Abstract
A basic proposition of modern economics is the so-called price premium proposed by Irving Fisher (1907, 1922, 1930): the nominal rate of interest is composed of the real rate and a price, or inflation, premium that reflects the change in the value of money. Murray Rothbard offered a critique of Fisher’s interest theory, arguing that the price premium is largely nonexistent and proposing in its stead a terms-of-trade premium (Rothbard 2009). In the present article, we argue that Rothbard’s critique is fundamentally correct. Fisher’s price premium is an incoherent concept that does not correctly reflect monetary and financial reality. Instead we combine Rothbard’s terms-of-trade component with Mises’s (1953, 1998) understanding of inflation and interest to suggest a Mises-Rothbard premium based on the Cantillon effect as the correct understanding of the relation between money and interest. This approach allows us to explain the experience of persistently low interest rates over recent decades as a result of money creation.
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