The Determination of the Rate of Interest

Abstract

I. Mr. Keynes and his critics have this in common, that they all look upon the interest-rate as being determined by a system of what might be styled equations. Their curves describe relationships existing between social aggregates,-collective categories such as Total Money, Total Supply of Loanable Funds quantities which are arrived at by adding together the corresponding items appertaining to the various individuals who make up the economic community. For purposes calling for estimates of quantitative importance such as statistical testing, forecast, or the framing of policy, and even for purposes of exposition, it is necessary to express the economic system in terms of such aggregates. But no one doubts that a more exact understanding of the underlying relationships can be obtained by atomic or microeconomic analysis -direct examination of the behaviour of the individuals and institutions who produce, consume, own and administer wealth. When rival macro-economic theories are put forward, and still more when it is asserted that there is no real difference between them, recourse should be had to the basic explanation in terms of individual behaviour, from which such theories are, or should be, derived. According to Mr. Keynes, the rate of interest is the price which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash.2 That is to say,

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