The first problem confronting a Socialist administration would be the

method of getting possession of the instruments of production. In the

early years of the Socialist movement, most of its adherents seemed to

favour a policy of outright confiscation. Professor Nearing estimates

the total property income now paid in the United States as, "well

above the six-billion-dollar mark."[124] Were the Socialist State to

seize all land and capital without compensation, it could conceivably

transfer more than six billion dollars annually from landowners and

capitalists to the community. Not all of it, however, would be

available for diversion to the labourers. According to the

computations of Professor King, about two billion dollars were in 1910

saved and converted into capital.[125] A progressive Socialist régime

would want to appropriate at least that sum for the renewal and

increase of the instruments of production. Consequently, it would have

only four billion dollars to add to the present total income of

labour. This would be equivalent to $43.50 for every person in the

United States.

Desirable as would be such an addition to the remuneration of labour,

it could never be realised through the process of confiscation. The

owners of land and capital would be sufficiently powerful to defeat

any such simple scheme of setting up the collectivist commonwealth.

They constitute probably a majority of the adults of our population,

and their economic advantages would make them much stronger relatively

than their numbers.[126] Ethically the policy of confiscation would

be, on the whole, sheer robbery. To be sure, not all owners of land

and capital have a valid claim to all their possessions, but

practically all of them hold the greater part of their wealth by some

kind of just title. Much land and capital that was originally acquired

by unjust means has become morally legitimatised by the title of

prescription.

The majority of present day Socialists seem to advocate at least

partial compensation.[127] But this plan does not seem to offer any

considerable advantage over complete confiscation. As regards

morality, it would differ only in the degree of its injustice; as

regards expediency, it would be at best of doubtful efficacy. If the

capitalists were given only a small fraction of the value of their

holdings they would oppose the change with quite as much

determination as though they were offered nothing; if they were paid

almost the full value of their possessions there would be no

substantial gain to the community from the transfer; if they were

compensated at a figure somewhere between these two extremes their

resistance would still be more costly to the State than the extra

amount required to make full compensation.

Finally, if full compensation were offered it would have to take the

form of government obligations, securities, or bonds. If these did not

bear interest the great majority of capital owners would regard the

scheme as partial and considerable confiscation, and would fight it

with determination and effectiveness. If the State bound itself to pay

interest on the bonds it would probably find itself giving the

dispossessed capitalists as high a rate of return on their capital, as

large a share of the national product, as they receive under the

present system. Consequently, the expropriation of the capitalists

would bring no direct and pecuniary gain to the labouring classes.

Indeed, the latter would suffer positive loss by the change, owing to

the fact that the State would be required to withdraw from the

national product a considerable amount for the maintenance, renewal,

and expansion of the instruments of production. At present the

capitalist class performs the greater part of this function through

the reinvestment of the incomes that it receives in the form of

interest and rent. The average Socialist entirely ignores this

capitalistic service, when he draws his pessimistic picture of the

vast share of the national product which now goes to "idle

capitalists." So far as the larger capitalist incomes are concerned;

that is, those in excess of twenty-five thousand dollars annually, it

is probable that the greater part is not consumed by the receivers,

but is converted into socially necessary capital instruments. Since

this would not be permitted in a Socialist order, the capitalists

would strive to consume the whole of the incomes received from the

public securities, and the State would be compelled to provide the

required new capital out of the current national product. In a word,

society would have to give the capitalists as much as it does at

present, and to withhold from the labourers for new capital an immense

sum which is now furnished by the capitalists.

It is undoubtedly true that the richest capitalists would be unable to

expend the whole of their incomes upon themselves and their families.

If they turned a considerable part of it over to the State, the

surrendered sum would be available as capital, thereby reducing the

amount that the State would need to take out of the national product

for this purpose. Were all those possessing incomes in excess of fifty

thousand dollars per family to give up all above that amount, the

total thus accruing to the State would be a little more than one

billion dollars.[128] But this would be only one-half the required new

capital. A part of the additional one billion is now provided out of

wages and salaries, but the greater part probably comes out of rent

and interest. Under Socialism this latter portion would have to be

deducted from that part of the national product which at present goes

to the workers and is consumed by them. Hence they would undergo a

loss of several hundred million dollars.

One reply to this difficulty is that the total product of industry

would be much increased under Socialism. Undoubtedly an _efficient_

organisation of industry on collectivist lines would be able to effect

economies by combining manufacturing plants, distributive concerns,

and transportation systems, and by reducing unemployment to a minimum;

but it could not possibly make the enormous economies that are

promised by the Socialists. The assertion that under Socialism men

would be able to provide abundantly for all their wants on a basis of

a working day of four, or even two, hours is seductive and

interesting, but it has no support in the ascertainable facts of

industrial resources. Even if the Socialist organisation were

operating with a fair degree of efficiency, the gains that it could

effect over the present system would probably not more than offset the

social losses resulting from increased consumption by the compensated

capitalists.

But the proposed industrial organisation would not operate with a fair

degree of efficiency. According to present Socialist thought,

industries that are national in scope, such as the manufacture of

petroleum, steel, and tobacco, would be carried on under national

direction, while those that supplied only a local market, such as

laundries, bakeries, and retail stores, would be managed by the

municipalities. This division of control would be undoubtedly wise and

necessary. Moreover, the majority of Socialists no longer demand that

_all_ tools and all industries should be brought under collective or

governmental direction. Very small concerns which employed no hired

labour, or at most one or two persons, could remain under private

ownership and operation, while even larger enterprises might be

carried on by co-operative associations.[129] Nevertheless the attempt

to organise and operate collectively the industries of the country,

even with these limitations, would encounter certain insuperable

obstacles. These will be considered under the general heads of

inefficient industrial leadership, inefficient labour, and

interference with individual liberty.

_Inefficient Industrial Leadership_

Under Socialism the boards of directors or commissions which exercised

supreme control in the various industries, would have to be chosen

either by the general popular vote, by the government, or by the

workers in each particular industry. The first method may be at once

excluded from consideration. Even now the number of officials chosen

directly by the people is far too large; hence the widespread

agitation for the "short ballot." Public opinion is coming to realise

that the voters should be required to select only a few important

officials, whose qualifications should be general rather than

technical, and therefore easily recognised by the masses. These

supreme functionaries should have the power of filling all

administrative offices, and all positions demanding expert or

technical ability. If the task of choosing administrative experts

cannot be safely left to the mass of the voters at present, it

certainly ought not to be assigned to them under Socialism, when the

number and qualifications of these functionaries would be indefinitely

increased.

If the boards of industrial directors were selected by the government,

that is, by the national and municipal authorities, the result would

be industrial inefficiency and an intolerable bureaucracy. No body of

officials, whether legislative or executive, would possess the varied,

extensive, and specific knowledge required to pick out efficient

administrative commissions for all the industries of the country or

the city. And no group of political persons could safely be entrusted

with such tremendous power. It would enable them to dominate the

industrial as well as the political life of the nation or the

municipality, to establish a bureaucracy that would be impregnable for

a long period of years, and to revive all the conceivable evils of

governmental absolutism.

The third method is apparently the one now favoured by most

Socialists. "The workers in each industry may periodically select the

managing authority," says Morris Hillquit.[130] Even if the workers

were as able as the stockholders of a corporation to select an

efficient governing board, they would be much less likely to choose

men who would insist on hard and efficient work from all subordinates.

The members of a private corporation have a strong pecuniary interest

in selecting directors who will secure the maximum of product at the

minimum of cost, while the employés in a Socialist industry would want

managing authorities who were willing to make working conditions as

easy as possible.

The dependence of the boards of directors upon the mass of the

workers, and the lack of adequate pecuniary motives, would render

their management much less efficient and progressive than that of

private enterprises. In the rules that they would make for the

administration of the industry and the government of the labour force,

in their selection of subordinate officers, such as superintendents,

general managers, and foremen, and in all the other details of

management, they would have always before them the abiding fact that

their authority was derived from and dependent upon the votes of the

majority of the employés. Their supreme consideration would be to

conduct the industry in such a way as to satisfy the men who elected

them. Hence they would strive to maintain an administration which

would permit the mass of the labour force to work leisurely, to be

provided with the most expensive conditions of employment, and to be

immune from discharge except in rare and flagrant cases. Even if the

members of the directing boards were sufficiently courageous or

sufficiently conscientious to exact reasonable and efficient service

from all their subordinates and all the workers, they would not have

the necessary pecuniary motives. Their salaries would be fixed by the

government, and in the nature of things could not be promptly adjusted

to reward efficient and to punish inefficient management. So long as

their administration of industry maintained a certain routine level of

mediocrity, they would have no fear of being removed; since they would

be supervised and paid by public officials who would have neither the

extraordinary capacity nor the necessary incentive to recognise and

reward promptly efficient management, they would lack the powerful

stimulus which is provided by the hope of gain. In the large private

corporations, the tenure of the boards of directors depends not upon

the workers but upon the stockholders, whose main interest is to

obtain a maximum of product at a minimum of cost, and who will employ

and discharge, reward and punish, according as this end is attained.

Moreover, the members of the boards, and the executive officers

generally, are themselves financially interested in the business and

in the maintenance of the policy demanded by the other stockholders.

All the subordinate officers, such as department managers,

superintendents, foremen, etc., would exemplify the same absence of

efficiency. Knowing that they must carry out the prudent policy of the

board of directors, they would be slow to punish shirking or to

discharge incompetents. Realising that the board of directors lacked

the incentive to make promotions promptly for efficient service, or to

discharge promptly for inefficient service, they would devote their

main energies to the task of holding their positions through a policy

of indifferent and routine administration.

Invention and progress would likewise suffer. Men who were capable of

devising new machines, new processes, new methods of combining capital

and labour, would be slow to convert their potencies into action. They

would be painfully aware that the spirit of inertia and routine

prevailing throughout the industrial and political organisation would

prevent their efforts from receiving quick recognition and adequate

rewards. Inventors of mechanical devices particularly would be

deprived of the stimulus which they now find in the hope of

indefinitely large gains. Boards of directors, general managers, and

other persons exercising industrial authority would be very slow to

introduce new and more efficient financial or technical methods when

they had no certainty that they would receive adequate reward in the

form of either promotion or money compensation. They would see no

sufficient reason for abandoning the established and pleasant policy

of routine methods and unprogressive management.

