The Time Element in Interest
Donald L. Thompson
[Reprinted from Land and Freedom, July-August
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.