erest rates in managing the American economy. The relationships between interest rates and economic effects are also examined.
The information required for the conduct of this research was obtained from published materials. These published materials include both governmental documents, and articles presented in scholarly journals.
Information relevant to all of the factors covered in the discussion of the issues and questions investigated were gathered through library research. In assessing this information, quantitative analysis was not employed. Conclusions were drawn on the basis of findings derived from qualitative analysis.
Interest, in the early development period of capitalism, was regarded simply as the rate of return on capital invested.4 At this time, interest, as income on capital, was considered to be analogous to rent on land.
As economic theory developed, however, the nature of interest, and the determinants of interest rates began to be perceived in more complex terms. Classical economic theory eventually held that interest rates were determined by forces affecting the supply of and demand for funds.5 The demand for funds was held by this economic theory to derive from the expectations of businesses with respect to profits. In turn, the expectations of businesses with respect to profits were held to be a function of the marginal productivity of investment.
The supply of funds, on the other hand, was held by this theory to be dependent upon the aggregate willingness of members of an economy to save.6 In turn, the aggregate willingness to save was held to be a function of the marginal rate of time preference for funds.
In the context of the theory of interest, investment refers to expenditures on capital goods, and the marginal
4Robert B. Ekelund, and Robert F. Hebert, A History of Economic theory and Method, 3rd ed. (New York: McGraw Hill Book Company, 1990), 90.
productivity of invest...