_Inefficient Labour_

The same spirit of inefficiency and mediocrity would permeate the rank

and file of the workers. Indeed, it would operate even more strongly

among them than among the officers and superiors; for their

intellectual limitations and the nature of their tasks would make them

less responsive to other than material and pecuniary motives. They

would desire to follow the line of least resistance, to labour in the

most pleasant conditions, to reduce irksome toil to a minimum. Since

the great bulk of their tasks would necessarily be mechanical and

monotonous, they would demand the shortest possible working day, and

the most leisurely rate of working speed. And because of their

numerical strength they would have the power to enforce this policy

throughout the field of industry. They would have the necessary and

sufficient votes. In a general way they might, indeed, realise that

the practice of universal shirking and laziness must sooner or later

result in such a diminution of the national product as to cause them

great hardship, but the workers in each industry would hope that those

in all the others would be more efficient; or doubt that a better

example set by themselves would be imitated by the workers in other

industries. They would not be keen to give up the certainty of easy

working conditions for the remote possibility of a larger national

product.

_Attempted Replies to Objections_

All the attempts made by Socialists to answer or explain away the

foregoing difficulties may be reduced to two: the achievements of

government enterprises in our present system; and the assumed efficacy

of altruism and public honour in a régime of Socialism.

Under the first head appeal is made to such publicly owned and managed

concerns as the post office, railroads, telegraphs, telephones, street

railways, water works, and lighting plants. It is probably true that

all these enterprises are on the whole carried on with better results

to the public than if they were in private hands. It is likewise

probable that these and all other public utility monopolies will

sooner or later be taken over by the State in all advanced countries.

Even if this should prove in all cases to be a better arrangement from

the viewpoint of the general public welfare than private ownership and

management, the fact would constitute no argument for a Socialist

organisation of all industry. In the first place, the efficiency of

labour, management, and technical organisation is generally lower in

public than in private enterprises, and the cost of operation higher.

Despite these defects, government ownership of public utilities, such

as street railways and lighting concerns, may be socially preferable

because these industries are monopolies. Inasmuch as their charges and

services cannot be regulated by the automatic action of competition,

the only alternative to public ownership is public supervision.

Inasmuch as the latter is often incapable of securing satisfactory

service at fair prices, public ownership and management becomes on the

whole more conducive to social welfare. In other words, the losses

through inefficient operation are more than offset by the gains from

better service and lower charges. Three cent fares and adequate

service on an inefficiently managed municipal street railway are

preferable to five cent fares on a privately owned street railway

whose management is superior. On the other hand, all those industries

which are not natural monopolies can be prevented from practising

extortion upon the public through regulated competition. In them,

therefore, the advantages of private operation, of which competition

itself is not the least, should be retained.

In the second place, practically all the public service monopolies are

simpler in structure, more routine in operation, and more mature in

organisation and efficiency than the other industries. The degree of

managerial ability required, the necessity of experimenting with new

methods and processes, and the opportunity of introducing further

improvements in organisation are relatively less. Now, it is precisely

in these respects that private has shown itself superior to public

operation. Initiative, inventiveness, and eagerness to effect

economies and increase profits are the qualities in which private

management excels. When the nature and maturity of the concern have

rendered these qualities relatively unimportant, public management can

exemplify a fair degree of efficiency.

In the third place, the ability of the State to operate a few

enterprises, does not prove that it could repeat the performance with

an equal degree of success in all industries. I can drive two horses,

but I could not drive twenty-two. No matter how scientific the

organisation and departmentalisation of industries under Socialism,

the final control of and responsibility for all of them would rest

with one organ, one authority, namely, the city in municipal

industries, and the nation in industries having national scope. This

would prove too great a task, too heavy a burden, for any body of

officials, for any group of human beings.

Finally, it must be kept in mind that the publicly operated utilities

are subject continuously to the indirect competition of private

management. By far the greater part of industry is now under private

control, which sets the pace for efficient operation in a hundred

particulars. As a consequence, comparisons are steadily provoked

between public and private management, and the former is subject to

constant criticism. The managers of the State concerns are stimulated

and practically compelled to emulate the success of private

management. This factor is probably more effective in securing

efficiency in public industries than all other causes put together. In

the words of Professor Skelton: "A limited degree of public ownership

succeeds simply because it is a limited degree, succeeds because

private industry, in individual forms or in the socialised joint stock

form, dominates the field as a whole. It is private industry that

provides the capital, private industry that trains the men and tries

out the methods, private industry that sets the pace, and--not the

least of its services--private industry that provides the

ever-possible outlet of escape."[131]

The Socialist expectation that altruistic sentiments and public honour

would induce all industrial leaders and all ordinary workers to exert

themselves as effectively as they now do for the sake of money, is

based upon the very shallow fallacy that what is true of a few men may

very readily become true of all men. There are, indeed, persons in

every walk of life who work faithfully under the influence of the

higher motives, but they are and always have been the exceptions in

their respective classes. The great majority have been affected only

feebly, intermittently, and on the whole ineffectively by either love

of their kind or the hope of public approval.

A Socialist order could generate no forces which would be as

productive of unselfish conduct as the motives that are drawn from

religion. History shows nothing comparable either in extent or

intensity to the record of self surrender and service to the neighbour

which are due to the latter influence. Yet religion has never been

able, even in the periods and places most thoroughly dominated by

Christianity, to induce more than a small minority of the population

to adopt that life of altruism which would be required of the great

majority under Socialism.

Moreover, the efficacy of the higher motives is much greater among men

devoted to scientific, intellectual, and religious pursuits than in

either the leaders or the rank and file engaged in industrial

occupations. The cause of this difference is to be sought in the

varying nature of the two classes of activity: the first necessarily

develops an appreciation of the higher goods, the things of the mind

and the soul; the second compels the attention of men to rest upon

matter, upon the things that appeal to the senses, upon the things

that are measurable in terms of money.

There is a special fallacy underlying the emphasis placed by

Socialists on the power of public honour. It consists in the failure

to perceive that this good declines in efficacy according as the

number of its recipients increases. Even if all the industrial

population were willing to work as hard for public approval as they

now do for money, the results expected by Socialists would not be

forthcoming. Public recognition of unselfish service is now available

in relatively great measure because the persons qualifying for it are

relatively few. They easily stand out conspicuous among their fellows.

Let their numbers vastly increase, and unselfishness would become

commonplace. It would no longer command popular recognition, save in

those who displayed it in exceptional or heroic measure. The public

would not have the time nor take the trouble to notice and honour

adequately every floor walker, retail clerk, factory operative, street

cleaner, agricultural labourer, ditch digger, etc., who might become a

candidate for such recognition.

When the Socialists point to such examples of disinterested public

service as that of Colonel Goethals in building the Panama Canal, they

confound the exceptional with the average. They assume that, since an

exceptional man performs an exceptional task from high motives, all

men can be got to act likewise in all kinds of operations. They

forget that the Panama Canal presented opportunities of self

satisfying achievement and fame which do not occur once in a thousand

years; that the traditions and training of the army have during many

centuries deliberately and consistently aimed and tended to produce an

exceptionally high standard of honour and disinterestedness; that,

even so, the majority of army officers have not in their civil

assignments shown the same degree of faithfulness to the public

welfare as Colonel Goethals; that the Canal was built under a régime

of "benevolent despotism," which placed no reliance upon the "social

mindedness" of the subordinate workers; and that the latter, far from

showing any desire to qualify as altruists or public benefactors,

demanded and received material recognition in the form of wages,

perquisites, and gratuities which greatly surpassed the remuneration

received by any other labour force in history.[132] In a word,

wherever in the construction of the Canal notable disinterestedness or

appreciation of public honour was shown, the circumstances were

exceptional; where the situation was ordinary, the Canal builders were

unable to rise above the ordinary motives of selfish advantage.

Beneath all the Socialist argument on this subject lies the assumption

that the attitude of the _average man_ toward the higher motives can

by some mysterious process be completely _revolutionised_. This is

contrary to all experience, and to all reasonable probability. Only a

small minority of men have ever, in any society or environment, been

dominated mainly by altruism or the desire of public honour. What

reason is there to expect that men will act differently in the future?

Neither legislation nor education can make men love their neighbours

more than themselves, or love the applause of their neighbours more

than their own material welfare.

_Restricting Individual Liberty_

Even though human nature should undergo the degree of miraculous

transformation necessary to maintain an efficient industrial system on

Socialist lines, such a social organisation must soon collapse because

of its injurious effect upon individual liberty. Freedom of choice

would be abolished in the most vital economic transactions; for there

would be but one buyer of labour, and one seller of commodities. And

these two would be identical, namely, the State. With the exception of

the small minority that might be engaged in purely individual

avocations, and in co-operative enterprises, men would be compelled to

sell their labour to either the municipality or the national

government. As competition between these two political agencies in the

matter of wages and other conditions of labour could not be permitted,

there would be virtually only one employer. Practically all material

goods would have to be purchased from either the municipal or the

national shops and stores. Since the city and the nation would produce

different kinds of goods, the purchaser of any given article would be

compelled to deal with one seller. His freedom of choice would be

further restricted by the fact that he would have to be content with

those kinds and grades of commodities which the seller saw fit to

produce. He could not create an effective demand for new forms and

varieties of goods, as he now does, by stimulating the ingenuity and

acquisitiveness of competing producers and dealers.

Prices and wages would, of course, be fixed beforehand by the

government. The supposition that this function might be left to the

workers in each industry is utterly impracticable. Such an arrangement

would involve a grand scramble among the different industries to see

which could pay its own members the highest wages, and charge its

neighbours' members the highest prices. The final result would be a

level of prices so high that only an alert and vigorous section of the

workers in each industry could find employment. Not only wages and

prices but hours, safety requirements, and all the other general

conditions of employment, would be regulated by the government. The

individuals in each industry could not be permitted to determine these

matters any more than they could be permitted to determine wages.

Moreover, all these regulations would from the nature of the case

continue unchanged for a considerable period of time.

The restriction of choice enforced upon the sellers of labour and the

buyers of goods, the utter dependence of the population upon one

agency in all the affairs of their economic as well as their political

life, the tremendous social power concentrated in the State, would

produce a diminution of individual liberty and a perfection of

political despotism surpassing anything that the world has ever seen.

It would not long be tolerated by any self respecting people.

To reply that the Socialist order would be a democracy, and that the

people could vote out of existence any distasteful regulation, is to

play with words. No matter how responsive the governing and managing

authorities might be to the popular will, the dependence of the

individual would prove intolerable. Not the manner in which this

tremendous social power is constituted, nor the personnel of those

exercising it, but the fact that so much power is lodged in one

agency, and so little immediate control of his affairs left to the

individual,--is the heart of the evil situation. In a word, it is a

question of the liberty of the individual versus the all pervading

control of his actions by an agency other than himself. Moreover, the

people in a democracy means a majority, or a compact minority. Under

Socialism the controlling section of the voting population would

possess so much power, political and economic, that it could impose

whatever conditions it pleased upon the non-controlling section for

an almost indefinite period of time. The members of the latter part of

the population would not only be deprived of that immediate liberty

which consists in the power to determine the details of their economic

life, but of that remote liberty which consists in the power to affect

general conditions by their votes.

