THE THEORY OF INTEREST

§4. The Imaginary “Hard-Tack” Illustration

To fix our ideas, let us suppose these conditions to berealized on a desert island on which some sailors areshipwrecked and each left with a specified number ofpounds of hard-tack and with no prospect of ever im-proving his lot. We shall suppose the use of this hard-tackto be the only real income open to these castaways,and that they have given up all hope of ever addingto it by accessions from outside or by cultivating theisland which, for our hypothesis, must be barren. Nochange in their human nature need be assumed. We as-sume that they would react to the same income just asbefore the shipwreck. Merely their circumstances havechanged. In consequence, the only possible variation oftheir income streams—consisting solely of the use ofhard-tack—is that made possible by varying the time ofits consumption. Suppose one of them has an initialstock of 100,000 pounds. He has the option of consuminghis entire store during the first year, or of spreading itsuse over two or more years, but in any case he will event-ually aggregate the same total income, measured inhard-tack, spread over the future, namely 100,000 pounds.

A little reflection will show that, in such a community,the rate of interesOm terms of hard-tack would necessarily

be zero! For, by hypothesis, the giving up of one pound

of hard-tack out of present consumption can only resultin an equal increase in future consumption. One poundnext year can be obtained at the cost of exactly one poundthis year. In other words, the rate of return over cost iszero. Since, as we have seen, this rate must equal therates of preference, or impatience, and also the rate ofinterest, all these rates must be zero also.

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