§6. The Loan Market Is a Highway for Re-Distribution

We see, then, that the existence of a market rate of interest to which the individual adjusts his rate of impatience supplies an easy highway for the movement of his fortune in one direction or the other. If an individual Edition: current; Page: [339] has spendthrift tendencies, their indulgence is facilitated by access to a loan market; and reversely, if he desires to save, he may do so the more easily if there is a market for savings. In like manner, the business man may, by recourse to loans, either lose or gain. The inequality of the distribution of capital is thus fundamentally caused in large part by exchanging present for future income. A rate of interest is simply a market price for such exchange. If all individuals were hermits, it would be much more difficult either to accumulate or to dissipate fortunes, and the distribution of wealth would therefore be much more even.

It is true, as the socialist maintains, that inequality is due to social arrangements, but these arrangements are not, as he assumes, primarily such as take away the chance to rise in the economic scale; they are, on the contrary, arrangements which facilitate both rising and falling, according to the choices made by the individual. The improvident sink like lead to the bottom. Once there, they or their children find difficulty in rising. Accumulation is usually a slow process, and especially slow because the great numbers of the poor competing against each other reduce the values of their services to so low a point that the initial saving becomes almost impossible. While it is true that waste begets poverty, it is equally true that poverty begets waste. Whole communities and peoples, for example, the Chinese and Indians, are steeped in misery not because of any inherent extravagance, but because they are so poor they must use up all they produce, leaving no margin of savings for bettering their methods of production. Occasionally a Rockefeller, a Carnegie, or a Ford rises from near the bottom and ascends to the top. But the great masses, once they Edition: current; Page: [340] get near the bottom, are likely to remain there. Their high rates of impatience manifested through generations have brought many if not most of them to poverty. A labor leader once said to me that few labor men have any acquisitive instinct. They are a self-selected group of those impatient by nature or habit or both. They tend to spend rather than to save. The great need and opportunity for education in thrift is manifest.

This is not the place to answer the many questions which arise in such an inquiry, such as, what is the effect of change in the rate of interest in stimulating or discouraging the accumulation or dissipation of capital?11 What is the effect on the poor of the luxurious habits of the rich? Nor are we concerned with the other factors which influence the distribution of wealth but which do not involve the rate of interest. We are at present content merely to prepare the way for their answer by indicating the nature of the problem and the relation of the theory of interest to it.

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