In the last chapter we saw that the claim to the full product of

industry, made on behalf of labour by the Socialists, cannot be

established on intrinsic grounds. Like all other claims to material

goods, it is valid only if it can be realised consistently with human

welfare. Its validity depends upon its feasibility, upon the

possibility of constructing some social system that will enable it to

work. The present chapter has shown that the requirements of such a

system are not met by Socialism. A Socialist organisation of industry

would make all sections of the population, including the wage earning

class, worse off than they are in the existing industrial order.

Consequently, neither the private ownership of capital nor the

individual receipt of interest can be proved to be immoral by the

Socialist argument.

Since private ownership and management of capital are superior to

Socialism, the State is obliged to maintain, protect, and improve the

existing industrial system. This is precisely the conclusion that we

reached in chapter iv with reference to private ownership of land. In

chapter v we found, moreover, that individual ownership of land is a

natural right. The fundamental considerations there examined lead to

the parallel conclusion that the individual has a natural right to own

capital. But we could not immediately deduce from the right to own

land the right to take rent. Neither can we immediately deduce from

the right to own capital the right to take interest. The positive

establishment of the latter right will occupy us in the two following

chapters.

FOOTNOTES:

[121] Wilhelm Liebknecht, cited in Hillquit's "Socialism in Theory and

Practice," p. 107.

[122] "Das Erfurter Program," cited by Skelton, op. cit., p. 178.

[123] Cf. Skelton, op. cit., ch. vii; Bernstein, "Evolutionary

Socialism," pp. 1-94; Simkhovitch, "Marxism vs. Socialism," _passim_;

Walling, "Progressivism and After," _passim_; Hillquit-Ryan, op. cit.,

ch. iv.

[124] "Income," p. 152.

[125] "The Wealth and Income of the People of the United States," p.

132.

[126] Cf. Hillquit-Ryan, op. cit., pp. 107, 136.

[127] Cf. Hillquit-Ryan, op. cit., pp. 73-77; Skelton, op. cit, p.

183; Walling, "Socialism as It Is," p. 429.

[128] Cf. King, op. cit., pp. 224-226.

[129] Cf. Kautsky, "The Social Revolution," pp. 166, 167;

Hillquit-Ryan, op. cit., p. 72.

[130] Hillquit-Ryan, op. cit., p. 80; cf. Spargo, "Socialism," pp.

225-227.

[131] "Socialism: A Critical Analysis," p. 219.

[132] Cf. "The Panama Gateway," by Joseph Bucklin Bishop, p. 263.

CHAPTER XII

ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST

In his address as President of the American Sociological Society at

the annual meeting, Dec. 27, 1913, Professor Albion W. Small denounced

"the fallacy of treating capital as though it were an active agent in

human processes, and crediting income to the personal representatives

of capital, irrespective of their actual share in human service."

According to his explicit declaration, his criticism of the modern

interest-system was based primarily upon grounds of social utility

rather than upon formally ethical considerations.

A German priest has attacked interest from the purely moral

viewpoint.[133] In his view the owner of any sort of capital who

exacts the return of anything beyond the principal, violates strict

justice.[134] The Church, he maintains, has never formally authorised

or permitted interest, either on loans or on producing capital. She

has merely tolerated it as an irremovable evil.

Is there a satisfactory justification of interest? If there is, does

it rest on individual or on social grounds? That is to say: is

interest justified immediately and intrinsically by the relations

existing between the owner and the user of capital? Or, is rendered

morally good owing to its effects upon social welfare? Let us see what

light is thrown on these questions by the anti-usury legislation of

the Catholic Church.

_Attitude of the Church Toward Interest on Loans_

During the Middle Ages all interest on _loans_ was forbidden under

severe penalties by repeated ordinances of Popes and Councils.[135]

Since the end of the seventeenth century the Church has quite

generally permitted interest on one or more extrinsic grounds, or

"titles." The first of these titles was known as "lucrum cessans," or

relinquished gain. It came into existence whenever a person who could

have invested his money in a productive object, for example, a house,

a farm, or a mercantile enterprise, decided instead to lend the money.

In such cases the interest on the loan was regarded as proper

compensation for the gain which the owner might have obtained from an

investment on his own account. The title created by this situation was

called "extrinsic" because it arose out of circumstances external to

the essential relations of borrower and lender. Not because of the

loan itself, but because the loan prevented the lender from investing

his money in a productive enterprise, was interest on the former held

to be justified. In other words, interest on the loan was looked upon

as merely the fair equivalent of the interest that might have been

obtained on the investment.

During the seventeenth, eighteenth, and nineteenth centuries, another

title or justification of loan-interest found some favour among

Catholic moralists. This was the "praemium legale," or legal rate of

interest allowed by civil governments. Wherever the State authorised a

definite rate of interest, the lender might, according to these

writers, take advantage of it with a clear conscience.

To-day the majority of Catholic authorities on the subject prefer the

title of virtual productivity as a justification. Money, they contend,

has become virtually productive. It can readily be exchanged for

income-bearing or productive property, such as, land, houses,

railroads, machinery, and distributive establishments. Hence it has

become the economic equivalent of productive capital, and the interest

which is received on it through a loan is quite as reasonable as the

annual return to the owner of productive capital. Between this theory

and the theory connected with "lucrum cessans" the only difference is

that the former shifts the justification of interest from the

circumstances and rights of the lender to the present nature of the

money itself. Not merely the fact that the individual will suffer if,

instead of investing his money he loans it without interest, but the

fact that money is generally and virtually productive, is the

important element in the newer theory. In practice, however, the two

explanations or justifications come to substantially the same thing.

Nevertheless, the Church has given no positive approval to any of the

foregoing theories. In the last formal pronouncement by a Pope on the

subject, Benedict XIV[136] condemned anew all interest that had no

other support than the intrinsic conditions of the loan itself. At the

same time, he declared that he had no intention of denying the

lawfulness of interest which was received in virtue of the title of

"lucrum cessans," nor the lawfulness of interest or profits arising

out of investments in productive property. In other words, the

authorisation that he gave to both kinds of interest was merely

negative. He refrained from condemning them.

In the Responses given by the Roman Congregations from 1822 onward to

questions relating to the lawfulness of loan-interest, we may

profitably consider four principal features. First, they declare more

or less specifically that interest may be taken in the absence of the

title of "lucrum cessans"; second, some of them definitely admit the

title of "praemium legale," or civil authorisation, as sufficient to

give the practice moral sanction; third, they express a genuine

permission, not a mere toleration, of interest taking; fourth, none of

them explicitly declares that any of the titles or reasons for

receiving loan-interest will necessarily or always give the lender a

_strict right_ thereto. None of them contains a positive and reasoned

approval of the practice. Most of them merely decide that persons who

engage in it are not to be disturbed in conscience, so long as they

stand ready to submit to a formal decision on the subject by the Holy

See. The insertion of the latter condition clearly intimates that some

day interest taking might be formally and officially condemned.

Should such a condemnation ever appear, it would not contradict any

moral principle contained in the "Roman Responses," nor in the present

attitude of the Church and of Catholic moralists. Undoubtedly it could

come only as the result of a change in the organisation of industry,

just as the existing ecclesiastical attitude has followed the changed

economic conditions since the Middle Ages.

All the theological discussion on the subject, and all the

authoritative ecclesiastical declarations indicate, therefore, that

interest on loans is to-day regarded as lawful because a loan is the

economic equivalent of an investment. Evidently this is good logic and

common sense. If it is right for the stockholder of a railway to

receive dividends, it is equally right for the bondholder to receive

interest. If it is right for a merchant to take from the gross returns

of his business a sum sufficient to cover interest on his capital, it

is equally right for the man from whom he has borrowed money for the

enterprise to exact interest. The money in a loan is economically

equivalent to, convertible into, concrete capital. It deserves,

therefore, the same treatment and the same rewards. The fact that the

investor undergoes a greater risk than the lender, and the fact that

the former often performs labour in connection with the operation of

his capital, have no bearing on the moral problem; for the investor

is repaid for his extra risk and labour by the profits which he

receives, and which the lender does not receive. As a mere recipient

of interest, the investor undergoes no more risk nor exertion than

does the lender. His claim to interest is no better than that of the

latter.

_Interest on Productive Capital_

On what ground does the Church or Catholic theological opinion justify

interest on invested capital? on the shares of the stockholders in

corporations? on the capital of the merchant and the manufacturer?

In the early Middle Ages the only recognised titles to gain from the

ownership of property were labour and risk.[137] Down to the beginning

of the fifteenth century substantially all the incomes of all classes

could be explained and justified by one or other of these two titles;

for the amount of capital in existence was inconsiderable, and the

number of large personal incomes insignificant.

When, however, the traffic in rent charges and the operation of

partnerships, especially the "contractus trinus," or triple contract,

had become fairly common, it was obvious that the profits from these

practices could not be correctly attributed to either labour or risk.

The person who bought, not the land itself, but the right to receive a

portion of the rent thereof, and the person who became the silent

member of a partnership, evidently performed no labour beyond that

involved in making the contract. And their profits clearly exceeded a

fair compensation for their risks, inasmuch as the profits produced a

steady income. How then were they to be justified?

A few authorities maintained that such incomes had no justification.

In the thirteenth century Henry of Ghent condemned the traffic in rent

charges; in the sixteenth Dominicus Soto maintained that the returns

to the silent partner in an enterprise ought not to exceed a fair

equivalent for his risks; about the same time Pope Sixtus V denounced

the triple contract as a form of usury. Nevertheless, the great

majority of writers admitted that all these transactions were morally

lawful, and the gains therefrom just. For a time these writers

employed merely negative and _a pari_ arguments. Gains from rent

charges, they pointed out, were essentially as licit as the net rent

received by the owner of the land; and the interest received by a

silent partner, even in a triple contract, had quite as sound a moral

basis as rent charges. By the beginning of the seventeenth century the

leading authorities were basing their defence of industrial interest

on positive grounds. Lugo, Lessius, and Molina adduced the

productivity of capital goods as a reason for allowing gains to the

investor. Whether they regarded productivity as in itself a sufficient

justification of interest, or merely as a necessary prerequisite to

justification, cannot be determined with certainty.

At present the majority of Catholic writers seem to think that a

formal defence of interest on capital is unnecessary. Apparently they

assume that interest is justified by the mere productivity of capital.

However, this view has never been explicitly approved by the Church.

While she permits and authorises interest, she does not define its

precise moral basis.

So much for the teaching of ecclesiastical and ethical authorities.

