INTEREST 29 



entire earnings of the business would have to be retained as 

 capita] and not a cent withdrawn as dividends. This capital 

 must then be utilized in such a manner that it will produce net 

 earnings equal in rate to the earnings on the original capital. 

 Each year this process must be repeated, resulting in an expan- 

 sion of the business at a geometric rate. If this result is ob- 

 tained, the total capital at the end of the period will not be 

 worth one cent more than the funds accumulated in the second 

 investment, where ah 1 income is deferred until the end of the 

 period. 



Should the proprietor withdraw any portion of the earnings 

 during the entire period, or should the business fail to expand 

 annually at the required per cent, the resultant rate of com- 

 pound interest earned by annual profits will be lowered below 

 that demanded in the comparison. 



50. Limitation of Opportunity. Such compound expansion 

 of a business is possible only where the economic opportunity 

 ( 27) is practicaUy unlimited, or increases at a rate which keeps 

 pace with the growth of the business. This occurs only as a 

 temporary condition, both in business and in ah 1 other forms of 

 activity. 



Animal and plant life have the capacity for expansion at geo- 

 metric ratios comparable to enormous rates of compound in- 

 terest; such events seldom occur, but when they do, the result 

 is calamitous. English sparrows imported into America found 

 an environment not used by any existing species of bird. Until 

 this niche had been completely occupied, the sparrow increased 

 at a compound rate. The species is now merely holding its own. 



In manufacturing, the production of new articles and the 

 growth of a demand for them, as in the case of automobiles, 

 creates an opportunity which permits of a trade expansion at 

 geometric or compound rates for a while. This expansion took 

 place when bicycles were first made popular. It cannot con- 

 tinue in'any line at the same rate over an extended period. A 

 lessening, not of the annual demand, but merely of its rate 

 of increase, has the effect of preventing further expansion at a 

 like rate, and with the establishment of equilibrium, not only 



