Page:Collier's New Encyclopedia v. 02.djvu/392

LEFT CAPITAL 338 CAPITAL of a business man consists in marshaling his assets so that he always has enough cash and enough quick assets to provide for impending debts, while maintaining at the same time enough slow assets to insure a satisfactory income from his business. Since the liabilities of one man are also the assets of another, when one man fails and is able to pay only fifty cents on the dollar, the unlucky man who is his creditor — who has the first man's notes as assets — suffers a shrinkage in his own assets which may in turn mean embarrassment or even bankruptcy to him. It is usually true in a panic that the failures start with the collapse of some big firm, involving a shrinkage in the assets of others. We have seen how the capital account of each person in a community is formed. Our next task is to express the total net capital of any community. This is the sum of the net capitals of its members, i. e., all the innumerable assets of all the persons less all the liabilities of those persons. This net sum will be the same, of course, in whatever order the items are added and subtracted. There are two ways in particular. The simplest is, first, to obtain the net capital balance of each person by subtracting the value of his liabilities from that of his assets, and then to add together these net capitals of different persons to get the capital of society. This method of obtaining society's net capital may be called the method of bU- ances; for we balance the books of each individual. The other method is to can- cel each liability against an equal and opposite asset, which equal and opposite asset, as we shall see, must exist some- where in another individual's account, and then add the remaining assets. This method may be called the method of couples; for we couple items in two dif- ferent accounts. The method of couples is based on the fact that every liability item in a balance sheet implies the ex- istence of an equal asset in some other balance sheet. This is true because every debit implies a credit. A debt may be owed to somebody, as well as from somebody, a debtor, and the debt of the debtor is the credit of the creditor. It follows that every negative term in one balance sheet may be can- celed against a corresponding positive term in some other. Each of these two methods — of balances and of couples — is important in its own way. If, then, we suppose balance sheets so constructed as to include all the real and fictitious persons in the world, with entries in them for every asset and lia- bility — even public parks, and streets, household furniture, and other posses- sions not formally accounted for in or- dinary practice — it is evident that we shall obtain, by the method of balances, a complete account of the distribution of capital value among real persons; and, by the methods of couples, a com- plete list of the articles of actual wealth thus owned. In this list there will ba no stocks, bonds, mortgages, notes, or other part rights, but only land, build- ings, and other land improvements, and commodities. All debit and credit items being two-faced — positive and negative — cancel out in the total. In spite of this close association be- tween them, capital and income have thus far been considered separately. The question now arises: How can we calculate the value of capital from that of income or vice versa? The bridge or link between them is the rate of interest. Although the rate of interest may be used either for computing from present to future values, or from future to pres- ent values, the latter process is far the more important of the two. Account- ants, of course, are constantly comput- ing in both directions, for they have both sets of problems to deal with; but the problem of time valuation which nature sets us is that of translating the future into the present; that is, the problem of ascertaining the value of capital. The value of capital 7nust be computed from the value of its expected future income. We cannot proceed in the opposite direc- tion and derive the value of future in- come from the value of present capital. This statement is at first puzzling, for we think of income as derived from capital, and, in a sense, this is true. Income is derived from capital goods. But the value of the income is not de- rived from the value of those capital goods. On the contrary, the value of the capital is derived from the value of the income. Not until we know how^ much income an item of capital will bring us can we set any valuation on that capital at all. It is true that the wheat crop depends on the land which yields it. But the value of the crop does not depend on the value of the land. On the contrary, the value of the land depends on the value of its crop. The present worth of anything is what men are willing to give for it. In order that each man may decide what he is willing to give, he must have (1) some idea of the value of the future benefits his purchase will bring him, and (2) some idea of the rate of interest by which these future values may be trans-