INCOME AND CAPITAL

(4) Capital value is increased by savings, the incomebeing decreased by the same amount that the capital isincreased.

(5) These savings thus diverted from income andturned back into capital will, except for mischance, bethe basis for real income later.

§16. Application to this Book

The problem of the rate of interest is entirely a problemof spending and investing, of deciding between variouspossible enjoyments constituting income, especially be-tween relatively small but immediate enjoyments andrelatively large but deferred enjoyments. There is aneternal conflict between the impulse to spend and theimpulse to invest. The impulse of a man to spend iscaused by his impatience to get enjoyments withoutdelay, and his impulse to invest is caused by the oppor-tunities to obtain by delay relatively more enjoymenteither for himself or others.

For the study of interest from this point of view weneed as our chief subject matter a picture of a person’sincome stream. We may get this most clearly by plot-ting day by day, month by month, or year by year, theclosest statistical measure of one’s real income, namely,one’s cost of living.

If this income flows at a constant rate of $200 a monthor $2400 a year, the picture of the income stream is asshown in Chart 1.

If the income stream flows at an increasing rate, thepicture is as shown in Chart 2.

If it flows at a decreasing rate, the picture is as inChart 3. 11

u In all three examples, each month’s income is represented by arectangular column or bar. In the last two cases, the resultant row of

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