In your May-June issue appeared a long article by Raymond V. McNally with the above caption. It shows much reading and thought, but is more clear in proving what interest is not than what it is. His conclusion seems to be that interest is "very likely nothing else but compensation for risk." That risk has much to do with the rate of interest I heartily agree, but I also believe that there is a fundamental reason for interest which Mr. McNally has not made clear.

The primary cause of interest is the service rendered by the lender to the borrower, which enables the latter to overcome the disutility of time. For example A has land but little money. By working for a year he could accumulate money enough to cultivate his farm, but in the meantime the land would lie idle. He knows that B has capital and persuades B to lend him $500 for one year at 6 per cent. With this A purchases the necessary stock, seed and tools and then plants and tills his land. Within the twelve month's period he sells the produce of his farm for $1,000. He pays B principal and interest ($530) and finds himself the possessor of a stock of tools and several hundred dollars in cash. Both A and B are benefited A by the use of his own labor and land to advantage; and B by the interest added to his principal. Moreover the community is benefited by the increased production of food.

It is true that A might have had a bad season and could not have done so well; but the above shows that B rendered a service to A and that I claim is the true cause of interest.

In reflecting upon the interesting letter of C. H. Kendal (Interest and the Rate of Interest) in the same issue, I can agree with him only in part. He says, "There is but one interest, and that is the increase which labor produces when it uses capital, over the same labor not using capital." This I believe to be untrue. It gives the idea that all of said increase is interest, which manifestly is not so. Of what aid would it be to the borrower if all the gain be obtained from the use of borrowed capital be paid to the lender in the form of interest? The advantage to the borrower would be nil. On the contrary I contend that all the gain obtained by the borrower, from the use of capital, is his own; being the result of his labor, although that labor be amplified by the use of borrowed capital. The sum he pays as interest may or may not come out of his gains from the use of said capital. His plans may go awry, but he will still be obligated for interest due.

No! Interest is payment for service rendered to the borrower by the lender that service enabling the borrower to overcome the disutility of time.

As to the rate of interest, I agree with him that this depends upon supply and demand. Moreover the element of risk enters into the equation. A lender who would not be willing to accept 5 per cent might be persuaded to take 6 per cent, even though the risk be greater. The rate of interest however is not the matter of chief importance; the primary cause of interest is the main thing, and that is the service rendered the borrower by the lender at least that is my contention.