What are the objective reasons in favour of the capitalist's claim to

interest? In this chapter we consider only the intrinsic reasons, those

arising wholly out of the relations between the interest-receiver and

the interest-payer. Before taking up the subject it may be well to

point out the source from which interest comes, the class in the

community that pays the interest to the capitalist. From the language

sometimes used by Socialists it might be inferred that interest is

taken from the labourer, and that if it were abolished he would be the

chief if not the only beneficiary. This is incorrect. At any given time

interest on producing capital is paid by the consumer. Those who

purchase the products of industry must give prices sufficiently high to

provide interest in addition to the other expenses of production. Were

interest abolished and the present system of private capital continued,

the gain would be mainly reaped by the consumer in the form of lower

prices; for the various capitalist directors of industry would bring

about this result through their competitive efforts to increase sales.

Only those labourers who were sufficiently organised and sufficiently

alert to make effective demands for higher wages before the movement

toward lower prices had got well under way, would obtain any direct

benefit from the change. The great majority of labourers would gain far

more as consumers than as wage earners. Speaking generally, then, we

may say that the capitalist's gain is the consumer's loss, and the

question of the justice of interest is a question between the

capitalist and the consumer.

The intrinsic or individual grounds upon which the capitalist's claim

to interest has been defended are mainly three: productivity, service,

and abstinence. They will be considered in this order.

_The Claims of Productivity_

It is sometimes asserted that the capitalist has as good a right to

interest as the farmer has to the offspring of his animals. Both are

the products of the owner's property. In two respects, however, the

comparison is inadequate and misleading. Since the owner of a female

animal contributes labour or money or both toward her care during the

period of gestation, his claim to the offspring is based in part upon

these grounds, and only in part upon the title of interest. In the

second place, the offspring is the definite and easily distinguishable

product of its parent. But the sixty dollars derived as interest from

the ownership of ten shares of railway stock, cannot be identified as

the exact product of one thousand dollars of railway property. No man

can tell whether this amount of capital has contributed more or less

than sixty dollars of value to the joint product, i.e., railway

services. The same is true of any other share or piece of concrete

capital. All that we know is that the interest, be it five, six,

seven, or some other per cent., describes the share of the product

which goes to the owner of capital in the present conditions of

industry. It is the conventional not the actual and physical product

of capital.

Another faulty analogy is that drawn between the productivity of

capital and the productivity of labour. Following the terminology of

the economists, most persons think of land, labour, and capital as

productive in the same sense. Hence the productivity of capital is

easily assumed to have the same moral value as the productive action

of human beings; and the right of the capitalist to a part of the

product is put on the same moral basis as the right of the labourer.

Yet the differences between the two kinds of productivity, and between

the two moral claims to the product are more important than their

resemblances.

In the first place, there is an essential physical difference. As an

instrument of production, labour is active, capital is passive. As

regards its worth or dignity, labour is the expenditure of human

energy, the output of a _person_, while capital is a material thing,

standing apart from a personality, and possessing no human quality or

human worth. These significant intrinsic or physical differences

forbid any immediate inference that the moral claims of the owners of

capital and labour are equally valid. We should logically expect to

find that their moral claims are unequal.

This expectation is realised when we examine the bearing of the two

kinds of productivity upon human welfare. In the exercise of

productive effort the average labourer undergoes a sacrifice. He is

engaged in a process that is ordinarily irksome. To require from him

this toilsome expenditure of energy without compensation, would make

him a mere instrument of his fellows. It would subordinate him and his

comfort to the aggrandisement of beings who are not his superiors but

his moral equals. For he is a person; they are no more than persons.

On the other hand, the capitalist as such, as the recipient of

interest, performs no labour, painful or otherwise. Not the

capitalist, but capital participates in the productive process. Even

though the capitalist should receive no interest, the productive

functioning of capital would not subordinate him to his fellows in the

way that wageless labour would subordinate the labourer.

The precise and fundamental reason for according to the labourer his

product is that this is the only rational rule of distribution. When a

man makes a useful thing out of materials that are his, he has a

strict right to the product simply because there is no other

reasonable method of distributing the goods and opportunities of the

earth. If another individual, or society, were permitted to take this

product, industry would be discouraged, idleness fostered, and

reasonable life and self development rendered impossible. Direful

consequences of this magnitude would not follow the abolition of

interest.

Perhaps the most important difference between the moral claims of

capitalist and labourer is the fact that for the latter labour is the

sole means of livelihood. Unless he is compensated for his product he

will perish. But the capitalist has in addition to the interest that

he receives the ability to work. Were interest abolished he would

still be in as good a position as the labourer. The product of the

labourer means to him the necessaries of life; the product of the

capitalist means to him goods in excess of a mere livelihood.

Consequently their claims to the product are greatly unequal in vital

importance and moral value.

The foregoing considerations show that even the claim of the labourer

to his product is not based upon merely intrinsic grounds. It does not

spring entirely from the mere fact that he has produced the product,

from the mere relation between producer and thing produced. If this is

true of labour-productivity we should expect to find it even more

evident with regard to the productivity of capital; for the latter is

passive instead of active, non rational instead of human.

The expectation is well founded. Not a single conclusive argument can

be brought forward to show that the productivity of capital directly

and necessarily confers upon the capitalist a right to the

interest-product. All the attempted arguments are reducible to two

formulas: "res fructificat domino" ("a thing fructifies to its owner")

and "the effect follows its cause." The first of these was originally

a legal rather than an ethical maxim; a rule by which the title was

determined in the civil law, not a principle by which the right was

determined in morals. The second is an irrelevant platitude. As a

juristic principle, neither is self evident. Why should the owner of a

piece of capital, be it a house, a machine, or a share of railway

stock, have a right to its product, when he has expended neither time,

labour, money, nor inconvenience of any kind? To answer, "because the

thing which produced the product belongs to him," is merely to beg the

question. To answer, "because the effect follows the cause," is to

make a statement which has nothing to do with the question. What we

want to know is why the ownership of a productive thing gives a right

to the product; why this particular effect should follow its cause in

this particular way. To answer by repeating under the guise of

sententious formulas the thesis to be proved, is scarcely satisfactory

or convincing. To answer that if the capitalist were not given

interest industry and thrift would decrease and human welfare suffer,

is to abandon the intrinsic argument entirely. It brings in the

extrinsic consideration of social consequences.

_The Claims of Service_

The second intrinsic ground upon which interest is defended, is the

_service_ performed by the capitalist when he permits his capital to

be used in production. Without capital, labourers and consumers would

be unable to command more than a fraction of their present means of

livelihood. From this point of view we see that the service in

question is worth all that is paid in the form of interest.

Nevertheless it does not follow that the capitalist has a claim in

strict justice to any payment for this service. According to St.

Thomas, a seller may not charge a buyer an extra amount merely because

of the extra value attached to the commodity by the latter.[138] In

other words, a man cannot justly be required to pay an unusual price

for a benefit or advantage or service, when the seller undergoes no

unusual deprivation. Father Lehmkuhl carries the principle further,

and declares that the seller has a right to compensation only when and

to the extent that he undergoes a privation or undertakes a

responsibility.[139] According to this rule, the capitalist would have

no right to interest; for as mere interest-receiver he undergoes no

privation. His risk and labour are remunerated in profits, while the

responsibility of not withdrawing from production something that can

continue in existence only by continuing in production, is scarcely

deserving of a reward according to the canons of strict justice.

Whatever we may think of this argument from authority, we find it

impossible to prove objectively that a man who renders a service to

another has an intrinsic right to anything beyond compensation for the

expenditure of money or labour involved in performing the service. The

man who throws a life preserver to a drowning person may justly demand

a payment for his trouble. On any recognised basis of compensation,

this payment will not exceed a few dollars. Yet the man whose life is

in danger would pay a million dollars for this service if he were

extremely rich. He would regard the service as worth this much to him.

Has the man with the life preserver a right to exact such a payment?

Has he a right to demand the full value of the service? No reasonable

person would answer this question otherwise than in the negative. If

the performer of the service may not charge the full value thereof, as

measured by the estimate put upon it by the recipient, it would seem

that he ought not to demand anything in excess of a fair price for his

trouble. In other words, he may not justly exact anything for the

service as such.

It would seem, then, that the capitalist has no moral claim to pure

interest on the mere ground that the use of his capital in production

constitutes a service to labourers and consumers. It would seem that

he has no right to demand a payment for a costless service.

_The Claims of Abstinence_

The third and last of the intrinsic justifications of interest that we

shall consider is _abstinence_. This argument is based upon the

contention that the person who saves his money, and invests it in the

instruments of production undergoes a sacrifice in deferring to the

future satisfactions that he might enjoy to-day. One hundred dollars

now is worth as much as one hundred and five dollars a year hence.

That is, when both are estimated from the viewpoint of the present.

This sacrifice of present to future enjoyment which contributes a

service to the community in the form of capital, creates a just claim

upon the community to compensation in the form of interest. If the

capitalist is not rewarded for this inconvenience he is, like the

unpaid labourer, subordinated to the aggrandisement of his fellows.

Against this argument we may place the extreme refutation attempted by

the Socialist leader, Ferdinand Lassalle:

"But the profit of capital is _the reward of abstinence_. Truly a happy

phrase! European millionaires are ascetics, Indian penitents, modern

St. Simons Stylites, who perched on their columns, with withered

features and arms and bodies thrust forward, hold out a plate to the

passers-by that they may receive the wages of their privations! In the

midst of this sacro-saint group, high above his fellow-mortifiers of

the flesh, stands the Holy House of Rothschild. That is the real truth

about our present society! How could I have hitherto blundered on this

point as I have?"[140]

Obviously this is a malevolently one-sided implication concerning the

sources of capital. But it is scarcely less adequate than the

explanation in opposition to which it has been quoted. Both fail to

distinguish between the different kinds of savers, the different kinds

of capital-owners. For the purposes of our inquiry savings may be

divided into three classes.

First, those which are accumulated and invested automatically. Very

rich persons save a great deal of money that they have no desire to

spend, since they have already satisfied or safeguarded all the wants

of which they are conscious. Evidently this kind of saving involves no

real sacrifice. To it the words of Lassalle are substantially

applicable, and the claim to interest for abstinence decidedly

inapplicable.

Second, savings to provide for old age and other future contingencies

which are estimated as more important than any of the purposes for

which the money might now be expended. Were interest abolished this

kind of saving would be even greater than it is at present; for a

larger total would be required to equal the fund that is now provided

through the addition of interest to the principal. In a no-interest

régime one thousand dollars would have to be set aside every year in

order to total twenty thousand dollars in twenty years; when interest

is accumulated on the savings, a smaller annual amount will suffice to

produce the same fund. Inasmuch as this class of persons would save in

an even greater degree without interest, it is clear that they regard

the sacrifice involved as fully compensated in the resulting provision

for the future. In their case sacrifice is amply rewarded by

accumulation. Their claim to additional compensation in the form of

interest does not seem to have any valid basis. In the words of the

late Professor Devas, "there is ample reward given without any need of

any interest or dividend. For the workers with heads or hands keep the

property intact, ready for the owner to consume whenever convenient,

when he gets infirm or sick, or when his children have grown up, and

can enjoy the property with him."[141]

The third kind of saving is that which is made by persons who could

spend, and have some desire to spend, more on present satisfactions,

and who have already provided for all future wants in accordance with

the standards of necessaries and comforts that they have adopted.

