WAGES-POLICY.--MINIMUM OF WAGES.
The demand[178-1] so frequently heard recently, that the state should
guaranty an "equitable" minimum of wages, could be granted where the
natural rate of wages has fallen below that minimum, only on condition
that some of the working class in the distribution of the wages capital
(no longer sufficient in all the less profitable branches of business)
should go away entirely empty handed. Hence, as a rule, in addition to
that wages-guaranty, the guaranty of the right to labor is also
required. But as useful labor always finds purchasers (the word "useful"
being here employed in the sense of the entire economy of a people, and
understood in the light of the proper gradation of wants and the means
of satisfying them), such a right to labor means no more and no less
than that the state should force labor which no one can use, upon
others.[178-2] Something similar is true of Louis Blanc's proposition
that the rate of wages of the workmen should be determined and regulated
by their own votes and among themselves.[178-3]
All such measures are injurious in proportion as they, by extending aid
and the amount of the minimum, go beyond the limits of benevolence, and
approach those of a community of goods. (§ 81 ff.) However, if they
would be lasting and not pull workmen rapidly down to the very depths of
universal and irremediable misery, these measures should be accompanied
by the bestowal of power on the guarantor to hold the further increase
of the human family within bounds.[178-4]
The condition of workmen can be continued good or materially improved
only on condition that their numbers increase less rapidly than the
capital destined for wages. The latter increases usually and most surely
by savings. But only the middle classes are really saving. In England,
for instance, the national capital increases every year by at least
£50,000,000, while the working classes spend at least £60,000,000 in
tobacco and spirituous liquors, _i. e._, in numberless instances, only
for a momentary injurious enjoyment by the adult males of the class, one
in which their families have almost no share. According to this, every
compulsory rise in wages would be a taking away from the saving class
and a giving to a class that effect no savings. Is not this to act after
the manner of the savages who cut down a fruit tree in order more
conveniently to relish its fruit?[178-5]
Benjamin Franklin calls out to workmen and says: If any one tells you
that you can become rich in any other way than through industry and
frugality, do not listen to him; he is a poisoner! And, in fact, only
those changes permanently improve the condition of the working classes
which are useful to the whole people: enhanced productiveness of every
branch of business in the country, increased capital, the growth (also
relative) of the industrial middle classes, the greater education,
strength of character, skill and fidelity in labor of workmen
themselves. Much especially depends upon their foresight and
self-control as regards bringing children into the world. Without this
latter virtue even the favorable circumstances would be soon trifled
away.[178-6]
[Footnote 178-1: Compare, besides, the Prussian A. L. R.,
II, 19, 2. In _Turgot_, _droit du travail_, and _droit au
travail_ are still confounded one with the other. Oeuvres
éd. _Daire_, II, 302 ff; especially 306. In such questions,
people generally think only of factory hands. But have not
writers just as good a _droit au travail_ to readers whom
the state should provide them with, lawyers to clients and
doctors to patients?]
[Footnote 178-2: _L. Faucher_ calls the _droit au travail_
worse than the equal and compulsory distribution of all
goods, because it lays hands on not only present products
but even on the productive forces. It supposes that
unlimited production is possible; that the state may
regulate the market at pleasure to serve its purposes; that,
in fact, the state can give without having first taken what
it gave. (Mélanges d'Economie politique, II, 148 ff.) The
French national assembly rejected the "right to labor" on
the 15th of September, 1848, by 596 ayes to 187 nays, after
the provisional government had proclaimed it, February 25.
Le Droit au Travail à l'Assemblée nationale avec des
Observations de _Faucher, Wolowski, Bastiat_ etc., by _J.
Garnier_, Paris, 1848.]
[Footnote 178-3: _L. Blanc_, De L'Organization du Travail,
1849.]
[Footnote 178-4: "Every one has a right to live. We will
suppose this granted. But no one has a right to bring
creatures into life to be supported by other people. Whoever
means to stand upon the first of these rights must renounce
all pretension to the last.... Posterity will one day ask
with astonishment what sort of people it could be among whom
such preachers could find proselytes." (_J. S. Mill_,
Principles, II, ch. 12.)]
[Footnote 178-5: Compare _Morrison_, loc. cit. Quarterly
Rev., Jan. 1872, 260. The English savings in the savings
banks, between 1839 and 1846, increased yearly in amount
only £1,408,630, and scarcely half of this came from
wages-workmen in the narrower sense of the term. What the
latter contribute to the fund for the old and sick is not
really productive capital but only individually deferred
consumption. Let us suppose that a man had an income of
$3,000 a year, of which he laid out yearly $2,000 ($1,000
for wages, $1,000 for rent and interest on capital), and
that he capitalizes $1,000. If now this man were, either
through philanthropy or in furtherance of socialism, to
double the wages he paid, the result would not be
detrimental to the economic interests of the whole country
only on the supposition that working classes who received
the increased wages should either save what he is no longer
able to save, or that by inventions or greater personal
skill, etc., they should increase the national income.]
[Footnote 178-6: According to _Hildebrand's_ Jahrbb., 1870,
I, 435, 193, North American workmen, the quality of work
being supposed the same, now accomplish from 20 to 30 per
cent. less than before 1860. Thus, in 1858, in New York, a
steam engine was manufactured for $23,000, in 2,323 work
days. In 1869, a similar one was built for $40,000 in 3,538
days. In the former case, the manufacturer made a profit. In
the latter, he lost $5,000.
_John Stuart Mill_, II, ch. 13. Against the
"philanthropists" who find it hard to preach to the poor,
the only efficacious means of improving their condition,
_Dunoyer_, L. du T., IV, ch. 10, says: The rich _do_ employ
it, although they have much less need of it! Even _Marlo_
admits that a guaranty of the right to labor, without any
measures to limit population, would, in a short time, and
irredeemably lead the country to destruction. (Weltökonomie,
I, 2, 357.) _von Thünen_, der isolirte Staat., II, 1, 81
ff., would take a leap out of the vicious circle that those
who live by the labor of their hands can produce no rise in
their wages, because they are too little educated to hold
their increase properly in check; and that, on the other
hand, they cannot give their children a decent education,
because their wages are too low; by suggesting that
educational institutions should be established by the state,
and that these should elevate the subsequent generation of
workmen intellectually.]
CHAPTER IV.
INTEREST ON CAPITAL.
SECTION CLXXIX.
THE RATE OF INTEREST IN GENERAL.
Interest on capital,[179-1] or the price paid for the use of capital,
should not be confounded with the price of money (§ 42); although in
common life people so frequently complain of want of money where there
is only a want of capital, and sometimes even when there is a
superabundance of money.[179-2] This error is connected with the fact,
that for the sake of convenience, loans of capital are so often effected
in the form of money and that they are always at least estimated in
money; but neither of these things is essential.
In reality, however, we as seldom meet with interest[179-3] pure and
simple, as we do with rent pure and simple. A person who works with his
own capital can, at best, by a comparison with others, determine where,
in the returns of his business, wages stop and interest begins.[179-4]
And even in the loaning of capital, it depends largely on supply and
demand, whether the creditor shall suffer a deduction in consequence of
the absence of care and labor attending his gain, and whether the
debtor, in order to get some capital at all, shall sacrifice a part of
the wages of his labor.[179-5] When Adam Smith assumes it to be the rule
that the "profit of stock" is about twice as great as the "interest of
money,"[179-6] it is evident that a considerable amount of what is
properly wages or profit of the employer (_Uhternekmer_ = undertaker) is
included in the former.
Many businesses have the reputation of paying a very large interest on
the capital employed in them, when in reality they only pay the
undertaker of them wages unusually high as compared with the amount of
capital employed in them. Apothecaries, for instance, are called in some
places "ninety-niners," because it is said that they earn 99 per cent.
To discover the error, it would be sufficient to inquire the rate of
interest on the capital borrowed by the apothecary on hypothecation, for
instance, to enlarge his industry. But on the other hand, such a man who
has more than any other manufacturer to do with the most delicate
materials and with them in greater variety, requires proportionately
greater caution and knowledge. Besides, as the guardian of the health
and life of so many, and even as the comptroller of physicians, he
should be a man who inspired universal and unqualified confidence.[179-7]
By the rate of interest customary in a country, we mean the average rate of
the interest on money-capital employed safely and without trouble.
[Footnote 179-1: In the case of fixed capital, we generally
speak of rent; in the case of circulating capital, of
interest. If interest be conceived as a fractional part of
the capital itself, the relation between the two is called
"the rate of interest," most generally expressed as a
percentage, and for one year.]
[Footnote 179-2: In Russia, great depreciation of the
assignats, and yet the people complained of a "want of
money." (_Storch_, Handbuch, II, 15.) According to the San
Francisco correspondent of the Times, Jan. 31, 1850, one per
cent. a day discount was paid there! Compare _North_,
Discourse on Trade, 11 seq.]
[Footnote 179-3: Gross interest and net interest
corresponding to the difference between gross product and
net product.]
[Footnote 179-4: This is the natural rent of capital in
contradistinction to the stipulated rent. (_Rau_, Lehrbuch,
I, § 223.)]
[Footnote 179-5: Thus, for instance, a so-called beginner
who is conscious of possessing great working capacity, but
who possesses for the time being little credit. _Tooke_,
Considerations on the State of the Currency, 1826,
distinguishes three kinds of capitalists: a, those who are
averse to running any risk whatever or incurring any
trouble, or are not able to incur any risk or trouble, for
whom every great increase of the sinking fund lowers the
rate of interest, and every war loan raises it; b, those who
will run no risk, but who are not averse to the trouble of
looking after their investments and of endeavoring to obtain
a higher rate of interest; c, such as, to obtain a higher
rate of interest, unhesitatingly risk something. Borrowers
he divides thus: a, those who employ the borrowed capital
and their own in such a way as to enable them to meet their
obligations and besides to earn a reasonable profit; b,
those who need others' capital to make up for the momentary
failure of the productiveness of their own; lastly c,
unproductive consumers.]
[Footnote 179-6: Wealth of Nat., I, ch. 9. The gross product
of English cotton industry was, in 1832, estimated at
£32,000,000, viz: £8,000,000 worth of material, £20,000,000
wages, £2,000,000 interest, £2,000,000 undertaker's profits.
(_Schön_, Nat. Oek, 104.)]
[Footnote 179-7: _Adam Smith_, I, ch. 10, 1: where the
reasons why a shop-keeper in a small town apparently gets a
larger interest than one in a large city, and yet gets rich
less frequently, are developed. The high profit made from
industrial secrets, Adam Smith very correctly considers
wages (I, ch. 7). Why not also that made by inn-keepers? (I,
ch. 10, 1.) When the returns of a business differ according
to circumstances which depend on the person of the conductor
of the business himself, and may by him be transferred into
another business, etc.; when the competition in it is
determined by personal agreeableness or disagreeableness, it
is evident that the larger returns are to be ascribed rather
to the highness of wages than of the rate of interest. The
profit also which a second-hand hirer makes is wages.
(_Riedel_, Nat. Oek., 376.)]
SECTION CLXXX.
RATE OF INTEREST IN GENERAL.--ITS LEVEL.
Within the limits of the same national-economic territory, the different
employments of capital tend uniformly to pay the same rate of
interest.[180-1] If one branch of business were much more profitable
than another, it would be to the interest of the owners of capital to
allow it to flow into the former and out of the latter, until a level
was reached.[180-2]
The most noticeable exception to this rule is only an apparent one. The
revenue (_Nutzung_) derived from the use of capital must not be
confounded with its partial restoration.[180-3] Thus, for instance, the
rent of a house, if the entire capital is not to be sooner or later
consumed entirely, must embrace, besides a payment for the use of the
house, a sum sufficient to defray the expenses of repairing it, and even
to effect a gradual accumulation of capital for the purpose of
rebuilding. The risk attending the investment of capital plays a very
large part and must be taken into special consideration. If the risk in
a business be so great that ten who engage in it succeed and ten fail,
the returns of the former, which are more than double those usual in the
country, in reality pay, when the ten who failed are taken into the
account, only the rate of interest customary in the country. The risk
may depend on the uncertainty of the person to whom the capital is
confided;[180-4] on the uncertainty of the branch of business in which
it is intended to employ it,[180-5] or on the uncertainty of the
commercial situation in general; but especially may it depend on the
uncertainty of the laws.[180-6] The temporary lying idle of capital, for
instance, in dwelling houses at bathing places during the winter season,
increases the rate of interest much more than it does the rate of wages
in the corresponding case of the lying idle of labor; for the reason
that there is something pleasurable in the repose of the latter.
(_Senior._) On the whole, the vanity of mankind has an effect upon the
rate of interest similar to that which it has on the rate of wages. (See
§ 168.) It causes the small chances of loss to be estimated below their
real value, and the extraordinary chances of gain above it.[180-7]
[Footnote 180-1: Compare _Harris_, Essay on Money and Coins,
13. _Per contra, Ganilh_, Dictionnaire analyt., 107.
According to _Hermann_, Staatsw. Untersuchungen, 147, a
product which withdraws an amount of capital = _a_ from the
immediate use of its owner for _n_ months must bring in in
its price a surplus, over and above the outlay of capital,
which would bear the same ratio to the profit from another
product which employed an amount of capital = _b_, _m_
months, that _an_ bears to _bm_.]
[Footnote 180-2: The class of bankers, etc. which precisely
in the higher stages of civilization is one so highly
developed, is called upon to adjust these differences.]
[Footnote 180-3: Life annuities and annual revenues, _à
fonds perdu_.]
[Footnote 180-4: Hence, for instance, good men engaged in
industrial pursuits who employ borrowed capital productively
pay lower interest than idlers who are suspected of desiring
only to spend it in dissipation. High house-rent usually
paid by proletarians.]
