<h2>CHAPTER 19</h2>
<h3>SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF INTEREST</h3>
<h4>§ I. SAVING AS AFFECTED BY THE INTEREST RATE</h4>
<div class="sidenote">The interest rate traces the division between present and
future gratifications</div>
<p>1. <i>In the case of consumption goods, present marginal uses are often
less than future uses as judged at the present.</i> The proposition that
future goods sometimes have a greater instead of a less value than
present goods may at first seem to deny the general fact of economic
interest, which is a premium on present over future goods. The
contradiction is only apparent, however, and the proposition is merely a
proper interpretation of the theory of interest. The assertion that
present goods have greater value than future goods, as we have accepted
it, requires two explanations. First, it means that this difference
exists when the two are judged and compared <i>at the present moment</i>. The
future use when it matures may be much greater than the present use;
indeed, the very existence of interest depends upon this surplus of
value arising by the lapse of time in the future use. Secondly, the
proposition does not mean that every concrete good, or every use of the
goods, is worth more in the present than in the future; it means merely
that the demand for present goods preponderates so that a market rate in
favor of present possession prevails. In a great many cases a particular
good may have a greater value to be kept for the future than to be used
at present, in which case it is kept, or it is exchanged for something
else having a higher value in the present. But this preference of the
future over the<span class="pagenum"><SPAN name="Page_160" id="Page_160">[Pg 160]</SPAN></span> present cannot pass a moderate limit without condemning
the person to present misery, and at length to death. On the other hand
the excessive preference of present over future would lead to the using
up and wearing out of wealth, to the present enjoyment of every possible
resource, on the penalty of future misery. Evidently somewhere between
these two extremes there must be, in each economy, a ratio of exchange
between present and future, which in fact is the interest rate. This
rate applied to utilities traces through each good a line analagous to
the isothermal line on the map, marking off a zone of utilities for the
present and other zones for each period of the future. There is thus a
close relation between saving and the rate of time-discount.</p>
<div class="figcenter"> <ANTIMG src="images/i160.jpg" width-obs="650" height-obs="294" alt="" /> <span class="caption">Present VALUE line</span></div>
<div class="sidenote">The less necessary goods are the ones saved</div>
<p>Let us illustrate by the case of fruit stored in the cellar for future
use. In the fall after the appetite for apples has been gratified up to
a certain point, there still remains a large stock which affords less
gratification if consumed at once than if kept for a time. Thus wood,
food, and clothing are stored in the summer for the winter's need. Even
the animals act on this principle. Squirrels, bees, and ants store up in
the season of superfluity for the season of scarcity. The animals
recognize with their feeble intelligence or by instinct, that a time
will come when these consumption goods will represent greater importance
to their welfare than they do at the moment. It results from the nature
of wants and<span class="pagenum"><SPAN name="Page_161" id="Page_161">[Pg 161]</SPAN></span> the principle of diminishing utility that in many cases
some portion of a large supply of present goods must be worth less now
than at a future time. This part, the marginal, less necessary part,
will be left for a future time, and it is to this part that our opening
proposition refers. This is roughly illustrated by the diagram.</p>
<p>Things that cannot be kept, perishable goods, do not permit of this
comparison. But if goods that can be kept continue to be used after
utility has fallen down the scale, their high value for the future is
cast away. Man lives not alone in the present but, in a far greater
measure than do any animals, he lives in the future also. His economic
life and his economic judgment comprehend a great number of periods at
once. With the aid of memory and imagination he forecasts the future,
and compares it with the present. The diminishing utility of goods,
therefore, is modified by this fact that a thing has want-gratifying
power at different periods. Before man uses goods for an inferior
purpose he will ask whether, if they are kept for the future, they will
not gratify a greater want.</p>
<div class="sidenote">The less valuable rise in value with the lapse of time</div>
<p>2. <i>The gradual rise of a consumption good with the lapse of time from
the lower to the higher degree of gratification is the rent it yields.</i>
The difference in value of present and future rents is expressed by the
discount of the future use when it is capitalized at any earlier moment,
and emerges in the rise in value as the thing approaches to the time
when it can render the later use. Next year the unit whose use is
deferred will afford as much gratification as the earlier units do now,
and more than if used at the present moment. The importance of any
present utility is compared with its importance a year later, plus
interest at a rate which expresses the limit to which future uses are
discounted. Anything that makes men feel more the importance of future
uses causes them to value those uses more. But the pressure of present
want is such that a present use of a lower order competes with a future
use of a higher order. Only goods of<span class="pagenum"><SPAN name="Page_162" id="Page_162">[Pg 162]</SPAN></span> a lower order, nearer the margin,
are reserved for the future. But just as the possibility of using a
thing for several different purposes at present causes it to be valued
more highly than if it had but one use, so the possibility of reserving
to the future a portion of a stock imparts to every unit a higher
marginal utility.</p>
<div class="sidenote">Interest is the equalizer of time values</div>
<p>3. <i>The saving of present goods for future use is encouraged by the
motive of gaining the interest.</i> Many consumption goods grow into higher
uses in the hands of the owner, whether he uses them for himself or not.
