Chap. 4: Stock Lent At Interest
1 The stock lent at interest is always considered as a capital by its lender.
- He expects that:
- it will be restored to him in due time
- the borrower will pay him a rent for using it
- The borrower may use it as a capital or as a stock for immediate consumption.
- If he uses it as a capital, he employs it to maintain productive labourers.
- In this case, he can restore the capital and pay the interest without encroaching on any other source of revenue.
- If he uses it as a stock for immediate consumption, he acts as a prodigal.
- The stock dissipates in maintaining idle people.
- In this case, he cannot restore the capital nor pay the interest without encroaching on some other source of revenue, such as the property or rent.
2 The stock lent at interest is occasionally employed in both these ways.
- It is employed more frequently as a capital than as stock for consumption.
- The man who borrows to spend will soon be ruined.
- His lender will generally repent his mistake.
- In all cases where there is no gross usury, to borrow or to lend for spending is contrary to the interest of both parties.
- It cannot happen frequently because of the regard that all men have for their own interest.
- Any rich man who lends will laugh at you if you ask him whether he lends to people who use it profitably, or to those who spend it idly.
- There are more frugal and industrious borrowers than those who are prodigal and idle.
3 Only country gentlemen, who borrow upon mortgage, borrow without being expected to make profitable use of it.
- They rarely borrow merely to spend.
- What they borrow is commonly spent before they borrow it.
- They generally consume so many goods which are advanced to them on credit by shopkeepers and traders.
- They find it necessary to borrow at interest to pay the debt.
- The capital borrowed replaces the capitals of those shopkeepers and traders.
- Those capitals could not have been replaced with the rents of the estates of the country gentlemen.
- It is borrowed not to be spent, but to replace a capital which was spent before.
4 Almost all loans at interest are made in paper or metal money.
- The borrower really wants and the lender really supplies him, not with money, but with the money's worth or the goods that it can purchase.
- Only those goods can be used by the borrower as his stock for immediate consumption or as his capital.
- Through the loan, the lender assigns to the borrower the lender's right to a certain portion of the national annual produce to be employed as the borrower pleases.
5 The money which can be lent at interest in any country, is regulated by:
- the value of the annual produce immediately destined for replacing a capital, and
- the capital which the owner does not employ himself
It is not regulated by the value of paper or coin money or any loan instruments.
- Such capitals are called the monied interest as they are lent out and paid back in money.
- It is distinct from the landed, trading, and manufacturing interests.
- These other interests are earned by owners who employ their own capitals.
- Even in the monied interest, the money is just the deed of assignment.
- This deed conveys those capitals which the owners do not care to employ themselves.
- Those capitals may be greater than the physical money which conveys them.
- The same pieces of money successively serve many different loans and many different buyers.
- A lends to W 1,000 pounds.
- W immediately uses it to buy 1,000 pounds worth of goods from B.
- B having no use for the money, lends the 1,000 pounds of money to X.
- X immediately uses it to buy 1,000 pounds worth of goods from C.
- C having no use for the money, lends the 1,000 pounds of money to Y.
- Y immediately uses it to buy 1,000 pounds worth of goods from D.
- In this manner, the same 1,000 pounds of paper or coin money serve as the instrument of three loans and three purchases.
- Each loan and purchase is equal in value to those 1,000 pounds of physical money.
- "What the three monied men A, B, and C assign to the three borrowers, W, X, Y, is the power of making those purchases."
- "In this power consist both the value and the use of the loans."
- The stock lent by the three monied men is equal to the value of the goods which can be purchased with it.
- The stock lent is three times greater than the value of the physical money used in the purchases.
- Those loans however, may be all perfectly secured.
- The goods purchased by those different debtors will bring back money with a profit.
- The same pieces of money can thus serve as the instrument of different loans to three or to 30 times their value.
- They may likewise successively serve as the instrument of repayment.
6 In this way, the lender assigns a certain portion of the produce to the borrower through the capital which he lends, provided that the borrower shall assign to the lender a smaller portion, called the interest.
