THE THEORY OF INTEREST

of the investment in the other, but before any loan ismade.

Each will, let us say, borrow $1,000 this year and repaythis with 5 per cent interest next year, making a totalrepayment of $1,050. Each, therefore, will have a finallyadjusted income this year of $10,000 -j- $1,000 or $11,000and next year of $12,500 — $1,050 or $11,450. The effectof the loan is thus identical on the income streams in thetwo cases. The difference is that the unfortunate, if de-prived of his loan, could not escape from his lowerincome stream this year of $10,000 despite his higher in-come next year, whereas the business man, if deprived ofhis loan, could, if he chose, give up easily the investmentaltogether. That is, the merchant has another optionwhich the unfortunate lacks. He has two options andtherefore the opportunity to replace one by the other.

If the merchant did not have this extra option, thetwo cases would be so similar that not even a stickler forthe distinction between a consumption loan and a pro-duction loan would assert any essential difference. For,suppose the merchant had already been committed some-time previously to the investment, not, perhaps, realizingthat he would be unable to pay for it without borrow-ing or skimping. When the time arrives when he mustof necessity pay in his money, he finds that a loan isbadly needed to avoid pinching himself in income. Hewill now think of the loan not as enabling him to invest,for that has to be done anyway, but as enabling him tobuy his bread and butter. In short, his loan, like theunfortunate’s, is now a consumption loan! It is becauseordinarily the merchant is not thus constrained to makethe investment that the loan is connected in his mindwith the investment rather than with his private necessi-

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