THE THEORY OF INTEREST

often obtain as a consequence a return on their originalinvestment far greater than the rate of interest. Com-modore Vanderbilt, Andrew Carnegie and Henry Ford are examples in point.

The rate of interest on loan contracts will rise as a re-sult of those operations but only slightly. The cause ofthe increase which will occur is the increase in the margi-nal rate of return over cost.

In consequence of the higher interest rates, there oc-curs a revaluation of investment securities, and, in fact,of all capital. The value of capital, assuming that thevalue of the income from the capital remains the sameas is true of bonds, sinks as the rate of interest rises.Bonds tend to fall while common stocks tend to rise,unless counteracting influences prove to be dominant.

This revaluation applies also to the very capital inwhich the new invention or discovery is embodied. If itis found that $100,000 invested in a newly discoveredgold mine will result in a yield of $1,000,000 a year, thatmine will no longer sell for its original cost, but for asum far above it. It is the relation of the $1,000,000 ayear to the new value of the mine, and not its relationto the original investment value or cost which will re-flect the true rate of interest. Original investors in TheBell Telephone Company realized returns far beyondthe normal interest on their investment, but the presentinvestor pays a price for Bell Telephone stock commen-surate with its dividends.

New devices will also cause a revaluation of the olderones which they have displaced, but in this case the newvalues are lower than before. The adoption of the circularsaw rendered nearly valueless the mill plants equippedwith the old up-and-down saw, and the band saw low-

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