[Footnote 180-5: Thus even in _Anderson's_ time, it was
necessary that the profit of one good year in the whale
fishery should compensate for the damage caused by six bad
ones. (Origin of Commerce, III, 184.) Slave-traders made
their calculations to lose from three to four out of five
expeditions. (Athenæum, May 6, 1848) Similarly in smuggling
and contraband. High rate of interest in gross adventure
trade and bottomry contracts, frequently 30 and even 50 per
cent.; in ancient Athens, for a simple voyage to the Black
Sea, 36 per cent., while the rate of interest customary in
the country was only from 12 to 18 per cent.; the interest
paid by rented houses only 8-1/7, and by land leases only 8
per cent. (_Bockh_, Staatshaushalt der Athener, I, 175 ff.;
_Isaeus de Hagn._, Hered., 293) In Rome, before Justinian's
time, maritime interest was unlimited. (_Hudtwalker_, De
Foenore nautico Romano, 1810.) And so in the manufacture of
powder, the frequent explosion of the mills has to be taken
into account: in France and Austria, 16 per cent. per annum.
(_Hermann_, Principien, 119.) Here belong those new
enterprises which, when they succeed, pay a high profit.
_Thaer_, in reference to this insurance premium, says: if
the capital employed to purchase a landed estate yields 4
per cent., the inventory (_Inventar_) should bring in at
least 6, and the working capital 12 per cent. (Ration.
Landwirthschaft.)]
[Footnote 180-6: Compare _supra_, § 91; _infra_, §§ 184,
188.]
[Footnote 180-7: Thus _Friedr. Perthes_, in _Politz_,
Jarhbüchern, Jan., 1829, 42, thinks that the publication of
scientific books in Germany, since 1800, caused, on the
whole, a loss of capital. In the Canadian lumber trade,
also, speculators, in the aggregate, lost more than was
gained. Yet the business goes on because of its lottery
character. (_John Stuart Mill_, II, ch. 15, 4.) In
lotteries, it is certain that the aggregate of players lose.
So too in speculation in English stocks, on account of the
costs to be paid the state. In the case of frightful losses,
which may afford food for the imagination, the reverse is
found. Thus, for instance, in England, fire insurance, stamp
duties included, was paid for at a rate five times as high
as mathematical calculation showed it to be worth.
(_Senior_, Outlines, 212 ff.) Much here depends naturally on
national character, which, in England for instance, or in
the United States, is much more adventurous than in many
quiet regions of continental Europe.]
SECTION CLXXXI.
RULE OF INTEREST IN GENERAL.--CAUSES OF DIFFERENT RATES.
The real exceptions to the above rules are caused by a prevention of the
leveling influx and outflow of capital. Among nations in a low stage of
civilization, there is wont to be a multitude of legal impediments in
this respect. The existence of a difference of classes, of privileged
corporations, etc., not only restrains the transition of workmen, but
also of capital from one branch of industry to another. But even the
mere routine of capitalists, that blind distrust of everything new so
frequently characteristic of easily contented men, may produce the same
result.[181-1] In the higher stages of civilization, patents for
inventions and bank privileges, are causes of a lastingly higher rate of
interest than is usual in the country.[181-2] Finally, since in many
enterprises only a large amount of capital can be used at all, or at
least with most advantage, the aggregation of which from many small
sources is ordinarily much more difficult than the division of a large
one into small fractional parts; the rate of interest for very small
amounts of capital, and especially in the higher stages of civilization,
is usually lower than that of large amounts of capital. We need only
mention interest paid by savings-bank investments.[181-3]
If circulating capital has been changed into fixed capital, its yield
will depend upon the price of the particular goods in the production of
which it has been made to serve. Compared with the cost of restoration
of fixed capital, this yield may, in a favorable case, constitute an
extraordinarily high rate of interest, in an unfavorable a very low one;
and the former of these two extremes has a greater chance of being
realized, in proportion as it is difficult to multiply fixed capital of
the same kind; the latter, the more exclusively it can be employed in
only one kind of production, and the longer time it takes to be used up
by wear.[181-4] When fixed and circulating capital coöperate in
production, the latter, because it can be more easily withdrawn, but
also more easily replaced, first takes out its own profit, that is the
profit usual in the country and leaves all the rest to the former. When
fixed capital is sold, practically no attention is paid to what it
originally cost. The purchaser pays only for the prospective revenue it
will yield, which he capitalizes at the rate of interest usual in the
country. The seller henceforth looks upon his gain as an accretion to
capital, his loss as a diminution of capital, and no longer as high or
low interest.[181-5] That accretion might be considered the wages, paid
once for all, for the intelligent labor which governed the original
investment of the capital, and _vice versa_.
[Footnote 181-1: Thus the rate of interest in the Schappach
valley remained for a long time much lower than in the
vicinity, for the reason that the peasantry who had grown
rich through the lumber trade possessed notwithstanding
little of the spirit of enterprise. (_Rau_, Lehrbuch, I, §
233.)]
[Footnote 181-2: Here the law produces a species of
artificial fixation.]
[Footnote 181-3: _Von Mangoldt_, Unternehmergewinn, 150.]
[Footnote 181-4: In other words, the more fixed they are.
Thus, for instance, dwelling houses in declining cities,
canals, etc. which have been supplanted by better commercial
routes; or again, the shafts and stulms of a mine which has
been abandoned. When Versailles ceased to be a royal
residence, the value of inhabited houses sank to one-fourth
of what it had been. (_Zinkeisen_ in _Raumer's_ histor.
Taschenbuch, 1837, 426.) A rate of interest greater than
that usual in a country is seldom found where freedom of
competition prevails, since it is necessary there to
distinguish between rent and interest on capital. When in an
open city, the capital employed in the construction of
dwelling houses _detractis detrahendis_ pays 8 per cent.,
while the rate of interest customary in the country is only
4 per cent., the supply of houses will grow continually
greater. Only the difficulties in the way of transferring
capital from one business to another could here retard the
leveling process, which where the political prospect for
instance was bad, might last a long time--one of the
principal reasons why, in 1848, the rent of houses declined
much less than their purchase prices. The conjuncture was
not serious enough to prevent the increase of population;
but it entirely stopped the building of new houses. On the
other hand, a bridge or railroad company may maintain a high
rate of profit because competition cannot exist in the face
of the great expense such enterprises require; but
especially because the party who has here the advantage of
priority may lower the price of transportation to such a
point as to entirely discourage his rival. Compare
_Hermann_, Staatsw. Untersuchungen, 145 ff. Interesting
example of the London gas and water companies in _Senior_,
Outlines, 101.]
[Footnote 181-5: Thus, for instance, Leipzig-Dresden
railroad stock cost originally 100 thalers per share, and
was taken at that rate. The yearly dividends amounted in
1856 to 13 thalers; that is, 13 per cent. for the original
stockholders. But a person who on the 30th September, 1856,
paid 285 thalers for a share, received but an interest of
4-1/2 per cent. on his capital. It is characteristic, how
_Serra_, Sulle Cause, etc., 1613, I, 9, calls the high and
the low rate of interest _prezzo basso e alto delle
entrate_.]
SECTION CLXXXII.
VARIATIONS OF THE RATE OF DISCOUNT.
The fact that in commerce, etc., the rate of interest on capital loaned
for short periods of time (discount) is subject to great fluctuations,
while the mortgage rate of interest, for instance, remains the same
throughout, depends on similar causes.[182-1] Yet there are
contingencies in trade which, when taken immediate advantage of, promise
enormous profits, but which may disappear within a month; risks of the
most dangerous kind which can be conjured only by the immediate aid of
capital. These are both sufficient grounds of a high rate of interest.
Again, there are times of the profoundest calm in the commercial world,
during which capitalists are perfectly willing to make loans at a low
rate of interest, provided they are sure to be able to get back their
capital with the first favorable breeze that blows. Agriculture is too
immovable to come opportunely to the assistance of capitalists, here as
a receiver and there as a loaner of capital. As the cycle of its
operations is gone through usually only in a series of years, sudden
influxes or outflows of capital would cause it the greatest
injury.[182-2]
[Footnote 182-1: _Nebenius_, Oeff. Credit, I, 74 ff. Thus,
Hamburg discount towards the end of the last century
fluctuated between 2-1/2 and 12 per cent., while the capital
invested in agriculture brought an interest almost
invariably of 4 per cent. (_Büsch_, Geldumlauf, VI, 4, 19.)
At the same time, in Pennsylvania, the usual rate of
interest was 6 per cent. per annum, and the rate of discount
not unfrequently from 2 to 3 per cent. a month. (_Ebeling_
Geschichte und Erdbeschreib. von Amerika, IV, 442.) During
the crisis of 1837, it happened that 1/4 per cent. a day was
paid. (_Rau_, Archiv. N. F. IV, 382.) In the Prussian ports,
during the crisis of 1810, it is said that in July the rate
of discount was 2-1/2 per cent. a month. (_Tooke_, Thoughts
and Details, I, 111.) In Hamburg and Frankfort the rate of
discount rose in the spring of 1848, but declined in June to
2; until December it was 1-1/4, until the summer of 1849,
3/4 per cent. (Tüb. Zeitschr., 1856, 95.) Rate of discount
in France, about 1798, at least 2 per cent. a month.
(_Büsch_, loc. cit., IV, 52.) Half a year previous, capital
employed in the purchase of land paid an interest of from 3
to 4 per cent. Legal interest was 5 per cent.; discount, at
most, 6 per cent.; in very prosperous times 8-9, per cent.
(_Forbonnais_, Recherches et Considérations, I, 372.)]
[Footnote 182-2: Remarkable case in _Cicero's_ time in which
bribery, carried on on a large scale, raised the rate of
discount from 4 to 8 per cent. _Cicero_ ad. Quint. M, 15;
ad. Att. IV, 15.]
SECTION CLXXXIII.
EFFECT OF INCREASED DEMAND FOR LOANS.
The price paid for the use of capital naturally depends on the relation
between the supply and demand, and especially of circulating capital.
The increase of the supply need no more unconditionally lower the rate
of interest than the price of any other commodity. If 50 hunters kill
1,000 deer yearly, and give 100 deer per annum as interest to the
capitalists who provided them with ammunition and rifles, a second
capitalist with an equal number of rifles and an equal amount of
ammunition may appear on the scene. If now 2,000 deer a year are killed,
the rate of profit of the capitalists will probably remain the same. But
if the woods are not rich enough in game for this, or the hunters not
numerous enough, too indolent, or too easily satisfied, the rate of
interest falls.[183-1]
The difficulties in the way of the desired increase of capital are here
of great importance. The smaller the surplus over and above their
absolutely necessary wants, which the people produce, the less their
tendency to make savings, the less the inclination to capitalization;
and the less the security afforded by the law is, the higher must the
rate of interest be to induce people to face these difficulties. We may
very well transfer the idea of cost of production to this
condition.[183-2]
The demand for capital depends, on the one hand, on the number and the
solvability of borrowers, especially of non-capitalists like landowners
and workmen; and, on the other hand, on the value in use of the capital
itself. Hence the growth of population is, other circumstances being the
same, a means to raise the rate of interest; because it infallibly
increases the competition of borrowers of capital, even if the increased
rate must take place at the expense of wages. The solvability or paying
capacity of the land-owning class as contrasted with the capitalists
can, in the last analysis, depend only on the extent and fertility of
their lands and on the quality of their agricultural husbandry; the
solvability or paying capacity of the working class, only on their skill
and industry. Where these have grown, an increase of the rate of
interest may be found in connection with an absolute growth of the rate
of wages and of rent, because the aggregate income of the nation has
become greater.
The value in use of capital, which is more homogeneous in proportion as
it has the character of circulating capital (_res fungibiles_) is, in
most instances, synonymous with the skill of the working class, and the
richness of the natural forces connected with it. The deciding element,
therefore, is the yield of the least productive investment of capital
which must be made to employ all the capital seeking employment. This
least productive employment of capital must determine the rate of
interest customary in a country precisely as cost of production on the
most unfavorable land determines the price of corn (§§ 110, 150), and as
the result of the work of the laborer last employed does the rate of
wages. (§ 165.)
What portion of the total national income, after deduction is made of
rent, shall go to the capitalists and what portion to the working class,
will depend mainly on whether the capitalists compete more greedily for
labor or the laboring classes for capital.[183-3] If, for instance,
capital should increase more rapidly than population, there must be a
relative increase in wages, and _vice versa_.[183-4] This is true
especially of that peculiar kind of higher wages which we shall (§ 145,
ff.) designate as the "undertaker's profit." The smaller the number of
persons engaged in enterprises is, in comparison with the number of
retired persons who live on their rents, incomes, etc., the smaller is
the portion of the so-called net profit of enterprise the latter must be
satisfied with in the shape of interest.[183-5]
[Footnote 183-1: It is one of _Ricardo's_ (Principles, ch.
21) chief merits, that he demonstrated the groundlessness of
the opinion that the mere increase of capital must, on
account of the competition of capitalists, lower the rate of
interest, as is assumed by _Adam Smith_, I, ch. 9, _J. B.
Say_, Traité, II, 8, and others. Compare also, _John Stuart
Mill_, Principles, IV, ch. IV, 1.]
[Footnote 183-2: _Storch_, Handbuch, II, 20.]
[Footnote 183-3: Frequent withdrawals of capital must, other
circumstances being the same, temporarily raise the rate of
interest. In the long run, however, the question is decided
by this: whether public opinion considers labor a greater
sacrifice than the saving of capital. Compare _Roesler_,
loc. cit., 8.]
[Footnote 183-4: Compare _Hermann_, Staatsw. Unters., 240
ff. Very much depends on whether the new increased
consumption (of workmen when wages are rising, of
capitalists when wages are declining) is of goods which are
mainly the product of large capital, large factories, etc.,
or chiefly of common labor, (_von Mangoldt_, Grundriss, 155
seq.) When _Adam Smith_ suggests that the relation between
wages and the profit of capital is determined by this:
whether there is a market demand for more work or more
commodities, for more "work to be done" or "work done" (I,
ch. 7), he is, spite of appearances, very unsatisfactory.
_Malthus_ distinguishes a restrictive principle of the rate
of interest, viz.: the return made to the least productive
agricultural capital, and a regulative one, viz.: the
reciprocal relation between demand and supply of capital and
labor. (Principles, ch. 5, sec. 4.) _Ricardo_, ch. 6, makes
the profit of capital at all times and in every country
depend on the quantity of labor which it is necessary to
expend on the land which pays no rent, in order to satisfy
the wants of workmen--a very correct theory.
