The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Conversation I.: Introduction.
• Conversation II.: Introduction — Continued.
• Conversation III.: On Property.
• Conversation IV.: On Property— Continued.
• Conversation V.: On the Division of Labour.
• Conversation VI.: On Capital.
• Conversation VII.: On Capital — Continued.
• Conversation VIII.: On Wages and Population.
• Conversation IX.: On Wages and Population. Continued.
• Conversation X.: On the Condition of the Poor.
• Conversation XI.: On Revenue.
• Conversation XII.: On Revenue Derived From Property In Land.
• Conversation XIII.: On Revenue Derived From the Cultivation of Land.
• Conversation XIV.: On the Revenue of Those Who Do Not Employ Their Capital Themselves.
• Conversation XV.: On Value and Price.
• Conversation XVI.: On Money.
• Conversation XVII.: Subject of Money Continued.
• Conversation XVIII.: On Commerce.
• Conversation XIX.: On Foreign Trade.
• Conversation XX.: Continuation of Foreign Trade.
• Conversation XXI.: Subject of Foreign Trade Continued.
• Conversation XXII.: On Expenditure.

CONVERSATION XIV.

ON THE REVENUE OF THOSE WHO DO NOT EMPLOY THEIR CAPITAL THEMSELVES.

caroline.

I think I now understand very well how an income is derived from agriculture and manufactures; and also how it is produced by trade; but there are many men of property who follow none of these occupations; how, therefore, can their capital yield an income?

mrs. b.

When a man possesses a very large property, he frequently will not be at the trouble of employing it himself; but will engage some other person to do it for him. You have seen that a landed proprietor who does not farm his own estate derives a revenue from the farmer in the form of rent.

caroline.

But I allude to men of fortune without landed property, who live upon their income, although their capital is not employed.

mrs. b.

Reflect a moment, and you will be convinced that no capital can yield an income without being employed. If, therefore, the owner does not invest it in some branch of industry himself, another person must do it for him. A capitalist under such circumstances may be supposed to say, “I am possessed of an ample stock of subsistence for labourers, and of materials for workmanship, but I will engage some other person to take charge of so troublesome an undertaking as that of setting the people to work, and collecting the profits derived from their labours.”

caroline.

This person must be handsomely remunerated for the time and pains he bestows on the management of a capital which is not his own.

mrs. b.

No doubt; a considerable share of the profits derived from the use of capital must go to him who takes charge of it; but when a man’s property is very large, he would rather lose that share than be at the trouble of managing it himself. Thus you see that the employer and the proprietor of capital are frequently different persons.

caroline.

Yet I do not recollect ever to have heard of a man of fortune making use of an agent to employ his capital.

mrs. b.

He does not engage an agent on his own account, but he lends his capital to some person who invests it either in agriculture, manufactures, or trade, and who pays him so much per cent. for the use of it. This is called lending money at interest.

caroline.

Is it then simply money that is lent; or capital consisting of produce?

mrs. b.

It is eventually the same; for money gives the borrower a command over a proportional share of the produce of the country. If the money would not purchase the things which the borrower wanted, it would not answer his purpose; but it will procure him either materials or implements for work, maintenance for labourers, stock for farming, or merchandise for trade. In a word, it will enable him to exert his industry in whatever way he chooses.

caroline.

I should have imagined that it would have been more advantageous to the capitalist to have engaged an agent at a stipulated salary, for the purpose of undertaking the use of his capital?

mrs. b.

Your plan would probably not answer so well; for if, instead of lending his capital at interest, a man of property paid an agent to employ it for him, the agent would be less cautious what risks he engaged in, as he would not be a sufferer by losses.

caroline.

But is not the loan of capital at interest liable to the same objection? If the employer of capital be ruined, the proprietor of it must share the same fate.

mrs. b.

This not unfrequently happens; yet there is less risk incurred in this mode than if the employer of capital could injure the proprietor without being himself involved in the same fate; and it would be so if he acted as clerk or agent, as he would lose only his salary, although the proprietor might be utterly ruined.