Ice may be stored in midwinter when it is all but a free good and a
little labor serves to fill the ice-house. Kept until the summer months,
the ice rises in value as the desire for it grows. Likewise the higher
price secured by the owner of a thing kept for sale to others, reflects
the change in utility, and affords practically a rent which is the
motive for investing capital in that business. Any saver or abstainer
puts aside present wants only when the future good, with the addition of
time-value or of money interest, appears as large as the present good.
Interest is therefore the equalizer of the value of things in different
periods. Put into the scale of judgment when present and future are
compared, it helps to balance the disparity in the gratifications given
by economic goods in different periods of time.</p>
<div class="sidenote">Saving increases and improves economic agents</div>
<p>4. <i>The postponement of present wants results in bettering the economic
environment for the future.</i> Economic environment means simply the
economic conditions in which men live, the stock of wealth, the supply
of useful things with which they are surrounded. This betterment may be
only temporary, only for the immediate future. Like the busy bee or the
prudent ant, one may in summer store the cellar with consumption goods
to be consumed the following winter. But often there is a more lasting
way of improving the economic environment by converting savings into
durable indirect agents. The accumulation of wealth that will yield its
fruits only after years of growth is the record, so<span class="pagenum"><SPAN name="Page_163" id="Page_163">[Pg 163]</SPAN></span> to speak, of the
successful competition of forethought with present desires. It means
that the two periods have presented their respective claims and that men
have decided in favor of the future. Saving thus lifts society from
poverty to wealth by the progressive enlargement of the sources of
future utilities.</p>
<div class="sidenote">The kinds of abstinence</div>
<p>5. <i>Abstinence is the faculty of mind that enables present wants to be
subordinated to future wants.</i> Abstinence may be considered as a
quality, or faculty, of the mind, or as an act resulting from that
quality. There is little danger of confusion in this usage, but it is
well to note the distinction and the fact that the former is the primary
meaning. Abstinence expresses an act of the will, a choice made by man.
It is the guardian of the future, so to speak, against the greediness of
the present. For convenience we may speak of conservative abstinence as
that which keeps men from using up or invading their present stock of
resources, and of cumulative abstinence as that which impels them to add
to that stock. There is no sharp dividing line, no abrupt break, between
these two, yet on the whole they differ. There is a quality of mind very
like the inertia or momentum of physical matter. The inertia of mind
makes men resist stubbornly the reduction of wealth and of inherited
social position; but it requires a more positive quality of mind to add
to wealth at the cost of present sacrifice. Abstinence is embodied in
individuals, never elsewhere, and is found in most varying degrees of
strength. Upon it depends the growth and betterment of man's
environment.</p>
<h4>§ II. CONDITIONS FAVORABLE TO SAVING</h4>
<div class="sidenote">Political insecurity discourages saving</div>
<p>1. <i>Political security and domestic order are essential to the
development of saving.</i> As saving results from a comparison of the
future with the present, any lack of certainty regarding the future
decreases the appeal it makes. Men employ roughly the theory of
probabilities in this matter,<span class="pagenum"><SPAN name="Page_164" id="Page_164">[Pg 164]</SPAN></span> and count a utility only half as much
when there is but one chance in two of enjoying it. In countries where
there are constant revolutions and border wars, as in Africa and South
America, and in lands where brigandage is common, as in Italy,
Macedonia, and Bulgaria, the motive for saving is cut in two. Oppressive
and irregular taxation kills the motives of providence, and decreases
the appeal made by the future. While the miserable subjects of the state
live from hand to mouth, the very sources of the public revenue
disappear. Improvidence grows upon such a people into a prevailing
national custom; ambition is wanting; industry is the sport of chance;
economic order and economic prosperity are impossible.</p>
<div class="sidenote">Influence of private property on saving</div>
<p>2. <i>Social institutions that give a motive to the individual are
essential to saving.</i> Among these institutions the most important are
the family and, closely connected with it, the institution of private
property which, in its ideal manifestation, places the responsibility
for economic welfare on the individual or the family. Through it the
state says to men: "Save if you will; the wealth and its fruits shall be
yours. But if you spend and consume all you can, you alone will suffer
the consequences." It is true that the institution of private property
never is found in an ideal form. Dishonest public officials weaken and
defeat its benefits. Every propertyless family marks a failure in its
purpose. Private property is a favorite object of attack by social
reformers, but it never can be safely abolished in a civilized state
until some other incentive is provided, equally effective to make men
subordinate present desires to future welfare. Unless the mass of men
can be greatly changed, property creates the only motive that can induce
saving regularly and on a large scale. It diffuses responsibility for
present consumption. It multiplies the motives for abstinence and thus
increases the welfare of all economic society.</p>
<div class="sidenote">Safe and paying investments encourage saving</div>
<p>3. <i>Opportunity for the investment of small savings favors a spirit of
abstinence.</i> The institution of small property,<span class="pagenum"><SPAN name="Page_165" id="Page_165">[Pg 165]</SPAN></span> peasant proprietorship,
worked powerfully in this direction in many parts of Europe, and the
same effects have resulted in America from the wide diffusion of
property in land. If the decline in the number of small independent
farmers has somewhat weakened this influence in America, in other ways
other agencies are effectively performing the same functions.
