nuary, 1896, a dollar and four cents for every dollar
he has loaned in January, 1895, and you enable him to command a
hundred and five units of commodity for every one hundred that he
commanded at the earlier date.[1] You give him by a reduced monetary
payment what is equivalent to the real increase of capital.

[1] There is a slight compounding here to be taken into
account. If commodity has gained five per cent, while prices
have lost one per cent, the capital as measured in money has
increased by three and ninety-five one-hundredths per cent
instead of exactly four.

_Practical Differences between Real Interest and the Increase of Real
Capital._--It is the increase of capital in kind that fixes the rate
of loan interest. Care must be taken not to claim for this part of the
adjustment any unerring accuracy; for the marginal productivity law
does not work without friction. With real capital creating five and a
half per cent, the lender might get only five. When, however, the play
of forces that fixes real interest has had its way and has determined
that, in commodity, capital shall secure for its owners five per cent
a year, that amount is unerringly conveyed to them by the monetary
payments that follow. If, by paying four per cent as interest, the
merchant, in the illustrative case, makes over to the lender of
capital that part of the increase of goods that by the law of interest
falls to him, four per cent is the rate that the loan in money will
bring. This is on the supposition that the change in the purchasing
power of money is perfectly steady. If it is unsteady, effects will
follow that are of much consequence.

Changes in the purchasing power of a currency produce an effect on the
rate of interest on loans of "money." If, with a currency of perfectly
stable value, the interest on loans is five per cent, corresponding to
the earnings of real capital, then a gain in the purchasing power of
the currency of one per cent a year has the effect of reducing nominal
interest practically to four per cent. The debtor then really pays and
the creditor really gets the same percentage as before of the actual
capital loaned. The borrower, the _entrepreneur_ in the case, finds at
the end of the year that he has more commodities by five
one-hundredths than he had. He must pay the equivalent of this to the
lender. With money of stable purchasing power it takes five new
dollars for every hundred to do it; bu