form and compare it with the real theory of interest and capital. It is possible to conceive of the rate of interest as being determined by the supply and demand either of capital goods, or of securities, or of money. In this paper we shall always think of it as being determined in the market for securities, and to make the analogy with the supply and demand analysis of consumers' commodities easier, we shall have to think in terms of security prices as well as in terms of yields. This may be a little inconvenient at first because of the inverse relationship between the price and yield of a security, but I hope that the advantages of this approacl

Capital (architecture) · Commodity · Economics · Extant taxon · Financial economics · Interest rate · Liquidity preference · Market liquidity · Microeconomics · Monetary economics · Preference · Supply and demand · Economic theories and models · Economic Theory and Institutions · Economic Theory and Policy · Finance

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