§6. Interest Ineradicable

Thus interest taking cannot be prevented by prohibiting loan contracts. To forbid the particular form of sale called a loan contract would leave possible other forms of sale, and, as was shown in Chapter I, the mere act of valuation of every property right involves an implicit rate of interest. If the prohibition left individuals free to deal in bonds, it is clear that they would still virtually be borrowing and lending, but under the names of selling and purchasing; and if bonds were tabooed, they could change to preferred stock. Indeed, as long as buying and selling of any kind were permitted, the virtual effect of lending and borrowing would be retained. The possessor of a forest of young trees, not being able to mortgage their future return and being in need of an income stream of a less deferred type than that receivable from the forest itself, could simply sell his forest and with the proceeds buy, say, a farm, with a uniform flow of income, or a mine with a decreasing one. On the other hand, the possessor of a capital which is depreciating, that is, which represents an income stream great now but steadily declining, and who is eager to have an increasing income, could sell his depreciating wealth and invest the proceeds in such instruments as the forest already mentioned.

It was in such a way, as for instance by rent purchase, that the medieval prohibitions of usury were rendered Edition: current; Page: [117] nugatory. Practically, the effect of such restrictive laws is little more than to hamper and make difficult the finer adjustments of the income stream, compelling would-be borrowers to sell wealth yielding distant returns instead of mortgaging them, and would-be lenders to buy such wealth instead of lending to the present owners. It is conceivable that explicit interest might disappear under such restrictions, but implicit interest would certainly remain. The young forest sold for $10,000 would bear this price, as now, because it is the discounted value of the estimated future income; and the price of the farm, $10,000, would be determined in like manner. The rate of discount in the two cases, the $10,000 forest and the $10,000 farm, must tend to be the same, because, by buying and selling, the various parties in the community would adjust their rates of preference to a common level—an implicit rate of interest thus lurking in every contract, though never specifically mentioned therein. Interest is too omnipresent a phenomenon to be eradicated by attacking any particular form of it; nor would any one undertake to eradicate it who perceived its substance as well as its form.