Front Page Titles (by Subject) 18: Of Lending at Interest - Commerce and Government Considered in their Mutual Relationship
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18: Of Lending at Interest - Étienne Bonnot, Abbé de Condillac, Commerce and Government Considered in their Mutual Relationship 
Commerce and Government Considered in their Mutual Relationship, translated by Shelagh Eltis, with an Introduction to His Life and Contribution to Economics by Shelagh Eltis and Walter Eltis (Indianapolis: Liberty Fund, 2008).
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Of Lending at Interest
A farmer, who takes land on a lease, exchanges his work for a part of the product, and gives the other part to the landowner, and that is in the order of things.
Now would the borrower be in the same position as the farmer? Or does money have a yield of which the borrower owes the lender a part?
A septier of corn can produce twenty, thirty or more according to the goodness of the soil and the hard work of the cultivator.
Indubitably money does not reproduce itself in the same manner. But it is not with corn that we should compare it: it is with land, which does not reproduce itself any more than money.
Now in commerce, money yields a return according to the effort of the person who borrows it, just as the land yields one according to the hard work of the farmer.
Indeed, an entrepreneur can only maintain his trade in so far as the money, with which he makes advances, comes back continuously to him with a return in which he finds his subsistence and that of the workers he employs, that is to say, a wage for them and a wage for him.
If he were alone, he would make the most of the demand people had for the articles he sells, and he would bring this return to the highest point.
But as soon as many entrepreneurs carry on the same trade, forced to undercut each other, they make do with a smaller wage and those whom they employ are reduced to smaller gains. Thus competition regulates the return they can reasonably draw from the advances they have made; advances which are for them what the expenses of cultivation are for the farmers.
If commerce could only be carried on by entrepreneurs who were rich enough to provide the capital for it, a small number would carry it on exclusively. Less under pressure from competition to sell at a discount, they would put their wage at a rate that would be all the higher because they would be less pushed to sell their goods, and because it would be easy for them to get together to wait for the moment when they could take advantage of the citizens’ needs. Then their wage could be taken to 100 per cent or more.
But if in contrast commerce is carried on by entrepreneurs to whom people have given advances from their stock, they will be under pressure to sell in order to be able to pay out as their obligation falls due. It will therefore not be in their power to await, from one day to the next, the moment when people will have the greatest need of their goods, and competition will force them all the more to make do with a smaller wage because, being more numerous and for the most part under pressure to make money, it will be harder for them to take concerted action. One cannot doubt that it is desirable for commerce to be carried on by such entrepreneurs.
Now I assume that, having subtracted all the expenses of commerce, there is a general net residue, to form the wage of each entrepreneur, of 15 to 20 per cent.
How will a man manage who has no property, and yet who could with hard work carry on some branch of commerce? He has only two openings. Someone must lend him a stock of merchandise, or someone must lend him the money to buy it, and it is clear that these two possibilities come down to the same thing.
He approaches a rich businessman who says to him: “I am going to advance you what I should have given you for one hundred ounces of silver if you had been able to pay me in ready money, and in a year you will give me one hundred and ten ounces for it.”
He accepts this offer, in which he sees a profit of 5 to 10 per cent for himself out of the 15 to 20 per cent that one may customarily earn when one owns one’s own capital.
No one will condemn this transaction, which is freely made and is at one and the same time advantageous to both contracting parties, and which, by multiplying the number of merchants, increases competition, an absolute necessity if trade is to benefit the state.
No one will deny the rich businessman the right to demand interest for advances which he runs the risk of losing. He counts, as a matter of fact, on the honesty and the hard work of those to whom he has made them; but he can be deceived: he is sometimes: it is necessary for those who pay him to compensate him for the losses he makes with the others. Would it be fair to condemn him to make advances on which he would often lose, without his ever being able to compensate himself? He would certainly never make the advances.
Besides, you cannot deny that a merchant who advances a stock of merchandise has a right to reserve to himself a share in the profits which this stock must produce; he who before advancing the stock had the sole right to the profits.
Now we have just noted that to advance an entrepreneur a stock of merchandise, or to advance him the money he needs to buy that stock is the same thing. If one is in the right to demand interest in the first case, one then has the same right in the other case.
It is a fact that the interest-bearing loan sustains commerce. It has besides been shown that it increases the number of merchants; that in increasing them, it increases competition; that in increasing competition, it makes commerce more profitable to the state. The loan at interest is therefore equitable, and must be allowed.
I know that the casuists condemn it when it is made in money; but I also know that they do not condemn it when it is made in goods. They allow a businessman to lend at 10 per cent, say, merchandise to the value of a thousand ounces of silver; but they do not allow him to lend, at the same interest rate, the thousand ounces in kind.
