THE THEORY OF INTEREST

curing larger incomes in the future, and larger incomesmean larger consumption. Production loans then aremade only in contemplation of future consumption.Hence, though loans for the acquisition of intermediategoods do greatly preponderate in the loan markets, theseloans have power to affect the interest rate only bychanging the relative amount of future incomes comparedto present incomes.

To the criticism that the consumption concept of in-come when used as the foundation of interest theory pre-sents but a partial analysis of the supply and demandfactors which are operative in determining interest rates,I make this reply: Interest rates are not a resultant ofthe supply of, and demand for, either capital goods or ofcapital values—sometimes conceived of as a loanablefund or funds, except as these signify the supply of anddemand for income. An investment of capital, so called,is nothing more nor less than the sacrifice of income inanticipation of other, larger, and later income. It is acase of flexing the income stream, reducing it in the pres-ent or early future and increasing it in the remoter future.The income stream, so fundamental in the interest prob-lem, includes incomes from all sources. It includes thevalue of the services of land, machines, buildings, and allother income-producing agents. Upon the value of theseservices, discounted at the prevailing rate of interest, thevaluation of said land, machinery, buildings, and so ondepends. What is properly called funds is this valuationof the income stream or portions of it. It should be evi-dent that the approach to the problem of interest throughthe income stream and the supply of and demand forincome gives to the problem the broadest possible basis.

The second indictment of narrowness of my concept

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