This magic number understanding will also explain an incredible contradiction in what Mises wrote. On the one hand, he writes:
…the rate of originary interest… determines both the demand for and the supply of capital and capital goods.
Meaning if the interest is high, there is more capital made available for investment, meaning people will decide to put their money in the bank and/or lend it to someone.
Then he writes just the opposite, in the very next paragraph:
People do not save and accumulate capital because there is interest.
What gives?
In light of the magic number explanation, the first line we quoted is clear. What he means in the second line is this:
People do not save and accumulate capital because there is interest [i.e. a magic number in their head].
Interest [= a magic number in someones head] is neither the impetus to saving nor the reward or the compensation granted for abstaining from immediate consumption [because all it is is a magic number in someone head, as he says in the very next sentence]. It is the ratio in the mutual valuation of present goods as against future goods [= magic number in someones head].
Of course, getting 5% from the bank is an impetus to saving. And of course getting 5% is a reward and a compensation for abstaining from immediate consumption. But those are consequences, not defintions, of originary interest. In addition, those consequences will NOT determine how high or low will be the actual percentage the bank offers. The defintion of originary interest, and what determines the amount, is the magic number in peoples heads, and that number is the ratio of mutual valuation of present goods etc. And that’s what he means in the second quote.