CONTENTS PAGE I 117 117 123 VII. OTHER THEORIES OF INTEREST "Differences in Want and Provision for Want" "Underestimation of Future Pleasures and Pains " 225 CALIFORNIA A THEORY OF INTEREST CHAPTER I THE PROBLEM 1 § I. The facts of interest have presented a theoretical and a moral problem from time immemorial. Lending at interest was condemned by the Mosaic law 1 as between Israelites; it was declared by Aristotle 2 to be unnatural, was forbidden by the Roman Church until modern times, and is denounced by most Socialists today; yet it persists age after age, and its justification seems to most business men too obvious for discussion. If we turn from moralists and business men to professed economists, we find that although most of them justify interest, they are well-nigh hopelessly disagreed as to the theory of its justification. The most notable recent books on the subject, indeed, such as those of Cassel,3 1 E.g. Deut. xxiii. 19, 20: "Thou shalt not lend upon usury to thy brother . . . unto a stranger thou mayest lend upon usury. 2 Jowett's translation, as quoted in Macfarlane's Value and Distribution, p. 140: “The most hated sort [of money-making], and with the greatest reason, is usury, which makes a gain of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term usury, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of making money, this is the most unnatural." 3 G. Cassel: The Nature and Necessity of Interest, Macmillan & Co., London, 1903. Böhm-Bawerk,' Landry,2 and Fisher,3 offer theories so different that a faint-hearted inquirer would be tempted to give up the problem in despair. Confronted by such a variety of opinions, we should be justified in assuming, notwithstanding the views of business men to the contrary, that the facts of interest do present a problem, and that one of the utmost difficulty. Instead of making this assumption forthwith, however, let us analyze the facts briefly in connection with some of the most commonly accepted explanations of them, to convince ourselves at first hand of the difficulty of the problem and to get some idea of its nature. The facts themselves are obvious enough. If you have $100 to spare under any normal circumstances, you can get at least $3 in addition to the original hundred by lending it for a year under conditions that eliminate virtually all risk. Furthermore, if you do not lend the $100, but invest it in machinery, you can normally increase the value of your product for the year enough to cancel the cost of repairing the machinery so that it is as good as new, of insuring against its destruction or its depreciation in value, and of making and overseeing the investment, and to leave you at the end of the year a net surplus of at least $3. The apparent surplus of $3 that you get in the first case we shall call, with everybody else, loan interest. 1 E. v. Böhm-Bawerk: Recent Literature on Interest, Macmillan Co., N.Y., 1903. 2 Adolphe Landry: L'Intérêt du Capital, Giard et Brière, Paris, 1904. 3 Irving Fisher: The Nature of Capital and Income, Macmillan Co., N.Y., 1906; The Rate of Interest, Macmillan Co., N.Y., 1907. The apparent surplus of the same amount that you get in the second case we shall call, for reasons that will appear later, natural interest.1 §3. It is against loan interest that the attacks of moralists have been mainly directed. The reason is evident in the case of loan interest the fact that the lender gets something of value that costs him no labor is perfectly obvious; whereas in the case of natural interest the apparent surplus- that is, the something of value which costs the recipient no laboris noticed only when the several items that go to make up the cost, excluding any allowance for interest on the capital employed, but including outgo for repairs, insurance, and oversight, are carefully added up and compared with the receipts from the sale of the finished product. Recently, however, natural interest has been attacked as vigorously as ever loan interest has been, notably by Karl Marx in his work Das Kapital, in which it is called "the average rate of profit." § 4. That the bulk of the great sums constantly. borrowed by business men nowadays are borrowed solely to secure natural interest, so that loan interest. and natural interest are most closely connected and rise and fall together, is now realized by nearly everybody who thinks of the subject at all. Intelligent men of affairs, such as bankers and manufacturers, look upon loan interest as simply the price of what we are calling natural interest. A loan yields interest, they say, because it gives the borrower the opportunity to use, for the time covered by the loan, machinery or other things 1 This definition is modified in § 33. r |