THE THEORY OF INTEREST

the rise in capital value which produces this fall in inter-est. On the contrary, it is the fall in the interest rate whichproduces the rise in the capital. If we attempt to makethe rate of interest depend on capital value, then, sincecapital value depends on two factors—the prospectiveincome and the rate oj interest —we thereby make theinterest rate depend partly on income and partly on itself.The dependence on itself is of course nugatory, and weare brought back to its dependence on income as the onlyfact of real significance. It is present and future incomethat are traded against each other.

But, even as thus amended and explained, (that capitalstands for income) the proposition that the rate of inter-est depends on the amount of capital is not satisfactory.For the mere amount of capital does not tell us enoughabout the income for which the capital stands. To knowthat one man has a capital worth $10,000,000 and anotherhas a capital worth $20,000,000 shows, to be sure, thatthe latter man can have an income of double the valueof the former; but it tells us absolutely nothing as to thetime shapes of the two incomes actually selected; andthe time shape of income has, as we have seen, a mostprofound influence on the time preference of its posses-sor, and time preference is a prime determiner of interest.

To illustrate this important fact, let us suppose thattwo communities differ in the amount of capital and thecharacter of the income which that capital represents but,as far as possible, are similar in all other respects. Oneof these two communities we shall suppose has a capitalof $100,000,000, invested, as in Nevada, in mines andquarries nearly exhausted, while in the other communitythere is $200,000,000 of capital invested in young or-chards and forests, as in Florida. According to the theory

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