But what is it that determines the rate which the marginal investor will regard as just repaying him for his saving or abstinence ? This question finds its answer in the theory of interest which is usually associated with the name of Professor von Böhm-Bawerk, one of the leaders of the so-called Austrian or psychological school of economists. To repeat our question in another form, Why is it that men for instance, the marginal investorwill not give $50 now for $50 ten years hence, even though all risk should be amply covered by insurance ? Why will not the marginal investor lend his money without interest even when the loan involves no risk? Simply because desire, which is the source of value, is stronger for things near than for things far away. And for the same reason the one who borrows is willing to pay for $50 to be repaid a year from now more than the $50 which he borrows in the present.

Human experience in a thousand lines furnishes abundant proof of this. The wants of men are like Esau's hunger. He would rather havehe values highera mess of pottage now than a whole inheritance in the future. "A bird in the hand is worth two in the bush." Distant enjoyments are vague to men's minds, while near ones are vivid and tempting. Thus it is that a man will rarely give present goods for future goods in like amount, because future goods are less valuable than present goods.

Yet it becomes apparent on a moment's reflection that there is the greatest difference among men in the comparative estimates which they place upon the present and the future. This is in part (1) a matter of civilization. Thus travellers have again and again pointed out that among primitive peoples there is the utmost recklessness and improvidence of the future. Hence, among savages, if interest were demanded or allowed at all, the rate would be very high. The comparative valuation of present and future enjoyments (2) varies widely also among civilized men. Some there are who are almost as reckless of the future as is the savage, while there are others who would be glad to exchange a quantity of present goods for a like quantity assured to them in the future. The provident classes would therefore save even if the rate of interest should fall to a very low figure. Finally, (3) the comparative valuation varies widely according to the affluence of the individual. What we must have to satisfy the pangs of hunger to-day is evidently more highly valued than the same things can be when obtainable only at a future time. Other things equal, then, the millionnaire will, of course, overvalue the present less than will his poorer neighbor. The man who has an income just sufficient to satisfy his physical requirements cannot save, no matter how high the interest rate may be. And so we come back to our marginal investor, who in the given state of civilization is of such a temperament and is of such a degree of affluence or poverty that he will just invest the marginal dollar's worth of capital when the rate of interest will repay his sacrifice, or, in other words, will make the goods which he is to have in the future equal in his mind to the goods which he abstains from consuming in the present.

Not least among the contributions of the Austrian economists to the theory of interest has been their very complete explanation of what they call the "technical superiority" of future goods, or capital, in the work of production. The point has already been noted in the discussion of the general subject of production, but it may be well to remind the student again at this point that to make a summary statement of it capital enables men to increase production by the use of natural forces which could not otherwise be used; and this use of natural forces is rendered possible by the fact that capital enables men to substitute roundabout processes for direct ones and, as a necessary incident, to lengthen the average interval of production. Evidently, this technical superiority of future goods acts directly to stimulate the demand for capital.

Summary. Let us now retrace the steps we have taken and state in summary form the theory of interest which is here developed. Interest is determined primarily by the relation between the demand for capital and the supply of it, the rate being such as will make possible the widest possible use of capital in the existing state of demand and supply. The demand for capital is determined by its productiveness, as measured by the value of the product. The supply is determined by the difference in the value of present and future goods in the minds of investors. The rate is therefore fixed at a point which will bring into equilibrium the productiveness of capital, measured by the value of its product, and the sacrifice involved in the marginal investment of capital, as determined by the relative valuation of present and future goods in the mind of the marginal investor.

Interest on Different Kinds of Capital. For practical purposes we may distinguish three special loan markets which are temporarily affected by different conditions, and within which the rate of interest may at any time be different. (1) Long-time loans are usually loans of producers' goods. If money is the immediate object of the loan, the borrower must convert the money into the form of capital which he desires. (2) Short-time loans, on the other hand, are usually loans of money for use as money. Men who have to meet money obligations want money and not goods when they borrow for the purpose. If they can only borrow other goods, these goods must be converted by the borrower into money before he can satisfy his obligations. Such loans as these are an important feature in our large cities where business notes are constantly falling due and must be met, and where the buying of stocks calls for large cash payments. Although these two classes of loans are subject to different conditions, they are bound in the long run to react one upon another. Thus, if the rate for long-time loans temporarily falls to a low point, while short-time loans command a high rate, producers' goods will be converted as rapidly as possible into money, and the money will enter into the short-time loan market, thus raising the rate in the one and lowering it in the other.

The interest paid on (3) loans of wealth which is not capital, not used for purposes of further production, is governed by the rate of interest paid for capital. It is the same percentage of value. The obvious reason is the power of the owner to sell his non-capitalistic goods and invest the proceeds in capital goods. If we should adopt the view that houses are not capital, but simply " consumers' goods," we should similarly have the rate of interest governed by the forces controlling the rate of interest on capital.