Chapter XX. Proceeds Of Capital: Interest And Rent.
Practical distinctions.—The terms interest and rent are distinguished in actual practice by the fact that interest is paid for the use of capital in some circulating form, while rent is paid for the use of fixed capital. One who borrows anything, expecting to return not the thing itself but its equivalent in value, is said to borrow upon interest. One who borrows the same thing, expecting to return the identical thing, is said to pay rent for its use. Thus interest is paid for control of circulating capital until an equivalent is returned, and rent is paid for control of fixed capital until the same articles are returned in prime condition. A farmer who borrows a mowing machine from the warehouse, giving his note for its value, pays, when he returns that value at the end of the year, interest upon his note. If he borrows the same machine from his neighbor under contract to return the machine in good condition at the end of the season, he pays rent for its use. The young man who borrows his neighbor's farm, expecting at the end of five years to make that farm his own, gives a mortgage note, promising at the end of five years to return an equivalent value for the farm, with annual interest. If, on the contrary, he expects to return the farm itself [pg 280] at the end of five years, without reduction in value, he makes a lease, embodying this agreement, with annual rent for use of the farm.
Both interest and rent are liable to involve the element of risk as to the proper return of the valuable thing promised, and to that extent they partake of the nature of profits. The true interest and rent are independent of the possible risk, and have to do simply with the advantage naturally accruing to the possessor of wealth from its use as capital, and forming one of the chief reasons for accumulating wealth at all.
In technical discussion the term rent is usually confined to the compensation secured from appropriation of space, peculiar location, natural fertility, mineral deposits, water privileges, or any natural advantage to be used in production. In this limited meaning rent is confined to the advantage gained by the owner of wealth in any form so affected by the law of supply and demand as to gain a scarcity value. The term unearned increment,—meaning an increase of value without cost of exertion,—has been largely applied to such cases, and illustrations are taken chiefly from the ownership of land and similar natural forces. The same unearned increment, however, accrues to the possessor of any article of value or any personal attainment, which through increasing wants of the community becomes, on that account alone, more valuable in market. Thus a bin full of wheat, saved from a year of plenty to a year of scarcity, has gained a value abnormal,—that is, from the fact of its scarcity. Yet no one would think of applying the term rent in such a ease, because the foresight which [pg 281] stored the grain gains its compensation in profits. If the same kind of foresight has plotted a city upon wild lands, and held a portion of those plotted lots until a crowded population competes for their use, such wealth is said to be gained upon the principle of rent. The difference seems to be chiefly in the greater permanence and the gradual advancement of the profits secured.
The every-day operations of a farming community illustrate both interest and rent in all their complications and definitions. Every farmer, in estimating the cost of his wheat crop, may properly calculate both the interest on his capital invested in tools, teams, machinery and wages, and the rent of his land, keeping distinct accounts of interest and rent; or he may combine in one account as interest the use of capital in machinery and land. If he owns the whole establishment, he is likely to combine both interest and rent with the return for his foresight and energy in managing the farm under the name profits. All these returns, however, come for different reasons, though under the same general principle of values expressed in the law of supply and demand. The farmer working a rented farm and the one working a mortgaged farm are alike paying both rent and interest, since every farm involves both the wealth accumulated by exertion and the wealth advanced by increasing population. While the owner of the mortgaged farm apparently pays interest, if at the end of the term of the mortgage the farm is returned to its former owner by foreclosure, the result is that the mortgagee, while nominally owner of the land, has simply been a renter. In a fair settlement of equities he will have paid [pg 282] for the use of the land he has cultivated. Interest and rent are thus seen to be terms separated rather by peculiarities of application than by difference of principle. It is proper, however, to treat them separately for the sake of more perfect understanding of the conditions applicable to each.