Relationship Between the Rate of Interest and Level Consumption
The relationship between the rate of interest and level of consumption was first visualized by Irving Fisher. He was one of American’s greatest mathematical economists and one of the clearest economics writers of all time. He had the intellect to use mathematics in virtually all his theories and the good sense to introduce it only after he had clearly explained the central principles in the word The theoretical relation existing between interest and appreciation implies, then, that the rate fo interest is always relative to the standard in which it is expressed. The fact that interest expressed in Money is High, say 15 percent, might conceivably indicate merely that general prices are expected to rise at the rate of 10 percent and that the rate of interest expressed in terms of Goods is not High, but only about 5 percent.
We thus need to distinguish between interest expressed in terms of money and interest expressed in terms of other goods but no two forms of goods can be expected to maintain an absolutely constant price ratio toward each other. There are, therefore, theoretically just as many rates of interest expressed in terms of goods as there are kinds of goods diverging from one another in value.