INTEREST A PAYAIENT FOR CAPITAL 1. Money and banks.—In the midst of the indus trial system stands the banker. He is the most com manding of all the figures in modern commerce and trade. Granting credit here, accepting loans there and determining the fate of bond issues, he directs the course of production. Men come and go but the banker remains, holding in his hands the success of many an enterprise. So important is the function which the bank has come to occupy, that many, reading the signs on the surface, have concluded that banks make capital. The great Pennsylvania Railroad sells its bonds in the market, and the banks and trust cOmpanies take them in vast sums. Is it not the banks that have the money? And do they not supply the capital for the railway? Not long ago, a well-known private banker told the author about his relations with investors in the East. From time to time, he said, his clients asked for of ferings in the way of mortgages in order that they might send him money to loan on such security. He has two classes of customers, a moneyed class and a borrowing class. The latter are engaged in produc tion, in this case thru the operation of their farms.
Having inadequate capital, they hope to borrow funds to make up the deficiency. The lenders in this pres ent instance were interested in the rate and the safety of the loan; the borrowers had in mind what they could do with the money, and whether by their labor, direc tion and good sense they could earn the interest and a surplus over and above the annual payment to make their labor worth while.
In time the loan came due--what then was there to show for the funds advanced to the borrowers thru the medium of the private banker ? Sometimes the bor rower had wasted it ; in other instances there were a barn and more cattle as a result ; and in some cases, the farmer had held his surplus in the form of a bank deposit. The lenders, in all instances involving capi tal, are at the first step of the process of the invest ment of capital, which is the saving of money in comes. The second step is the purchase of capital goods, a part of which is done by such men as the farmers who have borrowed the money referred to. They exchange the funds turned over to them, for machinery, tools, seed, cattle or other commodities.
The bank can hardly be said to supply capital, if capital consists of goods. The transfer from saving to capital is an important step, just as the process of replacing wornout equipment, old houses and ma chinery used in production is a necessary procedure in maintaining capital. In the long-time process of
production, saving has become more necessary and at the same time easier. As a consequence, there has been a vast growth of middlemen, who intervene be tween savers and enterprisers, whether individuals or corporations.
Modern life insurance, acting as a means of pro tecting families against the loss of bread-winners, has also been an important factor in promoting saving. Its encouragement of saving has been brought about by the obligation which it has placed upon the insured to pay the life insurance premiums regularly over a period of years.
The bank, in its capacity as a buyer and seller of credit, has been the agency thru which savings are gathered together. The banker is the intermediary between the saver of incomes and the owner of capital, in whatever form that capital may be ; and, as such, he is able to help the merchant or manufacturer to an ticipate what is due him in the form of payment for products sold. The banker thus comes to be an im portant agent in regulating the command of capital and in directing the use of it.
The entrepreneur does not borrow- the capital, i.e., the tools, raw materials, etc., which he needs ; he gets credit from a bank, and with that buys what he needs for the prosecu tion of his enterprise. He is commonly said to borrow "money" or "capital," but these popular expressions are in accurate; he borrows credit, or, in other words, a right to demand money, and with that buys his capital, becoming the absolute owner of it.1 2. Capital concepts.—Capital consists of producers' goods, i.e., materials, tools, machinery and other facili ties of production. This is the community concept. Looking at the question from the individual stand point, anything is capital which assists in increasing income; some of the writers of today have given such individual wealth the name of acquisitive capital. Consumer,s' good are also, at times, utilized as capi tal, and it should be borne in mind that a usable, con sumable good may be regarded as making a return of interest to the owner. Yet from the community point of view, capital is essentially producers' goods ; the loans of such goods, made for production pur poses, settle the returns of capital.