Only _Ricardo_ himself (ch. 21) and his school postulate
altogether too unconditionally that their wants would always
coincide with the minimum of maintenance or support. Thus,
for instance, _J. S. Mill_, Principles, IV, ch. 3, 4.
However, _Mill_ instead of _Ricardo's_ "wages" employs the
better expression, "cost of labor." _Senior_ teaches that
the distribution of the aggregate result between laborers
and capitalists depends on the anterior course of both
classes: on the value of the capital previously employed by
capitalists to produce the means of satisfying working men's
wants, and on the number of workmen which the previous
laboring population have brought into existence. (Outlines,
188 ff.) Concerning _von Thünen's_ vain attempt at a general
formula, see _supra_, § 173. _Fourier's_ idea that 5/12 of
the product should be distributed among labor, 3/12 among
talent, and 4/12 among capital, is entirely baseless. (N.
Monde, 309 ff.) _Considérant_, Destinée sociale, 192 ff. As
early a writer as _H. Boden_, Fürstliche Machtkunst, 1700
and 1740, 42, came strikingly near the truth. According to
him, a low rate of interest is produced by four
circumstances: surplus capital, a dearth of landed estates,
a want of credit and exact justice, and lastly, the heavy
taxation of capital.]
[Footnote 183-5: Thus, in the last century, Spanish
capitalists loaned capital readily to sure commercial
companies, at from 2 to 3 per cent. per annum. (_Bourgoing,_
Tableau de l'Espagne, I, 248.) The contemporary low rates of
interest in Hannover, _Büsch_, Geldumlauf, VI, 4, 12,
endeavors to explain by the absence of opportunities for
investment, as no one dared to loan to any extent on fiefs
or on the land of the peasantry, and because there was no
law governing bills of exchange, etc.]
SECTION CLXXXIV.
HISTORY OF THE RATE OF INTEREST.
Among barbarous nations, the loaning of capital is wont to happen so
seldom, and to be limited so strictly to near relations, that it does
not yet occur to any one to stipulate for a regular compensation
therefor.[184-1] But, however, when they pass from this state to
interest proper, the rate must be, of course, very high.[184-2] The
premium for insurance is here very great, the possibility and
inclination to accumulate capital exceedingly small. Even of the
existing supply of capital, a great part remains idle, because the
faculty and the institutions necessary to concentrate it and permit it
to flow are wanting. (§ 43.) The unskillfulness of labor is more than
overcome by the excess of fertile and naturally productive land, of rich
sites still unoccupied, the cream of which, as it were, needs only to be
culled. Population is indeed sparse, but the usually prevailing absence
of freedom of the lower classes prevents wages claiming the full benefit
of competition.[184-3] This last circumstance is especially
important.[184-4] For a given amount of the national income and of rent,
every depression of wages must obviously raise the rate of interest, and
every enhancement of wages lower it.[184-5]
[Footnote 184-1: _Tacit._, Germ., 26; _Marculf_, Form., 18,
25 ff., 35; _Savigny_, Ueber das altrömische Schuldrecht, in
the transactions of the Berlin Academy, 1833, 78 seq.]
[Footnote 184-2: According to the Lex Visig., V, 5, § 8, the
maximum rate of interest allowed on loans of money was
12-1/2 per cent., and on other _res fungibiles_, 50 per
cent. From the 12th to the 14th century, the Lombards and
the Jews in France and England took generally (?) 20 per
cent. a year. (_Anderson_, Origin of Commerce, _a._, 1300.)
Philip V. of France, in 1311, fixed the rate of interest at
the fairs in Champagne at 15 per cent. (a species of
discount) at most, and at a maximum everywhere of 20 per
cent. (Ordonnances de la France, I, 484, 494, 508.) The
legal rate of interest in Verona, in 1288, was fixed at a
maximum of 12-1/2 per cent.; in Modena, 1270, at 20 per
cent. (_Muratori_, Antiquitt. Ital., I, 894); in Bresica,
1268, at 10 per cent. (_v. Raumer_, Geschichte der
Hohenstaufen, V, 395 ff.) Frederick II. wished to reduce it
to 10 per cent. for Naples, but failed. (_Bianchini_, Storia
delle Finanze di Nap., I, 299.) The tables of _Cibrario_,
Economia polit. del medio Evo., III, 380, for 1306-1399,
show for upper Italy interest to have been at 20, 15, 14,
10, and also 5-1/2 per cent. About 1430 the Florentines, in
order to moderate the enormously high rate of interest,
called Jews to their city, and the latter promised not to
charge over 20 per cent. (_Cibrario_, III, 318.) In the
Rhine country, the Kowerzens, during the 14th century, took
from 60 to 70 per cent., for which they had, however, to pay
a heavy tax to the archbishop. (_Bodmann_, Rh. Alterthümer,
716.) Of Jewish maximum rates of interest, in the 14th and
15th centuries, see _Stobbe_, Juden in Deutschland während
des M. Alters, 103, 110, 234 seq.; _Hegel_, Strassb. Chr.,
II, 977, 984.
The rate of interest usual in these countries must not
however be calculated from the data furnished by these
usurious rates and fixed rates of interest, simply. In
Germany, the rate of interest promised by princes in the
13th and 14th centuries was usually 10 per cent. The
Frankfort municipal loans made by Jews in the 14th century
bore interest at the rate of 9, 11-2/3, 13, 18, 26, and even
45 per cent. (_Kriegk_, F.'s Bürgerzwiste, 343, 539.) The
rate of interest in the purchase of annuities continually
declined between 1300 and 1500, especially in the time of
the emancipation of manual laborers. Old Base documents
give, between 1284 and 1580, as the highest rate, 11-3/9,
and as the least, 5 per cent. The latter became more and
more usual later, especially in the sale of house-rents
(_Hauszins_), so that in 1841 all annuities (_Renten_) might
be canceled by a payment of their amounts multiplied by 20.
Until the beginning of the 15th century, in the city, the
rule was 6 to 7 per cent.; outside of it, 8 to 10 per cent.
(_Arnold_, Geschichte des Eigenthums in den deutschen
Städten, 222 seq., 227 seq.) According to the Bremen Jahrb.
of 1784, 164 seq., the rate of interest in the case of
_Handfesten,_ in 1295, = 10 per cent., gradually sank: in
the 15th century it was never over 6-2/3; after 1450,
generally 5; in 1511 only 4 per cent. In 1441 ff., in
Augsburg, people were satisfied with a business profit of
7-2/3 per cent., while the usual rate of interest paid by
house-rent, etc. was 5 per cent. (_Hegel_, Augsb. Chr., II,
134 seq., 157.) Handsome tables in the rate of interest in
the purchase of annuities for all Germany, from 1215 to
1620, give as the rule, 7 to 10, scarcely ever over 15 per
cent., in _M. Neumann_, Geschichte des Wuchers, 266 ff. For
the upper Rhine, compare _Mone's_ Zeitschr., 26 ff. Among
the Fathers of the councils of Constance and Basil 5 per
cent. was considered equitable. Compare _F. Hammerlin_,
1389-1457, De Emtione et Venditione unius pro viginti.
Russian interest at 40 per cent., according to the laws of
Jaroslaw (ob. 1054 after Christ). _Karamsin_, Russ. Gesch.,
II, 47.]
[Footnote 184-3: The high rate of interest in many countries
at present may be thus accounted for. In the United States,
during the last century, less than 8 per cent. was seldom
paid. (_Ebeling_, III, 152.) According to _M. Chevalier_,
Lettres sur l'Amérique du Nord, 1836, I, 59, the rate of
interest in Pennsylvania was 6, in New York, 7, in most of
the slave states, 8-9; in Louisiana, 10 per cent. In South
Australia (1850) it was, with full security, 15-20 per cent.
(_Reimer_, Südaustralien, 39.) In the West Indies, about the
end of the last century, a strong negro might produce a
revenue equal to one-fourth of his capital value. (_B.
Edwards_, History of the British West Indies, II, 129.) In
Brazil, the lowest rate of interest was at 9 per cent., and
12-18 per cent. was nothing unusual. (_Wappäus_, M. and S.
Amerika, 1871, 1413.) In Cuba, for the government 10, for
private parties, 12 to 16 per cent. (_Humboldt_, Cuba, I,
231.) In Potosi, in 1826, Temple got 30 per cent. interest
on chattel mortgage, and from 2 to 4 per cent. a month was
offered, while the rate of interest in Buenos Ayres amounted
to 15 per cent. per annum. (_Temple_, Travels, II, 217.) In
Russia, _Storch_, Handbuch, I, 262, speaks of 8-10 per cent.
According to _v. Haxthausen_, it was, in the interior, never
less than from 8 to 12 per cent. per annum; at Kiew and
Odessa, 1-1/4, 1-1/2 and 2 per cent. per month. (Studien, I,
58, 467; II, 495.) In _Greece_, the rate of interest on
first mortgages is at least 10, on a second, 15-18 per cent.
(Ausland, 1843, No. 82.)]
[Footnote 184-4: _Nebenius_, Oeff. Credit, I, 55.]
[Footnote 184-5: Only in this particular instance is what
_Ricardo_ so frequently insists on true, viz: that the rate
of wages can be increased only at the expense of the profit
of capital, and _vice versa_.]
SECTION CLXXXV.
HISTORY OF THE RATE OF INTEREST.--INFLUENCE OF AN ADVANCE IN
CIVILIZATION.
With an advance in civilization, the rate of interest is wont to
decline.[185-1] [185-2] One of the chief causes of this phenomenon is the
necessity, as population and consumption increase, to employ capital in
the fertilization of less productive land, and in less profitable
investments.[185-3] An increase in the stock of money does not
necessarily depreciate the rate of interest. If this increase comes in
connection with a corresponding depreciation of the individual pieces of
metal, it cannot be said that the nation has thereby become richer in
capital. All that would be required in such case is only a greater
number of pounds of gold or silver, or more paper bills to represent the
same capital.[185-4] Only during the transition-period, during which the
depreciation of money is still incomplete, is the rate of interest wont
to be lowered; and all the more, since loaned capital is generally
offered and sought after in the form of money.[185-5] [185-6]
The decline of the rate of interest generally shows itself earliest in
the large cities, which are everywhere the national organ, in which the
good and bad symptoms of later civilization may be soonest
observed.[185-7]
Moreover, the condition of capitalists is not necessarily made worse by
a decline of the rate of interest. It is possible that, for a long time,
the increase of capital should continue more rapid than the decrease of
interest for each individual. (If, indeed, the aggregate interest of
capital should become absolutely smaller, there is always a pleasant
remedy available, viz.: to consume a part of the capital!) But, however,
a decline of the rate of interest is nearly always followed by increased
activity on the part of capitalists; and they come to the resolve to
retire later to enjoy the results of their previous labors. In Holland,
after the time of Louis XIV., no branch of business was wont to pay more
than from two to three per cent. In the case of the purchase of land, no
one calculated on more than two per cent. Hence it was scarcely possible
for small capitalists there to live on their interest; and the good
sense of the people so well adapted itself to this state of things that
to live in leisure on one's rents was considered a not entirely
honorable mode of existence.[185-8] The lower the rate of interest, the
larger, in highly civilized countries, is the stock on hand of cash apt
to become, for the reason that business men then hope to gain more by
the advantages of cash payments than by the saving of interest.[185-9]
[185-10]
[Footnote 185-1: _Proudhon's_ idea, that this decline might
at last bring about a total abolition of interest, is based
on the same error as this other: that since a man may keep
diminishing his per diem quantum of food, he might finally
dispense with food altogether. _Proudhon's_ Banque du
Peuple--People's Bank--which, by gradually diminishing the
interest on its loans to the minimum cost of its
administration, should compel other capitalists to follow
its example.]
[Footnote 185-2: Thus, in England, by virtue of 37 Henry
III., c. 9, the legal interest was = 10 per cent.; by 21
James I, c. 17 = 8; about 1651 = 6 per cent. (confirmed in
1660); by 12 Anne, ch. 16 = 5 per cent. In the time of
George II., where the security was good, only 3 per cent.
was, as a rule, paid. In France, the legal rate of interest,
at the beginning of the 16th century, was 1/10 of the
capital; after 1657, 1/12; 1601 (_Sully_), 1/16; 1634
(_Richelieu_), 1/18; 1665 (_Colbert_), 1/20. Compare
_Forbonnais_ Recherches et Considérations, I, 48, 225, 385
ff. It continued at this rate of 5 per cent. with short
interruptions until the revolution. (_Warnkönig_, Franz.
Staats. und Rechtsgeschichte, II, 588 seq.)
The rates of interest in Russia, in the 16th century, had
already declined to 20 per cent. (_Herberstein_, Reise, 41
ff.; _Karamsin_, Russ. Geschichte, VII, 169.) In Holland, in
1623, it was estimated that land purchases paid 3 per cent.;
hypothecations, 4 to 6; deposits, 5 to 6; a flourishing
business, 10 per cent. Compare _Usselinx_ in _Laspeyres_,
Geschichte der volkswirthschaftl. Anschauungen der
Niederländer, 76. About 1660, the rate of interest usual in
Italy and Holland was at most 3 per cent. (in war times, 4);
in France, 7; in Scotland, 10; in Ireland, 12; in Spain, 10
to 12; in Turkey, 20 per cent. (_Sir J. Child_, Discourse on
Trade, French translation, 75 ff.) Side by side with 6 per
cent. as the rate of interest in England, it was (a little
later) 10 in Ireland. _Petty_, Political Anatomy of Ireland,
74.
The same course of things is to be observed in ancient
times. In _Solon's_ time, and again in that of _Lysias_, it
was 18 per cent. (_Böckh_, Staatshaushalt der Athener, I,
143 ff.) I am of opinion that the rate of interest declined
during this long interval, but rose again in consequence of
the Peloponnesian war. Among friends, in the time of
_Demosthenes_, 10 per cent. (adv. Onetor., I, 386.)
_Aristotle_, Rhet., III, 10, mentions 12 per cent., which
_Aeschines_, adv. Ctes., 104, and _Demosthenes_, adv. Aph.,
I, 820, 824, call low. The rate of commercial interest in
Egypt (146 before Christ) seems to have been 12 per cent.
per annum. (_Letronne_, Recompense promise à celui, etc.,
1833, 7.) Contemporaneously in Rome, a similar rate of
interest must have been considered usurious. (_Cicero_, ad.
