which they might have secured with the money. In either case the production of capital involves the sacrifice of waiting on the part of some members of the community.

But why should waiting be called a sacrifice? Do not those who give up present satisfactions in order that capital goods may be produced get a full repayment if they get back in the form of the products of their capital goods as much as they, for the time being, give up? In other words, why should capital not be furnished for productive purposes if those who furnish the capital get back an exact equivalent (in price) for the amount of capital they have supplied? Why should an extra payment, in the form of interest, be necessary to induce saving?

The answer to these questions is found in the difference between our present appraisals of things to be had now and things to be had in the future. We visualize the present more vividly than we do the future; we yield sometimes to the temptation of satisfying the more trivial wants of the present, even when we know that we are thereby rendering uncertain the satisfaction of more important wants in the future; and when we take considerable periods of time into account, we may reasonably say that the uncertainty of life itself gives us some ground for preferring present to possible future satisfactions. Notwithstanding the vast difference between civilized men and savages in this respect - for many of the latter seem to have absolutely no regard for future needs the fact still remains that waiting is a sacrifice, and in order to induce the saving that is a prerequisite to the use of capital in industry, a premium or reward for waiting has to be paid in the form of interest. This fact is the most fundamental thing in the explanation of interest.

It must not be inferred that, in the actual economic life of today, no capital would be suplied if interest were not paid. There are other motives that incomes. The desire to pro tingencies as sickness and a one's family in case of deat amount of saving. The mer fact that the satisfaction of m

desire to own a house, or the desire for foreign travel, necessitate the gradual accumulation of what is to most persons a considerable sum of money, must also be given due weight. Moreover, none of these motives would in itself induce men to invest or lend their saved funds in productive undertakings if no interest at all were paid. In fact, this would be a matter of indifference, for savings might just as well be hoarded. But a very low interest premium would suffice to overcome this indifference and to bring about their investment in productive undertakings. Even this low interest rate, however, would be sufficient to balance, in some additional cases, the difference between the intensity of present wants and the intensity of future wants, so that in these cases, in turn, spending or saving would be a matter of indifference an indifference that would in its turn be overcome by a slight increase in the interest rate. In a similar way every increase in the interest rate would induce more persons to save and would induce many of those who were already saving a part of their incomes to save a larger proportion of them.

At any given time, accordingly, the interest rate is considerably higher than is necessary to secure a large part of the waiting that devolves upon those who furnish capital funds for productive purposes. It is just high enough, however, to be a recompense for marginal waiting, which is the waiting that would not take place if the interest rate were any lower. If the interest rate is 5 per cent, a dollar today is worth a dollar and five cents a year from today, not to all savers, but to the marginal savers.

Investment. We have seen that the supply of capital originates in the fact that some people save part of their money incomes, and that interest has to be paid in order to induce this saving. Such persons are said to get an "income from their capital." Strictly speaking, their savings are not productive capital at all, in the sense in which the word "productive" is used in this book. Productive capital consists of the concrete material instruments of production, such as factory buildings, machines, raw materials, merchants' stocks of finished products,

and the like. Savings are not productive capital in this sense, but the process by which they are transmuted into productive capital is a simple and familiar one. The simplest case is where the entrepreneur saves part of his own money income and uses his savings in the purchase of additional capital goods, the selling value of the products of which he estimates will be large enough to repay him for his waiting, as well as to replace his capital as it is used up, that is, to earn interest for him as well as repay the principal. Or, the entrepreneur may borrow money directly from others who have saved it, agreeing to pay annual interest, and in addition to repay the amount of the loan - the principal - at some specified time. In the complex economy of the present, however, it very often happens that the entrepreneur who can use money profitably and the man who has surplus funds to invest do not arrange the transaction directly. Savings are "placed at interest" in savings banks, insurance companies, or other financial institutions, and it is to such institutions that the entrepreneur who thinks that he can use more capital profitably applies for loans.

