t with money that gains in its
power to buy goods at the rate of one per cent a year it takes only
four. The rate of interest on loans is, in the long run, reduced by an
amount that accurately corresponds with the appreciation of the
monetary metal _wherever the appreciation is steady_. This law works
with a precision that is unusual in the case of economic laws. Loan
interest varies more or less from the marginal earnings of capital;
but interest as paid in money accurately expresses interest as
determined in kind by the play of economic forces.

_Conscious Forecasts not necessary for Insuring the Adjustment of Loan
Interest to Changing Prices._--It is possible that, where this subject
has been considered, the impression may prevail that this reduction
in the nominal rate of interest is the result of foresight on the part
of borrower and lender. According to that view, both parties look
forward to the time when the loan will be paid. The borrower sees
that, although by means of his business he may have at the end of a
year five per cent more of commodity in his possession, prices will
probably have fallen so as to enable him to realize in money only four
per cent. On the other hand, the creditor will see that with four per
cent more in money he can, if he will, buy with his principal and
interest five per cent more than he virtually loaned in commodity. He
is satisfied with this increase; and, moreover, he is forced to adopt
it, since the natural increase of real capital will not enable a
borrower to pay more. The _entrepreneur_ will stop borrowing if more
is demanded. The whole adjustment is supposed to rest on a forecast
made by the contracting parties and a speculative calculation as to
the trend of prices. Now, while men do indeed consider the future, the
adjustment that is actually made does not call for foresight. No
conscious forward glance is necessarily involved therein. It is made
by a process that works more unerringly than any joint calculation
about the coming conditions could possibly do.

The interest on a loan that is to run through a period in the near
future is based on the rate that capital is now producing. The
evidence as to what that rate is must be furnished by the experience
of the immediate past. It takes much experience, of course, accurately
to determine how much the marginal unit of capital for the year 1895
has been worth to the men who have used it. This, however, has to be
ascertained a