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[SECT. V.—: OF INTEREST.] - Dugald Stewart, Lectures on Political Economy, vol. 1 
Lectures on Political Economy. Now first published. Vol. I. To which is Prefixed, Part Third of the Outlines of Moral Philosophy, edited by Sir William Hamilton (Edinburgh, Thomas Constable, 1855).
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Having finished the very slight view which our time permitted me to take of money considered as a medium of exchange, and of the principles which regulate its value in relation to that of commodities, I proceeded (at our last meeting) to consider the tendency which this important invention has, to facilitate the accumulation of stock or capital, which Turgot and Mr. Smith have shown to be so intimately connected with the increase of National Wealth; in this respect its effects in promoting the progress of society are no less striking than those which it produces, (as I had occasion formerly to remark,) by facilitating the separation of professions, and the distribution of labour among the different orders of the community.
Before the introduction of gold and silver in trade, undertakings of every kind, but especially those of manufactures and of commerce, must evidently have been extremely confined, on account of the perishable nature of every other species of property which could be employed as a medium of exchange, and the trouble attending the preservation of them. “A great number of those arts,” as M. Turgot observes, “which are indispensable for the use of the most indigent members of society, require that the same materials should pass through many different hands, and undergo, during a considerable space of time, difficult and various operations. Such, for example, is the art of preparing leather for the purposes of the shoemaker. Whoever has seen the work-house of a tanner, must immediately perceive the impossibility of one, or even several indigent persons providing themselves with leather, tan, utensils, &c., causing the requisite buildings to be erected, and procuring the means of their subsistence till such time as their leather can be sold. In this art, and many others, must not those that work have learned the craft in some degree before they begin to exercise it on materials which are not to be obtained without expense? In what manner are the materials to be collected for the manufactory; the ingredients and the necessary tools for their preparation? How shall this multitude of workmen subsist till the commodity comes to market; a multitude of whom none individually could earn his subsistence by the preparation and sale of a single hide? Who shall defray the expenses for the instruction of the apprentices, and maintain them till their labour can be useful? All this, it is manifest, requires the aid of a proprietor of capital, who shall supply the advances necessary for the purchase and preparation of materials, and for the wages of the workmen employed in preparing them. This capitalist, on the other hand, will naturally expect that the sale of the commodity will not only return to him his advances, but will afford an emolument sufficient to indemnify him for what his money would have procured him, if he had turned it towards the acquisition of land; and, moreover, a salary due to his trouble, and attention, and risk. In proportion as the capital returns to him by the sale of his works, he employs it in new purchases for supporting his family, or maintaining his manufactory. By this continual circulation he lives on his profits; accumulating what he can save to increase his stock, and thereby to enlarge his enterprises still farther.”*
Similar observations might be made to illustrate the necessity of advances for lucrative enterprises in commerce, and also in agriculture, wherever the cultivation of land is carried on to a considerable extent.
All such enterprises, therefore, must necessarily have been confined within very narrow limits, till the accumulation of stock was facilitated by the introduction of money; an invention which thus appears to be not only subservient to the prompt circulation of wealth, but to be essentially connected with its production.
Since capitals then are indispensably necessary to all lucrative enterprises, a certain command of stock may be said, in the ordinary course of things, to be implied in every reasonable project for the augmentation of personal property. And it is thus, that according to the common proverb, “Money has the power of begetting money,” [“Money breeds money.”] Hence those industrious individuals who have not adequate funds of their own, will be willing to share the profits of their enterprises with such owners of capital as may agree to trust them with the employment of their stock. On this principle is founded in reason and equity the practice of lending upon interest; or, in other words, the commerce of money. The lender selling the use of his stock, and the borrower buying it, in a manner perfectly analogous to that in which the proprietor of an estate sells, and the farmer who rents it buys or hires the temporary use of the land.
Of this subject I propose to treat at greater length than of some other articles that may appear at first view, of still more fundamental and general importance. My principal reason for doing so is, that it leads to some interesting discussions which continue to divide the opinions of very eminent writers; and which have been less exhausted than most of the questions connected with this part of the course, by the profound and comprehensive speculations of Mr. Smith.
