THE THEORY OF INTEREST

All persons, however different in nature, would alikehave a zero rate of impatience. They would differ simplyin the way they distributed their income over present andfuture. The spendthrift and the miser would still spendand save respectively but both would value a unit ofhard-tack today as the exact equivalent of one due a yearhence. It is evident that some of the sailors, with anaturally keen appreciation of the future, would plan toconsume their stores sparingly. Others would prefer gen-erous rations, even with the full knowledge that starva-tion would thereby be brought nearer, but none of themwould consume all of his stock immediately. They would,generally speaking, prefer to save out of such recklesswaste at least something to satisfy the more urgent needsof the future.

In other words, a certain amount of saving (if suchan operation can be called saving) would take place,without any interest at all. This conclusion coincideswith conclusions expressed by Professor Carver in hisDistribution of Wealth . 3 It shows also that the prefer-ence for present over future goods of like kind and num-ber is not, as some writers assume, a necessary attributeof human nature, but that it depends always on therelative provisioning of the present and future.

The foregoing imaginary hard-tack case is of great help,therefore, in emphasizing the essential role of the rate ofreturn over cost. This simple example, of itself, demon-strates that no theory of interest is complete whichignores the rate of return over cost. In the example wehave both elements, investment opportunity and im-patience, although both are at the vanishing point, that

’ p. 232. See also Carver, T. N. The Place of Abstinence in the Theoryof Interest, Quarterly Journal of Economics, Oct., 1893, pp. 40-61.

[ 190 ]