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value for the purposes of corporate capital by being coupled with a mass of intangible property rights and a managing organization. We have defined interest as the price paid for the use of capital, but we must emphasize that by "the use of capital," we mean its use in going concerns. There is no other "use."

Although the foregoing analysis is presented from the viewpoint of the individual corporation, the same principle applies to the nation's business as a whole. The State itself is a going organization, and confidence in the stability and permanence of its power to continue its State functions is an essential feature of the valuation of the nation's capital. When Russia suffered the overthrow of the going organization of the State the capital wealth of the nation sank to a mere fraction of its former value. The detached units of things were still there, but security of property rights was gone, business morale was gone, confidence in order and stability was gone. The going concern value of the national capital was wiped out. Apart from the influence of the State, the business system viewed as a private organization constitutes a going system. The accumulated stock of engineering knowledge, the fund of technical and scientific information, the confidence in the soundness of currency and credit, the education and character of the population, the habits of efficiency, workmanship, and discipline, the ideals and ethical standards of leaders and executives, the permeating spirit and morale of employers and employees, these factors combine in a vast network of invisible threads to give life to the going concern of the nation's business as an entirety. In the broad and fundamental uses of the terms, going plant, going concern, going business, going law and order, dominate the modern concept of capital.

Before leaving this subject, a caution may be interposed. There is no intent to disparage the production of actual goods for human use and welfare as a primary aim and endeavor. There is no intent to discount the significance of indexes of physical volume of production and of capital. Elsewhere in this book the author makes intensive use of these concepts. The crucial point here is that the only way to make any progress toward the attainment of those urgently desired ends is to recognize business facts as they are at the present day. And if there is any outstanding fact in modern business, that fact is that production for use is purely incidental to production for profit, and physical production is only one means toward pecuniary gain. Progress in and through the present business system can come only in so far as production for profit can more and more completely be made synonymous with production of goods for human use. To understand the task of progress, therefore, it is necessary to recognize the primacy and dominance of capital values, good will, prospective profits, property rights to income, and the private and public going concern.

Marginal Saving and Savers' Surplus.-Capital and interest are subjects to which marginal theory has been applied, and it is essential to obtain a view of the marginal approach. In studying marginal supply,

we shall consider chiefly the waiting and saving end of the capital process. In studying marginal demand, we shall consider chiefly the viewpoint of demand for capital for purposes of making profits. For purposes of brevity and simplification it is necessary to adhere to these viewpoints, but marginal theory applies to all phases of capital supply and demand which have been presented.

Interest rates resemble other prices in that they are uniform prices paid to savers. Savers making equal investments acquire equal interest returns. But even though the rate is the same to savers, this does not indicate that their willingness to save is the same. Many who receive six per cent would save just as much if they received only three per cent. Doubtless many who receive six per cent would save just as much as if they received no interest return at all. Large groups would save any way, save in order to build estates for themselves and their families, or for other good and sufficient reasons.

It would even be true for no small class of people that the lower the interest rate the more they must save. For instance, if a professional man sets himself to the task of building by the age of retirement an estate of $50,000, compound interest will take care of a large part of the accumulation. The less the rate of interest the more he will have to save out of pocket. Although this type of reaction would obtain for many people, yet the probability is that it would be more than offset by the majority tendency to save somewhat less when the interest rate became less. The latter reaction would be the dominating one.

It follows that only a certain fraction of all savers require the full market rate of interest as an inducement to save. Others would save as much or more at a lower rate. The classes which require the full going rate of interest as an inducement to save are called the marginal savers. They are the least willing savers. They are that fraction of all savers who would positively save less if interest rates were less. Consequently, if society needs and demands their savings, society must pay interest rates to make its demand effective. It is the only way to persuade marginal savers to save. Even though billions of dollars would be saved at a lower rate, society must pay the higher rate to all classes of savers in order to secure an adequate grand total of capital supply. Hence marginal savers set the rates for all savers. The most willing savers receive just as high a rate as the least willing savers. Those who would gladly save at a lower rate do not have to do so, because society requires the additional savings of the marginal class.