Att., I, 12.) Under the emperor _Claudius_, 6 per cent.
(_Columella_, De Re rust., III, 3.) _Justinian_ allowed _to
personae illustres_ 4 per cent. per annum. (L. 26 Cod., IV,
32.)]
[Footnote 185-3: A Huron with his bow and arrow kills 12
pieces of game; the European, with a much better capital,
his rifle, only 5. Compare _v. Schözer_, Anfangsgründe, I,
28. _Mallthus_, Principles, ch. 5. According to _Ricardo_,
ch. 6, the decline of the rate of interest because of the
necessity of carrying on agriculture under harder
conditions, must make all capital of which raw material
forms a part more valuable; while the possessors of
money-capital particularly find no indemnification.
_Wakefield_, England and America, 1853, accounts for it by
saying that production, besides the coöperation of capital
and labor, needs "a field of employment;" and _Bastiat_,
Harmonies, ch. 5, 13, by saying that with the advance of
civilization, the results of former services lose in value
as compared with later ones, because performed under less
favorable circumstances.]
[Footnote 185-4: _D. Hume_, Discourses No. 4 On Interest.
Per contra, see _Locke_, Considerations of the Consequences
of the Lowering of Interest; _Law_, sur l'Usage des Monaies,
1697 (Daire); and _Montesquieu_, Esprit des Lois XXII, 6.
_Cantillon_ draws a very nice distinction: If the increased
amount _of_ money in a state comes into the hands of
loaners, it will decrease the current rate by increasing the
number of loaners; but if it comes into the hands of
consumers, the rate rises, because now the demand _for_
commodities is so much greater. (Nature du Commerce, 284.)]
[Footnote 185-5: The reviews in the Göttingen G. Anz., 1777,
and of _von Iselin_, in the Ephemeriden der Menschheit, II,
170 ff., 177, question _Adam Smith's_ (Wealth of Nat., II,
ch. 4) entirely too positive denial of the influence of the
American production of gold and silver on the diminution of
the rate of interest, a view which was shared also by
_Turgot_, Form. et Distr., § 78. See a beautiful comparison
between a declining of the prices of the currency which,
promotes production, with the phenomena attending the growth
of a tree, in _Schäffle_, N. Oek., II, Aufl., 249.]
[Footnote 185-6: Thus the rate of interest in Rome fell from
12 to 4 per cent. when Octavian suddenly threw the treasures
of conquered Egypt upon the market, and the price of
commodities only doubled. When later commerce had divided
this amount of money among the provinces, it rose again.
(_Sueton._, Oct., 41; _Dio C._, LI, 17, 21; Oros, IV, 19.)
_Law's_ emissions of paper, in colossal amounts, depressed
the rate of interest to 1-1/4 per cent. (_Dutot_,
Réflexions, 990--Daire.) But as soon as the paper money had
lost its value, the former condition returned. Similar
observations in Rio de Janeiro: _Spix_ und _Martius_, Reise,
I, 131.]
[Footnote 185-7: While in Paris the capital safely invested
paid 2-1/2 to 3 per cent., 57 out of 61 _conseils généraux_
declared, in 1845, that the rate of interest on
hypothecations, in their departments, was always over 5 per
cent.; 17 estimated it at an average of from 6 to 7 per
cent.; 12 at from 7 to 10; some said 12 and 15, and even 22
per cent. in the case of small sums loaned for a short time.
(_Chegarny_, Rapport au Nom de la Commission de la Réforme
hypoth., 29 Avril, 1851.) In Russia, at the beginning of
this century, the rate of interest in the Baltic provinces
was 6 per cent.; in Moscow, 10; in Taurien, 25; in Astracan,
30 per cent. (_v. Schlözer_, Anfangsgründe I, 102.) In 1750,
in Naples, the rate of interest was from 3 to 5 per cent.,
in the provinces from 7 to 9 per cent. (_Guliani_, della
Moneta, IV, 1.) In Trajan's time in Rome, 6; in Bithynia, 12
per cent. (_Plin._, Epist. VII, 18; X, 62.)]
[Footnote 185-8: _Delacourt_ Aanwysing, 1669, I, 7.
_Temple_, Observations on the U. Provinces, ch. 6, Works L.
1854. Even _Descartes_ says of Holland's _ubi nemo non
exercet mercaturam_. Compare per contra, _H. Grotius_, Jus
Belli et Pacis, II, 12, 22. Very large capitalists, in
_Smith's_ time, certainly lived generally on the interest of
their money: Richesse de Hollande, II, 172. In England, at
the present day, likewise, a vast number of persons who live
on the interest of their money, occasionally take part in
the speculation in commodities; which explains why so-called
commercial crises are incomparably more extensive there, and
reach incomparably deeper, than in Germany. Similarly,
according to _Conring_, De Commercii, 1666, c. 36, in Venice
and Genoa.]
[Footnote 185-9: Hence the larger cash balances in England
at the present day, which, however, are not kept in the form
of coin, but of bank notes and bankers' deposits.]
[Footnote 185-10: As to how every frugal capitalist works to
the injury of capitalists as a class, but to his own
advantage, by lowering the rate of interest and increasing
the rate of wages, see _Senior_, Outlines, 188 ff.]
SECTION CLXXXVI.
HISTORY OF THE RATE OF INTEREST.--CAUSES OF A HIGH RATE IN THRIVING
COMMERCIAL NATIONS.
There are, however, even where a people's economy is in a flourishing
condition, many obstacles which cause the decline of the rate of
interest to take a retrogressive course, or which at least may delay it
for a time.
To this category belong all the modifications of a nation's economy
alluded to in § 183.[186-1] Among them, therefore, is every extension of
the limits of productive land. Let us suppose a nation which, its
capital and labor remaining the same in every respect, should suddenly
double its territory. The less productive places where investments were
made in the old province are now abandoned, and labor and capital
emigrate to the new. The result is, of course, an increase of the
aggregate national income, and, at the same time, a decrease of rent. (§
157.) Hence, the interest on capital and the wages of labor, taken
together, must greatly increase. Which of these two branches shall
profit most and longest by the increase will depend upon whether capital
or the number of workmen increases most rapidly.[186-2] A similar effect
must be produced when, by changes or modifications in the commercial
situation, in the tariff, etc., a nation is enabled to obtain the means
of subsistence at cheaper rates from more fertile and less settled
countries.[186-3]
The introduction of better methods of production has very different
immediate consequences, according as these methods affect the
commodities which minister to the wants peculiar to workmen as a class,
or do not. Let us suppose, as a first case, that the cost of ordinary
clothing is reduced one half by reason of newly discovered material,
better machines, etc. As in the case of the whole people, so also in
that of the owners of capital as consumers, there is, in consequence, an
addition to their enjoyment of life. Their interest as well as their
capital, compared with clothing material, would have become more
valuable. But the relation between capital and interest, that is, the
rate of interest, could not be directly changed. (Compare _infra_, note
3.) Only when the working class employ their materially increased wages
to increase population; when in consequence hereof, their wages,
estimated in money, again decline beyond what it was before; when,
therefore, the price of a given quantity of labor declines, does the
rate of interest rise, although a portion of that which the workmen have
lost may be added to rent on account of the increased population?[186-4]
[186-5] If the applicability of the new method of production is confined to
articles of luxury used by the upper classes, for instance to fine lace,
the rate of interest usual in the country will be affected thereby only to
the extent that through the medium of commerce such products are exchanged
with foreign nations against commodities consumed by the working classes.
But there are very few improvements in production which have not led to a
greater cheapness of those things which satisfy the wants of the working
class; and this is especially clear in the improvements in the means of
transportation so usual in our day.
However, the increase of fixed capital, such as machines, railroads,
etc., once they are completed, may, at first, cause a depression of the
rate of wages, as well as an enhancement of the rate of interest; the
former from the fact that a number of workmen is thereby, at least
temporarily, thrown out of employment; the latter because the conversion
of so much circulating into fixed capital must diminish the supply of
the former.[186-6]
A second class of obstacles consists in the diminution of the supply of
capital. War, for instance, always causes such a destruction of capital,
and at the same time for the most part renders the reproduction of
capital more difficult to such a degree that the rate of interest is
wont to rise greatly.[186-7] Something similar is true of other great
catastrophes and of extravagance on a large scale.[186-8] Every state
loan, whether intended for direct consumption or to procure capital for
use (_Nutzkapitalien)_, decreases the supply of circulating capital
which most directly determines the market rate of interest.[186-9] [186-10]
[Footnote 186-1: _Wolkoff_ very well shows that the economic
progress of mankind is effected partly by the improvement of
production, and partly by saving. The former increases the
rate of interest, the latter lowers it. (Lectures, 182, 189.
Compare _supra_, § 45.)]
[Footnote 186-2: Thus the rate of interest in Russia rose,
after Catherine II. had conquered the provinces situated on
the Black Sea. (_Storch_, Handbuch, II, 34.) The same is
still more strikingly apparent in the judicious planting of
agricultural colonies.]
[Footnote 186-3: Abolition of the English corn laws! Foreign
commerce when very advantageous, always adds to the
well-being of the people; to the rate of interest, however,
only to the extent that articles which are calculated to
satisfy the wants of the working class become cheaper in
consequence; and this in turn lowers the rate of wages. Let
us suppose that a country had hitherto purchased yearly
10,000 barrels of wine for $1,000,000. It might now happen
that, in consequence of an advantageous commercial treaty,
for instance, the 10,000 barrels might be obtained for
$500,000. If, after this, wine-drinkers want to spend
$1,000,000 for wine as they did before, they of course
double their consumption of wine, but the rate of interest
remains unchanged. If, on the other hand, they leave their
consumption of wine where it was before and apply the saved
half million to effect an increased demand for home
products, the capital required for this production is set
free at the same time. Hence, the relation between the
supply and demand for capital has not changed, abstraction
made of certain difficulties in the transaction. Compare
_Ricardo_, Principles, ch. 7, rectifying _Adam Smith_,
Wealth of Nat., I, ch. 9.]
[Footnote 186-4: An increase in the rate of interest caused
by a diminution in the rate of wages does not last long.
Capital now increases more rapidly, and the increase is
accompanied by an increased demand for labor. If, in the
mean time, workmen have become accustomed to a lower
standard of life, the increasing wages are followed by an
increase of population: then the necessity of having
recourse to the cultivation of land of a worse quality is an
additional cause of a decreasing rate of interest. (Edinb.
Rev., March, 1824, 26.)]
[Footnote 186-5: According to this, it is easy to tell what
influence the increasing skill or activity of the working
class (for instance by a decrease in the number of holidays,
coöperation of wife and child) must have. Where there has
been no accompanying and corresponding elevation of the
standard of life, and of the want of the class, the gain
soon falls to the lot of the capitalists or landowners.]
[Footnote 186-6: See the very clear but not entirely
complete discussion in _John Stuart Mill_, Principles, IV,
ch. 3 ff. When new railways, machines, etc., before they are
complete, simultaneously increase the rate of interest and
the rate of wages, and even sometimes rent, although they do
not immediately increase the national income in any way, the
phenomena are to be explained, not by a distribution of
income, but as the result of an advance of capital made.]
[Footnote 186-7: Compare _supra_, § 184. The rise of the
rate of interest in Basil, between 1370 and 1393, _Arnold_
(loc. cit.) accounts for by the wars and defeats of the
upper German cities. Similarly in Zürich, 1457. (_Joh.
Müller_, Schweizer Geschichte, IV, 211.) During the time
immediately following the Spanish war of succession, the
_usuriers les flus modérés_ in France got 12-15 per cent. a
year. (_Dutot_, Réflexions, 1866.) In Russia the rate of
interest, after the war of 1805-15, rose by 4-5 per cent.
(_Storch_, Handbuch, 35 seq.) Per contra, _Nebenius_, Oeff.
Credit., 70 seq.]
[Footnote 186-8: Thus the Hamburg conflagration, combined
with the bad harvests of 1841, raised the rate of interest
in Mecklenburg for a long series of years. Similarly in
Würtemburg, the many bad harvests from 1845 to 1853, which
are said to have caused a deficiency of 50,000,000 florins.
(Tübinger Zeitschr., 1856, 568.)]
[Footnote 186-9: In bad times, state loans are usually
effected at a disproportionally high rate of interest. This
also operates momentarily on the general rate of interest,
to the injury of persons engaged in business enterprises;
who, by the very fact of the withdrawal of so much capital,
become involved in an unfavorable competition. In the long
run, indeed, the high or low rates of interest paid by
national debts, in so far as the creditor cannot demand
reimbursement, has no influence on the rate of interest
usual in the country. Such debts as cannot be declared due
assume the character of stationary capital, the value in
exchange of which is determined by their yearly return,
capitalized at the rate of interest usual in the country.
(_Hermann_, Staatswirthschaftliche Untersuch., 223.)]
[Footnote 186-10: The coöperation of most of the causes
above mentioned raised the English rate of interest which
had sunk to 3 per cent. to an average of 5, from about 1760
to 1816. Thus _Gauss_, in a manuscript work which I have
used, relates that the fund for the support of professors'
widows in Göttingen was, in 1794, expected to pay only 3 per
cent. In 1799, the trustees observed that their capital
could often be safely invested at 4 per cent.; somewhat
later the rate of interest rose to 5 per cent., at which
point it remained for years. About 1843 ff. the rate of
interest in old Bavaria was only 4 per cent.; in more highly
cultured Rhenish Bavaria, 5 per cent.]
SECTION CLXXXVII.
HISTORY OF THE RATE OF INTEREST.--EMIGRATION OF CAPITAL.
Midway between these classes of obstacles lies the very usual proceeding
of highly civilized nations whose rate of interest is low, to transfer
their capital into countries with a higher rate of interest, where the
production of raw material is predominant.[187-1] This is most
thoroughly accomplished by the emigration for good of the capitalists
themselves; but also least frequently, because the natural attachment of
man to his native country is usually too powerful, among the well-to-do
classes, to be overcome by the attraction of a higher rate of interest.