Their fund for the future is already sufficient to meet all those

needs which seem weightier than their present unsatisfied wants. If

the surplus in question is saved it will go to supply future desires

which are no more important than those for which it might be expended

now. In other words, the alternatives before the prospective saver

are to procure a given amount of satisfaction to-day, or to defer the

same degree of satisfaction to a distant day.

In this case the inducement of interest will undoubtedly be necessary

to bring about saving. As between equal amounts of satisfaction at

different times, the average person will certainly prefer those of the

present to those of the future. He will not decide in favour of the

future unless the satisfactions then obtainable are to be greater in

quantity. To this situation the rule that deferred enjoyments are

worth less than present enjoyments, is strictly applicable. The

increased quantity of future satisfaction which is necessary to turn

the choice from the present to the future, and to determine that the

surplus shall be saved rather than spent, can be provided only through

interest. In this way the accumulations of interest and savings will

make the future fund equivalent to a larger amount of enjoyment or

utility than could be obtained if the surplus were exchanged for the

goods of the present. "Interest magnifies the distant object."

Whenever this magnifying power seems sufficiently great to outweigh

the advantage of present over future satisfactions, the surplus will

be saved instead of spent.

Among the well-to-do there is probably a considerable number of

persons who take this attitude toward a considerable part of their

savings. Since they would not make these savings without the

inducement of interest, they regard the latter as a necessary

compensation for the sacrifice of postponed enjoyment. In a general

way we may say that they have a strict right to this interest on the

intrinsic ground of sacrifice. Inasmuch as the community benefits by

the savings, it may quite as fairly be required to pay for the

antecedent sacrifices of the savers as for the inconvenience undergone

by the performer of any useful labour or service.

Summing up the matter regarding the intrinsic justification of

interest, we find that the titles of productivity and service do not

conclusively establish the strict right of the capitalist to interest,

and that the title of abstinence is morally valid for only a portion,

probably a rather small portion, of the total amount of interest now

received by the owners of capital. Consequently interest as a whole is

not conclusively vindicated on individual grounds. If it is to be

proved morally lawful its justification must be sought in extrinsic

and social considerations. This inquiry will form the subject of the

next chapter.

FOOTNOTES:

[133] Hohoff, "Die Bedeutung der Marxschen Kapitalkritik"; Paderborn,

1908.

[134] Pp. 64-67, 88, 89, 96.

[135] Cf. Van Roey, "De Justo Auctario ex Contractu Crediti"; and

Ashley, "English Economic History."

[136] Encyclical, "Vix Pervenit," 1745.

[137] Cf. St. Thomas, "Summa Theologica," 2a 2ae, q. 78, a. 2 et 3.

[138] "Secunda Secondae," q. 77, a. 1, in corp.

[139] "Theologia Moralis," I, no. 1050.

[140] "What is Capital?" p. 27.

[141] "Political Economy," p. 507.

CHAPTER XIII

SOCIAL AND PRESUMPTIVE JUSTIFICATIONS OF INTEREST

As we saw in the last chapter, interest cannot be conclusively

justified on the ground of either productivity or service. It is

impossible to demonstrate that the capitalist has a strict right to

interest because his capital produces interest, or because it renders

a service to the labourer or the consumer. A part, probably a small

part, of the interest now received can be fairly justified by the

title of sacrifice. Some present owners of capital would not have

saved had they not expected to receive interest. In their case

interest may be regarded as a just compensation for the sacrifice that

they underwent when they decided to save instead of consuming.

_Limitations of the Sacrifice Principle_

Nevertheless these men would suffer no injustice if interest were now

to be abolished. Up to the moment of the change, they would have been

in receipt of adequate compensation; thereafter, they would be in

exactly the same position as when they originally chose to save rather

than consume. They would still be able to sell their capital, and

convert the proceeds to their immediate uses and pleasures. In this

case they would obviously have no further claim upon the community for

interest. On the other hand, they could retain the ownership of their

capital, and postpone its consumption to some future time. In making

this choice they would regard future as more important than present

consumption, and the superiority of future enjoyment as sufficiently

great to compensate them for the sacrifice of postponement. Hence

they would have no moral claim to interest on the ground of

abstinence. In general, then, the sacrifice-justification of interest

continues only so long as the interest continues. It extends only to

the interest received by certain capitalists in certain circumstances,

not to all interest in all circumstances. Therefore, it presents no

moral obstacle to the complete abolition of interest.

Since probably the greater part of the interest now received cannot be

justified on intrinsic grounds, and since that part of it which is

thus justified could be abolished consistently with the rights of the

recipients, let us see whether it is capable of justification for

reasons of social welfare. Would its suppression be socially

beneficial or socially detrimental?

_The Value of Capital in a No-Interest Régime_

The interest that we have in mind is pure interest, not undertaker's

profit, nor insurance against risk, nor gross interest. Even if all

pure interest were abolished the capitalist who loaned his money would

still receive something from the borrower in addition to the repayment

of the principal, while the active capitalist would get from the

consumer more than the expenses of production. The former would

require a premium of, say, one or two per cent. to protect him against

the loss of his loan. The latter would demand the same kind of

insurance, and an additional sum to repay him for his labour and

enterprise. None of these payments could be avoided in any system of

privately directed production. The return whose suppression is

considered here is that which the capitalist receives over and above

these payments, and which in this country seems to be about three or

four per cent.

Would capital still have value in a no-interest régime, and if so how

would its value be determined? At present the lower limit of the value

of productive capital, as of all other artificial goods, is fixed in

the long run by the cost of production. Capital instruments that do

not bring this price will not continue to be made. In other words,

cost of production is the governing factor of the value of capital

from the side of supply. It would likewise fix the lower limit of

value in a no-interest régime; only, the cost of producing capital

instruments would then be somewhat lower than to-day, owing to the

absence of an interest charge for the working capital during the

productive process.

But the cost of production is not a constant and accurate measure of

the value of artificial capital. The true measure is found in the

revenue or interest that a given piece of capital yields to its

owners. If the current rate of interest is five per cent., a factory

that brings in ten thousand dollars net return will have a value of

about two hundred thousand dollars. This is the governing factor of

value from the side of demand. In a no-interest economy the demand

factor would be quite different. Capital instruments would be in

demand, not as revenue producers, but as the concrete embodiments, the

indispensable requisites of saving and accumulation. For it is

impossible that saving should in any considerable amount take the form

of cash hoards. In the words of Sir Robert Giffen: "The accumulations

of a single year, even taking it at one hundred and fifty millions

only, ... would absorb more than the entire metallic currency of the

country [Great Britain]. They cannot, therefore, be made in

cash."[142] The instruments of production would be sought and valued

by savers for the same reason that safes and safety deposit boxes are

in demand now. They would be the only means of carrying savings into

the future, and they would necessarily bring a price sufficiently high

to cover the cost of producing them. One man might deposit his savings

in a bank, whence they would be borrowed without interest by some

director of industry. When the owner of the savings desired to recover

them he could obtain from the bank the fund of some other depositor,

or get the proceeds of the sale of the concrete capital in which his

own savings had been embodied. Another man might prefer to invest his

savings directly in a building, a machine, or a mercantile business,

whence he could recover them later from the sale of the property.

Hence the absence of interest would not change essentially the

processes of saving or investment. Capital would still have value, but

its valuation from the demand side would rest on a different basis. It

would be valued not in proportion to its power to yield interest, but

because of its capacity to become a receptacle for savings, and to

carry into the future the consuming power of the present.

The question whether the abolition of interest by the State would be

socially helpful or socially harmful is mainly, though not entirely, a

question of the supply of capital. If the community would not have

sufficient capital to provide for all its needs, actual and

progressive, the suppression of interest would obviously be a bad

policy. Most economists seem inclined to think that this condition

would be realised; that, without the inducement of interest, men would

neither make new savings nor conserve existing capital in sufficient

quantity to supply the wants of society. Very few of them, however,

pretend to be able to prove this proposition. So many complex factors

with regard to the possibilities of saving and the motives of savers,

enter into the situation that no opinion on the subject can have any

stronger basis than probability. As a preliminary to our consideration

of the question of abolition, let us inquire whether there exists any

definite relation between the present supply of capital and the

current rate of interest.

_Whether the Present Rate of Interest Is Necessary_

It is sometimes contended that the interest rate must be kept up to

the present level if the existing supply of capital is to be

maintained. The underlying assumption is that some of the present

savers would discontinue that function at any lower rate, with the

consequence that the supply of capital would fall below the demand.

Owing to this excess of demand over supply, the rate of interest would

rise, or tend to rise, to the former level. Therefore, the rate

existing at any given time is the socially necessary rate. The rate of

interest is said to be analogous to the rate of wages. For example; of

ten thousand men receiving five dollars a day, nine thousand may be

willing to work for four dollars rather than quit their present jobs.

But the other thousand set their minimum price at five dollars. If the

wage is reduced to four dollars these men will get employment

elsewhere, thus causing such an excess of demand over supply as to

force the wage rate back to five dollars. The same thing, it is

contended, will happen when the high-priced section of the savers,

"the marginal savers," discontinue saving on account of the artificial

lowering of the rate of interest.

The analogy, however, is misleading. The "marginal" one thousand wage

earners refuse to work for four dollars a day because they can get

better compensation in some other occupation. This phenomenon has been

proved over and over again by observation and experience. On the other

hand, there is no experience, no positive evidence, which shows or

tends to show that any _necessary_ group of present savers would

discontinue or materially reduce their accumulations if they were no

longer able to secure the present rate of interest. If the rate were

lowered simultaneously in all civilised countries the dissatisfied

savers, unlike the dissatisfied labourers, would not be able to get a

better price for their capital elsewhere. Their only alternative

would be to spend their actual or potential savings for present

enjoyment. Now we have no empirical data to justify the assumption

that any considerable number of savers would choose this alternative

in preference to, say, three or two per cent. interest. The fact that

any group of savers at present gets and insists on getting a higher

rate, merely proves that they can get it, and that they are selfish

enough to take advantage of the possibility. We know that some men who

now obtain six per cent. interest would accept two rather than cease

to save; yet they do not hesitate to demand six per cent. So far as we

know, all present savers might take the same attitude. At any rate, we

can not conclude that they would not take less from the fact that they

now get more. Why then does not the rate of interest fall? If all

present savers are getting a higher rate than is necessary to induce

them to save, why do they not increase their savings to such an extent

that the supply of capital will exceed the present volume of demand,

and thus lead to a decline in the rate of interest? This is what

happens when the price of consumption-goods rises appreciably above

the minimum level that satisfies the most high-priced or "marginal"

producers. There is, however, an important difference between the two

cases. The capacity to produce more goods is practically unlimited,

and the corresponding desire is also unlimited, so long as the price

of the product exceeds the cost of production. The capacity to save is

not unlimited, and the desire to save is neutralised and sharply

restricted by other and more powerful desires. Hence it is quite

possible that the price of capital, i.e., interest, is determined to

only a slight degree by the "cost" of saving, being mainly dominated

and regulated from the side of demand.

