The Time Element in Interest

Donald L. Thompson

[Reprinted from Land and Freedom, July-August 1937]

In the last issue of LAND AND FREEDOM our fellow Georgeist, Raymond V. McNally, completely disposed of numerous theories dealing with the cause of interest. His arguments are unanswerable. It is to be regretted that even Henry George with all his ability to analyze should set up a theory regarding the cause of interest that is no more tenable than the ones he so successfully demolished. His interest theory is the one weak link in his great book, Progress and Poverty. Mr. McNally has very ably disposed of this theory.

On the other hand I am not so sure that there is not a law of interest. Neither am I convinced by Mr. McNally's argument that what we term interest is merely "compensation for risk." If what we term interest is merely compensation for risk, then it occurs to me that under existing conditions interest rates would be much higher than they are, as the element of risk has steadily increased since the last industrial breakdown. Instead of going up as the element of risk has increased they have fallen, which only proves Mr. George's contention that wages and interest tend to rise and fall together. Surely no one will contend that investments are more secure now than they were during the years preceding the depression and that this accounts for the present lower interest rates. As a matter of fact investments are not nearly as secure, not even investments in government bonds, yet the interest rate is lower. If Mr. McNally is right they should be higher.

While it is true that part of the commercial interest rate consists of insurance to cover risk, I am convinced that in addition to this there is true interest, which is payment for the use of capital.

Despite the fact that Mr. McNally has upset the Bohm-Bawerk time theory as a cause of interest, I am still persuaded that the element of time does account for interest. Even Mr. George saw this dimly but confused it with his "reproductive forces of nature" theory. Time is a most important factor in the satisfying of human wants. A saving in time in the satisfaction of human desires is equivalent to greater earnings. We want things now and not ten to twenty years hence. This being the case we are willing to pay a premium for the use of capital or wealth, so as to more quickly satisfy our wants. Thus interest arises. I want a home, I can secure one by going to work over a period of years, but I want it now, hence I am willing to pay some owner of a home a premium for the use of it over and above the cost of depreciation and insurance to cover risk, and this premium is interest. It is quite obvious that as long as people feel that they are obtaining an advantage by borrowing, they will be willing to pay for this advantage. Interest therefore is natural and it is just. It is a reward for accumulation. It gives encouragement to store up capital in excess of personal needs. If it is natural, then it can be said that there is a law of interest.