One of the first authors who in this country investigated with success the principles that regulate the rate of interest, was Mr. Hume, in his Political Discourses, published in 1752. Long indeed before his time, political writers had admitted the general maxim, that a low rate of interest was the most certain of all signs of national prosperity; but they seem very generally to have misapprehended the manner in which these two effects are connected. The lowness of interest was ascribed by Locke, Law, and Montesquieu, to the abundance of money, in proof of which they appealed to the fall of interest, through the greater part of Europe, since the discovery of the Spanish West Indies. But this doctrine, as Mr. Hume observes, is contradicted by the most obvious facts. “Interest in Batavia and Jamaica is at ten per cent., in Portugal at six, though these places, as we may learn from the prices of everything, abound much more in gold and silver than either London or Amsterdam.”* The fact is unquestionably as Mr. Hume states it, although the test to which he appeals, in the difference of prices, is not perhaps so conclusive as he appears to have imagined.
As a further presumption against the same doctrine, Mr. Hume remarks, that “Prices have risen about four times since the discovery of the Indies, and gold and silver have probably multiplied much more; but interest has not fallen much above half. The rate of interest, therefore, is not derived from the quantity of the precious metals.”†
The same conclusion to which Mr. Hume is thus led by an induction from facts, is very clearly and concisely deduced by Mr. Smith from a theoretical view of the subject.
“Before the discovery of the Spanish West Indies, ten per cent. seems to have been the common rate of interest through the greater part of Europe. It has since that time in different countries sunk to six, five, four, and three per cent. Let us suppose that in every particular country, the value of silver has sunk precisely in the same proportion as the rate of interest, and that in those countries, for example, where interest has been reduced from ten to five per cent., the same quantity can now purchase just half the quantity of goods which it could have purchased before. This supposition,” continues Mr. Smith, “will not probably be found anywhere agreeable to the truth; but it is the most favourable to the opinion we are going to examine; and even upon this supposition it is utterly impossible that the lowering of the value of silver could have the smallest tendency to lower the rate of interest. If a hundred pounds are in those countries now of no more value than fifty pounds were then, ten pounds must now be of no more value than five pounds were then; whatever were the causes that lowered the value of the capital, the same must necessarily have lowered that of the interest, and exactly in the same proportion. The proportion between the value of the capital and that of the interest must have remained the same, though the rate had never been altered. By altering the rate, on the contrary, the proportion between these two values is necessarily altered. If a hundred pounds now are worth no more than fifty were then, five pounds now can be worth no more than two pounds ten shillings were then. By reducing the rate of interest, therefore, from ten to five per cent., we give for the use of a capital which is supposed to be equal to one half of its former value, an interest which is equal to one-fourth only of the value of the former interest.”*
“High interest,” according to Mr. Hume, “arises from three circumstances;—a great demand for borrowing,—little riches to supply that demand,—and great profits arising from commerce; and these circumstances are a clear proof of the small advance of commerce and industry, not of the scarcity of gold and silver. Low interest, on the other hand, proceeds from the three opposite circumstances: a small demand for borrowing, great riches to supply that demand, and small profits arising from commerce,—circumstances which are all connected together, and proceed from the increase of industry and commerce, not of gold and silver.”† This analysis of Mr. Hume’s seems to be accurate and satisfactory; and I shall accordingly, in the further prosecution of the subject, follow the arrangement which he has adopted, beginning, in the first place, with the causes and effects of a great or small demand for borrowing.
