$100 capital invested will buy net incomes of as many dollars as the rate per cent.
ent possession. Indeed it is simply this which would give a borrower a motive for a new loan. Here are many different agents and many series of yields, the price of all of them ex pressed in terms of the money unit (let us say the dollar). The money prices involve the rate of premium on present valuations (and correspondingly a discount on future prices).
§ 11. Present dollars and what they can buy. A pres ent dollar is purchasing power that gives possession of future incomes at discounted prices. The market would present it self something like the (greatly simplified) illustrative table. Whoever has a disposable dollar which he does not need or choose to use for present desires, may either buy something and hold it for the expected increase, or he may by the method of money loans lend it to another person to do the same. It matters not how the dollar happened to be disposable, whether it was stolen, or was received in payment for some other property, or is new savings from interest on other loans, or from wages, etc.; inl any case the dollar gets its power of earn ing interest from this prevailing discount on the future, in volved in prices. Because of this fact the owner of a dollar possesses an econo is power which he can assign by contract to a borrower. nterest then might be described as the price paid by a borrower for the right to buy goods at discounted prices. Money is a generalized present good, and when loaned at interest is exchanged for the promise of future goods at a ratio reflecting prevailing capitalization.
§ 12. Blending of the investment premiums into a com mon rate. Now given the existence of these parallel series of time-prices in different lines of agents and products, it follows that they must, so far as exchange takes place among men, tend to embody a common rate. Aside from differences in the difficulty of keeping, ease of management, etc., all these series must, by the law of substitution, be leveled toward a common rate of income. This would include money also, for in its function as a medium of exchange, money will be spent always for the thing which at the moment has the highest value. In the hands of an investor buying money incomes, the money will be spent in the way to buy (other things equal, trouble, risk, etc.) the largest net income. Therefore, the bidding of investors for whichever income is offered at the lowest capitalization tends to level (up or down) the invest ment-power of a dollar in all the options of present goods offered. The different choices blend, in a variety of ways,
into the common rate of which the interest rate is the super ficial expression. As happens in the exchange of commodi ties, the individual valuations vary from the market-price as a result of different circumstances of age, health, ability for business and liking for it, particular tastes inclining to this or that business, etc. (This variation of values from mar ket-price leads men to become borrowers or lenders, in this or that line of investment. The individual takes the market rate as a fact, and adjusts his own conduct to it! Money being at the same time the medium of exchange, the common denominator of prices and the standard of deferred payments, is the unit in which all these valuations are expressed. In one form preeminently, the interest contract, the rate of time preference comes to a definite arithmetic expression. The rate of interest sometimes appears to be the determining fac tor, whereas it is but the reflection of the choice of timeliness in the whole economic situation.
of interest is no more the cause of time-preference than the shadow on the sun dial is the cause of the rotation of the earth on its axis. The interest-rate is but an index of the ratio inherent in the equilibrium of psychological forces, de sires for present and future incomes; that is, time-preference. A change in the mental habits, in regard to this choice, on the part of any considerable number of men, must change the general distribution in time df the entire series of in comes under the control of men, collectively. Future incomes are maintained only through the constant exercise of the faculty of abstinence. This conserving and dynamic influ ence of abstinence we shall study further in Chapter 38.