If capital did not earn enough to replace the cost of making it there would be no capital. The truth of this statement is self-evident, for no use of legerde main can. conceal the fact that human greed and self ishness will not lend themselves to toil unless there is certain promise of results. The use of capital pre supposes the return of a value equal to the original amount, but another factor appears in this problem. It is the simple element of waiting; the owner of capital must wait for a return. The process of labor must be completed, and time naturally enters as a factor.
But men do not like to wait; present goods are always valued more highly than future goods. The owner of capital can exchange his capital for present consumers' goods. Many a man does just that nowadays, under the lure of social position and the desire for pleasure. Every day capital is being exchanged for consumers' goods as, for example, in the immense sale of automobiles for pleasure purposes. The maker of capital must wait for his return. Waiting is saving; it involves, under modern con ditions, the turning over of bits of capital to a, bank which, in turn, lends them to a man who wants -to use capital. The man and the capital must do their work before the depositor can have his income.
Waiting, therefore, must be paid for. In our analysis of interest we have reached this conclusion: capital must be productive in specific instances of production. It has been demonstrated again and again that men can do more with capital than with out it. In the first place, in waiting for a return some sacrifice is involved. A reward is therefore paid for the capital, and interest is set up as an inducement to lend. The productivity of capital, on the one hand, and the reward for abstinence, on the other, explain the paynient of interest. From the viewpoint of the lender, interest is the discounting of future goods; from that of the borrower, interest results from the fact that capital goods for him are productive and by means of them he can create a larger product.
6. The rate of immediate form in which capital comes into the market is money. It is customary to speak of the price of money, and to express the price in an interest rate. As an outcome of this view, it is repeatedly declared that the rate of interest varies with the amount of money in the market. This fallacy springs from the failure to
appreciate the difference between money and capital. Prices rise with the increase ortbe quantitTOT moneN:, but the interest rate depends upon the sup-0E21cm ital available." In view of the relations of the credit rund to the capital of a land, the interest rate, under ordinary conditions, expresses the percentage paid for capital.
Under the provisions of the modern economic ma chinery, money acts as a medium of exchange in the buying and selling of commodities of every character. The man Who enters business immediately faces the problem of money and credit. He must have the first to pay over the counter for labor and the incidental expenses of the business; he fulds the second desirable in securing additional capital in the form of materials and machinery. The bank is the agency thru which he gets his loans. In borrowing he agrees to return a given amount of money at a certain rate of interest that has been placed upon it.
In the money mark-et there are many kinds of paper or securities. Some of these are: the short-time com mercial paper of a commercial house, issued upon col lateral in the form of the notes of customers; personal notes of individuals ; notes accompanying mortgage security; and bonds issued by corporations and gov ernment bodies, extending over long periods of time. Each kind bears its own statement of facts and carries on its face a rate of interest which varies, in actual fact, with the value of the security. How are the distribution and use of capital, consisting of what the economist calls producers' goods, related to loan able funds in the form of different kinds of paper found in the hands of bankers? A merchant brings to a bank a considerable sum of money and deposits it, receiving therefor a book credit. The money he has deposited represents goods which he has sold. This typical example is repeated many times and in many places. In fact, the bank dep,osits of the nation have their source in some actual product of labor that has been passed on by the orig inal owner to other users. It appears, then, that the loanable capital of the country is really the concrete goods in the stream of the country's production while the money and credit for which these goods are exchanged constitute the loanable funds of the banks.