INTEREST 25 



included in the income earned and not in costs. Should the 

 fallacy be introduced of considering interest as a cost in comput- 

 ing profits, the apparent profit required would be increased 

 abnormally. For instance, it is stated that a certain business 

 should earn a profit of 10 per cent, which, with interest at 6 per 

 cent, indicates an enterpriser's profit of 4 per cent. By consid- 

 ering this interest as an actual cost, an additional profit of 10 

 per cent might be expected. But, in reality, this 10 per cent 

 would be the enterpriser's profit. The total net income must 

 then be 16 per cent, and the enterpriser's gain is 2\ times as 

 great as in the original case. If an enterpriser's profit of 10 

 per cent is necessary, the "profits" of the business must be 16 

 per cent and not 10 per cent. 



The larger the amount of capital invested in a business, the 

 smaller, as a rule, will be this margin between income and 

 interest, which represents the enterpriser's gain. Both income 

 and "gain," while larger in amount, average less in proportion 

 than on small investments. This shrinkage does not come 

 entirely on the margin of gain, since funds can probably be 

 borrowed at lower rates in such undertakings. The longer the 

 time elapsing before income is received, the less will be this 

 margin of profit over compound interest at standard rates. 

 For very long investments, the enterpriser's gain tends to dis- 

 appear, and is entirely dependent on the rate of interest chosen 

 as representing the legitimate income on the capital itself. 



In both the above cases, in spite of the shrinking of enter- 

 priser's profits, the income or profit over expenses remains in 

 the form of interest returns, and, especially on long time in- 

 vestments, the final results may still be considered by the inves- 

 tor as highly satisfactory. 



This attitude is partly due to ignorance. The owner of un- 

 productive property, such as unimproved real estate, seldom 

 keeps a cost account which shows him the total outlay repre- 

 sented by the purchase price plus taxes and improvements, and 

 still more rarely does he add the "cost" of the unearned interest 

 on this total from year to year. When he sells this property 

 after the lapse of several years, for more than double what he 



