Financial Legislation and its Limitations. 



69 



or individually agreed upon as to compensation by way of 

 interest. 



However, it is doubtless true that parties to contracts do agree 

 to the repayment, at times, of a larger or smaller principal in 

 money, in the expectation that the purchasing power of money 

 will be smaller or larger. In this case, also, interference of 

 government by manipulation of prices is injurious. The theory 

 of deferred payment, founded upon utilities, has generally been 

 worked out upon the supposition that the compensation for the 

 fluctuation in the value of commodities should be made through 

 the principal rather than through interest. The discussion, then, 

 of the ideal standard may be understood upon the hypothesis 

 that the whole of the compensation is attributed to the principal, 

 whereas Fisher's analysis, driven to its logical conclusion, teaches 

 that it is effected through interest alone. In both theories it is 

 necessary to make the hypothesis of knowledge beforehand, only 

 in the one case the principal is made to increase or decrease, and 

 in the other, the interest. 



§ 6. The marginal utility theory, as already described, requires 

 that the same total value be returned by the debtor as that which 

 he received from the creditor. The valuation contemplated was 

 either that of the debtor or creditor or one privately agreed upon 

 between them. The question immediately arises, is an individual 

 debtor free to make a contract which will allow him to return 

 exactly the same value? The rate of interest is more or less of 

 a social matter, and the level of prices is essentially so. On the 

 assumption that the compensation on account of principal is to be 

 made through a change in the level of prices, it is quite evident 

 that the reasoning does not hold good for an individual who 

 varies from a type or social standard. If the market value of 

 commodities is expected to decrease, the understanding must also 

 be that that decrease will hold good for all persons, and equally 

 for them all. If potatoes are expected to be cheaper, it must 

 also be understood that the cheapness will reduce the utility of 

 potatoes equally to the rich and to the poor, and, indeed, for 

 persons of all appetites. Hence, the reasoning holds rather for a 

 typical instance, and, as usual in such discussion, it reduces itself 



183 



The theory 

 of deferred 

 payments 

 simplified by 

 the hypothesis 

 of compensa- 

 tion by prices 

 alone. 



Under this 

 hypothesis, 

 freedom of 

 individual 

 action must be 

 reconciled with 

 the further 

 hypothesis of 

 the " eco- 

 nomic man." 



