s best it can. It takes strategy on the part of both
borrowers and lenders to make the loan rate correspond to the marginal
earnings. Here there is a chance for economic friction and for
variations from the theoretical standard, and the loan rate will
sometimes exceed it; but in the long run the deviations will offset
each other. In any case, the experience of 1906 fixes, with or without
variations, the loan rate for 1907.

The earnings revealed by the experience of 1906 may be theoretically
computed either in money or in commodity. Let us say they have been
five per cent in real wealth, but by reason of the fall in prices they
have been only four per cent in money. That, then, is the rate for a
loan that is to run through 1907. If prices continue to fall at the
rate now prevailing, the loan rate in money will correspond to the
marginal earnings of capital for the latter year as accurately as it
does for the former year. Bargain-making strategy, the "higgling of
the market," may yield an imperfect result, and the lender of real or
commodity capital may or may not get the exact real earnings of
marginal capital of the same kind. _In translating the earnings of
real capital for the earlier or test year into terms of money, the
appreciation of the coins has unerringly entered as an element._ If
the same rate of appreciation is continued through the following year,
no deviation of the loan rate from the earnings of capital can result
from this cause. Whatever deviation there is results from the other
causes just noted.

In commercial terms a man borrows "money," and, by using it in his
business, produces "money." He does this, however, by converting the
currency into merchandise, and then reconverting this into currency.
He gives to the lender approximately what the "marginal" part of the
loan produces. If this adjustment is inexact, the lender will get less
or more than the actual earnings of such capital. With money gaining
in its purchasing power at a uniform rate, the adjustment is as exact
as it would have been with money of stable value. The appreciation
works unerringly in translating earnings measured in goods into
smaller earnings measured in money. The loan rate approximates the
earnings.

_Effects of Changes in the Rate of Appreciation._--What happens if the
rate of appreciation changes? What if gold gains two per cent in
value, instead of one, during the second of the periods? The
capitalist will then clearl