Prudent men seldom lend capital without good security. If the loan be made to a merchant, it is not unfrequent to require other merchants, or men of property, to become responsible for the payment. If to a man of landed property, the capital is lent upon the security of his estate; that is to say, if the loan be not repaid according to agreement, the lender has the right to seize that particular property, upon the security of which the capital was advanced. This is called lending money upon the security of mortgage.

caroline.

That must be the best kind of security, for the land cannot be made away with. It is making fixed capital responsible for circulating capital.

The man who borrows capital with a view to employ it, must necessarily expect to make greater profits than will pay the interest of the loan, otherwise he would be no gainer by it.

mrs. b.

Certainly. The average profits of the use of capital may be estimated at about double the interest of money. Legal interest, that is to say, the highest rate which the law allows to be given, is five per cent. and the usual profits of trade are about ten per cent.

caroline.

Therefore the lender and the borrower, or in other words the proprietor and employer of capital, commonly divide the profits arising from it equally between them; the one making as much by his property as the other by his industry.

The landed proprietor who lets his land to a farmer, I conceive to be situated in the same manner as the man who lends his capital at interest, neither of them choosing to undertake the employment of their capitals themselves, but procuring some other person to do it for them; and the rent the farmer pays for the use of the land is similar to the interest paid for the use of capital?

mrs. b.

It is so; and the advantages derived from letting land are analogous to those which result from the loan of capital. We have observed that if the farmer, instead of paying a rent, received a certain stipend for his labour, and reserved the whole of the produce for the landlord, he would certainly be less attentive to the cultivation of the land than if his gains resulted from the value of the produce raised.

There is, however, one essential difference between borrowing capital and renting land. The man who borrows capital to be employed in trade or manufactures, requires nothing more to enable him to prosecute his business. Whilst the farmer who borrows land cannot undertake the cultivation of it without the assistance of another capital, which he must either possess or borrow for that purpose.

caroline.

Then there is another difference. The landed proprietor and the farmer do not divide the profits arising from the cultivation of the land equally between them, as is usually, you say, the case with the lender and borrower of capital; for the farmer makes greater profits by the use of the land than the proprietor by the rent.

mrs. b.

There are several reasons for this difference. In the first place you must recollect that the profits of capital vary with the degrees of risk to which it is exposed; and then consider that an income derived from the rent of land is much more secure than any other kind of revenue. For if the farmer ruin himself, he cannot make away with the land: he may be obliged to quit his farm, but then his stock is liable to seizure for the payment of rent.

Another considerable advantage attached to landed property is, that in proportion as agriculture improves, the produce of the land increases; this augments the profits of the farmer, and enables the landlord to raise his rent. And lastly, we must call to mind the observations we made on the origin of rent; and we shall find that in proportion as agriculture extends, and new and inferior lands are taken into cultivation, the rent of land rises. If you weigh all these advantages, you will no longer be surprised that a landed proprietor should be satisfied with making between three and four per cent. of his capital, instead of lending it at five per cent. interest with more or less risk of loss, and a certainty that the capital will not improve.

caroline.

The real profit, therefore, to be derived from the loan of capital perfectly secure, is between three and four per cent., and whatever is received above that sum may be considered as an indemnification for the risk to which it is exposed?

mrs. b.

If you take the improvable nature of rent, as well as its perfect security into the calculation, some deduction may be allowed in consideration of the certain prospect of future increase; the profit to be derived from the loan of capital, even when the security is perfect, may therefore be estimated somewhat higher than that which is afforded by the rent of land.

We must now make a few observations upon the interest of money.

The interest of money, or price paid for the loan of capital, was formerly much higher than it is at present. It has gradually diminished for some centuries past.

caroline.

And why should that be the case?

mrs. b.

Whenever great profits can be made by the employment of capital, great interest will be given for the loan of it. When, on the contrary, but small profits can be made, the interest will be low.