Savings-banks, penny banks, building and loan associations,
penny-provident funds, and other convenient means of investing small
sums, encourage men to reduce their tobacco bills, their candy bills,
their saloon bills, and to lay aside for the winter's coal, for the
children's education, for houses, for business investments, or for old
age. Probably no one thing has given a greater stimulus to saving than
has the development of insurance and the endowment policies in
connection with it. While the great modern corporations have destroyed
many of the small business enterprises into which so much of the saving
of the past was put, at the same time the increase of negotiable paper,
of loans, and of stock in joint-stock companies, has opened up other
large fields for investors.</p>
<div class="sidenote">Changing interest rate in relation to saving</div>
<p>4. <i>Variations in the rate of discount of the future react upon the
spirit of saving in various ways.</i> This very general proposition
requires more detailed discussion. In general, a high rate of interest
gives a large motive to save, for as the discount on the future is
large, so is the reward for waiting. But this favoring motive may be
offset by other unfavorable conditions, and is, in fact, wherever the
high rate continues. In countries backward economically, where war,
brigandage, and political oppression prevail, the rate of interest is
frequently ten and twelve per cent. on the best secured loans. A high
interest rate does not of itself insure a high degree of cumulative
abstinence; it is only one of several factors. But in a new and favored
country like America, a high rate of interest is a strong stimulus to
saving. Again, interest may fall while saving continues at the same or a
greater pace. Ordinarily a fall from six per cent. to five,<span class="pagenum"><SPAN name="Page_166" id="Page_166">[Pg 166]</SPAN></span> giving men
a smaller motive for abstinence, would be expected to cause less saving,
yet this is not always the case. Custom and example help to fix a habit
of saving in individuals and cause them to continue saving at a lower
rate of interest. With the growth of wealth, the prevailing ideas as to
the amount needed for a competence change, impelling to greater saving.
The tendency, however, of a fall in the rate of interest is to weaken,
and that of a rise of the rate, other things being equal, is to
strengthen the motive to save. But the influence of the interest rate on
saving is relative to the character of men.</p>
<h4>§ III. INFLUENCE OF THE INTEREST RATE ON METHODS OF PRODUCTION</h4>
<div class="sidenote">Saving permits improvement of agents</div>
<p>1. <i>The individual saver is enabled to improve the agents that he uses.</i>
The simplest case is presented when means of enjoyment are improved and
made more durable. If Crusoe on his island spends less time and fewer
resources on gratifying his immediate wants, he may improve the quality
of his clothing and the convenience of his house and furniture. By thus
putting his consumption goods into durable instead of temporary forms,
he will increase eventually the sum of utilities enjoyed. Again,
abstinence permits the tools of the laborer to be made more convenient.
If the farmer spends less time in the garden and he and his family live
on plainer food, while he makes a plow, mends a rake, and builds a shed,
he will be enabled thereafter to gather a greater crop with less effort.</p>
<div class="sidenote">Saving of consumption goods for exchange</div>
<p>2. <i>Consumption goods, when saved, may be exchanged for services, and
these may be used to create durable agents.</i> Various ways are open to
one wishing to increase his stock of durable agents. He may forego
seeking immediate enjoyments while he makes durable agents himself. Or
he may make and save a stock of consumption goods, a surplus supply for
the future, and exchange it for durable agents.<span class="pagenum"><SPAN name="Page_167" id="Page_167">[Pg 167]</SPAN></span> Finally, one who has
accumulated consumption goods can always exchange them for the services
of those seeking subsistence and enjoyment; and thus in control of a
labor force, he can direct it toward the production of new forms of
productive agents.</p>
<div class="sidenote">Money savings are converted into other wealth</div>
<p>3. <i>In modern industry, saving frequently takes the form of money, which
is then loaned to productive borrowers.</i> This is the typical form of
saving in modern industry. As it is more and more the case that income
takes first the form of money, saving most conveniently takes the money
form. The clerk on a salary of $60 a month spends $50 and saves $10
which he lends to a neighbor or deposits in a savings-bank. The borrower
is thus empowered to increase his stock of productive agents in the
measure that the lender has limited his consumption. The complexity of
the process by which money saving becomes embodied through a money loan
in new productive agents should not blind to its real nature. The money
is saved as a means to the exchange of present goods for future income.
