Evidently the demand for airplanes in the Euro pean war could not have brought about a demand for labor for their manufacture unless the necessary capi t'Al had been obtained by the different governments, and it is quite possible that this demand for airplanes, toward the construction of which the United States Congress appropriated over $600,000,000 in 1917, did not increase the total demand for labor in that year, but merely diverted the demand from other occupa tions to that of building airplanes.
13. Fixed and circulating capital.—When capital goods are in such form that they- can be utilized for the production of any of the goods for which they are adapted, they are called free or circulating capi tal. Capital of this sort disappears when consumed, but reappears in the form of another commodity.
When, however, a capital good is given a permanent form it is called fixed capital.
For example, iron ore is free or circulating capital. It can be first converted into steel and then into a great variety of articles, such as rails, steamships, nails, hammers, axes, saws, when it becomes fixed capital. Lumber fresh from a sawmill is circulating capital; in the form of a house it is fted capital.
The distinction is mainly one of degree, but is nevertheless important. A country's ability to carry thru new enterprises depends much upon the amount of circulating capital in its possession. If a large part of its capital is fixed, it cannot always be utilized to advantage. Fixed capital is always liable to be rendered worthless by progress, by new inventions, by changes in the market demand, etc. The automo bile largely displaced the bicycle, and bicycle factories were at a considerable expense fitted up to manufac ture automobiles. The great war in Europe, bringing to the United States an immense demand for muni tions, caused many factories and ships to be refitted, the old equipment being discarded. All this could not have been done by the owners had not the Allies been willing to supply the capital by paying prices which yielded much more than an ordinary profit.
The money or credit in banks is commonly referred ' to as circulating or liquid capital. When a depo'sitor withdraws his balance and buys the stocks and bonds of a corporation, he is said to invest it; in reality he has turned it into fixed capital.
The change of capital into a fixed form is always attended/With the risk that the market demand for capital in that form may change and that the invest ment therefore will not yield the expected return.
14. Interest, the return on rate of interest is commonly thought of as being a certain percentage of money paid for the use of money; and since money itself is not a productive agent, people of the olden times thought the money lender not de serving of compensation. Some people even today
hold this view and call interest usury, altho this term usury can properly be applied only to an excessive rate of interest.
The fact is, money in itself does not earn the in terest which is paid to its lender. The borroWer simply converts the money into capital goods and by their use, with the aid of labor, increases his income much more rapidly than he could without them.
The transaction would be plain enough if no money were used. Suppose you own a ferry boat and are making a fairly good living by its operation. But you are getting old and want to rest. So you lease your boat to some man who offers a satisfactory rental. Nobody would expect you to let him have the use of it for nothing. The boat is part of your wealth and it will not last forever. You will, there fore, want a rental large enough to serve two pur poses, first to give you a fair return on the value of the boat, say six per cent of its value, and second to recompense you for its deterioration thru use. If the "life" of the boat is only twenty years, the pay ment on account of the second purpose should be at least 5 per cent of the value of the boat. The pay ment on this second account in the language of eco nomics is for replacement or reproduction of the capi tal. Accountants designate it as a payment for de preciation.
15. Capital should be noted that all capital is consumed. As has already been pointed out, in varying periods of time, capital is destroyed when used and the product of its use must be sufficient to compensate the owner for having saved and also to replace it.
16. TVealth as we were to be absolutely exact in the use of terms, we should have to admit that all wealth is capital, for as we have seen all economic goods are productive of psychic income. A piano, the golf links, the automobile, diamonds, fine raiment, cigars, lu..xuries of all kinds—all things of this sort give pleasure and sa.tisfaction to many peo ple, that is, they yield a psychic income, and in the last analysis are economically as productive of in come as the Baldwin Locomotive Works or the United States Steel Corporation. Yet the psychic income produced by so-called consumable goods is not transferable or exchangeable, cannot be bought or sold, and therefore does not play any direct part in the field of business. Hence economists, with a few exceptions, have attempted no refinement in their definition of capital, but have applied it only to those material goods which aid in the production of addi tional economic goods or wealth.