Thus, as I have already pointed out to you, when a nation advances in opulence and population, so as to render it requisite to take inferior soils into cultivation, the necessaries of life become dearer, the wages of labour rise, the profits on capital are low, and the interest of money will generally correspond with the rate of such profits, for the borrower can afford to pay only in proportion to the profits he expects to make by the use of it.

A great and sudden accession of capital, by increasing the demand for labour, will raise wages and diminish profits; but this effect will last only till population increases in the same ratio, — it is then that it will be necessary to turn up new and inferior land, and the effect becomes permanent. Thus the greater or lesser demand for labour makes profits and interest fluctuate; but the only steady and permanent cause of the diminution of profits and of interest is the cultivation of inferior soils.

During the reign of the Emperor Augustus, the interest of money at Rome fell from ten to four per cent., owing to the great influx of wealth from the conquered provinces. In India, where the proportion of capital to the number of labourers is comparatively small, wages are extremely low, and the profits of capital and interest of money exorbitantly high. The common rate of interest was for a long time twelve per cent., and I have heard that it is not unusual to make as much as twenty, or even thirty per cent. interest. In China, interest is six per cent. per month.

caroline.

And is interest low in America, where labourers are scarce and wages high?

mrs. b.

No, it is not; on account of the great profits made by agriculture. In a country not yet fully peopled, where there is so great a choice of fertile land, that scarcely any of an inferior quality is brought into cultivation, and consequently where little or no rent is paid, the cultivator can afford to give high wages, and yet make great profits; and wherever great gains can be made by the use of capital, high interest will be given for the loan of it. Therefore, though capital has been increasing in America more rapidly than in any other country; yet as immediate and advantageous employment is found for every accession of capital by the cultivation of new and fruitful lands, the interest of money does not fall.

In all old-established fully peopled countries the low interest of money is a sign of great accumulation of capital, abundant population, extensive cultivation of a variety of soils, high price of raw produce, high wages of labour, and small profits.

caroline.

If I understand you right, you mean to say that a borrower will give but little for the loan of capital when he can make but small profits by the use of it; that he can make but small profits when he must pay high wages; that wages will be high whenever subsistence is dear; that subsistence will be dear when inferior soils are taken into cultivation; that inferior soils are taken into cultivation when population multiplies, and that population multiplies when wages are high, in consequence of accumulation of capital.

mrs. b.

Thus we trace low interest to a source which is the origin of national prosperity—accumulation of capital.

caroline.

But I thought that the interest of money was fixed by law, and incapable of fluctuation¿

mrs. b.

The legal interest in this country is 5 per cent. it may fall below that rate, though it cannot rise above it without becoming usury. In former times, to receive any remuneration for the loan of money was regarded much in the same light as usury is at present; that is to say, as taking an unfair advantage of the borrower.

caroline.

Such an opinion could have been entertained by those only who understood nothing of the reproductive nature of capital; for had they been aware of the profits to be made by the employment of money, they could not have considered it as unfair to pay for the use of it.

mrs. b.

Our forefathers had no pretensions to a knowledge of political economy; it is a science of later date. The prejudice against lending money at interest appears not to have prevailed in very ancient times, but to have originated in the darkness of the middle ages; for the interest of money was legally instituted both amongst the Grecians and the Romans. It must have been an established practice in the time of Solon, since it is upon record that he reduced the legal interest to 12 per cent. The Bramins, in India, are said to have taken 2½ per cent. monthly, so far back as 3000 years, and yet legal interest was not established in modern Europe until the year 1546.

Macpherson, in his History of Commerce, makes the following observations on the unpopularity of receiving interest for the loan of money: “In the year 1251,” he observes, “the consequence of the clamour and persecution raised against those who took interest for the use of money was so violent, that they were obliged to charge it much higher than the natural price, (which if it had been let alone would have found its level,) in order to compensate for the opprobrium, and frequently the plunder which they suffered; and thence the usual rate of interest was, what we should now call most exorbitant and scandalous usury.” And what we now call exorbitant and scandalous usury proceeds in a great measure from a similar prejudice, which prevents the interest of money, like all other pecuniary interests, from finding its natural level, and stamps with criminality, and the odium of usury, any bargain in which money is lent at a higher interest than 5 per cent., however great the risk incurred by the lender. Why should there be a limit to the terms on which money may be borrowed, any more than to the borrowing, or I should rather say, to the hiring any other commodity?

caroline.