“When a people,” says Mr. Hume, “have emerged ever so little from a savage state, and their numbers have increased beyond the original multitude, there must immediately arise an inequality of property; and while some possess large tracts of land, others are confined within narrow limits, and some are entirely without any landed property. Those who possess more land than they can labour, employ those who possess none, and agree to receive a determined part of the produce. In this manner the society comes to consist of two orders of men, proprietors and cultivators; and a landed interest arises with privileges, and views, and habits, strikingly discriminated from those which belong to the other members of the community. As the spending of a settled revenue is a way of life entirely without occupation, men have so much need of somewhat to fix and engage them, that pleasures, such as they are, will be the pursuit of the greater part of the landholders, and the prodigals among them will always be more numerous than the misers. In a state, therefore, where there is nothing but a landed interest, as there is little frugality, the borrowers must be very numerous, and the rate of interest must bear a proportion to it. The difference depends not on the quantity of money, but on the habits and manners which prevail.”*
This reasoning of Mr. Hume is perfectly just in the main; but the conclusion is perhaps expressed in too unqualified a manner. In a state where there is nothing but a landed interest, it is manifest that whatever the waste and profusion of the proprietors may be, it is scarcely possible that their expense should in general exceed their income, because there are, by the supposition, no articles of luxury in commerce to form an object for their expenditure. Mr. Hume’s reasoning, therefore, seems rather to apply to a country where commerce has made a certain progress, although not a considerable one; such a progress as to excite in the landed interest a taste for the luxuries and vanities of life, without having established a monied interest of sufficient opulence to supply the increased demand for borrowing. And, if I am not mistaken, this view of the subject receives confirmation from a fact mentioned by Mr. Hume himself, in the first edition of his Political Discourses, that about four centuries ago, money in Scotland, and probably in other parts of Europe, was only at five per cent., and afterwards rose to ten before the discovery of the West Indies.
This fact Mr. Hume states, on the authority of an eminent lawyer, who had verified it by an examination of ancient papers and records; and it certainly forms an exception to Mr. Hume’s general proposition, inasmuch as the monied interest in Scotland was still more inconsiderable four centuries ago than towards the end of the fifteenth century. Of its state at the former period, an idea may be formed from the account of Froissart, (who was at Dalkeith in the year 1360,) and who tells us, that “even in the Doulce Escoche, or lowlands, a complete ignorance prevailed of the commonest arts of life. The meanest articles of manufacture, horse-shoes, harness, saddles, bridles, were all imported, ready made from Flanders.” The same author estimates the houses in Edinburgh, then the capital, at four thousand, and tells us that they were small wooden cottages covered with straw. In the reign of Robert II., (about the year 1380,) the inhabitants of the capital are supposed to have hardly exceeded sixteen thousand.1
Before the end of the following century, commerce and luxury had made considerable progress. In a poem, written during the reign of James III., and entitled Tales of the Priests of Peebles, “taverns and dice are reprobated; and a merchant’s cupboard of plate is estimated at three thousand Scottish pounds, or about seven thousand five hundred of modern sterling currency.”2 The same poem complains of the degeneracy of the Peers from the wisdom, virtue, and valour of their ancestors, and that in consequence of their frequent poverty, they endeavoured to replenish their coffers by unworthy marriages with the opulent bastard daughters of priests, or heiresses of merchants, or by selling the right of marriage of their sons to rich commoners.3
In such a state of society it is certainly not surprising that the rate of interest should have risen greatly beyond what it was in times of comparative simplicity; and yet, if Mr. Hume’s conclusion were admitted without any limitation, the case should have been reversed. He seems indeed to have been sensible of this himself; for he remarks, (after stating the fact now under consideration,) that the lowness of the rate of interest in Scotland four centuries ago, was owing to this, that though the lenders were then few, the borrowers were still fewer. This concession, however, is plainly in direct opposition to his general principle; and confirms the necessity of that limitation with which I already said it ought to be adopted.
From what has been now observed, it appears, both a priori, and from the fact, that the rise of interest in Scotland before the discovery of the West Indies, resulted from the first operation of an infant commerce on the manners of a people among whom the national wealth was accumulated chiefly, but not exclusively in the hands of the landed proprietors; whatever opinion, however, we may form on this point, it is equally clear that the demand for borrowing depends on the general state of manners and habits, and not on the quantity of the precious metals.
