ase 1 per cent more goods per dollar than the
sum he loaned, or (approximately) $1060 worth of goods. Hence, he
has received, in quantum of goods, a yield of 6 per cent on his
investment. If this change continues for five years, the lender of a
five-year loan would receive each year $50 having a purchasing power
successively 1, 2, 3, 4, and 5 per cent greater than the same sum
had at the making of the loan; and at the end of the five years would
collect the principal, having a purchasing power 5 per cent greater.
The lender, on his part, would have to pay interest and repay the
principal in a money that is to be obtained only in exchange for a
larger sum of goods than that which could be bought with each dollar
that he borrowed. This means that, with individual exceptions,
creditors generally gain and debtors lose by falling prices.

But this is fully true only in respect to loans already made. For just
to the extent that such a movement of prices comes to be more or less
regularly in the same direction, both borrowers and lenders are able
to take it into account, and as experience shows, do take it into
account.[13] When prices fall men become more eager to sell wealth, to
lend the proceeds, and more reluctant to borrow for investment at the
prevailing rate of interest and at the prevailing prices. There is an
incentive to divest one's self of ownership (e.g., by selling stocks)
and to become a lender (e.g., by buying bonds). This whole situation
is reversed in a period of rising prices. The result is that the rate
of interest in any long continued period of falling prices (such as
from 1873 to 1896) has a trend downward and in a period of rising
prices (such as from 1897 to 1915) has a trend upward. This movement
of readjustment would not go on indefinitely, even if the same
trend of prices continued; for in the strict theory of the case the
adjustment would be complete when the interest rate had changed by
just the amount of the annual change in the level of prices. For
example, if 5 per cent is the static normal rate of interest, then
when prices are falling 1 per cent each year, the adjusted rate of
interest would be 4 per cent; and when prices were rising 1 per cent
each year, the adjusted rate of interest would be 6 per cent. Such
adjustments serve to some extent to neutralize the effects of changes
in the standard of deferred payments so far as concerns new loans made
in view of just such a change and in expecta