Temporary settlements in foreign countries are by far more frequent.
Either the capitalist removes there himself, for a time, to return
enriched, at farthest, in his old age; or he establishes a permanent
branch of his business there, and superintends it through the agency of
a trusted representative. The inhabitants of northern Italy, during the
last centuries of the middle ages, maintained such establishments, not
only for the purpose of carrying on commerce in merchandise along the
shores of the Levant, but also the money trade in the principal
countries of the west.[187-2] Similarly, the Hanseatic cities
contemporaneously in the north and northeast of Europe; and, to-day, the
English in almost all the important seaport cities in the world.[187-3]
Such enterprises are always somewhat dangerous, especially in countries
but little advanced in civilization.[187-4]
The best means to facilitate the migration of capital is credit. It is,
indeed, true, that in international trade, ordinary private loans are
seldom made. To make such loans would be to run too many risks; risks
through a want of knowledge of persons or circumstances, on account of
the difficulties in the way of continued supervision, and of being able
to assert and defend one's rights away from home.[187-5] Loans are much
more readily made to foreign states, to great corporations, or
joint-stock companies, whose condition is well-known; and which, by
reason of their perpetuity, have a deep and obvious interest in
maintaining an honorable reputation. The issuing of certificates of
stock, etc., has greatly facilitated international trade in
capital.[187-6] But the mode of loaning in foreign parts preferred is to
sell them commodities, and to require payment for them only after some
time has elapsed, of course, with interest. Purchases, on the contrary,
are paid for immediately, possibly even in advance.[187-7] The lower the
rate of interest in a country is, the longer and more cheaply can it
give credit to others; a new reason why the less civilized countries are
particularly fond of trading with the most civilized.[187-8] [187-9]
[Footnote 187-1: _Nebenius_, Der öffentliche Credit, 83 ff.
After the end of the Napoleonic war, English capital flowed,
by way of preference, towards South America, afterwards
towards Spain and Portugal; after 1830, to North America;
after 1840, towards Germany and France, to be invested in
the construction of railways in the latter countries.]
[Footnote 187-2: The inhabitants of Asti began in 1226 to
carry on the trade in money in trans-Alpine counties. In
1256, _Louis IX_. ordered 150 Asti money-changers to be
thrown into prison, and he confiscated the money they had
loaned in France, to the amount of over 800,000 livres. They
were afterwards turned over to their enemy, the Count of
Savoy, as usurers. (_Muratori_, Scr. Rerum Ital., XI, 142
seq.) About 1268, Louis IX. banished all money-changers of
Lombard or Cahors origin: they were allowed only three
months in which to collect their debts. (_Sismondi_,
Histoire des Fr., VIII, 112.) About 1277, again all Italian
money dealers were imprisoned, and 120,000 gold guldens
extorted from them. (_Giov. Villani_, VII, 52.) After the
Lombards had lost their freedom, the business passed into
the hands of the Florentines and of the inhabitants of
Lucca. (_Sismondi_, Gesch. der ital. Republiken, IV, 602;
_Dante_, Inferno, XXI, 38.) Great part played by the
brothers Franzesi as dealers in articles of luxury, and
loaners on pledge etc., at the court of Philip IV. They seem
to have instigated the persecution of other Italian money
dealers, in 1291, from jealousy. (_Sismondi_, Histoire des
Fr., VIII, 429 seq.) Great losses of the Florentines by the
English-French war in 1337: Edward III. remained in the debt
of his bankers Peruzzi and Bardi to the amounts respectively
of 135,000 and 184,000 marks sterling; so that they and many
others failed. France imprisoned all the Italian money
dealers, and compelled them to pay a large amount of
ransom-money. (_G. Villani_, XI, 71.) In 1376, the Pope who
was engaged in a struggle with Florence, called upon all
princes to despoil all Florentine merchants within their
jurisdiction of their wealth, and to sell them as slaves;
and France and England actually did so. (_Sismondi_,
Geschichte der ital. Republiken, V, 257 seq., VII, 74.)]
[Footnote 187-3: Shortly before the French Revolution, Cadiz
had over 50 wholesale merchants against 30 retail, 30
modistes and at least 100 tradesmen from France.
(_Bourgoing_, Tableau, III, 130.) Commercial colonies!]
[Footnote 187-4: Thus even the emperor Paul of Russia caused
the property of English factors to be confiscated. The
galleons which Holland and England captured in the Spanish
war of succession belonged mostly to Amsterdam houses.
(_Ranke_, Franz. Gesch., IV, 226.) Even _Galiani_, Della
Moneta, IV, 3, thinks that, on this account, such commerce
is incompatible with the warlike spirit. It is certain,
however, that a government like the English would do well
not to permit a war with such countries as Russia or the
United States to break out too suddenly, that their subjects
might have time to collect all their outstanding dues. When,
in 1855, it was reported in London that all Russian drafts
were dishonored, people looked upon that fact as the surest
sign of coming war. English merchants had called in their
advances to Russia during the preceding economic period, and
refused to make new ones.]
[Footnote 187-5: This of course disappears when the
borrowing country is dependent on the loaning country. Thus,
the Canton of Uri formerly prohibited the inhabitants of the
Livinerthal to borrow capital except from them. It is said
that, at the beginning of this century, the Uri capital then
loaned amounted to one-half a million florins, that is, an
average of 250 per householder. Now it is not over one-fifth
of that amount. (_Franscini_, Canton Tessin, 126.) Think
also of the plantation colonies! But even the East Indies
may be looked upon as a species of colony for England. Hence
_Fawcett_, Manual, 105, is rightly of the opinion that no
other country has the possibility of being as useful to the
East Indies as England. And in fact, the East Indian
railways obtained of their capital of £82,500,000, only a
very small part, £800,000, in India itself, a very small
proportion of which latter sum was subscribed by the native
population. (Ausland 24, Juli, 1869.)]
[Footnote 187-6: What England is to-day, the Italian
commercial cities were in the 16th and 17th centuries, viz.:
the chief market for foreign loans. (Compare _Mun,_
England's Treasure, 1664, ch. 4.) The Genovese loaned money
in foreign countries at 2 and 3 per cent. (_Montanari_,
Della Moneta, 1867, cap. 2.) It is said that the Dutch, in
1778 invested 1,500 millions of livres in foreign national
debts, especially those of France and England. (Richesse de
Hollande, II, 178.) According to _J. G. Forster_, Schriften,
III, 335, in 1781 alone, in Europe, 800 millions loaned
capital. The Niederl. Jaerboek of 1789, p. 729, estimates
the amount of interest coming from abroad, English and
French not included, at from 50 to 60 millions of florins.
About 1844, according to official estimates, 1,000 million
florins in foreign loans, that is one-third of whole
national income. (Allgemeine Zeitung, 1844, No. 35.) Now,
Belgium, 300 million florins, in Austrian evidences of
indebtedness. (Quarterly Review, October, 1862, 402.)
According to _Baumstark_, Staatswissensch. Versuche über
Staatscredit, etc., 1833, 77, foreign nations, between 1818
and 1825, borrowed in England £49,000,000; and, about the
same time, England participated in Russian, French and North
American loans to the extent of £55,500,000. It is said that
there were, in 1843, £25,000,000 English capital in the
canals, railroads and banks of the United States. (_Porter_,
Progress of the Nation, III, 4, 634.)]
[Footnote 187-7: It is evident, from many of Demosthenes'
orations on private matters, that Athens was in the habit of
advancing the commercial capital needed by a great part of
the inhabitants of the Mediterranean coast. Many colonial
cities, Phaselis, for instance, had the very worst
reputation in this respect. They were virtually pirates as
regards Athens. (Adv. Lacrit., 931.) Here also it seems that
the goods taken for the loan had to be brought to Athens.
(941.) On the regular advances of Prussian merchants to
their Lithuanian and Polish vendors, in the 15th century,
while the former were forbidden even to buy on credit, see
_Hirsch_, Geschichte des Danziger Handels, 167, 177. In
Colbert's time, the Dutch gave 12 months credit in Europe.
(_J. De Wit_, Mémoires, 184.) In England, _Child_ perceives
a great advance in this: that in 1650, in all business in
the interior, there was a credit of 3 to 18 months given;
and in 1669, everything was paid for in cash. (Discourse on
Trade, 45.) Concerning previous times, see _W. Raleigh_,
Observations touching Trade and Commerce with the Hollander
and other nations, 1603. (Works, VIII, 951 ff.) In North
America, merchants in the interior frequently purchase their
goods of importers on 6 months credit. (_Tellkampf_,
Beiträge, I, 52.) In the West Indies, about the end of the
last century, the English gave a credit, generally, of from
12 to 16 months. (_B. Edwards_, History of the British West
Indies, II, 383.) In Brazil, in the case of imports, 4, 8
and even 12 months credit; payment in monthly installments,
and frequently even longer delay, without interest. In the
case of exports, when cash payments are not made, 1 per
cent. a month, (_v. Reden_, Garn und Leinenhandel, 332.)
Recently only about 40 per cent. of foreign advances are
made at 12 to 20 months, 60 per cent. at from 50 to 70 days.
(Tübing. Zeitschr., 1864, 517.)
In Buenos Ayres, the producer or collector of export
articles required the price to be paid usually a long time
in advance (_habilitacion_), a very bold but necessary
procedure, on account of his poverty. (_Robertson_, Letters
on S. America, I, 174 ff.) In the corn trade in South
Russia, at least one-half of the purchase money was required
to be paid in advance, and even before shipment, the other
half as soon as the corn arrived in the harbor, and, hence,
sometimes, long before it was put on board. (_W. Jacob_, On
the Corn Trade of the Black Sea, 23.) Compare _Tooke_, View
of the Russian Empire, I, 339, Richesse de Hollande, II, 43,
_Storch_, Handbuch, II, 61 seq. Russia was, about 1770, a
credit-giving nation to the still poorer Persians.
(_Gmelin_, Reise, III, 413.) The Spaniards also, in their
American colonies, had always an expedition ready and
waiting, the payment for which was made on the arrival of
the second. (_Depons_, Voyage dans la Terre Firme, II, 368.)
Moreover, active commerce simply, especially when
circuitous, may be considered as in some way an
international loan; and thus it is that the favorable
"balance," by means of which claim-rights are obtained in
foreign countries, is secured.]
[Footnote 187-8: Notwithstanding the gratitude of the United
States towards France, and spite of all the French
ambassador could do, the English immediately after the
conclusion of peace, attracted the greatest part of American
trade to themselves. (_Chaptal_, de l'Industrie Fr., I,
103.) Countries with a low rate of interest have an
advantage in this respect, which grows after the manner of
compound interest, when the duration of the advance of
capital is prolonged. (_Senior_, Outlines, 195.)]
[Footnote 187-9: How capitalists may, by the giving of
international credit, fall into an injurious habit, is shown
by the late and troublesome building up of the Dutch railway
system, while so many foreign railway enterprises were
provided with Dutch capital.]
SECTION CLXXXVIII.
HISTORY OF THE RATE OF INTEREST.--EFFECT OF A LOW RATE ON STATIONARY
NATIONS.
Beneficial as the spur of a low rate of interest is for countries
capable of development, it is a heavy drag on a stationary people, and
more so on those who have lost a portion of the field for the investment
of their capital by the competition of too powerful rivals.[188-1] A
real superabundance of capital is attended with cares and temptations
for the middle classes very similar to those caused by a so-called
over-population, especially to dishonesty and extravagance.[188-2] When
capital, population and the skillfulness of labor remaining the same,
continues to increase, the enlarged capital may very readily have every
succeeding year only the same return to divide among its owners, that
the smaller had in previous years.[188-3] Hence additional saving here
would produce no real enrichment of the people; and it might even happen
that the instinct to accumulate capital might in the future become
torpid to a greater degree than the capital itself had increased. In any
case, however, the decline of the rate of interest can continue only to
a certain point. There are numberless persons who would rather consume
their capital, or invest it in hazardous speculations than put it out at
interest at one per cent. a year.[188-4] At least, the tendency of a
decline in the rate of interest is, in the case of the richer, to
increase the amount of capital consumed as compared with productive
capital. The more moderate, sober and provident a people are, the lower
may the rate of interest decline without producing this effect. And so,
the more the capital of a nation is concentrated in the hands of a few;
because then the owners of capital are all the later forced to break in
upon it, for the sake of subsistence.[188-5] [188-6]
Among nations which have totally declined, the rate of interest is wont
to reach a high point once more; the natural result of great losses of
capital and men, while, at the same time, the freedom of the lower
classes and the security of property have been either curtailed or lost.
The weakness of age is, in many respects, even in the case of nations, a
second childhood.[188-7]
[Footnote 188-1: _Temple_, Works I, 102, assures us that the
Dutch in his time considered the payment of the principal of
a public debt a real misfortune: "they receive it with
tears, not knowing how to dispose of it to interest with
such safety and ease." On Italy, see _Bandini_ (ob. 1760),
Sopra le Maremme Sienese, 154 seq.; earlier _Montanari_,
Della Moneta, 57. In the England of the present time, small
capitalists especially belong to the so-called "uneasy"
classes.]
[Footnote 188-2: Numberless bankrupts and unbounded
extravagance in Holland. (Richesse de Hollande, II, 168.) In
England, the hazardous enterprises of 1825 were very much
promoted by the action of the government which a short time
before reduced the interest on its state debt. (_Tooke_,
History of Prices, II, 148 ff.)]
[Footnote 188-3: _J. S. Mill_, IV, ch. 4, 4. When _Ricardo_,
ch. 6, says that every increase of productive capital must
enhance the value in use, and still more the value in
exchange, of a nation's property, but under such
circumstances only to the advantage of the working class,
and still more of the land owning class, he at least
apparently presupposes an improvement, or increase of
labor.]
[Footnote 188-4: Think only of the so-called commercial
crises, the speculation-rage preceding which is excited by
the lowness of the rate of interest, the destruction of
capital in which makes the rate of interest to retrograde
materially. However, this very decline is, in itself, only a
spur to speculation in evidences of national indebtedness,
stocks, etc., in commodities, only where, without such
speculation, a rise in prices was to be expected. Thus, for
instance, the great English periods of speculation: 1796
ff., in colonial products; 1808 ff., in raw materials in
general; 1814, in articles of export, were times in which
there was not the slightest facility in obtaining credit.
