280 Monetary theory

is an equilibrium condition. While Fishers diagram helps illuminate the

conditions necessary for equilibrium, it is an expository device and therefore
a simplification. It should not be confused with the main subject of this chapter,
which deals with how the interest rate is determined.

NOTES
1. Turgot (1766) quoted in Cassel (1903 [1956], pp. 2021). Turgots formulation, says Cassel,
has never afterwards [been] surpassed in clearness and definiteness.
2. Dorfman is mainly concerned to show that the period of investment of waiting and the average
period of investment of productive factors are meaningful concepts.
3. Hayek urges points like these in (1941, pp. 2967, 3356) and passim.
4. Samuelson (1965) reaches a similar conclusion, though without using the concept of waiting
and so by a less straightforward route.
5. The IRD (internal rate of discount) must not be confused with the internal rate of return,
which is the rate at which a projects net present value equals zero.
6. These paragraphs draw on a discussion among Samuelson (1958, 1959, 1960); Lerner (1959a,
1959b); Meckling (1960a, 1960b) and Cass and Yaari (1966). Earlier, Allais (1947, vol. 1,
pp. 48ff) published an essentially similar description of an economy with a negative interest
rate. We note that Samuelsons model serves as the basis for the overlapping generations
theory of money (see pages 623 above).
7. In Japan, nominal interest rates on short-term government bills and on deposits became slightly
negative in the late 1990s. Because holding ones wealth in the form of cash can be risky and
costly, people were willing to pay a fee for the opportunity to avoid holding cash (Thornton,
1999, p. 1).
8. Recognizing that the value of the amount of waiting required in a physically specified
production process depends in part on the price of waiting itself, Yeager (1976c) resolves the
capital paradoxes involving reswitching and capital reversal.
9. This section is based mainly on Hirshleifer (1970) and Copeland and Weston (1988).
10. Humphrey (1988, p. 4) argues that Fisher (1907, p. 409) invented this diagram in order to
show the gains from intertemporal trade. It has become what Baldwin (1982, p. 142) calls
the sacred diagram of the international trade economist and has been traditionally used to
illustrate the gains from international trade. Baldwins quote appears in Humphrey (1988,
p. 3), who traces the early history of the sacred diagram.
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