Even though many of the present savers and owners of capital should

diminish or discontinue their functions on account of a fall in the

rate of interest, a reduction would not necessarily take place in the

supply of capital. The function of these "marginal savers" would in

all probability be performed by other persons, who would be compelled

to increase their accumulations in order to provide as well for the

future as they had previously been able to provide with a smaller

capital at a higher rate of interest.[143]

_Whether at Least Two Per Cent. Is Necessary_

While admitting that the present rate is unnecessarily high, Professor

Cassel maintains that a certain important class of savers would

diminish very considerably their accumulations if the interest rate

should fall much below two per cent. This class comprises those

persons whose main object in saving is a fund which will some day

support them from its interest. At six per cent. a person can

accumulate in about twelve years a sum sufficient to provide him with

an interest-income equal to the amount annually saved. For example;

two thousand dollars put aside every year, and subjected to compound

interest, will aggregate in twelve years a principal capable of

yielding an annual income of two thousand dollars. At two per cent.

the same amount of yearly saving will not lead to the same income in

less than thirty-five years. If the rate be one and one-half per

cent., forty-seven years will be required to produce the desired

income. Hence, concludes Cassel, if the rate falls below two per cent.

the average man will decide that life is too short to provide for the

future by means of an interest-income, and will expect to draw upon

his principal. This means that he will not need to save as much as

when he sought to accumulate a capital large enough to support him out

of its interest alone.

The argument is plausible but not conclusive. If the rate of interest

is so low that a man must save for forty-seven years in order to

obtain a sufficient interest-income to support him in his declining

years, he will rarely attain that end. In the great majority of

instances men who are unable to save more annually than the amount

that they will need each year in old age, will expect and be compelled

to use up a part or all of their capital in the period following the

cessation of their economic usefulness. Nevertheless, it does not

follow that they will save less at one and one-half per cent. than at

six per cent. The determining factor in the situation is the attitude

of the saver toward the _capital sum accumulated_. He either desires

or does not desire to leave this behind him. In the latter case he

will save only as much as is necessary to provide an annual income

composed partly of interest and partly of the principal. If this

contemplated income is two thousand dollars, and the rate of interest

is six per cent., he will not need to save that much annually for as

long a period as ten years. He can diminish either the yearly amount

saved or the length of time devoted to saving. On the other hand, if

the rate is only one and one-half per cent. he will be compelled to

save a larger total in order to secure an equal accumulation and an

equal provision for the future. In all cases, therefore, in which the

saving is carried on merely for the saver's own lifetime it will be

increased instead of decreased by a low rate of interest.

If the saver does desire to bequeath his capital he will not always be

deterred from this purpose merely because he is compelled to use some

of the capital for the satisfaction of his own wants. Take the man who

can save two thousand dollars a year, and with the rate of interest at

six per cent. assure himself an interest-income of the same amount,

and who intends to leave the principal (some thirty-three thousand

dollars) to his children. Should the rate fall to one and one-half per

cent. he would be unable to accumulate and bequeath nearly such a

large sum. Surely this fact, discouraging as it is, will not determine

him to save nothing. He will not, as Cassel's argument assumes, decide

to leave nothing to his children, and content himself with that amount

of saving which will suffice to provide for his own future. In all

probability he will try to accumulate a sum which, even when

diminished by future deductions for his own wants, will approximate as

closely as possible the amount that he could have bequeathed had the

rate remained at six per cent. This means that he will save more at

the low than at the high rate of interest.

The relative insignificance of the sum which would be saved at a low

rate might sometimes, indeed, deter a person from saving for

testamentary purposes. With the rate at six per cent., a man might be

willing to save six hundred dollars a year for a sufficiently long

period to provide a legacy of twenty thousand dollars to an

educational institution. With the rate at one and one-half per cent.,

the amount that he could hope to accumulate would be so much smaller

that it might seem to him not worth while, and he would decline to

save the six hundred dollars annually. Cases of this kind, however,

always involve the secondary objects of saving, the luxuries rather

than the necessaries of testamentary transmission. They do not include

such primary objects as provision for one's family. When the average

man finds that he cannot leave to his family as much as he would

desire, as much as he would have bequeathed to them at a higher rate

of interest, he will strive to increase rather than decrease his

efforts to save for this purpose.

Speaking generally, then, we conclude that the assumption underlying

Professor Cassel's theory is contradicted by our experience of human

motives and practices. Men who save mainly for a future

interest-income, at the same time wishing to keep the principal intact

until death, and who could have fully realised this desire under a

high interest régime, will not become entirely indifferent to it when

they find that they cannot attain it completely. They will ordinarily

try to leave behind them as large a capital or principal as they can.

Hence they will save more rather than less.

_Whether Any Interest Is Necessary_

Perhaps the best known recent statement of the opinion that interest

is inevitable, appears in Professor Irving Fisher's "The Rate of

Interest."[144] While he does not assert explicitly that sufficient

capital would not be provided without interest, and even admits that

in certain circumstances interest might disappear, the general logic

and implications of his argument are decidedly against the supposition

that society could ever get along without interest. He lays such

stress upon the factor of "impatience," i.e., man's unwillingness to

wait for future goods, as to suggest strongly that other causes of

interest, and the number of savers free from "impatience," are quite

insignificant. Now, if "impatience" were the only cause of interest

the latter must continue as long as "impatience" continues; and if

practically all savers, actual and possible, are completely dominated

by "impatience" the abolition of interest would be socially

disastrous. However, neither of these assumptions is demonstrable. We

have just seen that the present rate of interest has other causes than

"impatience"; that a large proportion of savers insist upon getting

the present rate, not because they require it to offset their

"impatience," but simply because they can obtain it, and because they

prefer it to the lower rate. Therefore, the mere existence of the

present rate does not prove it to be necessary. By the same argument

it is evident that the existence of any interest does not demonstrate

the necessity of some interest. In the second place, the number of

savers, present and prospective, whose "impatience" is so weak as to

permit them to save without interest, is probably greater than the

average reader of Professor Fisher's pages is led to assume. The

question whether interest is necessary cannot be answered by reference

to the general fact of human "impatience"; it demands a preliminary

analysis of the extent to which "impatience" affects the different

classes of savers.

With interest abolished, those persons who were willing to subordinate

present secondary satisfactions to the primary future needs of

themselves and their families, would save at least as much for these

purposes as when they could have obtained interest. Most of them would

probably save more in order to render their future provision as nearly

as possible equal to what it would have been had interest accrued on

their annual savings. Whether a person intended to leave all his

accumulations, or part of them, or none of them to posterity, he would

still desire them to be as large as they might have been in a régime

of interest. In order to realise this desire, he would be compelled to

increase his savings. And it is reasonable to expect that this is

precisely the course that would be followed by men of average thrift

and foresight. Such men regard future necessaries and comforts,

whether for themselves or their children, as more important than

present non-essentials and luxuries. Interest or no interest, prudent

men will subordinate the latter goods to the former, and will save

money accordingly.

When, however, both future and present goods are of the same order and

importance, the future is no longer preferred to the present. In that

case the preference is reversed. The luxuries of to-day are more

keenly prized than the luxuries of to-morrow. If the latter are to be

preferred they must possess some advantage over the luxuries that

might be obtained here and now. Such advantage may arise in various

ways; for example, when a man decides that he will have more leisure

for a foreign journey two years hence than this year, or when he

prefers a large amount of future enjoyment at one time to present

satisfactions taken in small doses. But the most general method of

conferring advantage upon the secondary satisfactions of the future as

compared with those of the present, is to increase the quantity. The

majority of foreseeing persons are willing to pass by one hundred

dollars' worth of enjoyment now for the sake of one hundred and five

dollars' worth one year hence. This advantage of quantity is provided

through the receipt of interest. It affects all those persons whose

saving, as noted in the last chapter, involves a sacrifice for which

the only adequate compensation is interest, and likewise all those

persons who are in a position to choose between present and future

luxuries. Were interest suppressed these classes of persons would

cease to save for this kind of future goods.

According to Professor Taussig, "most saving is done by the well-to-do

and the rich."[145] On this hypothesis it seems probable that the

abolition of interest would diminish the savings and capital of the

community very considerably; for the accumulations of the wealthy are

derived mainly from interest rather than from salaries. On the other

hand, the suppression of interest should bring about a much wider

diffusion of wealth. The sums formerly paid out as interest, would be

distributed among the masses of the population as increased wages and

reduced costs of living. Hence the masses would possess an immensely

increased capacity for saving, which might offset or even exceed the

loss of saving-power among those who now receive interest-incomes.[146]

To sum up the results of our inquiry concerning the necessity of

interest: The fact that men now receive interest does not prove that

they would not save without interest. The fact that many men would

certainly save without interest does not prove that a sufficient

amount would be saved to provide the community with the necessary

supply of capital. Whether the savings of those classes that increased

their accumulations would counteract the decreases in the saving of

the richer classes, is a question that admits of no definite or

confident answer.

_The State Is Justified in Permitting Interest_

If we assume that the suppression of interest would cause a

considerable decline in saving and capital, we must conclude that the

community would be worse off than under the present system. To

diminish greatly the instruments of production, and consequently the

supply of goods for consumption, would create far more hardship than

it would relieve. While "workless" incomes would be suppressed, and

personal incomes more nearly equalised, the total amount available for

distribution would probably be so much smaller as to cause a

deterioration in the condition of every class. In this hypothesis the

State would do wrong to abolish the system of interest.

If, however, we assume that no considerable amount of evil would

follow, or that the balance of results would be favourable, the

question of the proper action of the State becomes somewhat complex.

In the first place, interest could not rightfully be suppressed while

the private taking of rent remained. To adopt such a course would be

to treat the receivers of property incomes inequitably. Landowners

would continue to receive an income from their property, while capital

owners would not; yet the moral claims of the former to income are no

better than those of the latter. In the second place, the State would

be obliged to compensate the owners of existing capital instruments

for the decline in value which, as we have already seen, would occur

when the item of interest was eliminated from the cost of reproducing

such capital instruments. It would likewise be under moral obligation

to compensate landowners for whatever decrease in value befell their

property as a result of the abolition of rent.

