CLASSICAL OR REAL THEORY OF INTEREST
There was no unanimity among the classical economists on the point as to how interest arises or why interest is paid. They had different views on this point. But they all agreed that the rate of interest is determined by the equilibrium of savings and investment. The classical theory of interest also goe hy the name of realthcury as it seeks to explain the dc termination of the rate of interest by real ract(Jr~ like productivity and thrift, i.e., productivity of capital goods and saving of goods. According to this theory the rate of interest is a payment for saving. The rate of interest is, thus, determined by thc demand for saving to invest in capital goods and the supply of savings. Let us explain these demand and supply sides.
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