The case is precisely similar with regard to the second circumstance mentioned in Mr. Hume’s enumeration,—the quantity of stock which exists to supply the demand of the borrowers. This effect also depends on the habits and way of living of the people, not on the quantity of gold and silver. In order to have, in any state, a greater number of lenders, it is not sufficient, nor requisite, that there be great abundance of the precious metals. It is only requisite that the property, or command of that quantity which is in the state, whether great or small, should be collected in particular hands, so as to form considerable sums, or compose a great monied interest. This begets a number of lenders, and sinks the rate at which money may be borrowed; and it evidently depends, not on the quantity of specie, but on particular manners and customs which accumulate a superfluity of specie in the hands of a certain description of individuals.
This description of individuals, too, naturally arises, in the farther progress of society, from the physical circumstances of our condition, combined with our moral constitution. The rude materials of all those objects which minister to our wants, are derived ultimately from the ground; but they are seldom furnished by nature in that form in which they can be applied to immediate use. There must, therefore, beside the cultivators and proprietors of land, be another order of men, who, receiving from the former the rude materials, work them into their proper form, and retain part for their own use and subsistence. In the infancy of society, these contracts betwixt the artisans and the peasants, and betwixt one species of artisan and another, are commonly entered into immediately by the persons themselves, who, being neighbours, are readily acquainted with each other’s necessities, and can lend their mutual assistance to supply them. But when men’s industry increases, and their views enlarge, it is found that the most remote parts of the state can assist each other as well as the more contiguous; and that this intercourse of good offices may connect together in a thousand ways the most different orders of individuals in the most extensive and populous community. Hence the origin of merchants, who serve as agents betwixt those parts of the state that are wholly unacquainted, and are ignorant of each other’s necessities. It is manifest, too, that as the people increase in numbers and industry, the difficulties of their mutual intercourse must increase; and of consequence the business of the agency or merchandise will become so complicated as naturally to divide and subdivide itself into various branches, from the same causes which give rise to the division of labour in the mechanical arts, and to the separation of trades and professions. In all these commercial transactions, it is necessary and reasonable, that a certain part of the commodities should remain with the merchant, to whose industry and skill in facilitating their exchanges, the existence of a great proportion of them is entirely owing; and thus gradually arises and multiplies that order of men, called the Commercial Interest, who have exerted so powerful an influence over the policy and manners of Modern Europe.
I have already illustrated the effects of Manufactures and Commerce in exciting a spirit of Agricultural industry, by leading the husbandman to increase his surplus produce, in order to have something to give in exchange for the articles that minister to his comfort or vanity. Commerce, at the same time, turns to account every particle of the produce of this industry, and instead of allowing it to perish on the spot where it is obtained, circulates it through the state, so as to render it at once an addition to the national stock, and a stimulus to the industry of others. Of this circulation merchants are the great agents and instruments; and as they take a more enlarged and comprehensive survey of the different interests of the community than any other description of men, they acquire a far greater command of the circulating stock. The habits of frugality, too, naturally connected with their education and profession, and that love of money, which is the never-failing consequence of commercial pursuits, render their expenditure less in proportion to their revenue than that of landed proprietors, or even than those of men who follow the more liberal walks of lucrative industry. In this manner, while they open channels for the free circulation of wealth, and thereby increase its quantity, they become themselves basins or reservoirs in which this wealth is locally accumulated. It is on this accumulation of wealth in particular hands, more than on the general wealth of the community, that the supply of stock to satisfy the demand for borrowing depends; and it appears from what has been said, how much both the existence of the stock and its partial accumulations are the consequences of commerce.