Nevertheless, the practical difficulties confronting the legal

abolition of interest are apparently so great as to render the attempt

socially unwise and futile. In order to be effective the prohibition

would have to be international. Were it enforced in only one or in a

few countries, these would suffer far more through the flight of

capital than they would gain through the abolition of interest. The

technical obstacles in any case would be well nigh insuperable. If the

attempt were made to suppress interest on producing capital, as well

as on loans, the civil authorities would be unable to determine with

any degree of precision what part of the gross returns of a business

was pure interest, and what part was a necessary compensation for risk

and the labour of management. Should the State try to solve this

problem by allowing the directors of industry varying salaries to

correspond with their comparative degrees of efficiency, and different

rates of insurance-payments to represent the different risks, it would

inevitably make some allowances so low as to discourage labour and

enterprise, and others so high as to give the recipients a

considerable amount of pure interest in the guise of profits and

salaries. Should it fix a flat rate of salaries and profits, the more

efficient undertakers would refuse to put forth their best efforts,

and the more perilous enterprises would not be undertaken. The

supervision of expenses, receipts, and other details of business that

would be required to prevent evasion of the law, would not improbably

cost more than the total amount now paid in the form of interest. On

the other hand, if the method of suppression were confined to loans it

would probably prove only a little less futile than the effort to

abolish interest on productive capital. The great majority of those

who were prevented from lending at interest would invest their money

in stocks, land, buildings, and other forms of productive property.

Moreover, it is probable that a large volume of loans would be made

despite the prohibition. In the Middle Ages, when the amount of money

available for lending was comparatively small, and when State and

Church and public opinion were unanimous in favour of the policy, the

legal prohibition of loans was only partially effective. Now that the

supply of and the demand for loans have enormously increased, and

interest is not definitely disapproved by the Church or the public, a

similar effort by the State would undoubtedly prove a failure. Even if

it were entirely successful it would only decrease, not abolish,

interest on productive capital.[147]

In view of the manifold and grave uncertainties of the situation, it

is practically certain that modern States are justified in permitting

interest.

_Civil Authorisation not Sufficient for Individual Justification_

This justification of the attitude of the State does not of itself

demonstrate that the capitalist has a right to accept interest. The

civil law tolerates many actions which are morally wrong in the

individual; for example, the payment of starvation wages, the

extortion of unjust prices, and the traffic in immorality. Obviously

legal toleration does not _per se_ nor always exonerate the individual

offender. How, then, shall we justify the individual receiver of

interest?

As already pointed out more than once, those persons who would not

save without interest are justified on the ground of sacrifice. So

long as the community desires their savings, and is willing to pay

interest on them, the savers may take interest as the fair equivalent

of the inconvenience that they undergo in performing this social

service. The precise problem before us, then, is the justification of

those savers and capitalists who do not need the inducement of

interest, and whose functions of saving and conserving capital are

sufficiently compensated without interest.

It is a fact that the civil law can sometimes create moral rights and

obligations. For example; the statute requiring a person to repair

losses that he has unintentionally inflicted upon his neighbour is

held by the moral theologians to be binding _in conscience_, as soon

as the matter has been adjudicated by the court. In other words, this

civil regulation confers on the injured man property rights, and

imposes on the morally inculpable injurer property obligations. The

civil statutes also give moral validity to the title of prescription,

or adverse possession. When the alien possessor has complied with the

legal provisions that apply, he has a moral right to the property,

even though the original owner should assert his claim at a later

time. Some moral theologians maintain that a legal discharge in

bankruptcy liberates the bankrupt from the moral obligation of

satisfying his unpaid debts. Several other situations might be cited

in which the State admittedly creates moral rights of individual

ownership which would have no definite existence in the absence of

such legal action and authorisation.[148]

This principle would seem to have received a particularly pertinent

application for our inquiry in the doctrine of _præmium_ legale as a

title of interest on loans. In the "Opus Morale" of Ballerini-Palmieri

can be found a long list of moral theologians living in the

seventeenth and eighteenth centuries who maintained that the mere

legal sanction of a certain rate of interest was a sufficient moral

justification for the lender.[149] While holding to the traditional

doctrine that interest was not capable of being justified on intrinsic

grounds, these writers contended that by virtue of its power of

eminent domain the State could transfer from the borrower to the

lender the right to the interest paid on a loan. They did not mean

that the State could arbitrarily take one man's property and hand it

over to another, but only that, when it sanctioned interest for the

public welfare, this extrinsic circumstance (like the other "extrinsic

titles" approved by moralists) annulled the claim of the borrower in

favour of the lender. In other words, they maintained that the money

paid in loan-interest did not belong to either borrower or lender with

certainty or definiteness until the matter was determined by economic

conditions and extrinsic circumstances. Hence legal authorisation for

the common good was morally sufficient to award it to the lender. More

than one of them declared that the State had the same right to

determine this indeterminate property, to assign the ownership to the

lender, that it had to transfer property titles by the device of

prescription. And their general position seems to have been confirmed

by the response of the Congregation of the Poenitentiaria, Feb., 1832,

to the Bishop of Verona, the substance of which was that a confessor

might adopt and act upon this position.[150]

And yet, neither this nor any of the other precedents cited above, are

sufficient to give certain moral sanction to the practice of

interest-taking by those persons who would continue to save if

interest were abolished. All the acts of legal authorisation that we

have been considering relate to practices which are beneficial and

necessary to society. Only in such cases has the State the moral

authority to create or annul property rights. In the seventeenth and

eighteenth centuries the legal authorisation of a certain rate of

interest made that rate morally lawful simply because this legal act

gave formal and authoritative testimony to the social utility of

interest-taking. The State merely declared the reasonableness, and

fixed the proper limits of the practice. The beneficent effect of

interest-taking upon society was its underlying justification, was the

ultimate fact which made it reasonable, and which gave to the action

of the State moral value. Had the taking of interest on loans not been

allowed the bulk of possible savings would either not have been saved

at all, or would have been hoarded instead of converted into capital.

And that money was badly needed in the commercial and industrial

operations of the time. Hence the owners of it were in the position of

persons who regarded saving and investing as a sacrifice for which

interest was a necessary and proper compensation. To-day, however,

there are millions of persons who would continue to perform both these

functions without the inducement of interest. Therefore, the public

good does not require that they should receive interest, nor that the

State should have the power to clothe their interest-incomes with

moral lawfulness. Inasmuch as the State is not certain that the

abolition of interest would be socially expedient or practically

possible, it is justified in permitting the institution to continue;

but it has no power to affect the morality of interest-taking as an

individual action.

_How the Interest-Taker Is Justified_

Although the interest received by the non-sacrifice savers is not

clearly justifiable on either intrinsic or social grounds, it is not

utterly lacking in moral sanctions. In the first place, we have not

contended that the intrinsic factors of productivity and service are

_certainly_ invalid morally. We have merely insisted that the moral

worth of these titles has never been satisfactorily demonstrated.

Possibly they have a greater and more definite efficacy than has yet

been shown by their advocates. In more concrete terms, we admit that

the productivity of capital and the service of the capitalist to the

community, are possible and doubtful titles to interest. A doubtful

title to property is, indeed, insufficient by itself. In the case of

the interest receiver, however, the doubtful titles of productivity

and service are reinforced by the fact of possession. Thus

supplemented, they are sufficient to justify the non-sacrifice saver

in giving himself the benefit of the doubt as regards the validity of

his right to take interest. To be sure, this indefinite and uncertain

claim would be overthrown by a more definite and positive title. But

no such antagonistic title exists. Neither the consumer nor the

labourer can show any conclusive reason why interest should go to him

rather than to the capitalist. Hence the latter has at least a

presumptive title. In the circumstances this is morally sufficient.

To this justification by presumption must be added a justification by

analogy. The non-sacrifice savers seem to be in about the same

position as those other agents of production whose rewards are out of

proportion to their sacrifices. For example; the labourer of superior

native ability gets as much compensation for the same quality and

quantity of work as his companion who has only ordinary ability; and

the exceptionally intelligent business man stands in the same relation

to his less efficient competitor; yet the sacrifices undergone by the

former of each pair is less than that suffered by the latter. It would

seem that if the more efficient men may properly take the same rewards

as those who make larger sacrifices, the non-sacrifice capitalist

might lawfully accept the same interest as the man whose saving

involves some sacrifice. On this principle the lenders who would not

have invested their money in a productive enterprise were nevertheless

permitted by the moralists of the post-mediæval period to take

advantage of the title of _lucrum cessans_. Although they had

relinquished no opportunity of gain, nor made any sacrifice, they were

put on the same moral level as sacrificing lenders, and were allowed

to take the same interest.

As a determinant of ownership, possession is the feeblest of all

factors, and yet it is of considerable importance for a large

proportion of incomes and property. In the distribution of the

national product, as well as in the division of the original heritage

of the earth, a large part is played by the title of first occupancy.

Much of the product of industry is assigned to the agents of

production mainly on the basis of inculpable possession. That is; it

goes to its receivers automatically, in exchange for benefits to those

who hand it over, and without excessive exploitation of their needs.

Just as the first arrival on a piece of land may regard it as a

no-man's territory, and make it his own by the mere device of

appropriation, so the capitalist may get morally valid possession of

interest. Sometimes, indeed, this debatable share, this no-man's share

of the product of industry, is secured in some part by the consumer of

the labourer. In such cases their title to it is just as valid as the

title of the capitalist, notwithstanding the doubtful titles of

productivity and service which the latter has in his favour. First

occupancy and possession are the more decisive factors. In the great

majority of instances, however, the capitalist is the first occupant,

and therefore the lawful possessor of the interest-share.

The general justification of interest set forth in the immediately

preceding paragraphs is supplemented in the case of the great majority

of capital owners by the fact that their income from this source is

relatively insignificant. The average income of the farmers of the

United States is only 724 dollars per year, and of this 322 dollars is

interest on the capital invested in the farm.[151] Even when we make

due allowance for the high purchasing power of farm incomes, due to

the lower cost of foodstuffs and house rent, the total amount of 724

dollars provides only a very moderate living. Consequently the great

majority of farmers can regard the interest that they receive as a

necessary part of the remuneration that is fairly due them on account

of their labour, sacrifices, and risks. So far as they are concerned,

the justification of interest, as interest, is not a practical

question. The same observation applies to the majority of urban

business men, such as small merchants and manufacturers. Their

interest can be justified as not more than fair wages and profits.

Again, there is a large number of interest receivers who are entirely

dependent upon this kind of income, and who obtain therefrom only a

moderate livelihood. They are mainly children, aged persons, and

invalids. Unlike the classes just described, they cannot justify their

interest as a fair supplement to wages; however, they may reasonably

claim it as their equitable or charitable share of the common heritage

of the earth. If they did not receive this interest-income they would

have to be supported by their relatives or by the State. For many

reasons this would be a much less desirable arrangement. Consequently

their general claim to interest is supplemented by considerations of

human welfare.

