Tuesday, June 29, 2010

The Factor-Cost of Money

I wrote to Milton Friedman back around 1980, calling the interest rate "the price of money." He wrote back -- he must have answered every letter he ever got -- to say that the interest rate is the price of credit. And he said the price of money is whatever you give up to get it.

I was fine with those corrections for 30 years. Recently, though, I had a thought.

To Friedman's two definitions, the price of credit and the price of money, one must add a third: the cost of money.

The total accumulated cost of interest paid in our economy is the factor cost of money. I'm not saying it's good or bad. I'm simply defining terms. Because if we don't define 'em, we cannot properly analyze the economic problem.

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