§ 5. Get-rich-quick schemes. Nothing discourages abstinence more than the example of the loss of hard-won savings through unfortunate investments, as happens with many million dollars of small capitals every year. A large part of these losses would be avoided if certain simple truths were generally recognized and certain maxims observed. Security against loss of principal is more important than promises of a large interest rate. It is well to remember that the prevailing rate of capitalization in the community sets the outside limit of safe investment to the investor without special knowledge and judgment of the conditions. Unusual percentages of income (over 4 or 5 per cent) are bought by the small investor at the cost of disproportionate chances of loss. Buying stocks on margin, real estate on options, or anything partly on credit, is not true investing; it is speculation, and the chance is large that it will end in disaster to the "outsider" and the "lamb." The stranger offering remarkable returns on small investments has almost certainly a flaw either in his judgment or in his morality. There are now and then good inventions which need but capital to develop them, but to judge their practical merits requires expert knowledge and business experience or influence which few possess. Only with the advice of trusted friends with these advantages should the inexperienced venture to invest outside of accustomed lines in the hope of unusual returns. "Get-rich-quick schemes" mean get-poor-quick for every one but their promoters. Patents from washing machines to chromatic printing, new processes from burning ashes to extracting gold from sea water, lead mines and gold mines which prove only to be "salted" mines, rubber plantations with elastic possibilities, electric "air line" roads destined ever to remain in air - these projects yearly lure millions of small savings from the trusting.

§ 6. Slower and safer plans. The average man investing outside of his own business should travel the well-marked roads: government, state and municipal bonds; stocks, or preferably bonds, of the more conservative corporations bought outright at other than times of booming business and high capitalization; real-estate mortgages in the neighborhood or placed through reliable agencies; shares in building and loan associations; deposits in savings banks; life insurance for breadwinners, first and mainly on the " ordinary life" plan or with payments limited to the earning years; and finally, old age pensions and life annuities. Carefully selected investments along these lines will yield to the average man in the long run much more than more active investments with the alluring promises of large dividends. If the small savings of the masses were more safe and remunerative, a wonderful stimulus would be given to industry, and the general welfare would be enhanced. In part no doubt this most desirable end can be furthered by public regulations in protection of investors, in part it must be brought about by the progress of sound principles of investment among persons of small means.

§ 7. Relation of the interest rate and saving. A question much debated is: should a rate of interest be looked upon as the cause of saving. Some persons might be willing to save somewhat were the rate of interest much lower, just as (on the hypothetical sellers' curve) some sellers might have been willing to sell for less than the market price if they had not found buyers willing to pay the actual price. In every loan market the price comes to equilibrium at a point lower than some borrowers would have consented to pay, and higher than some lenders would have consented to take. If the rate were much lower there would be many more borrowers and many fewer lenders. A higher rate reduces the number of borrowers and increases the number of lenders; borrowing is by so much discouraged and abstinence is given a larger premium, a reward for waiting.1

A high interest rate does not insure a high degree of cumulative abstinence in a community; it is indeed nothing but the visible index of a low degree of abstinence (a high rate of time-preference), and interest will remain high till abstinence grows. The rate of interest marks the point of equilibrium in the market between present and future value of incomes, like the pointer on the spring balances. A fall in the rate of interest is not so much the cause of lessened saving in the community as a whole as it is the effect of increased saving. The causal order is from the growth of the spirit of saving in large classes to a falling interest rate, which continues to fall as long and as far as the cause is operative or is not offset by the acts of others. The truth in the view that a fall in the interest rate decreases saving is this: that a fall in the rate of interest may cause some individuals to save less. The fall is the resultant of the acts of other individuals who are willing to go on saving at a lower rate of interest than some other individuals are.

1 A man carries a dollar in his pocket on a journey without getting interest, but he (now) values the future purchase more than the present purchase. Likewise, by persons ignorant of banks, dollars are sometimes laid away for sickness, old age, and other needs without the inducement of interest. The owner might even be imagined to pay for the safekeeping of the money in the meantime. Some have made much of these cases, have called hoarding a case of zero interest, and the payment of storage charges a case of negative interest. These are not cases of interest at all by our definition, they are cases of time-preference for future money. The zero rate of time-preference does not extend to goods generally, for this would mean an absolutely indifferent choice between present and future uses, gratifications and goods, and an infinite capital value for the smallest permanent series of incomes. (See above, under time-value.) These acts of saving money occur at a time when the individual is showing time-preference for the present in numberless ways. In these cases the money is for the time being withdrawn from its use as a medium of exchange and is turned to its use as a storehouse of saving. Like fruit in a plentiful season and ice stored in winter it is kept because it is relatively plentiful now, and a part of it if kept will provide necessities for a time of relative scarcity.

True, custom, example, and training have so fixed the habit of saving in many individuals that they would continue to accumulate just as much after the rate of interest fell. It is even conceivable that a few, in middle life, with a pretty definite idea of the amount of money income needed for a competence in old age, or to leave to their children, might be spurred to yet greater efforts when the investment premium fell. But this must be confined to a peculiar group of persons at a particular stage in their lives and is not characteristic of the whole community. Abstinence may, like jealousy, grow by what it feeds on, but only in some few older natures, not in the ever-renewing generations. It is not true of men in general that the longer they have to wait for income the easier they find it to wait.

Lending at interest was formerly very generally prohibited and the rate of interest was always high in those times. Well-meaning reformers are always proposing the prohibition of interest as a remedy for social ills. If this were done those savers who could buy and manage the agents themselves would still have strong motives for abstinence, but those who could not be active managers themselves would be deprived of the stimulus of a premium for saving. In itself the mere prohibition of contract interest would tend toward a lowering of the quality of the environment, and this would result in a higher rate of time-preference.