Those who would save for less interest, but who as a matter of their good fortune do not have to do so, receive saver's surplus. Saver's surplus may be defined as the difference between what a man would be willing to save for and the rate which he actually receives. If a man would save a thousand dollars at 4 per cent interest, but in fact receives a market rate of 6 per cent, the difference of 2 per cent is essentially surplus or bonus. The marginal saver receives no surplus, because he is the man who would be unwilling to save at a lower rate. Only the

intra-marginal saver receives saver's surplus. We will assume that in a given year the country needs total savings of new capital to the amount of $12,000,000,000, and to secure this amount offers interest rates which converge around 5 per cent. It may be true that ten billion dollars would be saved at 4 per cent. In order, then, to secure the extra two billions of savings, it is necessary to pay the full rate of 5 per cent on the entire twelve billions. The two billions of marginal savings would set the 5 per cent rate for all savings, and the ten billions of intramarginal savings would enjoy a saver's surplus. Although this illustration is hypothetical and is not intended to measure at all the actual proportion of savings which is marginal, it nevertheless is true to the essential principle and concept of marginal savings and saver's surplus.

Just what the proportion of marginal savings to total savings is has not yet been measured by the statistician, and economists differ widely in their estimates. The traditional economics commonly estimates that marginal saving is the great bulk of all saving. More recently, however, economics shows a tendency to reduce estimates of marginal savings to a small fraction of the total. The recent view is partly borne out by the observation of the fact that a great part of saving fluctuates independently of the interest rate. It is observable that savings often increase very greatly when the interest rate is falling, and that savings often decrease very greatly even though the interest rate rises sharply. Fluctuations in the supply of savings seem in large measure to defy the influence of changes in the interest rate. This being true, it seems necessary to conclude that only a relatively small portion of all saving is at the margin, and therefore directly affected by changes in the marginal rate.

This implies further that a relatively large part of interest is saver's surplus. Society makes a huge excess payment to the bulk of savers merely because the minority of least willing savers require the high rate. This excess payment is unearned income, a saver's rent. It is payment for something which would be done without payment, a bonus to the most willing savers. Consequently, saver's surplus is peculiarly suited to taxation levied on unearned income. In the chapter dealing with taxation this problem is dealt with more in detail, but at this point it is important to understand the nature of saver's surplus as a field for equitable taxation.

The problem of saver's surplus further requires an analysis of motives, habits, institutions of saving. Where do savings come from? Why do people save? The marginal saver saves for the sake of the interest rate. His is a financial motive pure and simple. But the man below the margin, the man to whom interest is in part or in whole saver's surplus has other important motives besides the financial one. The poorer classes in the wage-earning groups set aside funds for a "rainy day," for family need and emergency, for a decent burial, for old age. They are not thinking about interest rates, but of family and personal needs. The savings of more prosperous wage-earning groups are actuated

primarily by motives of family betterment. Their savings largely pass into savings banks, and deposits of that nature bear no direct ratio to changes in the interest rate. Higher interest rates cannot materially increase their savings, because the pressure for immediate gratification of urgent family wants eats up the great bulk of their income. Lower rates cannot materially decrease their savings, because they are saving for family, not acquisitive motives. Middle-class groups, professional groups, and small business men accumulate estates for the sake of their families or to build up their business enterprises, to the end that as "men on the make" they may win prestige and eminence among their fellow townsmen. Family care and social standing in the community. are the predominant motives to middle-class saving. It is here that it is so often true that a lower interest rate will actually cause a larger principal sum to be saved out of pocket. As for the well-to-do classes, it has been well said by one authority, "The higher income classes-say of over $50,000-save mechanically, with little or no sacrifice of present wants." Since they save thus automatically, it follows that the interest rate is not the primary incentive. It is often easier for them to save than to spend.