(_Tooke_, History of Prices, III, 159.)]
[Footnote 188-5: Between 1829 and 1849, the highest rate of
interest paid by English capital employed in cotton
industries was little over 2-1/2 per cent. (Edinb. Rev.,
April, 1849, 429.)]
[Footnote 188-6: As the symptoms of a condition are very
frequently mistaken for its cause, there have been many
writers who, blinded especially by the contemplation of
Holland, considered the lowness of the rate of interest as
the _causa causans_ of all wealth, and who promised really
magical results from its legislative regulation by the
state. Thus _Sir Thomas Culpeper_, A Tract against the high
Rate of Usury, 1623; continuation 1630; _Sir J. Child_,
Brief Observations concerning Trade and the Interest of
Money, 1668; Discourse of Trade, 1690. _Anderson_ (ob.
1765), was of a similar opinion: Origin of Commerce, a.
1601, 1651; and even _Ganilh_, Dictionnaire analytique, 99
seq. (_Infra_, § 162.) Per _contra_, the anonymous essay,
Interest of Money mistaken, 1668, and _Locke_,
Considerations of the Consequences of the Lowering of
Interest and Raising the Value of Money, 1691. Most moderns
have considered the decline of the rate of interest an evil.
Thus, for instance, _Canard,_ Principes, ch. 5, who
uniformly makes this the starting point of a nation's
downfall. See also _McCulloch_, Principles, III, 8.
_Malthus_ draws a comparison between the saving of capital
and the generation of children: only a high rate of interest
makes the former really useful, and a high rate of wages the
latter.
Even great destruction and disturbances of capital by war,
by loans to the state, for instance, are soon made good,
provided the sources of the saving of capital are not dried
up. (Principles, III, 370 ff., 401, ff.) _John Stuart Mill_
expressly counsels rich and highly civilized nations not to
neglect beneficent enterprises, although economically
unproductive, because capital might be lost in them. The
result of such a loss would, under certain circumstances,
simply be that less capital would be exported or wasted in
speculation. (Principles, II, ch. 5, 1.) Similarly _Canard_,
who, therefore, compares state loans with blood-letting, as
a remedy for a plethoric disease. (Ch. 9.) _Turgot_
confounded cause and effect when he compared a high rate of
interest to an inundation, below the level of which nothing
can be produced; and which, the lower it became, the more
dry ground there was for men to work on. (Sur la Formation,
etc., § 89.)]
[Footnote 188-7: Rate of interest in Persia from 40 to 50
per cent. a year. (Ausland, 1844, No. 208.) In Tripoli,
Christians and Jews alike loan the Arabs at the rate of 5
per cent. a month; at least 1-1/2 or 2. (_Rohlfs_, von
Tripolis nach Alexandrien, 1871, I, 22.) In most of the East
Indian kingdoms, the rate of interest is so high for the
government itself that when the creditor, even without a
return of the capital, gets the interest only for a few
years, he is considered passably well indemnified. (_J. S.
Mill_, II, ch. 15, 2.) In China, 12 to 15 per cent.; 36
nothing unheard of. (_Barrow_, China, 562.)]
SECTION CLXXXIX.
INTEREST-POLICY.--LEGITIMATENESS OF INTEREST.
The legitimateness of interest is based on two unquestionable grounds:
on the real productiveness of capital, and on the real abstinence from
enjoyment of it by one's self.[189-1] Let us suppose a nation of
fishermen with no private ownership in land and no capital, living naked
in caverns, on sea-fish which the ebb of the ocean has left in the
puddles along the shore, and which are caught only with the hand.[189-2]
All workmen here may be equal, and each catch and consume three fish a
day. Let us again suppose that some clever savage reduces his
consumption to two fish a day, for one hundred days, and uses the stock
of one hundred fish collected in this way to enable him to devote all
his strength and labor, during fifty days, to the construction of a boat
and a net. With the aid of this capital he, from the first, catches
thirty per day. What now will his fellow tribesmen, who are not capable
of such intelligent and systematic self control to do as he has done,
do? What will they offer him for the use of his capital? In discussing
this question both parties will very certainly consider not only the
fifty days' labor spent in the construction of the boat, etc., but also
the one hundred and fifty days during which its maker had to abstain
from his full ration of food. If the borrower, of the thirty fish which
may be caught daily with the aid of his capital, gives twenty-seven
away, his condition is at least no worse than it was at first. On the
other hand, the lender, if compensated only for the wear and tear of his
capital, would reap no profit whatever from his loan. The interest to be
paid will be fixed somewhere between these two extremes by the relation
between demand and supply. A loan which pays no interest is a donated
use of capital. (_Knies._)[189-3] Interest may be called the reward of
abstinence (_Senior_), in the same way as wages is called the reward of
industry.[189-4] With the abolition of interest, exchange would be
limited to the mere present, without any mediation between the past and
the future. A great number of services would bring no equivalent in
return, and, therefore, as a rule, never be performed. Most of the
charges commonly made in our day against the "tyranny of capital" are,
at bottom, only a complaint that capital is not inexhaustible; and even
those workmen who are obliged to pay most to capital would be much worse
off without it.
[Footnote 189-1: The Greeks very appropriately call interest
tokos, i. e., that which is born. In the loaning of capital
productively invested, the creditor, in the interest
received, consumes the real produce of his property. If the
debtor has consumed the property unproductively, the
creditor indeed lives on the debtor's other returns or
supplies; which, however, without his intervention would
probably have been consumed by their owner.]
[Footnote 189-2: We here, for the time being, make
abstraction of all entangling surrounding circumstances.
However, _Diodor._, III, 15 ff., and _Strabo_, XVI, 773,
describe a very similar condition of things among the
Ichthyographs; also _Hildebrand_, Reise, um die Erde, III,
2, in China. In the Sudan, whole generations fetch water
every day from a distant town, instead of working for a few
weeks to dig a deep well nearer home. (_Barth_, Afr. Reise,
III, 297.)]
[Footnote 189-3: The most recent relapse into the old error
of the unproductiveness of capital, viz.: that of _Karl
Marx_ (Das Kapital; Kritik der polit. Oekonomie, I, 167) is a
turning round and round of the author in the vicious circle
of his demonstration. If the value of every commodity
depends simply on the labor necessary to bring it into
existence, or on the time of labor required to produce it,
it is self-evident that the value of the capital consumed
for the purpose of its production, can at most be only
preserved in the new product, and that all the additional
value (_Mehrwerth_) of the latter should be ascribed to
labor. (172, and passim.) Hence, strictly speaking, the
capitalist who advances capital to workmen, is still bound
in duty to be grateful to the latter when the value of his
advance is preserved to him undiminished, (§ 173) and all
interest levied by him should be considered as a payment
towards the extinguishment of the capital [debt] itself.
(556.) Relying on such theories, many socialists admit
private property and even the right of inheritance to means
of enjoyment and use capital (_Gebrauchskapitalien_)
provided only that land and productive capital should pass
over into the "collective property" of society, with
compensation, however, to their former owners. Considering
the short duration of most goods used in enjoyment or
consumed, the evil consequences of a community of goods
mentioned in § 81, could not be avoided to any extent by
this means.
How entirely fallacious the above assumption is, is seen
most strikingly in the case of such goods as cigars, wine,
cheese, etc., which, without the least addition of labor, by
merely postponing the consumption of them, obtain a much
larger value both in exchange and in use. Or, how would it
be possible, for instance, to reduce the value of a
hundred-year-old tree, over and above the cost of planting
it, to labor alone? Similarly, the fact that on a Chilian
_hacienda_, 25 per cent. of the cattle can be slaughtered
and no diminution of the herd take place. (_Wappäus_, M. und
S. Amerika, 784.) _Strassburger_ rightly inquires: if all
the profit of capital is based on a cheating of workmen by
capitalists, who is cheated in the case in which a
manufacturer without workmen earns more with an increased
capital than before with a small capital? (_Hildebrand's_
Jahrb., I, 103.)]
[Footnote 189-4: In a time full of nabobism and pauperism,
when some can, without the least abstinence, make immense
savings, and others none at all even with the greatest
abstinence, we may comprehend where the socialists find food
for their derision of the expression, "reward of
abstinence."]
SECTION CXC.
INTEREST-POLICY.--AVERSION TO INTEREST.
At the same time, there is a strong aversion to the taking of interest
prevalent among nations in a low stage of civilization. Industrial
enterprises of any importance do not as yet exist here at all, and
agriculture is most advantageously carried on by means of a great many
parcels of land, but with little capital. The purchase of land is so
rare, and hampered by legal restrictions to such a degree, that loans
for that purpose are almost unheard of. And just as seldom does it
happen, by reason of the superabundance of land, that the heir of a
landowner borrows capital to effect an adjustment with his co-heirs, and
thus enter alone into the possession of the estate. Here, as a rule,
only absolute want leads to loaning.[190-1] If, in addition to this, we
consider the natural height of the rate of wages in such times, the
small number and importance of the capitalist class (§ 201), the tardy
insight of man into the course and nature of economic production,[190-2]
it will not be hard to understand the odium attached in the middle age
of every nation to so-called interest-usury[190-3] (_Zinswucher_).
Most religions, the Christian excepted (the universal religion!), have
been founded in the earlier stages of the nations who profess them, and
have there, at least outwardly, exercised their greatest influence. No
wonder, therefore, that so many religions have prohibited the taking of
interest. Thus, for instance, the Jewish which, indeed, allows interest
to be taken from foreigners, but raises loaning without interest among
Jews in their commerce with one another, to the dignity of a duty
binding on the conscience of the beneficent rich.[190-4] [190-5]
Similarly in the Koran.[190-6] The Fathers of the Church, also, on the
whole, look with disfavor on the taking of interest, relying upon
well-known passages in the Old Testament, and, in part, on misunderstood
expressions in the New.[190-7] This is especially true of the Fathers of
the Church from the beginning of the fourth century, when the Roman
empire was frightfully impoverished by the devastations of the
barbarians, and as a consequence the conditions as to interest which
prevail in the lowest stages of civilization had returned. Mercy towards
the poor usually occupies the foreground in the demonstrations of the
Fathers.[190-8]
[Footnote 190-1: Distress-debts in contradistinction to
acquisition-debts. (_Schmalz_, Staatswirthsch. Lehre in
Briefen, I, 227.) Compare _Hesiod._, Opp., 647; also
_Herodot._, I, 138.]
[Footnote 190-2: Thus _Aristotle_, calls the taking of
interest a gain against nature, since money is only a medium
of exchange, and cannot produce its like. (Polit., 3, 23,
Schn.) Similarly, _Plato_, De Legg., V, 742, and _Seneca_,
De Benef., VII, 10. Compare, however, _Tacit_., Annal, XIII,
42 seq. As late a writer as _Forbonnais,_ 1754, accounts for
interest thus: Some people hoard their money instead of
spending it; hence a scarcity or want of money, and those
who need it are obliged, in order to draw it out, to promise
to pay interest. (Eléments de Commerce, II, 92 ff.)]
[Footnote 190-3: Numerous disturbances on account of debt,
during the first centuries of the Roman Republic, until
finally (compare _Livy_, VII, 42), the taking of interest
was in the year 349 (?) before Christ, entirely prohibited.
(_Tacit._, Annal. VI, 16.) The public opinion in such
matters may be understood from the words of Cato: _majores
ita in legibus posuerunt, furem dupli condemnari,
foeneratorem quadrupli_. (De Re rust.) The _foenerari_
compared with the _hominem occidere_. (_Cato_, in _Cicero_,
De Off., II, 25.) In the higher stages of civilization
little heed was paid to the law, in practice (compare
_Livy_, XXXV, 7; _Plut._, Cato, I, 21.), although the
democratic party always held fast to the legal perpetuation
of the prohibition of interest. (_Mommsen_, Römisch. Gesch.,
III, 493.)]
[Footnote 190-4: Exod., 22, 25; Levit., 25, 35 ff.;
Deuteron., 15, 7 seq.; 23, 19 seq.; Psalms, 15, 5; 109, 11;
112, 5; Proverbs, 28, 8; Jerem., 15, 10; _Hes._, 18, 8.
After the return from exile, the prohibition was restored.
(Net. 5, 1 ff.) Was there, in the long duration of such
prescriptions, an educational measure having reference to
the peculiar fault towards which the Jewish national
character had a special tendency? In Josephus's time even,
usury practiced on one's country people was universally
despised (Antiq. Jud., IV, 8, 25.), and the Talmud continues
it. Compare _Michaelis_, De Mente ac Ratione Legis M. Usuram
prohibentis. In Russia, the orthodox Jews are wont to evade
the legal rate of interest by exacting one-half the profit,
and estimating it approximately in advance at a probable
sum. If, afterwards, the debtor declares under oath that he
made no profit, the creditor has no more to say; but then
the borrower would lose all credit in the future. (_Bonav.
Mayer_, Die Juden unserer Zeit, 1842, 13 seq.)]
[Footnote 190-5: The Mosaic passages, however, only prohibit
the taking of interest from poor people of one's own
country.]
[Footnote 190-6: The prohibition in the Koran, ch. 2, 30, is
regularly evaded in Persia, by deducting the proper amount
at the moment the loan is made. (_Chardin_, IV, 157 ff.)
Under the Mongolian rulers, it was done by way of
preference, by a fictitious sale for cash, at prices out of
all proportion. "Why cannot capitalists either buy land or
carry on trade?" asked Sultan Gazan, on an occasion when the
prohibition of interest was strongly insisted on.
(_d'Ohsson_, Histoire des Mongols, IV, 397.)]
[Footnote 190-7: For instance, _Luke_, 6, 34 ff., where
interest is no more prohibited than in _Luke_, 14, 12 ff.,
the mutual invitation of friends to a feast. Not less
groundless is the supposed allegorical allusion (_Matthew_,
21, 12) to interest-creditors. Rather might an approval of
interest be inferred from _Matthew_, 25, 27.]