It may be said, indeed, that the increase of commerce, if it adds to the number of lenders, adds also to the number of borrowers, or rather that it creates a new order of borrowers, who contract debts, not from necessity, but to increase their capital and enlarge their trade. The observation is just, undoubtedly; but the two circumstances do by no means compensate each other: for, in a great commercial country, there will be always a large proportion of individuals, who, after having acquired a competency by their industry, will be desirous to indulge in ease and indolence; and a still larger proportion of their descendants who, inheriting affluence from their forefathers, will be unwilling to burden themselves with the cares of a laborious profession. Such individuals constitute what is properly called the Monied Interest, in contradistinction not only to the landed interest, but to the trading and manufacturing interests in which the owners themselves employ their own capitals. The growth of this monied interest, or, in other words, the quantity of stock to supply the demand of borrowers, will evidently keep pace with the general increase of capital, that is, with the increase of national stock.1
The stock belonging to the monied interest, it is farther manifest, is not at all regulated by the value of the money, whether paper or coin, which serves as the instrument of the loans. The capitals are, indeed, commonly lent out and paid back in money; and hence the lenders are distinguished by the name of the Monied Interest; but the truth is, (as Mr. Smith remarks,* ) that the money is merely the deed of assignment, (as it were,) which conveys from one hand to another those capitals which the owners do not care to employ themselves. Those capitals may be greater in any proportion than the amount of the money which serves as the instrument of their conveyance; the same pieces of money successively serving for many different loans, as well as for many different purchases. The truth of this observation is sufficiently obvious from what was formerly stated on the subject of Circulation.—[P. 378, seq.]
While the progress of commerce thus creates a monied interest, it undoubtedly adds to the number of borrowers; but, by doing so, it does not necessarily raise the rate of interest. To understand the reason of this, it is of importance to attend to the different effects produced by a demand for money to be spent in consumption, and a demand for money to be employed in trade. The former has, undoubtedly, a tendency to raise the rate of interest; and there is no fixed limit which it may not be conceived to pass, as there is no fixed limit to the extravagance and improvidence of the prodigal. But the case is very different with respect to the latter; for the rate of interest paid by merchants will be always limited by the profits of trade; and the same circumstances which produce an increase in their demand for borrowed money, must necessarily sink these profits, by bringing a greater number of mercantile stocks into competition with each other. It is evident that when the stocks of many rich merchants are turned into the same trade, their mutual competition must tend to lower its profits; and, in like manner, when there is an increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all. It is farther evident, that the præmium given by a merchant for the use of money, will be proportioned to the profit he expects to make by his commercial speculations. And, accordingly, this is the third circumstance mentioned by Hume as a cause of low interest;—low profits arising from commerce.1
As low profits arising from commerce necessarily produce a low rate of interest, so a low rate of interest has a tendency, in its turn, to reduce still more the profits of trade, by inducing many to continue their stock in commerce, in order to derive from it all the advantages which the capitalist has a right to expect when he superintends the employment of his own money. It is owing to this circumstance, that in Holland almost every man is a man of business; for the interest of money is so low, that none but the very wealthiest people are able to live on the revenue which their capital affords. The Dutch carry on trade upon lower profits than any people in Europe; but low as these profits are, they are sufficient to render trade the general and fashionable pursuit in a country, where people of good credit are accustomed to borrow at three per cent., and where Government was able to borrow at two. These two causes, therefore, low profits and low interest, mutually act and react on each other; and they are both of them necessary consequences of an extensive and flourishing commerce. We may add, that, as low profits arise from the increase of commerce and industry, they serve in their turn to the farther increase of commerce, by rendering the commodities cheaper, increasing their consumption, and heightening the industry.
“In this manner,” says Mr. Hume, “if we consider the whole connexion of causes and effects, interest is the true barometer of the state, and its lowness is a sign almost infallible of the flourishing condition of a people. It proves the increase of industry, and its prompt circulation through the whole state, little inferior to a demonstration. And though, perhaps, it may not be impossible but a sudden and a great check to commerce may have a momentary effect of the same kind by throwing so many stocks out of trade, it must be attended with such misery and want of employment to the poor, that, besides its short duration, it will not be possible to mistake the one case for the other.”*
From the reasonings which have been already stated, and which, I must not at present attempt to recapitulate, we were led to conclude with Mr. Hume, (in opposition to the opinions of Locke, Law, and Montesquieu,) that the rate of interest has no necessary connexion with the plenty or scarcity of the precious metals, depending entirely on the habits and manners of a people, more particularly on the state of their commerce and industry. The result of the whole was, that the lowness of interest may be regarded as an almost infallible sign of a flourishing commerce, evincing at once an active spirit of national industry, and a prompt circulation of wealth through all those channels in which it can be employed with advantage.