When I say that the casuists allow the loan of goods at 10 per cent I do not wish to accuse them of using this language, “to lend at 10 per cent”: they would be contradicting themselves too palpably. I mean to say that they allow a businessman to sell for 10 per cent more the goods that he advances for a year. One can see that the contradiction is less palpable.
Our legislators, if that were possible, reason even worse than the casuists. They condemn the loan at interest, and they allow it. They condemn it without knowing why, and they allow it because they are forced to. Their laws, the outcome of ignorance and prejudice, are useless if they are not observed; and if they are observed they damage trade.
The error into which the casuists and the legislators fall comes uniquely from the confused notions they have formed. In effect, they do not blame the exchange market, and they blame the loan at interest. But why should money have a price in one that it does not have in the other? The loan and the borrowing, are they anything other than an exchange? If, in the exchange market, one exchanges sums of money where the loan or the sum borrowed are separated in place, cannot one exchange sums of money which are separated
in time? And because these distances are not of the same kind, must one conclude that the exchange in the one case is not an exchange in the other? So one does not see that to lend at interest is to sell; that to borrow at interest is to buy; that the money one lends is the goods which are sold; that the money one must give back is the price which is paid; and that the interest is the profit to the seller. Certainly, if one had only seen in the loan at interest, goods, sale and profit, one would not have condemned it; but one has only seen the words loan, interest, money; and without reflecting too much on what they mean, one has judged that they should not go together.
Interest at 10 per cent is only an assumption that I make, because I needed to make one. It can be higher, as it can be lower: it is a matter on which the legislator must not reach any decision if he does not want to harm liberty. Custom, which regulates this interest, will cause it to vary, according to circumstances, and the variations must be allowed. Observe how it must of necessity rise and fall in turn.
It will be high, however plentiful money may be, if there are many people wanting to borrow, and if there are few who want to lend.
If those who have money, or who own most of it, need it themselves to support enterprises in which they are engaged, they will only be able to lend by abandoning their enterprises, and it follows that they will only lend when they are assured of a profit equal to, or larger than, the one that they would have made. One will therefore have to give them a lot of interest.
But, even at a time when money is scarce, the rate of interest will be low if money is mainly in the hands of a large number of economical landowners who seek to place it.
Interest rises and falls in turn, in the proportion that the money that people wish to borrow is to the money on offer for loan. Now this proportion can vary all the time.
In a time when rich landowners make very great outlays of every kind, one will borrow more; firstly because the landowners will themselves often be forced to contract loans; and secondly, because to provide for all the consumption they make, a larger number of entrepreneurs will be established, or of men who for the most part need to borrow. That is one of the reasons why interest is higher in France than in Holland.
On the other hand, in a period when more economical landowners spend less, there will be fewer borrowers: for instead of their having to contract loans themselves, they will have money to lend; and since they will consume less, they will reduce the number of entrepreneurs and, consequently, of borrowers. There you have one of the reasons why interest is lower in Holland than in France.
If a new kind of consumption gives rise to a new branch of commerce, entrepreneurs will not fail to multiply in proportion as they believe they can promise themselves much greater profits; and the interest on money will go up because the number of borrowers will be greater.*
If this branch of trade collapses the money will come back to those who lent it, they will seek to place it a second time, and the interest rate will go down, because the number of lenders will have grown.
If entrepreneurs carry on their business with as much careful management as hard work, they will bit by bit become owners of the sums they borrowed. So they will have to be removed from the number of borrowers and added to the number of lenders when they have gained more than the money they need to carry on their commercial activities.†
Finally, laws will increase the number of lenders when they permit interest-bearing loans. Today, in contrast, they tend to reduce the number.
But it is pointless to seek to provide an exhaustive account of all the factors which cause variation in the ratio of the demand for money to borrow to that on offer for loan: I have said enough to show that interest rates must sometimes be higher, sometimes lower.
Just as prices settle themselves in the market place, following the haggling of sellers and buyers, so the rate of interest, or the price of money, is fixed in the places of trade following the haggling of borrowers and lenders. The government recognises that it is not its function to make laws to fix the price of goods which are sold in the market; why then should it think it ought to fix the rate of interest or the price of money?
To make a wise law on this subject, it would need to grasp the ratio of the quantity of money available to lend to the demand for borrowing. But since this ratio forever varies it will not grasp it, or it will only hold it for a moment and by chance; it will therefore need to keep on making new regulations without ever being sure it is doing good: or if it persists in wanting to enforce those it has made, because it does not know how to make others, it will only disturb commerce. People will escape these regulations in secret markets; and the interest rate, which it claimed the right to fix, will rise all the more, as the lenders, having the law against them, will lend with less security.
In contrast, in commercial centres, interest will always regulate itself well, without interference, because it is there that the offers of lenders and the demands of borrowers make apparent the ratio of money to lend to money to borrow.