Would not such unlimited freedom of interest afford too great encouragement to capitalists to supply prodigals and thoughtless youths with money, and thus facilitate their means of squandering it?

mrs. b.

Men of this description find no difficulty in borrowing of usurers, provided they are able to give security for the payment, and without such security they would not obtain the loan of money either from men of respectability or from crafty usurers. The only difference now is, that they must pay a higher price for the loan, because the lender requires to be remunerated, not only for the use of the money, and the risk he incurs, but also for the ignominy and criminality attached to the proceeding; this necessarily takes it out of the hands of men of honourable character, and throws it into those of people, who having no value for reputation, are much more likely to take undue advantage of the distress of men who are in urgent want of money, and of the ung arded thoughtlessness of prodigal youth.

There is yet another means by which a man of property may derive an income from his capital without employing it himself: it is by lending it to a borrower who is distinguished from all others by the singularity of his dealings — who borrows not only without any intention of making profits by the use of the capital; but also, in general, without any prospect of repaying the principal of the debt.

caroline.

Without any prospect of repaying the debt! And where can he find people who will agree to lend capital on such terms?

mrs. b.

This extraordinary borrower is no other than the government of the country. When government makes a loan, that is to say, borrows capital, it is for the purpose of spending it as soon as procured; and the proprietors of this capital, or, as they are usually denominated, the public creditors or stockholders, scarcely ever expect that the debt should be repaid. Yet notwithstanding this circumstance men are willing to lend their money to government even upon lower terms than to other borrowers. This arises from two causes; the first that the security of government for the punctual payment of the interest is better than that of any individual; and the second, that the public creditor has an indirect means of getting back his capital whenever he pleases, without being repaid by government.

caroline.

In what way?

mrs. b.

By selling his right to receive the interest, to any individual who wishes to invest his capital in the funds, and who will then stand in the place of the original creditor.

caroline.

And can he always sell that right for the sum he originally lent to government.

mrs. b.

Not always exactly; he will sometimes get more and sometimes less, according to the state of the market. If there are many creditors or stockholders desirous to sell, and but few capitalists wishing to buy, he will get less; if many buyers and few sellers, he will obtain more: in the latter case the stocks are said to be high, or rising; in the former, to be low, or falling.

caroline.

But since government spends the capital borrowed instead of deriving any profit from it, by what means is the interest paid?

mrs. b.

It is paid by taxes levied expressly for that purpose.

caroline.

If, then, government spends what is borrowed, the capital no longer exists, and the stockholder remains possessed of only an imaginary or fictitious capital.

mrs. b.

He remains possessed of the right to receive an annual payment, or annuity, equal to the stipulated interest, till the government pays him back the principal. And this annuity (where the government can be depended upon) will always sell for its value to such persons as have capital which they wish to lend at interest. It is thus that the stockholder is enabled to realise this fictitious capital, whenever he chooses, by selling his stock. The capital is, therefore, not lost to the individual; but it is entirely lost to the country. The stock may be sold, but the sale does not re-create the capital that has been spent; it merely transfers to the seller, capital already existing in the hands of the buyer, and which would equally have existed whether the stock were sold or not. So long, however, as it can be exchanged for real capital, and in the mean time produces a substantial income to the possessor, it affords him all the enjoyments that can be derived from wealth.

caroline.

And is it not very injurious to the prosperity of a country that the government should spend its capital?

mrs. b.

No doubt; but under some circumstances it is an unavoidable evil. In cases of urgent danger during a war, it is often necessary to raise larger sums of money, and with more expedition, than can be obtained by taxes; recourse is then had to loans, which, if not paid off, accumulate by repetitions, and become at length a heavy national debt, and a great burden to the country, owing to the taxes that must be raised in order to pay the interest.