Very often the entrepreneur is a corporation rather than an individual, but the same three methods of obtaining capital are open to it. The corporation may choose to reinvest some of its net earnings in productive forms of capital rather than to pay them all out in dividends to its stockholders. When in need of money to meet a temporary emergency, the corporation may borrow from banks just as the individual entrepreneur does. When in need of money for more permanent investment in the durable forms of capital goods, the corporation usually issues its own interest-bearing obligations in the form of bonds, which it sells to banks, insurance companies, and other financial institutions, as well as to individuals. Bond issues are merely one way of borrowing money. But whether the money funds are furnished by the entrep necessitates, first, t

second, the use of capital goods. The as a short way of des

The Replacement of Capital. It is clear, then, that saving which necessitates waiting, is a prerequisite to the formation of new capital, that is, to an increase of the supply of capital already in existence. But at any given time the capital already in existence forms a very large proportion of the total supply of capital, and it may be thought that the present interest rate does not affect this portion of the supply. We must, however, take into consideration the fact that almost all kinds of capital are being continually used up in production. This using up may be a matter of a single use, as in the case of fuel or raw materials, or it may be a gradual wearing out, as in the case of a machine, but such differences are differences in degree of durability rather than differences in kind.

As we have seen, the entrepreneur will normally not employ any given additional unit of capital unless he expects to get enough from the selling value of the added product to replace the capital actually used up in production as well as to pay interest. This means that if the entrepreneur's estimates prove correct, part of the money income he gets for his product may be regarded as a replacement fund, sufficient in amount to replace the capital used up in production.

We must not, however, make the error of thinking of the replacement fund as definite in quantity. Whether or not any unit of capital produces enough to furnish a replacement fund, depends on whether the entrepreneur's estimate is a correct one. There is no reason why unproductive forms of capital should be kept intact in amount. He would be a foolish business man, for instance, who would keep reinvesting a certain amount of money in raw materials in the face of a diminishing demand for the finished product. Even if enough income is earned to form a replacement fund, the capital used up need not be replaced unless the entrepreneur so chooses. A farmer may have saved for years in order to buy a reaper. The reaper will enable him to raise more wheat, or, possibly, to produce the same amount of wheat at less expense. In either case it will mean an increase his net money income. He may, if he chooses, set aside enough is added income so that, when the first reaper wears out, his

accumulated funds will replace it. From one point of view we may say that in this way the reaper "replaces itself." But the farmer may, if he prefers, use all of his increased income in the purchase of additional comforts and luxuries for himself and his family. In deciding whether he will replace his capital or increase his present consumption, he will be guided by the same kind of an estimate of the relative importance of present and future wants on the one hand, and of the amount which the capital will add to his income, on the other hand, that guided him in the original saving which led to the purchase of the first reaper.

Similar illustrations can be found in other kinds of undertakings. Many business enterprises have failed because business men have "lived beyond their incomes "— which often means simply that they have not replaced their capital so rapidly as they have used it up. Many American railways have maintained a specious prosperity for many years by paying "unearned dividends"; that is, by letting their capital (roadbed, rolling stock, buildings, etc.) deteriorate through not expending enough of their gross income in the maintenance of their way and equipment.

The stock of capital in existence at any one time is the result of past saving. But this stock of capital cannot be maintained intact without more saving. From this point of view we may say that the sacrifice of present satisfactions for future satisfactions which society undergoes in order to reap the advantages of capitalistic production is not something that is done "once for all," but is a continuous sacrifice.

The Shifting of Investment. As a matter of fact, a large amount of the capital that is used up in production is not replaced, for the simple reason that entrepreneurs find that some particular kinds of capital are not profitable; that is, they do not add enough to the selling value of the entrepreneur's total product to repay them for their cost (including interest and repayment of principal). It may happen that the entrepreneur has been mistaken as to the technical efficiency (or productivity) of his capital, or that he has overestimated the demand for his