THE THEORY OF INTEREST

purposes of exposition, to postulate two questions in-volved in the theory of the rate of interest, viz., (1) whyany rate of interest exists and (2) how the rate of inter-est is determined. This second question, however, em-braces also the first, since to explain how the rate of in-terest is determined involves the question of whether therate can or cannot be zero, i.e., whether a positive rateof interest must necessarily exist.

§9. Discounting isr Fundamental

But although the rate of interest may be used eitherway—for computing from present to future values, orfrom future to present values—the latter process (dis-counting) is by far the more important of the two. Ac-countants, of course, are constantly computing in bothdirections; for they have to deal with both sets of prob-lems. But the basic problem of time valuation whichNature sets us is always that of translating the futureinto the present, that is, the problem of ascertaining thecapital value of future income. The value of capitalmust be computed from the value of its estimated futurenet income, not vice versa.

This statement may at first seem puzzling, for we usu-ally think of causes and effects as running forward notbackward in time. It would seem then that income mustbe derived from capital; and, in a sense, this is true. In-come is derived from capital goods. But the value of theincome is not derived from the value of the capitalgoods. On the contrary, the value of the capital is de-rived from the value of the income. Valuation is a humanprocess in which foresight enters. Coming events casttheir shadows before. Our valuations are always anticipa-tions.

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