I shall only take notice farther before leaving this part of the subject, (and the remark may probably appear superfluous, after what has been already stated,) of the two different senses in which the value of money is to be understood in commercial disquisitions. On some occasions this phrase expresses the quantity of the precious metals we give in exchange for commodities: on other occasions, it expresses the proportion between a sum of money, and the interest it bears in the market.
These two different modes of valuing money have, in truth, very little connexion with each other, inasmuch as its exchangeable value in relation to the different articles of trade may be low, while the rate of interest is high, and vice versa. One obvious reason of this (although not the only one) is, that the money brought into the market for the purchase of commodities, is that which is circulated to procure the necessaries and accommodations of life: that which is lent on interest, is what is actually drawn out of circulation to be accumulated into a capital.
I should hardly have thought it necessary to mention this ambiguity in the word value, when applied to money, if it had not escaped the attention of some respectable writers.
In a late publication (for example) on the Corn Trade,1 there are some tables for converting the ancient money of England and of Scotland, into the present sterling money, which tables, we are told, proceed on the two following principles:—
1. In England and in Scotland, at the time of the Conquest, there were twenty shillings in the coinage pound of silver, which continued with very little variation in England, till the year 1347, and in Scotland till 1306; but now, there are sixty-two shillings in the coinage pound of silver in both kingdoms, so that £100 at that time, were equal to £310 of the present money, in point of sale or denomination.
2. Prior to the sixteenth century, the interest or yearly value of money, in both England and Scotland, was about sixteen per cent.; whereas it is now reduced to five per cent.
“Money therefore,” says this author, “being raised or reduced in value according to its yearly legal produce, £100 bearing interest at ten per cent., is equal in value to £200, bearing only five per cent.; and so of other sums in proportion. So that £100 of ancient money, being equal in value to £310 in point of denomination, and money being now worth only five per cent. yearly, therefore the £310, with the interest at sixteen per cent., were equal to £992 of the present money.”
On these principles, accordingly, a laborious table has been constructed, exhibiting the prices of wheat in England from 1223 to 1784; first, in the money of the times; and secondly, in what is supposed to be an equivalent money price at present.
It is sufficiently obvious, that in the observations now quoted, the two meanings of the phrase value of money, which have just been distinguished, are confounded together.
It would be easy to confirm and illustrate the foregoing reasonings by an appeal to facts, as well as to reconcile to them some apparent exceptions which occur in the history of commercial nations. I must, however, at present, confine myself to a few particulars, which seem to me more peculiarly interesting from their connexion with the history of this country, and to one or two anomalous cases which may be supposed, at first view, to contradict our general conclusions.
The first English Act of Parliament in which we find any rate of interest mentioned, is the 37th of Henry VIII., enacted in 1546. This Act prohibits, under severe penalties, all interest above ten per cent., and consequently proves, that before that period, a higher rate of interest had sometimes been taken. In the earlier ages of the English history, all loans of money for interest were regarded as usurious;—a prejudice which prevailed also all over the rest of Europe, and which (as will afterwards appear) is not altogether of modern origin. In the very preamble to this law of Henry VIII., the practice of taking interest is stigmatized as immoral and criminal; and although it authorized it, from political considerations, yet the prejudice continued so strong, that in the following reign (of Edward VI.) the Statute of Henry was repealed, and all interest prohibited. By the 13th of Elizabeth, the Statute of Henry VIII. was revived with additional clauses, still prohibiting the taking of interest above ten per cent. It appears from D’Ewes’s Journal of Queen Elizabeth’s Parliaments, that while this Act was depending in the House of Commons, it occasioned warm debates, and drew from many of the members violent invectives against usury or interest of every kind, as unchristian, detestable, and damnable. It was said to be,—“præter naturam,”—“idem ac hominem occidere,”—“proxima homicidio,” &c. &c.1
Mr. Hume (in the Third Appendix to his History of England) remarks, that “by a lucky accident in language, which has a great effect on men’s ideas, the invidious word usury, which formerly meant the taking of any interest for money, came at this period to express only the taking of exorbitant and illegal interest.” The Act of Queen Elizabeth violently condemns all usury, but permits ten per cent. interest to be paid.
