ABSTRACT
The classical theories of interest, the price level, and inflation were the direct applications of their theory of value discussed in Chapter 2. But as we noted in Chapter 3, the modern definition of money, by commingling money and credit (savings), has encouraged much confusion in the explanation of interest rate determination, the price level, and inflation. Thus, whereas the classical economists were very much at pains to explain that equilibrium interest rates are determined by the supply and demand for “capital” or savings, and not money, many modern analysts continue to argue, and many textbooks teach, the view that the supply and demand for money determine the rate of interest.