[Footnote 190-8: _Origen_, for instance, would have the
creditor take no interest; but exhorts the debtor to return
double the amount unasked. (Homil., III, ad. Ps., § 37.)
Hence there is here no condemnation of interest, but only an
effort to transform all legal relations into relations of
love. Quite the reverse in _Lactant._, Instit., VI, 12;
_Basil_, ad. Matth., 5 ff.; _Ambrose_, De Off., III, 3;
_Chrysost._, ad. Matth. Hom., 56; Tim., VII, 373 ff. (Paris,
1727); _Hieronym._, ad. Ezech., V, 367 c. (Francof, 1684);
_Augustin._, Epist., 54. Even _Cyprian_, 183, 318 (Paris,
1726).]
SECTION CXCI.
INTEREST-POLICY.--THE CANON LAW, etc.
The canon law, from the first, endeavored to prevent contracts for
interest. We may even say that the prohibition of interest-usury is the
key-stone of the whole system of the political economy of the _Corpus
Juris Canonici_. The development of that law coincides, as to time, with
the senility of the Roman Empire and the childhood of modern
nations.[191-1] In the golden age of papal power, every
interest-creditor was refused the communion, the _testamenti factio_ and
the right of ecclesiastical burial. Proceedings at law could not be
instituted for the recovery of the principal debt until the creditor had
restored all the interest obtained. In the council of Vienna, in 1311,
it was declared heresy to defend the taking of interest. The universal
antipathy of the church towards the growing importance of the
_bourgeoisie_,[191-2] and the desire to give the spiritual courts an
extensive jurisdiction in litigated cases, may have contributed largely
to the adoption of these measures. In later medieval times, the secular
power offered its services to execute these laws;[191-3] and, to judge
of what public opinion in this matter was, we need only call to mind the
decided disapproval of interest by Dante, Luther and Shakespeare.[191-4]
The _Weddeschat_, a species of pledge or loan on security, constituted
the transition from this state of things to the modern economic system
of interest. The _Weddeschat_ was a sale with a reserved right of
redemption, by which the debtor gave his creditor the use and enjoyment
of a piece of land a sort of interest in kind, but which he could at any
time recover back, by payment of the principal. This was not very
oppressive on the debtor, as he was the only party who could recall the
contract.[191-5] In a higher stage of civilization, indeed the
continuance of this species of land-pledge would be exceedingly
disadvantageous, since the momentary possessor of a piece of land which
might be bought back by another person at any time at a price fixed in
advance, would scarcely think of improving it.[191-6]
And so, the introduction of rent-purchase (_Rentekauf_) was an important
step in advance: the incumbrancing of a piece of land which remained in
the possession of the debtor with an interest in kind paid to the
creditor. The latter could never claim anything further, while the
debtor and his heirs might redeem the land from this interest-incumbrance
by paying back the purchase money.[191-7] As the Pope, on the 19th of
January, 1569, renewed, in express terms, the prohibition of all interest
not based on rent-purchase, so did the police ordinances of the Empire, of
the sixteenth century, declare it to be the only lawful form of loaning at
interest; provided, always, that only the debtor could demand the
cancellation of the contract.[191-8] We find, however, that, on the whole,
at least Protestant countries had, before 1654, adopted the modern Roman
law relating to interest.[191-9] [191-10]
However, the long persistence of the prohibition of the canon law in
relation to interest, even with the refuge afforded by the introduction
of the rent-purchase system, and of dormant partnerships (_Commanditen_)
etc., so common in the sixteenth century,[191-11] would be
unintelligible, if, contemporaneously, the Jews did not carry on an
important and somewhat free trade in capital,[191-12] precisely as the
Armenians, Hindoos and Jews do in the Mohammedan world of to-day.
[Footnote 191-1: The apostolic canons and several decrees of
councils of the fourth century prohibit the taking of
interest by the clergy. A Spanish provincial council dared,
in 313, to extend the prohibition to the laity. Pope Leo I.
condemned the taking of interest by the laity also, but only
in the form of a moral law. (443.) The synod of
Constantinople (814) punished the violation of the
prohibition with excommunication. See _Thomas Aquin._ (ob.
1274.) De Usuris, in the Quæstiones disputatae et quod
libetales. The canon law, however, always permitted
delay-interest (_Verzugszinsen_), and Gregory IX, allowed
_justa et moderata expensa et congruam satisfactionem
damnorum_ to be taken into account, (c. 17, X.) De Fora
Comp. II, 2. A tacit recognition of the productiveness of
capital is to be found in c. 7, X. De Donatt. inter. Virum.
cett. IV, 20; and the later schoolmen, _Antonin_ and
_Bernhardin_, (ob. 1459 and 144) are pretty clear on the
point. But _Albertus Magnus_ had already recognized the
_damnum emergens_ and _Thomas Aquinas_ the _lucrum cessans_
as causes of interest. (Tübinger Zeitschr., 1869, 151, 159,
161.) The essentially modern character of Roman law, which,
in the form it has finally assumed, is in harmony with a
high development of national economy, accounts for the fact
that the glosse of _Accursius_ relying on _Irnerius_ and
_Bulgarus_ entirely ignores the prohibition of interest. For
a similar reason, in the 16th century, _Donellus_ and
_Cujacius_ stand entirely on Roman ground. In the interval,
indeed, men like _Bartolus_ and _Baldus_ were not disquieted
by the canon law. (_Endemann_, Studien in der
Römisch-Canonischen Wirtchaftsund Rechtslehre, I, 18, 27
seq. 61.) Compare the rich historical material in
_Salmasius_, De Usuris, 1638; De Modo Usurarum, 1639, and De
Mutuo, 1640.]
[Footnote 191-2: _A. Thierry_, Lettres sur l'Histoire de
France, éd. 2., 248 ff.]
[Footnote 191-3: Thus the emperor Basil, in the year 867, as
_Justinian_ had before him, forbade the further payment of
interest, once the amount already paid equaled the
principal. (L. 29 seq.; Cod. IV, 32, Nov., 121, 2.) Compare
Sachsenspiegel, I, 54. _Edward the Confessor_ is said to
have issued the first prohibition of interest. (_Anderson_,
Origin of Commerce, a. 1045.) _Edward III._ forbade all
interest as the ruin of commerce. (Idem a., 1341.) About
1391, the lower House had its zeal aroused against the
"shameful vice of usury;" and again, in 1488, all interest
on money and all rent-purchases stipulated for on unlawful
conditions, were threatened with a fine of £20, the pillory,
and six months imprisonment. (_Anderson_, a., 1488.) In
France, the edict of Philip IV. of 1312. Compare
_Beaumanoir_, Coûtumes, ch. 67, des Usures, No. 2.]
[Footnote 191-4: _Dante_, Inferno, XI, 106 ff., suggests
that interest-creditors had violated the command of _Moses_,
I, 3. _Macchiavelli_ seems to judge otherwise: Compare
Istoria Fior., VII, a, 1464; VIII, a, 1478. Very interesting
discussions on the legitimateness of the taking of interest
in 1353 seq., in which the Dominicans, up to the time of
_Savonarola_, defended the strictest opinion. (_M. Villan_,
III, 106.) _Luther_, Tract on Trade and Money, 1524, and
Sermon on Usury, 1519. Later still, _Luther_ became more
moderate. Thus, in his letter to the Danzig counsel, 1525,
in _Neumann_, Geschichte des Wuchers in Deutschland, 617
ff., in which, for instance, he blames the forcible carrying
out of interest-prohibitions, draws a distinction between
rich and poor, etc. So, too, in his letter: An die
Pfarrherren, wider den Wucher zu predigen, 1540.
_Melanchthon_, Phil. moral., 137 ff., is also more moderate.
_Calvin_ was clearer in this matter, and no longer
recognized the canonical prohibition of interest. (Epistolæ
et Responsa, Hanov., 1597, epist. 383.) Similarly
_Zwinglius_, who will not praise interest, but considers it
a natural consequence of property (Opp. ed. Tugur., 1530, I,
319 ff.), and even _Erasmus_, ad. Evang. Luc., 6, 44. Adagia
v. Usuræ nautt. In _Shakespeare_, compare Merchant of
Venice. _Bodinus_ also rejects on principle, even Roman
interest, which he held to be 1-1/2 per cent. a year: De
Republ., 1584, V. 2. Even the practical Dutch excluded the
so-called "table-keepers," from the communion up to 1657.
Compare the contests hereon in _Laspeyres_, Gesch. d.
volkswirthsch. Ansich. d. Niederl., 258 ff.]
[Footnote 191-5: The mutual right of cancellation
(_Kündbarkeit_) in the case of these contracts during
periods poor in capital and credit, would easily have ruined
the debtor. Compare _J. Möser_, Patr. Ph., II, No. 18. Hence
municipal rights in the latter part of the middle ages,
which in many other respects are so antagonistic to Rome,
have seldom anything to object to its measures in this
matter.]
[Footnote 191-6: A reason why, as _A. Strüver_ remarks, the
Church which was more a creditor than a debtor, never
approved the Weddeschat above mentioned.]
[Footnote 191-7: The institution of rent-purchase
(_Rentekauf_) was already developed in the Hanse cities at
the beginning of the fourteenth century. (_Stobbe_, in the
Zeitschr. f. deutsches Recht, XIX, 189 ff.) About 1420, the
bishops of Silesia inquired of the Pope, whether such
contracts which had been the practice in Silesia for a
century were lawful. The answer was a favorable one,
although he left the rate of interest free in this
particular case (Extr. Com. III, 5, 1, 2); after _Alexander
IV._, however, as early as 1258, had instructed inquisitors
not to take part in litigations concerning usurious
contracts. Formerly all such contracts were prohibited in
express terms. (Decret. Greg., V. 19, 1, 2), although, in
France, the ordinances of Louis IX. and Louis X. (1254 and
1315) had established fixed rates of interest therefor.
Between pledge and rent-purchase, the right of the (virtual)
loaner to expel the (virtual) borrower, which after fell
into disquietude, occupies, so to speak, a middle place.
(Compare _Eichhorn_, D. St.- und R.-Gesch., II, § 361, a
III, § 450.) It was decreed, in France, in 1565, that all
rent in kind should be converted into money rent.
(_Warnkönig_, Franz., St.- und R.-Gesch., II, 585 ff.)]
[Footnote 191-8: Magnum Bullar. Roman., II, 295.]
[Footnote 191-9: A Prussian law allowing interest even
without a contract of rent-purchase as far back as 1385.
(_Voigt_, Geschich. von Preussen, V, 467.) In Marseilles, in
1406, a rate of interest of ten per cent. allowed.
(_Anderson_, Origin of Commerce, s. a.) Likewise in England,
37 Henry VIII., c. 9. In Brandenburg, 1565, 6 per cent.
(_Mylius_, C. C., March, II, 1, 11.) A retrograde step by 5
and 6 Edward VI., c. 20; by which all interest was again
prohibited. These laws had, practically, the effect of
increasing interest to 14 per cent., and were therefore
repealed in 1571. How unnatural the prohibition was is
apparent from the fact that by 4 and 5 Philip and Mary, c.
2, the possessor of 1,000 marks was estimated equal to a
person with £200 annual income. In Denmark, the taking of
interest at 5 per cent. was allowed in 1554, since "although
it is contrary to God's command, yet [according to an
opinion given by _Melanchthon_] this commerce cannot be
entirely abolished." (_Kolderup-Rosenvinge's_ Dänische R.
G., in _Homeyer_, § 142.) Similar views of the elector
Augustus, 1583. (Cod. August 1, 139 ff.)
The German Empire, in 1600, allowed the debtor to contract
that, in case of delay, the contract might be declared
annulled. In France, on the other hand, even during the 18th
century, nearly all loans were made in the form of
_rent-purchase_ (_Law_, Trade and Money, 127), and the
creditor could declare the contract void only in case the
debtor did not pay him the rent. (_Warnkönig_, Franz. R. G.,
II, 585 ff.) For strictly Catholic countries, the prohibition
relating to the taking of interest still really remains.
However, _Leo X.'s_ bull, Inter multiplices, exempts the
so-called _monti di pietà_, and by this means put obstacles
in the way of saving, and promoted real usury. Of this last,
_Niebuhr_, Briefe, II, 399, adduces very striking instances
from the Pope's own temporal dominion. In the case of
pledge, even 12 per cent. per annum is required. (Rom im
Jahr, 1833, 163.) Yet, in 1830, the Poenitentiaria Romana
instructed the clergy, without, however, deciding the chief
question, not to disquiet people any longer in the
confessional who had taken interest. (_Guillaumin_,
Dictionnaire de l'Economie politique, art. usure.) On the
Russian Sect, _Staroverzen_, which still condemns the taking
of interest, see _Storch_, Handbuch, II, 19. By the Russian
government it was permitted very early. _Ewers_, Ältestes
Recht der R., 323 seq.]
[Footnote 191-10: The first scientific defense of interest
is generally considered to be that of _Salmasius_, loc. cit.
Yet _Bacon_, Sermones fideles, C. 39 (after 1539), and at
bottom also _H. Grotius_, De Jure Belli et Pacis, 1626,
taught that it was lawful to take interest in so far as it
was not against the love due to one's neighbor (_Endemann_,
loc. cit., I, 62 ff.), and _Besold_, Quaestiones aliquot de
Usuris, 1598, was as near the truth as _Salmasius_. Compare
_supra_, note 4. How earnestly _North_ and _Locke_ labored
against the lowering of interest by governmental
interference, see _Roscher_, Z. Gesch. der engl.
Volkswirths., 90, 102 ff. The best writers, in strictly
Catholic countries, did violence to themselves in this
matter for a long time after. Thus _Galiani_, Della Moneta,
II, I seq.; and one cannot help being greatly surprised at
witnessing the subtleties which _Turgot_, Mémoire sur le
Prêt d'Argent, 1769, had to have recourse to, to prove the
clearest matters. Thus: at the moment of the loan, a sum of
money is exchanged against the mere promise of the other
party, which is certainly less valuable. [If it were not,
why should he borrow?] This difference must, therefore, be
made up in interest, etc. _Mirabeau_ even was a decided
opponent of interest. (Philos. rurale, ch. 6.) Compare,
however, the theological defense by _Viaixnes_, 1728, in the
Traité des Prêts de Commerce, Amsterdam, 1759, IV, 19 ff.]