- At the end of the loan, a considerable portion of that produce is assigned to the lender, called the repayment.
- Though money serves as the deed of assignment of the bigger repayment and the smaller interest, it itself is altogether different from these assignments.
7 The monied interest naturally increases with the increase in the produce destined for replacing the capital in any country.
- The increase of those interest-bearing capitals, naturally accompanies the increase of the capitals in any country.
- In other words, as stock increases, the quantity of stock to be lent at interest grows gradually greater.
8 As the quantity of stock to be lent at interest increases, the interest diminishes.
- It diminishes in the same way market prices of goods diminish when their quantity increases.
- It diminishes from other peculiar causes.
- As capitals increase in any country, their profits diminish.
- It becomes more difficult to find a profitable method of employing any new capital in the country.
- A competition arises between different capitals.
- The owner of one capital endeavours to get the employment occupied by another.
- Usually, he can jostle the other capital out of their employment only by dealing on more reasonable terms.
- He must sell cheaper and buy dearer.
- The demand for productive labour increases the funds for maintaining labour.
- Demand grows greater everyday.
- Labourers easily find employment
- The owners of capitals find it difficult to get labourers.
- Their competition raises wages and sinks profits.
- But when the profits from the use of capital are diminished at both ends, the price paid for using capital or the interest rate, diminishes with them.
Mr. Locke, Mr. Law, and Mr. Montesquieu, and many other writers, imagined that the increase of the quantity of gold and silver was the real cause of the decrease in interest rates in Europe.
- They said that those metals became less valueable themselves.
- Their use became less valueable too, and consequently the price paid for it.
- This notion, which at first sight seems plausible, was fully exposed by Mr. Hume that it is unnecessary to say anything more.
- The following argument explains the fallacy of those writers.
Before the discovery of the Spanish West Indies, 10% was the common interest rate in most of Europe.
- It has since sunk to 6%-3% in different countries.
- Let us suppose that in every country, the value of silver sunk precisely with the interest rate and interest rates have been reduced from 10% to 5%.
- The same quantity of silver can now purchase half of what it purchased before.
- This is a false supposition.
- But we will examine it because other writers suppose this.
- Even if this supposition were true, it is impossible that the lowering of the value of silver could have any tendency to lower interest rates.
- If 100 pounds in those countries are equal in value to 50 pounds before, 10 pounds must now be equal to 5 pounds then.
- Whatever lowered the value of the capital must have lowered interest rates in the same exact proportion.
- The proportion between the value of the capital and the interest must have remained the same, though the rate had been altered.
- By altering the rate, on the contrary, the proportion between those two values is necessarily altered.
- If 100 pounds now are equal to 50 pounds then, 5 pounds now must be equal to 2 pounds 10 shillings then.
- By reducing the interest rate from 10% to 5%, the interest rate in using capital which is reduced to half of its value, is reduced to 1/4 of its former value of 2.5 pounds.
Any increase in the quantity of silver, while the commodities circulated by it remained the same, only diminishes the value of silver.
- The nominal value of all goods would be greater.
- But their real value would be precisely the same.
- They would be exchanged for more silver.
- But the quantity of labour they commanded and the number of people they could maintain and employ would be precisely the same.
- The capital of the country would be the same
- More physical money might be needed to convey commodities from one hand to another.
- The deeds of assignment, like the conveyances of a verbose attorney, would be more cumbersome.
- But the thing assigned would be precisely the same.
- The funds for maintaining productive labour would be the same.
- The demand for productive labour would would be the same.
- Its wages would be nominally greater but would have the same real value.
- Wages are commonly computed by the quantity of silver paid to the labourer.
- They would be paid in more pieces of silver.
- Wages would appear to increase.
- But those pieces would buy the same quantity of goods as before.
- Profits would be the same nominally and really.
- But profits are not computed by the number of pieces of silver they are paid with.
- They are computed by the proportion of those pieces to the whole capital employed.
- Thus, 5 shillings a week are the common wages of labour but 10% are the common profits of stock.
