Here again, as in the case of fixed and circulating capital, we are compelled to deal with relative terms. No capital is entirely free, and only on rare occasions do we find capital so highly specialized as to be entirely worthless for any other use. Free capital may be defined as capital which serves a variety of uses; specialized capital, as capital which serves but few uses. For purposes of illustration take two common farming implements. The plow is used in preparing the ground for all kinds of crops, while the hay rake is practically worthless in gathering any other crop. For the sake of convenience of expression we call one free capital, the other specialized capital. Sometimes, however, capital is said to be free when it can be used for entirely different purposes. Coal, for example, may be used to generate steam, or to heat a building, while it is improbable that a second use could be found for a nutmeg grater.
There is a close relation between free and specialized capital on the one hand, and the rate of interest on the other. Free capital, as a general rule, earns a lower interest rate than does specialized capital, simply because the risk of losing the investment is less. Suppose two men contemplate the expenditure of equal amounts of money in two buildings, one a store building adaptable to almost any kind of merchandising, the other a moving-picture building with highly decorated interior, with a stage, and with an elevated floor. Plainly the risk involved, other things being equal, in getting tenants would be less in the case of the first building than in the case of the second. The first could be utilized in various ways; the second, unless extensive alterations are made, is likely to prove useless for any purpose other than moving-pictures. Knowledge of these facts causes investors to demand a higher interest rate in one case than in the other, and in the long run they secure their demands.