[Footnote 191-11: Of course, evaded in a thousand ways in
practical life. Thus, for instance, people gave wheat, other
commodities, and even uncoined gold and silver as loans, and
had what interest they pleased promised them. In alienating
the capital, they might stipulate _à fonds perdu_, as they
thought best. (Turgot, I, c. § 29.) When debtors had
promised under oath to make no complaint, the church ordered
that they should be helped officially. When the temporal
power showed itself lax, Alexander III. decreed that such
questions should be brought before the spiritual courts.
(Decret. Greg. V., tit. 19; 13 _Innocent_, Epist., VIII, 16;
X, 61.) In England, _Richard of Cornwall_ obtained a
monopoly of the whole loaning business. (_Matth. Paris_, ed.
1694, 639: compare, also, 20 Henry III., 5.), from which
fact the existence of the custom of taking interest about
1235, is apparent. Cases in which English kings borrowed and
promised payment back _cum damnis, expensis et interesse:_
Anderson, Origin of Commerce, a. 1274, 1339.]
[Footnote 191-12: Compare _Gioja_, Nuovo Prospetto, III,
190. The canon law desired to put an interdict on their
taking interest also: Decret. Greg., V, tit. 19, 12, 18.
Frequently, also, a minimum of interest was provided for
them: Ordonnances de la Fr., L. 53 seq. II, 575. Receuil des
anciennes, Lois, I, 149, 152. John of France extended this
to four _deniers_ per _livre_ per week, that is, annually
86-2/3 per cent.! (_J. B. Say_, Traité II, ch. 8.) In
Austria, in 1244, 174 per cent. allowed! (_Rizy_, Ueber
Zinstaxen und Wuchergesetze, 1859, 72 ff.)]
SECTION CXCII.
INTEREST-POLICY.--GOVERNMENT INTERFERENCE.--FIXED RATES.
Instead of the medieval prohibition of interest, most modern states have
established fixed rates of interest, the exceeding or evasion of which,
by contract or otherwise, is declared null and void, and is usually
punishable as usury.[192-1] If the fixing of the rate is intended to
depress the rate of interest customary in the country,[192-2] [192-3] it
uniformly fails of its object. If control were great enough, vigilant
and rigid enough, which is scarcely imaginable, to prevent all
violations of the law, it is certain that less capital would be loaned
than had been, for the reason that every owner of capital would be
largely interested in employing his capital in production of his own.
More capital, too, would go into foreign parts, and there would be less
saved by those not engaged in any enterprise of their own. All of this
would happen to the undoubted prejudice of the nation's entire
economy.[192-4] [192-5]
If, on the other hand, the control by the government be not great
enough, the law would, in most cases, be evaded; especially as each
party, creditor as well as debtor, would find it to his advantage to
evade it. The latter, who otherwise would not be able to borrow at all,
is, as a rule, more in need of obtaining the loan, than the creditor is
to invest his capital. How easily, therefore, might he be induced to
bind himself by oath or by word of honor![192-6] He would, moreover, be
compelled to pay the creditor not only the natural interest and the
ordinary insurance premium, but also for the special risk he runs when
he violates the law threatening him with a severe penalty.[192-7] Hence
the last result is either a material enhancement of the difficulty of
obtaining loans or an enhancement of the rate of interest.[192-8]
[Footnote 192-1: This is, historically, the second meaning
of the word usury, while in the middle ages, for instance in
England, under Elizabeth (_D. Hume_), the taking of any
interest whatever was called usury. Science should employ
this word only in the sense used in § 113.]
[Footnote 192-2: In Switzerland, at the end of the 17th
century, not only were those punished who took more interest
than the law prescribed, but those who took less. (Compare
Rechtsquellen von Basel, Stadt und Land, 1865, Bd. II.)]
[Footnote 192-3: Fixed rates of interest of this kind are to
be accounted for in part by a still continuing aversion of
the legislator for interest in general; in part, by the
opinion which prevails that precisely the most useful and
most productive classes might be elevated by an artificial
lowness of the rate of interest. (But most especially the
government itself, which borrows more than it lends.) When
Louis XIV. about 1665, lowered the rate of interest to 5 per
cent., he claimed in the preamble to his decree that it
would have the effect of promoting the welfare of landowners
and business men, and of preventing idleness. Similarly
_Sully_, Economies royales, L, XII. And so _J. Child_,
Discourse of Trade, 69 ff., says that every lowering of the
rate of interest, by law, produced a completely
corresponding increase of the national wealth. He says,
since the first reduction (?) of interest in 1545, the
national wealth increased six fold; since the last, in 1651,
the number of coaches increased a hundred fold;
chamber-maids wore now better clothes than ladies formerly;
on 'Change there were more persons with a fortune of £10,000
than before with £1,000. Similarly _Culpeper_: compare
_Roscher_, Z. Geschichte der eng. Volkswirthsch., 57 ff.
Later, the French generally thought that a lowering of the
rate of interest would prove injurious to the _noblesse de
la robe_; hence even in 1634, parliament was opposed to it.
(_Forbonnais_, Recherches et Considérations, I, 48, 226.)
_Darjes_ says that information of all loans of capital
should be made to the police authorities, and that the
authorities might compel payment and the loaning of the
principal over again to parties in need of capital. (Erste
Gründe, 426 seq.) Something analogous practically provided
for by the Würtemberg _Landesordnungen_ of the 16th century.
(Compare also _von Schröder_, F. Schatz- und Rentkammer,
XXV, 3.)]
[Footnote 192-4: Precisely a high rate of interest is a
powerful incentive to saving, and to the importation of
capital.]
[Footnote 192-5: _Usurae palliatae_, interest taken out of
the capital, or stem-interest, called also money-usury in
contradistinction to patent interest-usury. To this category
belong the written acknowledgments of indebtedness to a
larger amount than that actually received; acknowledging it
in a higher kind of money than that in which the loan was
made; the compulsory taking by the debtor of commodities at
a disproportionately high price, in the place of money, or
at a disproportionately low one, by the creditor. See the
enumeration of such things in the police regulations of the
empire, 1530, art. 26, and 1548, art. 17. Thus, in Paris,
jewels are "sold" to students hard-pressed for money, which
immediately find their way to the _monts de piété_, and have
to be paid for some time after to the usurious "seller," at
a most exorbitant price. The person who loans $100 at 6 per
cent., and retains the interest for the next following year
from the date of the loan, takes in reality nearly 6.4 per
cent. Fraudulent accessory expenses of all kinds, _faux
frais_, expenses of registration, for prolongation, and
extinguishment, etc. Here belong, also, the provisions
introduced into contracts to make redemption more difficult,
the fixing of terms of payment in such a manner that the
debtor is almost forced to let them slip by--called "usury
in the conditions" in Austria. Remarkable instances from the
16th century in _Vasco_, Usura libera, § 57 ff. Recently,
_Braun_ und _Wirth_, Die Zinswuchergesetze, 1856, 190 ff. In
view of the manifold business transactions behind which the
interest-usurer may take refuge, the complete prevention of
the latter would break the legs of commerce (loc. cit., 145
ff.).]
[Footnote 192-6: If the state, by annulling such promises,
should incite the people to violate them, it would be a
frightful step towards the demoralization of the nation:
"thus rewarding men for obtaining the property of others by
false promises, and then, not only refusing payment, but
invoking legal penalties on those who have helped them in
their need." (_J. S. Mill_, Principles, V, ch. 10, 2.)
Besides, the Austrian usury law of 1803 punishes the
borrower also as a spendthrift, and imprisons him for six
months (§ 18), or else it designates where he shall make his
domicile (_Ortsverweisung_). Modern loaning on drafts and
bills of exchange, the acceptance of which is forged with
the knowledge of the creditor, corresponds to what
_Plutarch_, Quaest., Gr., 53, relates of the Cretans, who
had, especially in later times, the worst possible
reputation for avarice and dishonesty. (_Polyb._, VI, 46.
_Paul_ to Titus, I, 12.)]
[Footnote 192-7: He must insure him against the usury laws.
(_Adam Smith._) According to _Krug_, Staatsökonomie, the
usury laws should be called so because they promote usury,
not because they prevent it. Compare to some extent,
_Montesquieu_, Esprit des Lois, XXII, 18 ff.]
[Footnote 192-8: When Catherine II. reduced the rate of
interest in Livonia, in 1785, from 6 to 5 per cent., it soon
became impossible, even on the best security, to borrow at
less than 7 per cent. (_Storch_, Handbuch, II, 26.) And so,
when in New York, in 1717, the rate of interest was reduced
to 6 per cent., it became necessary, the following year, to
raise it again to 8 per cent. The merchants, themselves,
petitioned that it might be so raised, because they found it
impossible to get any loans whatever. (_Ebeling_, Geschichte
und Erdbeschreib. von Nord Amerika, III, 152.) In Chili, the
legal rate of interest is 6 per cent., the actual rate,
however, never under 12 per cent., and frequently 18 to 24
per cent. In Peru, on the other hand, the repeal of the
usury laws rapidly reduced the rate of interest from 50 to
24 per cent., and finally to 12. (_Pöppig_, I, 118.)]
SECTION CXCIII.
INTEREST-POLICY.--EFFORTS TO AVOID THE EVIL EFFECTS OF A FIXED RATE.
It has been thought possible to avoid the evil effects of a fixed legal
rate of interest, by regulating it in such a way as to make it
coincident with the rate customary in the country.[193-1] But there are
numberless transactions in which an insurance premium, or premium for
risk or certain expenses of administration[193-2] on the part of the
loaner is inseparable from the true interest. Here, even the law which
entered most into detail could never properly provide for the infinite
gradations or shades of risk and trouble; and the rate in a great many
transactions would, therefore, be placed below the natural height.
Turgot long since observed that the value of a promise of future payment
is different not only for different persons, but at different times.
Thus, for instance, it is really less after there have been numerous
cases of bankruptcy than at other times.[193-3] If, now, it was desired
to fix the maximum rate of interest in such a way that it should equal
the rate customary in the country, where the security is good, the best
real property security for instance, the consequence would be, that
those persons who had no such guaranty to offer (leaving the loaning
"among brothers" out of the question) would either be unable to borrow
money at all, or, by evading the law, only at an artificially higher
rate. Hence the legislator causes injury where he wished to favor. This
has been observed in England in almost all past commercial
crises.[193-4] The man who makes it his business to loan his capital, on
short time and in small sums, undertakes a trade which the examination,
and the surveillance of a large number of small debtors, and the
necessity of reinvesting the many small sums paid him, render
exceedingly troublesome and disagreeable. Moreover, in loaning on short
terms of payment, there is always danger that his money may lie idle for
some length of time. These are reasons sufficient, why, in such cases,
when the whole compensation is denominated interest, a rate of interest
greater than usual in the country is equitable and even necessary. (§
179.)[193-5]
It has been frequently suggested that spendthrifts and adventurers
should be hindered using, or to speak more correctly, abusing the
nation's wealth by laws prohibiting the rate of interest at which they
might be expected to obtain credit; and this in the interest alike of
the creditors they might possibly find and in their own.[193-6] But
almost every inventor of genius, from Columbus to Stephenson, has been
obliged to be considered "an adventurer" for a time by "solid men." The
law limits him thus, and more especially during the critical period of
outlay which precedes the undoubted triumph of his idea, to his own
means or the gifts of others.[193-7] And how inadequate, as rule, are
both. The rich are as seldom discoverers, as discoverers are skillful
supplicants. And, as regards spendthrifts, they may ruin themselves in
so many thousands of ways, especially by buying or selling, and
unhindered by the state, that it is scarcely apparent why the one way of
borrowing should be legally closed to them.[193-8] How is it, if the law
itself drives them into the hands of a worse class of creditors, and
compels them to pay yet a higher rate of interest? Are they not simply
more rapidly ruined? States, themselves, have scarcely ever given any
heed to their own usury laws in borrowing or loaning.[193-9]
[Footnote 193-1: In Austria, in 1803, in loaning on pledge,
4 per cent.; in other loans and in the trade of merchants
with one another, 6 per cent. In France, since 1807, with
merchants, 6 per cent.; with others, 5. _Salmasins_, De Mono
Usur., c. 1, advises that the maximum should be fixed as
high as that usual in the most unfavorable cases. The
reduction from such rate, where possible, would regulate
itself.]
[Footnote 193-2: _Petty_, Quantulumcunque concerning money,
1682.]
[Footnote 193-3: Sur le Prêt d'Argent, § 36.]
[Footnote 193-4: How many merchants would have avoided
bankruptcy here if they had been allowed to borrow at 8 per
cent.! The established rate of 5 per cent. was certainly too
low, considering the great demand for capital and the want
of confidence at the moment, to permit capital to be loaned
at that rate. Many saw themselves compelled to sell their
merchandise or evidences of state indebtedness at a loss of
30 per cent., in order to meet their obligations. But the
person who, to anticipate the receipts due in 6 months, for
instance, consents to suffer a loss of 30 per cent., pays,
in a certain sense, interest at the rate of 60 per cent. a
year. Compare _Tooke_, Considerations on the State of the
Currency, 60, and History of Prices, II, 163, on the Crisis
of 1825-26. Since the Bank, least of all, could exceed the
legal rate of interest, numberless applications were made to
it in times of war in order to obtain the difference between
the legal rate and the rate usual in the country.
(_Thornton_, Paper Credit of Great Britain, ch. 10.)
Prussia, November 27, 1857, suspended the usury laws for 3
months, on account of the commercial crisis, except the
provisions relating to pawn-broker and minors.]
[Footnote 193-5: _Turgot_ tells of Parisian "usurers" who
made weekly advances to the market women of la Halle, and
received for 3 livres, 2 sous interest; that is 173 per
cent. a year. The premium for insurance may have been very
high here. When such loaners were brought before the courts,
and they were sentenced to the galleys, the usual punishment
for usury, their debtors came and testified their gratitude
by begging for mercy to them! (Mémoire sur le Prêt d'Argent,
§ 14, 31.) Compare _Cantillon_, Nature du Commerce, 276.]