APPENDIX

The mere accrual of value as we draw nearer the items con-stituting true income is neither income nor outgo but capitalgain. The typical picture we should carry in our mind is of asaw-tooth curve consisting alternately of a gradual ascent alonga discount curve, and a sudden drop as an income coupon isdetached. The only income in this picture is the series of suddendrops, on which all the rest hangs. The gradual ascent in eachsaw tooth is not income; otherwise it would (largely) duplicatethe true income. Nor is it outgo; otherwise it would (largely)negative the true income.

In the case of a bond selling at par these alternate ascents anddrops are equal, and we carelessly speak of both as interest oras income. But the instant the bond sells above or below parwe recognize the difference. If we follow this out we can scarcelygo astray.

Even to those who do not formally accept any cost theoryof interest, the interest itself will seem in some sense to be acost, and in most books on economics, interest, however ex-plained, is regarded as one of the costs of production. It istrue that for a debtor who pays interest, the interest is, tohim, a real cost, and is debited on his books. But we needonly to be reminded of the debit and credit bookkeeping ofthe first chapter to see that this item is counterbalanced onthe books of the creditor, to whom this interest is by no meansa cost, but, on the contrary, an item of income. For societyas a whole, therefore, even in the case of interest which is ex-plicitly paid, it cannot be said that it constitutes a cost ofproduction. In the case of a person who works with his owncapital, the truth of this statement is even more evident. Econ-omists who state that the independent capitalist must chargeoff interest as one of his costs of production seem to forgetthat such self-paid interest must be charged back again asincome also. Labor sacrifice is quite different. It is a real costand in no time bookkeeping can it be cancelled out. The fallacyof assuming that interest is a cost is doubtless due to the habitof regarding production from the point of view of the “enter-

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