The difference between the ethical character of the interest discussed

in the last two paragraphs and of that received by persons who possess

large incomes, is too often overlooked in technical treatises. Every

man owning any productive goods is reckoned as a capitalist, and

assumed to receive interest. If, however, a man's total

interest-income is so small that when combined with all his other

revenues it merely completes the equivalent of a decent living, it is

surely of very little significance as interest. It stands in no such

need of justification as the interest obtained by men whose incomes

amount to, say, ten thousand dollars a year and upwards.

Still another confirmatory title of interest is suggested by the

following well known declaration of St. Thomas Aquinas: "The

possession of riches is not in itself unlawful if the order of reason

be observed: that a man should possess justly what he owns, and _use_

it in a proper manner for himself and others."[152] Neither just

acquisition nor proper use is alone sufficient to render private

possessions morally good. Both must be present. As we have seen above,

the capitalist can appeal to certain presumptive and analogous titles

which justify practically his acquisition of interest; but there can

be no doubt that his claim and his moral power of disposal are

considerably strengthened when he puts his interest-income to a proper

use. One way of so using it is for a reasonable livelihood, as

exemplified in the case of the farmers, business men, and non-workers

whom we considered above. Those persons who receive incomes in excess

of their reasonable needs could devote the surplus to religion,

charity, education, and a great variety of altruistic purposes. We

shall deal with this matter specifically in the chapter on the "Duty

of Distributing Superfluous Wealth." In the meantime it is sufficient

to note that the rich man who makes a benevolent use of his

interest-income has a special reason for believing that his receipt of

interest is justified.

The decisive value attributed to presumption, analogy, possession, and

doubtful titles in our vindication of the capitalist's claim to

interest, is no doubt disappointing to those persons who desire

clear-cut mathematical rules and principles. Nevertheless, they are

the only factors that seem to be available. While the title that they

confer upon the interest receiver is not as definite nor as noble as

that by which the labourer claims his wages or the business man his

profits, it is morally sufficient. It will remain logically and

ethically unshaken until more cogent arguments have been brought

against it than have yet appeared in the denunciations of the income

of the capitalist. And what is true of him is likewise true of the

rent receiver, and of the person who profits by the "unearned

increment" of land values. In all three cases the presumptive

justification of "workless" incomes will probably remain valid as long

as the present industrial system endures.

FOOTNOTES:

[142] "Growth of Capital," p. 152.

[143] Cf. Gonner, "Interest and Saving," p. 73; Cassel, "The Nature

and Necessity of Interest," ch. iv.

[144] New York, 1907.

[145] "Principles of Economics," II, 42.

[146] Cf. Hobson, "The Economics of Distribution," pp. 259-265.

[147] Cf. Fisher, "Elementary Principles of Economics," pp. 396, 397.

However, he does not discuss in this passage the possibility of

suppressing interest on productive capital by a direct method.

[148] Cf. Lehmkuhl, "Theologia Moralis," I, nos. 917, 965, 1035.

[149] Vol. 3, pp. 617-629; 2d ed.

[150] Ballerini-Palmieri, loc. cit.; cf. Van Roey, op. cit., pp.

73-75.

[151] Cf. _American Economic Review_, March, 1916; p. 46.

[152] "Contra Gentiles," lib. 3, c. 123.

CHAPTER XIV

CO-OPERATION AS A PARTIAL SOLVENT OF CAPITALISM

Interest is not a return for labour. The majority of interest

receivers are, indeed, regularly engaged at some active task, whether

as day labourers, salaried employés, directors of industry, or members

of the professions; but for these services they obtain specific and

distinct compensation. The interest that they get comes to them solely

in their capacity as owners of capital, independently of any personal

activity. From the viewpoint of economic distribution, interest is a

"workless" income. As such, it seems to challenge that ethical

intuition which connects reward with effort and which inclines to

regard income from any other source as not quite normal. Moreover,

interest absorbs a large part of the national income, and perpetuates

grave economic inequalities.[153]

Nevertheless, interest cannot be wholly abolished. As long as capital

remains in private hands, its owners will demand and obtain interest.

The only way of escape is by the road of Socialism, and this would

prove a blind alley. As we have seen in a preceding chapter, Socialism

is ethically and economically impossible.

May not the burdens and disadvantages of interest be mitigated or

minimised? Such a result could conceivably be reached in two ways: the

sum total of interest might be reduced, and the incomes derived from

interest might be more widely distributed.

_Reducing the Rate of Interest_

No considerable diminution of the interest-volume can be expected

through a decline in the interest rate. As far back as the middle of

the eighteenth century, England and Holland were able to borrow money

at three per cent. During the period that has since intervened, the

rate has varied from three to six per cent. on this class of loans.

Between 1870 and 1890, the general rate of interest declined about two

per cent., but it has risen since the latter date about one per cent.

The Great War now (1916) in action is destroying an enormous amount of

capital, and it will, as in the case of all previous military

conflicts of importance, undoubtedly be followed by a marked rise in

the rate of interest.

On the other hand, the only definite grounds upon which a decline in

the rate can be hoped for are either uncertain or unimportant. They

are the rapid increase of capital, and the extension of government

ownership and operation of natural monopolies.

The first is uncertain in its effects upon the rate of interest

because the increased supply of capital is often neutralised by the

process of substitution. That is, a large part of the new capital does

not compete with and bring down the price of the old capital. Instead,

it is absorbed in new inventions, new types of machinery, and new

processes of production, all of which take the place of labour, thus

tending to increase rather than diminish the demand for capital and

the rate of interest. To be sure, the demand for capital thus arising

has not always been sufficient to offset the enlarged supply. Since

the Industrial Revolution capital has at certain periods and in

certain regions increased so rapidly that it could not all find

employment in new forms and in old forms at the old rate. In some

instances a decline in the rate of interest can be clearly traced to

the disproportionately quick growth of capital. But this phenomenon

has been far from uniform, and there is no indication that it will

become so in the future. The possibilities of the process of

substitution have been by no means exhausted.

The effects of government ownership are even more problematical.

States and cities are, indeed, able to obtain capital more cheaply

than private corporations for such public utilities as railways,

telegraphs, tramways, and street lighting; and public ownership of all

such concerns will probably become general in the not remote future.

Nevertheless the social gain is not likely to be proportionate to the

reduction of interest on this section of capital. A part, possibly a

considerable part, of the saving in interest will be neutralised by

the lower efficiency and greater cost of operation; for in this

respect publicly managed are inferior to privately managed

enterprises. Consequently, the charges to the public for the services

rendered by these utilities cannot be reduced to the same degree as

the rate of interest on the capital. On the other hand, the exclusion

of private operating capital from this very large field of public

utilities should increase competition among the various units of

capital, and thus bring down its rewards. To what extent this would

happen cannot be estimated even approximately. The only safe statement

is that the decline in the general rate of interest would probably be

slight.

_Need for a Wider Distribution of Capital_

The main hope of lightening the social burden of interest lies in the

possible reduction in the necessary volume of capital, and especially

in a wider distribution of interest-incomes. In many parts of the

industrial field there is a considerable waste of capital through

unnecessary duplication. This means that a large amount of unnecessary

interest is paid by the consumer in the form of unnecessarily high

prices. Again, the owners of capital and receivers of interest

constitute only a minority of the population of all countries, with

the possible exception of the United States. The great majority of the

wage earners in all lands possess no capital, and obtain no interest.

Not only are their incomes small, often pitiably small, but their lack

of capital deprives them of the security, confidence, and independence

which are required for comfortable existence and efficient

citizenship. They have no income from productive property to protect

them against the cessation of wages. During periods of unemployment

they are frequently compelled to have recourse to charity, and to

forego many of the necessary comforts of life. So long as the bulk of

the means of production remains in the hands of a distinct capitalist

class, this demoralising insecurity of the workers must continue as an

essential part of our industrial system. While it might conceivably be

eliminated through a comprehensive scheme of State insurance, this

arrangement would substitute dependence upon the State for dependence

upon the capitalist, and be much less desirable than ownership of

income-bearing property.

The workers who possess no capital do not enjoy a normal and

reasonable degree of independence, self respect, or self confidence.

They have not sufficient control over the wage contract and the other

conditions of employment, and they have nothing at all to say

concerning the goods that they shall produce, or the persons to whom

their product shall be sold. They lack the incentive to put forth

their best efforts in production. They cannot satisfy adequately the

instinct of property, the desire to control some of the determining

forms of material possession. They are deprived of that consciousness

of power which is generated exclusively by property, and which

contributes so powerfully toward the making of a contended and

efficient life. They do not possess a normal amount of freedom in

politics, nor in those civic and social relations which lie outside

the spheres of industry and politics. In a word, the worker without

capital has not sufficient power over the ordering of his own life.

_The Essence of Co-operative Enterprise_

The most effective means of lessening the volume of interest, and

bringing about a wider distribution of capital, is to be found in

co-operative enterprise. Co-operation in general denotes the unified

action of a group of persons for a common end. A church, a debating

club, a joint stock company, exemplifies co-operation in this sense.

In the strict and technical sense, it has received various

definitions. Professor Taussig declares that it "consists essentially

in getting rid of the managing employer"; but this description is

applicable only to co-operatives of production. "A combination of

individuals to economise by buying in common, or increase their

profits by selling in common" (Encyclopedia Britannica) is likewise

too narrow, since it fits only distributive and agricultural

co-operation. According to C. R. Fay, a co-operative society is "an

association for the purpose of joint trading, originating among the

weak, and conducted always in an unselfish spirit." If the word,

"trading" be stretched to comprehend manufacturing as well as

commercial activities, Fay's definition is fairly satisfactory. The

distinguishing circumstance, "originating among the weak," is also

emphasised by Father Pesch in his statement that the essence, aim, and

meaning of co-operation are to be found in "a combination of the

economically weak in common efforts for the security and betterment of

their condition."[154] In order to give the proper connotation for our

purpose, we shall define co-operation as, that joint economic action

which seeks to obtain for a relatively weak group all or part of the

profits and interest which in the ordinary capitalist enterprise are

taken by a smaller and different group. This formula puts in the

foreground the important fact that in every form of co-operative

effort, some interest or profits, or both, are diverted from those who

would have received them under purely capitalistic arrangements, and

distributed among a larger number of persons. Thus it indicates the

bearing of co-operation upon the problem of lightening the social

burden of interest.

From the viewpoint of economic function, co-operation may be divided

into two general kinds, producers' and consumers'. The best example of

the former is a wage earners' productive society; of the latter, a

co-operative store. Credit co-operatives and agricultural

co-operatives fall mainly under the former head, inasmuch as their

principal object is to assist production, and to benefit men as

producers rather than as consumers. Hence from the viewpoint of type,

co-operation may be classified as credit, agricultural, distributive,

and productive.

_Co-operative Credit Societies_