§ 13. Newly discovered process; effect upon interest-rate. What effect would the adoption of a newly discovered process have upon the time-price rate ?6 If it takes a smaller equipment than the old, its effect is that of releasing some productive agents for other processes before excluded; that is, it enables a community with the same abstinence to resort to longer processes and thus lower the time-price. Or if the new method gives increase in product with the same investment, the result is a fall in the price of the product, and a recapitalizing of the sources of the materials, etc., to bring income and capital value into accord with the prevailing rate. Then the question becomes: "What effect will this have on the prevailing rate of time-preference ? As the total income of the members of the community increases with the more bountiful production, and their present desires are better provided for they should find it easier to abstain. In itself this should result in more saving and a lower interest rate. But the final result so depends on changes in the standard of living, education, etc.,7 which are themselves usually elevated by more bountiful production, that the answer is not easy. The experience of the past two centuries shows that our progressive economic societies are constantly incorporating into their processes great improvements which raise the total production of objective goods per capita, while they maintain about the same rate of interest from generation to generation. Both present and future expected incomes are more bountiful than they were in the past, but the ratio of their time-valuation remains substantially unchanged.

5 Among the processes always waiting on the borders of utilization, known but not adopted, must always be many which are technically more indirect than those before in use; but they have been rejected not at all because of their technical indirectness, but because they involved either too large or too long an investment. If the indirectness involves initial cost - as for materials to make the complex parts -then that influences time-choice by increasing the investment; if it involves cost of operation because of complexity of parts and difficulty of repairs, this influences time-choice by reducing the net income expected. Given a certain investment, and a certain income in the future, and time-difference is the only factor that influences choice; technical indirectness is a merely incidental element.

6 Observe that we are considering the case not of a better technical method already known, and now first adopted because of a fall in the interest rate, but the case of a new method adopted while the old rate of interest still prevails.

§ 14. Railroad betterments and the rate of interest. The railroads in America have given a good illustration of the relation of the interest rate to improvements. In railroad financing, cost of operation is compared with fixed charges, i.e., the interest on the bonds needed to make an improvement that reduces costs. Our main lines in America were built when the interest rate was high (before 1873). Expensive improvements, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, accompanied a fall in the rate of interest. A fall in the interest rate 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 has been 5 per cent and falls to 4 per cent, many permanent improvements before unwise become economical. A net gain may result from increasing the capital investment in order to reduce the cost of operation per unit of traffic. One thousand dollars paid annually in wages balances a 5 per cent interest charge on a capital investment of $20,000; it balances a 4 per cent interest charge on $25,-000. It thus becomes profitable for the railroad to abandon or throw aside an enormous capital represented by the old, less perfect roadbed and equipment, and build new with capital borrowed at a lower rate. 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.

§ 15. Effect of war upon the interest rate. The commonly observed fact that a great war calling for much borrowing raises the interest rate is easily explained as the undoing of the process of saving and loaning. It presents a case of waste on an enormous scale. Waste and destruction are in their nature and in their main effect upon time-preference, interest, and productive processes, just the converse of saving and improving wealth. In the case of war the borrowing comes first, to get capital with which to buy the many supplies and munitions needed to maintain armies and navies. Goods are destroyed in enormous quantities: horses, wagons, gasoline, weapons, ammunition, ships, foods, clothing, etc.; great numbers of men, both combatants and non-combatants, are withdrawn from many of the usual productive pursuits and are giving every energy either to producing munitions of war or to destroying the soldiers and the wealth of the enemy - roads, fields, buildings, machinery, stores of all kinds. Within the region of hostilities the economy is reduced well nigh to the stage of savagery. Men become beasts of burden, and are obliged to carry on production with meager equipment. Even were a war in the territory of two modern nations limited to a few months, the destruction would be enough to consume the usual savings for years. The present need of nations at war is for enormous quantities of present goods; after the war the pressing need to rebuild their houses and their ruined industrial equipment will call for great quantities of present goods of another kind. This result is anticipated at the very outbreak of hostilities. The interest rate rises, and the capital-value of all existing securities with fixed incomes is reduced accordingly. During the continuance of the war the rising interest rate slackens investment in industries in countries at peace. The unparalleled economies of the people of warring nations, the lowering of their standard of living, the cessation of a large share of the costly entertainments and of social luxuries, and the sacrifices they make to support their governments, go far to offset the destruction, and thus to limit the rise of the interest rate. Notwithstanding this, the world's industrial equipment halts its progress and goes backward as, through the medium of international credit, this destructive, anti-saving process of war spreads its effects over the nations.