a common price. The excluded lenders on the line to the right of the price point are those who hold their present dollars (or a part of them) rather than lend further at the market-rate of interest; the excluded buyers are those to whom further loans at the market will cost more than the expected increment in incomes.
6 Of course cases occur where after the loan is made, the money is kept for a while awaiting a better time to buy the incomes which are to yield the increment of price.
In agreeing to pay interest at a certain rate, the borrower is obviously selling to the lender the right to collect a series of future money incomes including the return of the principal, and is in return buying a present sum of money. The princi pal is the result of capitalizing the incomes, so discounted that they will emerge at the rate of interest specified on the investment of capital. A thousand dollars at 5 per cent will yield an income of $50 a year until the principal is repaid.
loan is in perpetuity unless a date of payment is named. e form of the loan at interest plainly is that of the ex change of a larger (future) sum of money for a smaller (present) one. From ancient times this has seemed on the face of things a moral wrong to the borrower and an economic mystery, therefore an economic absurdity. "Money is bar ren," said Aristotle, and his thought is often echoed to-day in communistic arguments against the loan of money at interest. "The borrower pays interest and agrees to this un equal bargain because he is made to pay," is declared on the one side; "he pays because he can afford to pay," is answered from the other. Both statements may be right yet their very form indicates that the problem is looked upon as one of morality rather than of economics. The borrower doubtless would not make such an agreement unless he chose to do so; his choice, as every choice, may be thought of as due to eco nomic pressure or to economic advantage, as a choice of evils or a choice of benefits. Why must he (can he be made to) pay interest if he is to get the loan? How can he afford to pay interest? After the foregoing study of time-preference and capital ization we have not far to go to find the explanation of the contractual rate of interest at which incomes are yielded on money loans. No borrower would or could, for long, pay in
terest on money and let it lie in a cheat. What does he do with it? He buys things. Everythin he can buy has a price, is capitalized, and the explanatio of the interest rate lies in the relation between the price f goods that present money will buy, and the price of the series of incomes which those goods will afford up to the time of the repayment of the loan.
§ 10. Time-series of incomes, monetary and non-mone tary. Before ever a money-loan was made, before even money had come into existence in the world, time-preference existed. It lies in the very nature of choice by animals and by sav ages. (See Chapter 20, section 2.) In many ways it is inter woven into the valuations of every self-sufficing economy in the days of barter. It becomes generalized as a prevailing rate in each individual's economy and as a price for timeliness in all exchanges of goods and uses of different time-periods. The rate becomes equalized as between different series of uses, as the rate of time-preference and of time-price can not consistently be greatly unequal within any circle where time-choice is The use of money in trade gave much greater ex actness to this time-price as embodied in goods and to their prices in relation to the times of their use. To-day in the in numerable valuations of many business enterprises where there is no monetary borrowing and lending time-preference expresses itself in the capitalization (price) of the durative agents of the environment. Every loan of money (or of goods in terms of money) at interest therefore occurs where the price of goods already embodies this premium on the pres 7 This approximation to a common rate of yield on various invest ments may be illustrated by some such table as the following, showing the choices that present themselves to an investor.