George Lennox Sharman Shackle, “The Nature of Interest-Rates” (1949/1955)

Genre and scope: Shackle’s text is a single-author theoretical article in monetary economics, first published in Oxford Economic Papers and later collected. It asks not merely how rates move, but why interest exists, building from individual wealth-holding to aggregate saving and finally to evidence on British gilt-edged securities in 1945–47.

The question what is the nature of interest, what psychological, institutional or technological realities it manifests and corresponds to, is surely the first one we must answer in seeking to know how interest-rates are determined.

Against time-preference theory, Shackle argues that interest cannot be understood in a world where future consequences are treated as known. Keynes’s liquidity-preference theory matters because it restores uncertainty to the center; Shackle pushes this further by refusing probabilistic domestication of the unknown.

First, the language of probability theory seems to me wholly unsuited to the analysis of uncertainty.

The essay’s first conceptual move is to define wealth administration as two decisions: the composition of the stock and the rate at which it is augmented or diminished. Wealth is held not only for later consumption but for “possessor-satisfaction”—the present feeling of security, power, freedom, and independence. Its possible forms are banknotes, bonds, and equipment. Banknotes are undated claims, combining certainty of amount with freedom over when to spend; bonds are dated claims, secure as promises yet uncertain as ready money if the holder must sell at an unforeseen date.

A man who accepts a bond in exchange for banknotes is therefore exchanging a known for an unknown quantity of banknotes.

This is the core thesis: pure interest is compensation for surrendering liquidity’s certainty. The yield on a bond is the premium required because its future market value may disappoint, even when default is excluded. Shackle’s formal apparatus expresses this without probability distributions. Individuals form “gain-epitomes” and “loss-epitomes” from rival imagined outcomes; indifference curves over fear and hope explain why they may hold both money and bonds. Equipment is then assimilated to bonds: its expected earnings are conjectural instalments adjusted for doubt. Hence the marginal efficiency of capital is subjective, depending on expectations and the investor’s attitude to uncertainty.

The second decision—how fast to accumulate—allows Shackle to attack the doctrine that interest directly equilibrates saving and investment. In his simplified central-office model, individuals submit conditional expenditure and money-holding schedules for possible incomes and yields. Aggregate income is produced by expenditure, and saving equals investment as an identity, not through the independent adjustment of two flows.

Thus it follows that aggregate saving by all individual decision-makers taken together is identically equal to their aggregate net investment, and this is true ex ante as well as ex post.

A rise in thrift reduces consumption expenditure and therefore income; it need not raise the rate of accumulation. Any influence on interest is indirect, through a smaller transactions demand for money and a changed willingness to hold banknotes rather than bonds. Liquidity preference, not a supply of saving, remains the decisive mechanism.

The final section turns the theory into an interpretation of the British cheap-money drive. Short securities resemble money because redemption is near; long bonds expose holders to capital loss over an unknowable future. The authorities could lower yields while market opinion expected bond prices to keep rising. Once that belief broke during the fuel and convertibility crises, hopes of capital gain became fears of capital loss, and long yields rose despite a larger quantity of money.

The rate of interest is, of all prices, the one most inseparably bound up by the logic of its very nature with expectation and uncertainty.

The essay’s relevance lies in its radical Keynesian subjectivism. Interest is not a timeless reward for waiting, thrift, or productivity, but the market trace of imagined futures: a price formed where money’s safety, bond-market hazards, and conjectures about equipment meet. The closing lesson is directed against explanations resting on credit standing or national thrift.

They merely magnify and dramatize the fact that interest is a manifestation of uncertainty, and in highly uncertain times it will betray its nature by the scale and momentum of its changes.