676 THE ECONOMIC JOURNAL gence of theories of interest have shown that economic science has spoken even less decidedly on this question than it has done on others. The great world, however, has all the time gone on giving and taking interest without a thought of the theory. In- dustry as nqw organised could not be carried on without it: the reasonableness of it is accordingly taken for granted; and the only doubt that ever troubles the.practical man on the subject is when he lends money to a friend. For, strangely and significantly, the man who would resent a gift or an alms from his friend will often be quite ready to accept a loan without interest. As in most economic problems., our first duty ?s to analyze what practical people mean by interest, and what is their view of its function. If we take the balance sheet of a limited liability company, as offering a typical development of modern industry, we find that a dividend is not paid to capitalist shareholders till two recognised deductions have been made. Under various names these deductions are (1) a fund for wear and tear of capital, and (2) a fund for insurance against risk of loss. These deductions tell us quite clearly that dividend is paid only after the parent capital is replaced and put back to its full value of twelve months before, and after provision has been made that all probable contingencies of expense have been taken into account; in other words, that interest is something quite distinct from gradual repayment of capital on the one hand, and from premium for insurance on the other. But dividends vary from trade to trade, and no business man would consider a 10 per cent. return on his capital pure interest. He may not be very conscious to what he owes this large dividend, but he will compare it with what he calls, with perhaps some contempt, ' bank interest.' And then, if the company is a public one, quoted on any exchange, the cap. ital value of the stock paying 10 per cent. will rise to something like double, and the ' interest' on the selling value of the capital will fall to something like one half. Now in this latter fact we seem to see a pretty clear limitation of interest proper. It would seem to be defined thus: Interest is the return to capital where there is no personal exertion and no risk, and it is measured, indirectly, by the capital on which it is paid remaining at par. The ideal interest-bearing capital, then, in each nation, would be its great national security. We cannot, however, study the elementary phenomena of i?terest in this form. The income from Consols is a derivative
