Apple tree dating theory
While it is true that if new money first finds its way from the mint into the banks, it tends to lower the rate of interest, this effect is temporary.
The maladjustment between the money in banks and in circulation is soon corrected as the demand for loans overtakes the supply.
Yet, there is a very persistent belief that an increase or decrease in the quantity of money in circulation causes a decrease or increase in the rate of interest.
This fallacy seems to be based on a confused interpretation of the general observation that the rate of interest generally rises or falls with a decrease or increase in the reserve ratio of banks.
Loans under primitive conditions are generally made for consumption rather than for productive purposes.
In fact, interest taking is often prohibited in primitive societies.
Nor is it very illuminating to say that the rate of interest is the price paid for the use of money, especially as the money whose use is purchased is usually not money at all but credit—nor is either the money or credit literally used continuously during the loan.
It disappears at the beginning and reappears at the end.
Crude and inadequate notions beset this subject and some of them are so common and treacherous that it seems worth while, before proceeding with further analysis, to examine these notions in order to avoid falling into their pitfalls.
Nor are we greatly enlightened by saying that in one sense the rate of interest is the price of money.