Interest a Payaient for Capital 1

money, bank, loanable, credit, funds, machinery, demand, business and community

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The creation of capital, and its replenishment, are matters of perennial discussion. Saving is a pre requisite to the creation of capital. In the primitive societies the saving of food and materials was essential to larger production and, in consequence, to greater capital creation. In modern society the individual does not hoard bread and fish but retains a representa tive Of these in the form of money or a bank credit. Whether there will be more capital or not, depends upon the way the owner makes use of his credit or money. If he uses it to buy customers' goods, the capital of the community does not grow ; but if he begins the manufacture of useful machinery or en gages in agriculture, he is adding thereby to the com munity's capital.

Such capital undergoes constant wear ; every day's use lessens its value and efficiency, yet the world must keep its capital intact. The g,reat railroad is con stantly under process of reconstruction. Every seven years the ties must be replaced; in ten years rails show the need of renewal; locomotives and cars are being constantly rebuilt, and all the equipment is frequently added to by purchase. This is the problem of depre ciation and replenishment. Capital combined with labor, under intelligent direction, earns an _income large enough to pay what is called interest, and a fund sufficient to restore the capital to its original form. This return may be spread over a series of years.

In order to keep up the capital of the count7 it is necessary for capitalists to make sacrifices continually. If the owner of capital does not use the returns to niaintain repairs and to replace the old and worn out commodities, but uses his return only to secure consumers' g,00ds, the result must be a decline in his capital. This procedure, if repeated by a large num ber of persons, ultimately results in a decline in avail able capital. _Nothing shows so clearly the resu. lts of sucla conduct as the practice of paying unearned divi dends from fu.nds that should have been given over to maintenance and replacement. Numerous railroads have been plunged into receiverghip and bankmptcy as a result of such principles of management.

Another point should be kept in mind. As the re placement process goes on, the enterpriser must de cide whether or not it is worth while to continue the original form of capital. It is a longer and more diffi cult process in some instances than in others to trans fer capital from one type of industry to another. What really takes place is the abandoning of one form and the shifting of the replacement earnings to an other kind of capital. Some forms of capital are by nature freer than others; they can be transferred from one industry to another with comparative ease. The

freest capital is that which appears in the form of loanable/funds.

3. Source of loanable capital.—Some men have no desire .to enter into the active production of com modities, while some mistrust their abilities and know that they must turn their savings over to others for - . . .

utilization. Thus a fund-holding class appears, seek ing interest for the use of its funds. The supply of loanable capital comes from such groups. On the other hand, there are many who see opportunities which they could make use of if they had additional funds to supplement their own. The man engaged in business regards capital as a matter of money and credit, for to him whatever sums are available for business purposes constitute the supply of capital. Yet it is clear that money is only a medium thru which the business man comes into the possession of tools, machinery, materials and the means of subsistence— the real elements of capital.

Perhaps this phase of the capital question is best brought out by placing emphasis on the fact that a demand for capitaljs not a demand for money. Peo ple who have things to sell are those who want money, but the men anxious for capital want to get bold of wealth in the form of tools, machinery and raw ma terial's. The first of these demands determines price, and the second makes, in part, the rate of interest.

Dean Joseph French Johnson has stated well this difficult problem of loanable capital and has clearly distinguished such capital from the mass of capital goods. He puts it in this way: The loanable capital and the loanable funds of a country are practically the sanie thing ; the one, a heterogeneous mass of value in the form of various goods ; the other, the same mass of value made homogeneous by the universal solvent, money.' That is, the bank acts as the agent by which the right to use capital goods is transferred from one per son or institution to another, according to the needs of the community. In consequence, the interest ques tion becomes invoked in the demand for capital, the number of exchanges and the facilities of credit and exchange. Can the bank, for instance, accept as the reason for its loan the borrower's claim on some specific good? Or again, can a bank exchange its own obligation in the form of a bank credit—a kind of general claim against all capital goods—for the promise of the borrower to return to the bank his anticipated receipts from goods which he has turned over to the community to be sold in the market? The borrowing and lending of capital are everyday matters. In order to get hold of capital, then, the borrower must use the medium of money or credit.

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