THE THEORY OF INTEREST

Past costs have no direct influence on value. Only in-directly do they enter to the extent that they have de-termined the existing supply of goods and have thuseither raised or lowered the value of the services ofthese goods.

In this indirect way, past costs can determine presentvalues temporarily and until the prices of goods avail-able are brought into conformity with the present costsof production through the operation of supply and de-mand. For example, the cost of producing woolen clothdeclined very sharply after the close of the World War,but the price did not decline for many months becausethe new cloth made at less expense was not sufficient tomeet the demand, hence the price remained above thenew costs of production for a time. Again, the cost ofmaking shoes advanced rapidly during the early yearsof the twentieth century, but the price of shoes did notadvance pari passu with increased costs, because thesupply of more cheaply made shoes was still large andfor a time controlled the market price. In the same in-direct way, many other influences affect the value ofthe services of any good, especially any alternative tothose services. But none of these considerations affectsthe principle that the value of the good itself is thediscounted value of the value (however determined) ofits future services.

§11. The Discount Principle Applied

The principles which have been explained for obtainingthe present value of a future sum apply very definitelyto many commercial transactions, such as to the valuationof bank assets, which indeed exist largely in the form ofdiscount paper, or short time loans of some other kinds.

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