- But the whole capital of the country being the same, the competition between the different capitals of individuals would be the same.
- The common proportion between capital and profit, would be the same
- The common interest of money would be the same
- What is given for the use of money is regulated by what can it be used for.
On the contrary, any increase in the quantity of commodities circulated in the country, while the quantity of its money remained the same, would raise the value of the money and produce many important effects.
- The capital of the country would really be increased, though it might nominally be the same.
- The quantity of productive labour it could maintain and employ would be increased, and consequently the demand for that labour.
- Its wages would naturally rise with the demand, and yet might appear to sink.
- They might be paid with less money, but that smaller quantity might purchase more goods.
- Profits would be diminished both really and nominally.
- The competition between the different capitals would naturally be increased with the increase in national capital.
- Their owners would be obliged to content themselves with a smaller proportion of the produce of that labour their capitals employed.
- The interest of money, keeping pace always with profits, might be greatly diminished, though the value of money, or the quantity of goods it could purchase, was greatly increased.
In some countries, the interest of money is prohibited by law.
- But as money is useful everywhere, something should by be paid everywhere for the use of it.
- The prohibition on interest actually increases the evil of usury, instead of preventing it.
- The debtor must pay for:
- the use of the money
- the creditor's risk in accepting payment for that use
- The debtor must insure his creditor from the penalties of usury.
In countries where interest is allowed, the law fixes the highest rate to prevent usury.
- This rate should always be above the lowest market price.
- The market price of interest is the price commonly paid for the use of money by the most secure debtors.
- If this legal rate were fixed below the lowest market rate, it would have the same effect as the total prohibition of interest.
- The creditor will not lend his money for less than the use of it is worth.
- The debtor must pay him for the creditor's risk in accepting the full value of that use.
- If it is fixed at the lowest market price, it ruins honest people who respect the laws of their country.
- It ruins all those who cannot give the best security.
- It obliges them to deal with exorbitant usurers.
- In Great Britain, money is lent to government at 3%.
- Money is lent to private people with good security at 4.0-4.5%
- The present legal rate of 5% is perhaps as proper as any.
The legal rate should not be much above the lowest market rate.
- If the legal interest rate in Great Britain was fixed at 8-10%, most of the money would be lent to prodigals and projectors.
- Only they would be willing to give this high interest.
- Sober people will not give for the use of money more than what is useful.
- They would not venture into the competition.
- Most of the national capital would thus be thrown into people most likely to waste and destroy it.
- It would be kept out of those most likely to make a profitable and advantageous use of it.
- If the legal interest rate is fixed a very little above the lowest market rate, sober people will be preferred as borrowers over prodigals and projectors.
- The person who lends money gets nearly as much interest from sober people than from prodigals
- His money is much safer with sober people than prodigals.
- A great part of the national capital is thus lent to those most likely to employ it advantageously.
16 "No law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made."
- The French king attempted to reduce the rate of interest from 5% to 4% with the edict of 1766.
- Money continued to be lent in France at 5%.
- The law was evaded in several ways.
17 "The ordinary market price of land depends everywhere on the ordinary market rate of interest."
- The person who has a capital which he does not want to employ it himself will choose between buying land or lending it at interest.
- The superior security of land and its other advantages, will generally make him content with a smaller revenue from land than the revenue from lending out his money at interest.
- These advantages are sufficient to compensate a difference of revenue.
- But they will compensate a certain difference only.
- If the rent of land should fall short of the interest of money by a greater difference, nobody would buy land.
- Its ordinary price would soon be reduced.
- On the contrary, if the advantages should much more than compensate the difference, everybody would buy land.
- This would soon raise its ordinary price.
- When interest was at 10%, land was sold for 10-12 years purchase.
- When interest sunk to 6%, 5%, and 4%, the price of land rose to 20, 25, and 30 years purchase.
- The market interest rate is higher in France than in England.
- The common price of land is lower in France than England.
- In England it commonly sells at 30 years purchase.
- In France it sells at 20 years.
Next: Chapter 5: Employment of capitals