Value & Capital, CHAPTER XII -- THE DETERMINATION OF THE RATE OF INTEREST

The author, Sir John Hicks, begins Chapter XII of Value and Capital by raising the question of what determines the rate of interest.  Among economists, the traditional answer to this question had been the demand and supply of "capital," but Hicks notes that the definition of capital in this context had been somewhat imprecise.

Does capital mean 'real capital' in the sense of concrete goods and the power to dispose over a given quantity of them? ... Or does 'capital' mean 'money capital' in the sense of loanable funds -- power to dispose over a given quantity of money?  It makes a great deal of difference which interpretation we take.

Before addressing this particular question, Hicks notes another apparent controversy among "those who adhere to the monetary approach," namely whether the interest rate is "determined by the supply and demand of loanable funds (that is to say, by borrowing and lending)" versus being "determined by the supply and demand for money itself."

Hicks notes that the latter view is the one proposed by John Maynard Keynes in his General Theory, and Hicks explains that he will endeavor to show that these two views lead to the same results.