§ 10. The prodigal borrower. The peculiarity of the prodigal type of consumptive borrower is in the artificial, self-indulgent, subjective character of the desires that impel him to borrow. He has capital, relatively a good deal of it. A prodigal usually is one who has come into his fortune by chance - inheritance, gambling, a lucky stroke of business -and therefore is without discipline in thrift. With a habitual high rate of time-preference, he comes into sudden possession of incomes capitalized at a low rate. He is impatient at the slowness with which the incomes ripen, and he takes measures to hasten them to gratify desires long latent, and now up-springing, often in a favoring atmosphere of flattery, vanity, and false friendship. Sometimes he meets the difficulty by selling some property; or he temporizes and borrows money with a vague hope that some way may be found to retain his property. When interest is 10 per cent, a promise of a hundred dollars a year gives immediate control of a thousand dollars; when 5 per cent, control of two thousand dollars. Lacking business experience he is not likely to find the best form of loan. To secure an immediate loan he lightly agrees to pay an exorbitant rate of interest often made necessary by the prospect of his financial collapse. It is clear that the high rate of interest he pays is but a reflection of a time-valuation that already exists in his mind. The net result of such a course is a transfer of property from the prodigal to others, a wasteful transfer in which often scheming and avaricious men gain unjustly, and often the savings of true abstainers are transformed into riotous living and foolish display.

§ 11. Students and apprentices. We come now to some cases of consumptive loans with a more provident motive, that of increasing the future earning-power of the borrower. A student borrows money to spend for food, clothing, textbooks, tuition, etc., needed while taking a course in college. When he borrows he has little earning-power, but with that faith in himself which makes the young American so interesting, he pictures himself four years later, sheepskin in hand, drawing a munificent salary with which he can easily satisfy the most exacting Shylock. Apprentices, young lawyers waiting for clients, physicians slowly gaining a practice, business men "working up trade," have enough faith in themselves to borrow meantime what they need to live on. They may be disappointed and suffer loss, but hope supplies their motive in borrowing.4

4 Especially when such expenditure for self-improvement is directly in industrial lines, as learning a manual trade, or a profession (as dentistry, medicine, engineering, architecture, etc.) there is a temptation to call this "an investment of capital," or a capitalizing of man's earning power. But that is merely a figure of speech, tho it is true that the outlay for utilitarian training is made in order to increase the earning power of the learner. But the future incomes can not be capitalized, because man can not sell himself in sum. He can but earn a wage or salary for successive services.

In this type of consumptive loans we see a very different motive from the former types. The borrower is looking to future needs, not to present indulgence, and the loan is useless for its purpose unless he supplements it with a true abstainer's spirit, adding his industry, self-denial, and forethought to attain the end of his education. This type of consumptive loan is often economically better than one to spend upon material production.

§ 12. Becoming-owners as borrowers. The fifth type of consumptive borrower, the becoming-owner, has also a provident motive. He borrows not in order to consume more wealth than he otherwise could, but in order to pay for it by a different method, namely, under the interest contract instead of under the renting contract. To do this he borrows the money to buy the agent in use, and becomes its owner. His right is not absolute but is qualified by the equity of the creditor to whom the property is pledged. (Chapter 22, section 3.) This condition might continue without any effort of the borrower to save and thus reduce the debt; but so generally is this kind of loan prompted by motives of thrift and made in anticipation of and as an aid to saving, that such borrowers deserve to be called abstaining users.

Of this type are purchases on credit or on the instalment plan of sewing machines, typewriters, and many other labor-saving machines, not as added means of direct enjoyment (such as are automobiles, canoes, pianos) but as better means of obtaining direct goods without the sale of products. Of this kind also is the loan to build a house for the borrower, or to buy outright anything of a kind already used by him under the renting contract (as a farm considered as a direct good, a house to live in, a source of food for the family, etc.). If one who has been renting house, farm, machine, etc., ceases to rent and buys under the interest contract, he assumes a new responsibility as the legal owner of the wealth, but often he reaps a benefit by the change. The gross rent paid by a tenant (Chapter 15, seetion 2) must include not only taxes and repairs, but something to cover risk of bad collections, trouble of management, damage through carelessness of tenants, etc. Rent of a good grade of house built for tenants5 is therefore usually 10 per cent of the selling price, and not infrequently higher, being, it is said, as high as 25 per cent on bad tenements where risk, damage, and trouble are especially great. A man living in a $2400 house and paying $20 a month rent, and able to borrow at 6 per cent could buy the house, pay $12 a month interest, and out of the balance of $8, after paying taxes and repairs, have something left as a sinking fund. By saving a few dollars more each month he can, within a few years, become the absolute owner. His pride and pleasure as an owner often leads him to add further to the value of his investment by making improvements in yard and buildings which he would not make as a tenant.

The great capital in the building and loan associations, over a billion and a quarter dollars in 1914, is slowly becoming the absolute property of the borrowing owners, whose places are taken by others thus acquiring homes. This capital, large as it seems, is but a fraction of the amount constantly being acquired in this way by owners of homes mortgaged to savings banks, to corporations (universities, philanthropic endowments, etc.) and to private lenders, directly or through lending agencies.

§13. The borrower for profit. The term "productive loan"6 has generally been applied to the borrowing of capital to be used in carrying on of business either mercantile or manufacturing - that is, in buying goods to sell again. The borrower is a middleman whose motive is to get a "profit" by sale to an ultimate user. This type of loan must be more fully discussed in connection with the problem of enterprise and profit, and only the briefest indication of the relation of the interest-rate to capitalization need here be given. The borrower expects to pay the interest out of the surplus income (over and above the capital investment) which the sale of the products will put into his hands. This success in getting a surplus large enough to leave him a balance sufficient to pay interest depends on his investing the money in agents not capitalized too high; any balance of profit depends on his selecting a kind of agents and so directing their use, that he can make them earn more than the market rate of interest.

5 This proviso "built for tenants" is significant, for houses built by well-to-do owners for themselves are often so elaborately finished that they are notoriously poor investments when let to tenants.

6 But some of the so-called consumptive loans above are productive in the sense which we recognize. The money borrowed to build a house, to buy a pump to supply water, or a machine to sew cloth, or even an automobile to produce psychic income for the owner, is productive. A clearer distinction can be made between the non-commercial' and the commercial nature of the products, between loans by ultimate users of the goods (the occupant of the house, the user of the water from the pump, etc.), and loans by middlemen who produce to sell to ultimate users.