In addition to personal savings, we have large business savings. Corporate surplus, for instance, is reinvested in the business, not mainly for the sake of interest, but for the sake of business expansion and profits. Bank loans for capital purposes represent the banks' capacity to manufacture credit, which in turn rests upon specie reserves. Saver's effort to practice thrift for the sake of earning interest is not involved. It is bankers' effort to manufacture credit at a profit by means of earning interest which is involved. Reserves and fundamental business conditions govern the supply of bank credit more completely than such a factor as movements of the interest rate. As for the motives governing bank deposits, the situation is summed up as follows by a banking authority: "That savings are prompted in practically all cases by reasons other than the rate of interest is the general belief of bankers.” 9 In light of this survey of motives and habits of saving, it is necessary to conclude that the bulk of the supply of savings enjoys a huge saver's surplus. Probably the main portion of the total interest payment in modern business should be set down as surplus.

Any attempt to analyze the trend of interest rates must therefore take into account the fact that fluctuations in the supply of savings are fundamentally due to causes outside the interest rate. What some of these causes are will be discussed in the next chapter.

Marginal Productivity and Producer's Surplus. We turn now from the supply side of marginal analysis to the demand side. Demand for capital comes from men who wish to engage in business. They demand capital for its aid in the production of goods and profits.

8 A. B. Wolfe, Quarterly Journal of Economics, Volume 35, pp. 23 ff. 9 L. D. Woodworth, Economic World, Jan. 22, 1921, p. 118.

Although they pay a uniform rate of interest for the same kinds of capital, nevertheless they do not earn a uniform rate of profits on that capital. Some producers earn high profits, some earn low profits, some earn no profits at all, although all alike pay substantially the same rate of interest. Those who earn no profits at all, but just barely cover their interest charges and other expenses, are the marginal users of capital. If interest rates were higher, these marginal producers could not cover expenses and would be forced out of operation.

The term marginal is applicable not only to the producer as an individual but to the product as a unit of returns. Those units of capital which are used under least effective conditions will bring barely enough returns to cover interest and other charges. A high rate would force out of use these least effective units of capital. Marginal productivity of capital is the productivity of the least effective unit. Other units of capital there are above the margin, which could easily stand a higher rate of interest, but they do not have to stand the higher rate. because the marginal rate becomes the uniform rate to all borrowers.

The producers who secure, in addition to bare interest charges and other expenses, an extra return, are the recipients of producer's surplus. If interest rates were higher, they could still bear the burden and continue in business. But they do not have to pay a higher rate because the rate for all borrowers is governed by the rate necessary to keep the marginal concerns in operation. The most effective users of capital, out of their producer's surplus, could afford to pay higher interest, but, as a matter of their good fortune, they do not have to do so because the least effective or marginal users of capital would be squeezed out of business by any higher rate. The producer's surplus, or profit above interest, is a leading incentive to business activity. If a concern can borrow at 6 per cent, and make actual gains of 20 per cent, the producer's surplus is highly attractive. But if a marginal concern, borrowing at 6 per cent, can make only 6 per cent, there is no surplus, and any increase in the interest rate will force such a concern out of operation.

The proportion of all users of capital who are at the margin is great enough so that a change in the interest rate tends to have a distinct. effect upon the demand for capital. There are enough units of capital used at the margin so that a rise in interest rates tends to check demand for capital. Hence, demand for capital is highly sensitive to changes of the rate. This sensitivity is in marked contrast to the very sluggish response of supply of capital to changes of the rate.

The producer's surplus is in part earned income due to superior efficiency of management; but also in part unearned income due to monopoly, privilege, and chance. Unearned producer's surplus is a proper field for taxation, just as unearned saver's surplus is a proper field for taxation. A considerable part of surplus commonly accrues to the producer through no particular virtue of his own. Some of this

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