INTEREST ON FARM LOANS 691 



tivity of the capital as distinct from the labor, and whether or no it 

 is believed tbat the differences in the productivity of capital show 

 themselves through a process of diminishing returns, it seems to be 

 agreed that the factor which determines the rate of interest on capital 

 used for production (so far as it is dependent on demand) is the gain 

 in efficiency or output accruing to the last or marginal instalment of 

 capital. 



222. FACTORS DETERMINING THE SUPPLY OF CAPITAL 1 

 BY RICHARD T. ELY 



Why is the supply of capital limited ? This question leads us to 

 examine the nature of the supply of capital. Imagine a society with- 

 out capital carrying on its productive processes by the use of labor 

 and land only. So long as the members of this community produce 

 only what they consume directly or so long as they spend all their 

 money incomes (if a money economy may be imagined to prevail 

 despite the absence of capital) for things used up immediately in the 

 satisfaction of their wants, there will be no accumulation of capital. 

 In order that capital shall be furnished, it is necessary that some 

 members of the community turn aside from the production of things 

 that are used in the immediate satisfaction of their wants and devote 

 their time to the production of goods that will be used in further pro- 

 duction. Whether they do this on their own account, or whether 

 they are paid for it by others, some postponement of the satisfaction 

 of wants is necessary. In the one case those who produce the capital 

 goods give up temporarily the satisfactions which they might have 

 derived from the consumption goods which they could have produced. 

 In the other case, those who are devoting part of their money incomes 

 to the payment of those who are producing capital goods are giving 

 up the immediate satisfactions which they might have secured with 

 the money. In either case the production of capital involves the 

 sacrifice of waiting on the part of some members of the community. 

 But why should waiting be called a sacrifice ? Do not those who give 

 up present satisfactions in order that capital goods may be produced 

 get a full repayment if they get back in the form of the products of 

 their capital goods as much as they, for the time being, give up ? In 



1 Adapted from Outlines of Economics, pp. 420-22. ("Copyright by The Mac- 

 millan Co.) 