Money even in our day is occasionally stored away for future use under
hearthstones or in old stockings and hollow trees, but this is a
primitive and wasteful method, involving the loss of all the additional
rents that its exchange and investment would yield.</p>
<p>If the money saved by the thrifty saver is loaned to a thriftless
borrower, wealth is not increased, but merely changes hands. The
prodigal mortgaging his wealth, spending the money, and living beyond
his income, absorbs the savings of the other. One saves and adds to
wealth, the other consumes it. There is no net increase of goods, but
two individuals have shifted positions; each has gotten his reward of
growing affluence or penury.</p>
<p>The "normal" end, however, of savings and loans is productive. The
borrower, in getting control of purchasing power, aims to put a new
machine where it will be useful, to remove obstacles, and to make
economic agents more effective. Along the border-land of industry the
active and<span class="pagenum"><SPAN name="Page_168" id="Page_168">[Pg 168]</SPAN></span> alert borrower seeks out opportunities to make new agents
earn a rental, and having found the opening, turns to the money market
for the means to profit by it.</p>
<div class="sidenote">Lower interest means higher capitalization</div>
<p>4. <i>A fall in the rate of interest normally accompanies an increase in
the mass, efficiency, and valuation of durable economic agents.</i> A lower
rate of interest means a higher capitalization of all incomes. It is not
that either can be called the cause of the other; rather both are
aspects of the same thing, the interest rate merely registering the
change in capitalization. If the rate of interest has been five per
cent., an income of $100 has been capitalized at $2000. When the rate
falls to four per cent. the income is recapitalized at $2500. All along
the line of investment there is an increase in the value of the durable
economic agents.</p>
<div class="sidenote">And more complex industrial processes</div>
<div class="sidenote">It encourages the increase of fixed charges to reduce cost of
operation</div>
<p>Another phase of the change is the greater complexity of the processes
of industry. Production becomes technically more complex when interest
falls. Rental, product, and present goods, bear a smaller ratio to the
value of capital, and therefore it becomes advantageous to apply newly
formed capital to uses which before did not justify the investment.
Where formerly the utility of a second tool did not justify its making,
now it can be made to earn the smaller rental needed to balance its
capital value. One form, therefore, which the change takes, is a
multiplication of the tools already used. Things are placed wherever
most convenient. Another form this change takes is the putting of new
links into the chain of technical production. Cost of operation
constantly is compared with fixed charges, the interest with the capital
investment. Expensive improvements on railroads, the straightening of
curves, the tunneling of mountains, the reducing of grades, the
replacement of lighter by heavier rails, have been made possible by a
fall in the rate of interest. A fall in the rate of interest disturbs
the equilibrium that has been arrived at, between the cost of operation,
the amount paid for wages, coal, etc., and the income on permanent
investment. If the rate of interest<span class="pagenum"><SPAN name="Page_169" id="Page_169">[Pg 169]</SPAN></span> has been five per cent. and falls
to four per cent. many permanent improvements before unwise become
economical. One thousand dollars paid annually in wages then balanced an
interest charge on a capital investment of $20,000; now it balances the
interest charge on $25,000. It becomes a paying thing for the railroad
to abandon or throw aside an enormous capital represented by the old,
less perfect roadbed, and build a new one alongside of it. The changes
of this kind one sees in traveling on the great and progressive
railroads, reflect in part the growth of traffic, but in part also a
change of the interest rate, making it a net saving to increase the
capital investment in order to reduce the cost of operation per unit of
traffic.</p>
<div class="sidenote">Diffused benefits of saving</div>
<p>The benefits of saving viewed broadly are not confined to the owner of
the wealth saved, but are diffused throughout society, in the degree
that they increase and improve the industrial environment, and thus
raise the efficiency of production. Such a change works the same results
as would a magical increase in the fertility of the soil, an improvement
in the richness and accessibility of natural mineral stores, or in the
quantity and quality of artificial appliances.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_171" id="Page_171">[Pg 171]</SPAN></span></p>
<h2>PART II</h2>
<h3>THE VALUE OF HUMAN SERVICES</h3>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_173" id="Page_173">[Pg 173]</SPAN></span></p>
<h2>DIVISION A—LABOR AND WAGES</h2>
<hr class="chap" />
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