§ 12. Becoming-owners as borrowers. The fifth type of consumptive borrower, the becoming-owner, has also a prov ident motive. He borrows not in order to consume more wealth than he otherwise could, but in order to pay for it by a different method, namely, under the interest contract instead of under the renting contract. To do this he borrows the money to buy the agent in use, and becomes its owner. His right is not absolute but is qualified by the equity of the creditor to whom the property is pledged. (Chapter 22, section 3.) This condition might continue without any effort of the borrower to save and thus reduce the debt ; but so generally is this kind of loan prompted by motives of thrift and made in anticipation of and as an aid to saving, that such borrowers deserve to be called abstaining users.
Of this type are purchases on credit or on the instalment plan of sewing machines, typewriters, and many other labor saving machines, not as added means of direct enjoyment (such as are automobiles, canoes, pianos) but as better means of obtaining direct goods without the sale of products. Of this kind also is the loan to build a house for the borrower, or to buy outright anything of a kind already used by him under the renting contract (as a farm considered as a direct good, a house to live in, a source of food for the family, etc.). If one who has been renting house, farm, machine, etc., ceases to rent and buys under the interest contract, he as sumes a new responsibility as the legal owner of the wealth, capitalized, because man can not sell himself in sum. He can but earn a wage or salary for successive services.
but often he reaps a benefit by the change. The gross rent paid by a tenant (Chapter 15, section 2) must include not only taxes and repairs, but something to cover risk of bad collec tions, trouble of management, damage through carelessness of tenants, etc. Rent of a good grade of house built for ten is therefore usually 10 per cent of the selling price, and not infrequently higher, being, it is said, as high as 25 per cent on bad tenements where risk, damage, and trouble are especially great. A man living in a $2400 house and pay ing $20 a month rent, and able to borrow at 6 per cent could buy the house, pay $12 a month interest, and out of the bal ance of $8, after paying taxes and repairs, have something left as a sinking fund. By saving a few dollars more each month he can, within a few years, become the absolute owner.
His pride and pleasure as an owner often leads him to add further to the value of his investment by making improve ments in yard and buildings which he would not make as a tenant.
The great capital in the building and loan associations, over a billion and a quarter dollars in 1914, is slowly becom ing the absolute property of the borrowing owners, whose places are taken by others thus acquiring homes. This capi tal, large as it seems, is but a fraction of the amount con stantly being acquired in this way by owners of homes mort gaged to savings banks, to corporations (universities, philan thropic endowments, etc.) and to private lenders, directly or through lending agencies.
§ 13. The borrower for profit. The term "productive loan" has generally been applied to the borrowing of capi 5 This proviso "built for tenants" is significant, for houses built by well-to-do owners for themselves are often so elaborately finished that they are notoriously poor investments when let to tenants.
6 But some of the so-called consumptive loans above are productive in the sense which we recognize. The money borrowed to build a house, to buy a pump to supply water, or a machine to sew cloth, or even an automobile to produce psychic income for the owner, is pro ductive. A clearer distinction can be made between the non-commercial tal to be used in carrying on of business either mercantile or manufacturing—that is, in buying goods to sell again. The borrower is a middleman whose motive is to get a "profit" by sale to an ultimate user. This type of loan must be more fully discussed in connection with the problem of enterprise and profit, and only the briefest indication of the relation of the interest-rate to capitalization need here be given. The borrower expects to pay the interest out of the surplus income (over and above the capital investment) which the sale of the products will put into his hands. This success in getting a surplus large enough to leave him a balance sufficient to interest depends on his investing the money in, agents not capitalized too high ; any balance of profit depends on his selecting a kind of agents and so directing their use, that he can make them earn more than the market rate of interest.
and the commercial nature of the products, between loans by ultimate users of the goods (the occupant of the house, the user of the water from the pump, etc.), and loans by middlemen who produce to sell to ultimate users.