INTEREST ON FARM LOANS 693 



rate of interest is considerably higher than would be necessary to 

 compensate for a large part of the waiting that devolves upon those 

 who furnish capital funds for productive purposes. It is just high 

 enough, however, to be a recompense for marginal waiting, which is 

 the waiting that would not take place if the interest rate were any 

 lower. If the interest rate is 5 per cent, a dollar today is worth a 

 dollar and five cents a year from today, not to all savers, but to the 

 marginal savers. 



B. Other Factors in the Cost of Loans 

 223. GROSS INTEREST AND NET INTEREST 



Economists have been in the habit of drawing distinctions between 

 true and false interest, gross and net interest rates. Thus Walker 

 (Political Economy, p. 225) says: 



A great deal that is paid under the name of interest is not interest in 

 the true sense, but is merely a premium for the insurance of the principal 

 sum lent. Real interest comprises only that part of the payment made 

 which would be paid were the return of the principal, at the date of the 

 maturity of the obligation, a matter of reasonable certainty. Where the 

 risk is so small that it amounts to nothing in the mind of the lender, as in 

 the case of British consols or of a "bottom mortgage," where the sum lent 

 is only a half or a third of the value of improved real estate, we have an 

 instance of real interest, pure and simple. While this real rate of interest 

 may be as low as 3 per cent, loans on various kinds of fair security may range 

 from that rate up to 5 or 6 per cent; and note-brokers are all the time 

 "shaving" the paper of second and third rate dealers at from 10 to 20 per 

 cent discount. 



Professor Ely likewise mentions this element of recompense for 

 risk, but notes also that what is called an interest payment often 

 ncludes some element of return to the labor of supervision. He says- 

 (Outlines of Economics, p. 437) : 



While pure interest is the amount necessary to recompense marginal 

 waiting, actual interest often includes some payment for the supervision 

 which the capitalist has to maintain over his investment. Even the man 

 who "lives on his income" usually has to devote a certain amount of time 

 to the investigation of the safety of different possible investments, to the 

 collection of interest and principal, and similar things. The net earnings 

 of a savings bank the difference between the interest they get on their 

 investments and the interest they pay their depositors are partly a pay 

 ment for this element of supervision. 