We may return to this subject at some future time; let me now ask you whether you fully understand how those who do not employ their capital themselves derive an income from it?

caroline.

Through the agency of others, who, if the capital consists in land, pay them rent; if in money, pay them interest.

mrs. b.

Very well; take care, however, not to be misled by the term money, for no man’s capital consists wholly in money. It must consist chiefly either in lands or saleable produce, rude or manufactured; all of which is estimated in money. And you cannot, as I said before, have clear ideas on this subject until the nature and use of money have been explained to you.

We have now examined all the modes by which men derive a revenue from their capital; there yet remains to be noticed a class of men who are maintained by the revenue of others.

caroline.

Do you mean labourers, who are maintained by wages, and bring a profit to their employers?

mrs. b.

No; these, whom we have distinguished by the name of productive labourers, are maintained by the capital of others; whilst the class of men to whom I now allude are maintained by the income of others. They are labourers, it is true; but of this peculiar description, that their labour is totally unproductive; they consume without re-producing: their labour, therefore, can add nothing to the future wealth of the country, and hence they are called unproductive labourers.

caroline.

I think I guess what description of people you mean; are not menial servants unproductive labourers?

mrs. b.

Yes, they are; for their labour, however useful, does not augment the riches of the country. A productive labourer is paid out of the value of the work he produces: this work remains with his employer, and may be either accumulated or exchanged for other commodities; but the labour of the menial servant, so far from increasing the revenue of his master, is an expense to him, his wages being necessarily paid with the produce of some other labour.

caroline.

There is no doubt an essential difference between these two kinds of labourers: keeping a number of workmen is a source of wealth, whilst keeping a number of menial servants is a source of expense.

mrs. b.

The one is the employment of capital; the other the expenditure of income. Franklin, in his Correspondence, expresses this difference with his usual perspicuity and neatness: — “The first elements of wealth are obtained by labour from the earth and waters. I have land and I raise corn: with this I feed a family that does nothing; my corn will be consumed, and at the end of the year I shall be no richer than I was at the beginning. But if, while I feed them, I employ them, some in spinning, others in hewing timber and sawing boards, others in making bricks for building, the value of my corn will be arrested, and remain with me, and at the end of the year we may all be better clothed and better lodged. And if instead of employing a man, I feed, in making bricks, I employ him in fiddling for me, the corn he eats is gone, and no part of his manufacture remains to augment the wealth and conveniences of the family: I shall therefore be the poorer for this fiddling man, unless the rest of my family work more or eat less to make up the deficiency he occasions.”

But the class of unproductive labourers is far from being confined to menial servants; it extends to all the servants of the public: actors, signers, dancers, and all those who are maintained by the productive labour of others, are of this description.

caroline.

Is it not to be regretted that these people cannot be compelled to a more useful mode of employment?

mrs. b.

Their labour, though of an unproductive nature, is generally useful. Servants, for instance, by relieving the productive labourer of much necessary work, enable him to do more than he could otherwise accomplish. Thus a man engaged in the employment of a considerable capital can spend his time to greater advantage, both to himself and to the community, than in cleaning his own shoes and cooking his own dinner.

caroline.

The use of servants is evidently attended with some of the benefits of the division of labour.

mrs. b.

You will probably be surprised to hear that many of the most valuable ranks of society are included in the class of unproductive labourers. The divine, the physician, the soldier, ministers of state, and magistrates, are of this description.

caroline.

I did not imagine that the class of unproductive labourers had been so respectable. And although their labour is of an unproductive nature, they are, I think, in many instances, more valuable members of society than some of the productive labourers. A magistrate, who faithfully administers justice; a physician, who restores health; a clergyman, who teaches religion and morals; are certainly of more essential benefit to society, than the confectioner or the perfumer, or any of those productive labourers who are employed in the fabrication of luxuries.

mrs. b.

No doubt they are. There is no greater stimulus to industry than security of property; justice is therefore essentially necessary to encourage productive labour; and the legislator and magistrate, though they do not immediately produce commodities, are as necessary to their production as the labours of the husbandman or artisan.