Not only can interest rates vary from one day to another, they also vary according to the type of trade. That is what we still have to examine.
A merchant who has borrowed to raise the stock for a shop has to earn, over and above his subsistence, the wherewithal to pay the interest he owes. If he has formed a large concern, which he directs with hard work, his outlay to maintain it will be small beer compared with the profits he can make. He will therefore be all the more in a position to pay what he owes: one will therefore run fewer risks in lending to him; one will therefore lend to him with more confidence, and, consequently, at lower interest rates.
But if, with a trade that produces little, he barely earns his subsistence, then what he needs for his subsistence is a high proportion of what he earns. There is therefore no longer the same security in lending to him. Now it is natural that the interest which lenders demand increases in proportion as their confidence falls.
In Paris, the retailers from the Halles pay five sols interest a week for an écu of three livres. This interest puts up the price of the fish they sell in the streets; but the people prefer to buy from them than to go to the Halles to stock up.
On a yearly basis this interest comes to more than 430 per cent. However exorbitant it is, the government puts up with it, because it is profitable for the retailers to be able to carry on their trade at this price, or perhaps again because it cannot stop it.
However, the price that the lender places on his money, and the profit that the retailer makes, are out of all proportion. That is why this interest is hateful; and it becomes all the more open to abuse as the loans are made secretly.
It is not the same with loans made to entrepreneurs who carry on a large-scale business. The interest demanded, proportional to the profits they make, is regulated by custom; because money in the commercial centres has a current price, just as corn has one in the markets. People deal openly, or at least do not hide themselves, and a person sells his money as one would sell any other good.
It is only in the commercial centres that one can learn what rate of interest one may draw from one’s money. Every loan which conforms to that rate of interest is honest because it is in line.
If you ask me what is usury nowadays, I say that there is none in the loans of which I have just spoken, and which adjust themselves to the price that the dealers themselves have placed on the money, and have placed freely.
But the loans made to the retailers of the Halles are usurious, because they are without rules and underhand, and the greed of the lender rides roughshod over the need of the borrower.
In general, every loan between merchants and dealers is usurious when the interest that is extracted is higher than the rate which has been publicly fixed in the commercial centres. But when loans are made to individuals who do not carry out any trade or business, by what rule can one judge the interest one may extract from one’s money? The law. It is here, I think, that the government can without inconvenience set interest. It even ought to do it, and it would be an act beneficial to the state if it made borrowing more difficult. Let it only allow loans at the lowest rate of interest to owners of lands; fathers of families would have less scope to ruin themselves, and money would flow back into trade. Let it tax usury, or let it cover with a still more stigmatising note every loan, even at 1 per cent, made to a son who borrows without his family’s consent. Let it forbid underhand loans; or, if it cannot prevent them, let it give help itself to the entrepreneurs who are in the lowest class of merchants. In a word, while leaving the freedom to borrow in commercial centres, let it check it wherever it can degenerate into abuse. Doubtless it would not be easy to carry out this design but it would be useful to concern itself with it.
[A revised conclusion to the chapter in place of the above final paragraph When one considers the loans in these two extremes, it is easy to understand where usury lies: it will not be as easy to determine where it begins, if one considers in this interval the different prices money can have. Because, in commercial centres, this price is fixed between dealers who know each other to be solvent, would that be a reason to lend at the same price to a merchant whose affairs are in disorder? If so, no one will lend to him, and he will be utterly ruined. It seems that in such a case the risks one runs allow one to demand a higher price than that of the market place. Now what is this price? It is bound to vary according to the degree of confidence that the borrower’s honesty and hard work inspire. It is therefore impossible to predetermine it, and the government must leave well alone.
If trade were perfectly free, secrecy, which is the hallmark of a dishonest action, would be the true character of usury, and the fear of being found out would be the biggest restraint on it. Nowadays, when the law forbids an interest rate that it ought to allow, secrecy means nothing, since one only hides from a law which is held in contempt. People avoid it openly, they are even forced to. Usurious loans, as defined by this law, are authorised by practice which regards them as legitimate, and they are well known in all sorts of loans: people no longer fear opprobrium, and they end up demanding interest publicly.
But is it only the price of money that can be usurious? Cannot the price of every other good be equally so? Is not a merchant a usurer when he abuses my trust or my need in order to gain from me more than he should? Doubtless he is, and he is so with impunity. Now why does the government wish that it should only be the money merchants who cannot take interest, and why nevertheless, contradicting itself, does it allow it to the bankers? It would do better to tolerate in every instance what it cannot prevent.]
[* ] Is it really true, I have been asked, that growth of commerce raises the interest rate? I reply that it necessarily makes it rise if it increases the number of borrowers. Now that is what can happen and what I assume.
[† ] There you have a case where the growth of commerce causes the rate of interest to fall.