I shall have occasion afterwards to consider the origin of these prejudices against usury, and also to examine the policy of those restrictions which our legislators have thought proper to continue on money loans to the present day. In this inquiry I have referred to the English laws, only as affording a document of the different rates at which money appears to have been actually lent at different periods; for although the legal rate of interest does not with precision determine the market rate, (as it merely fixes the limit which it cannot exceed,) yet as the object of our lawgivers has plainly been to adapt the changes in the legal rate, to that market-rate which would naturally have arisen from the varying circumstances of society, and as the market-rate has been, on the whole, below the legal rate, the progress of our laws affords us sufficient data for comparing the actual rates of interest in England, with the general principles formerly stated.
The Law of Elizabeth authorizing interest under ten per cent., continued in force till the 21st of James I. (1623,) when it was made penal to take above eight per cent. Soon after the Restoration, it was reduced to six per cent., at which rate, by the way, it had been fixed nine years before under the usurpation of Cromwell; and by the 12th of Queen Anne it was farther reduced to five per cent., at which rate it still continues.
It appears, therefore, that since the reign of Henry VIII., a gradual abatement in the rate of interest has accompanied the growing commercial prosperity of the country. The demand for money at that epoch must have been great in consequence of the general spirit of improvement which was rising over the kingdom, and at the same time the ready money accumulated in the coffers of individuals comparatively inconsiderable. The kings of England, both before and after this period, borrowed large sums in Genoa and the Netherlands, and so low was their credit, that beside the exorbitant interest of ten or twelve per cent., they were obliged to make the city of London join in the security.1 It is somewhat curious, that the Act which, in 1623, reduced the interest of money to eight per cent., states in its preamble the declining circumstances of the nation, although it affords itself the most unequivocal of all documents of its advancing wealth; for (as Mr. Chalmers justly remarks) “such laws can never be safely enacted till all parties, the lenders as well as the borrowers, are properly prepared to receive them.” Accordingly, Stowe tells us (speaking of the reign of James VI.) “that it would in time be incredible, were there not due mention made of it, what great increase there is, within these few years, of commerce and wealth throughout the kingdom; of the great building of royal and mercantile ships; of the repeopling of cities, towns, and villages; beside the sudden augmentation of fair and costly buildings.” Nor will this account be suspected of any exaggeration, when we reflect, that during the reign of James the nation enjoyed a longer interval of peace than it has ever done since, no less than twenty-two years of almost uninterrupted tranquillity; a fact which has been alluded to by some historians, as involving a reproach on his glory as a sovereign, although, in truth, it is more than sufficient to expiate all the follies and absurdities which debased his character.
The picture given by Lord Clarendon of the state of England during the first part of the reign of Charles I., is no less flattering. Nor was the progress of the country, although interrupted for a time by the civil wars, retarded on the whole by that event. On the contrary, Mr. Chalmers has remarked, that “these wars, unhappy as they were while they continued, both to king and people, produced in the end the most salutary influences, by bringing the higher and lower ranks closer together, and by continuing in all a vigour of design and activity of practice, that in prior ages had no example.”1
One of the first consequences of real hostilities, was the establishment of taxes, to which the people had seldom contributed, and which produced before their final conclusion, the sum of £95,512,025. In this estimate, indeed, are included the sales of confiscated lands, compositions for estates, and such other more oppressive modes of raising money; but the wealth of the country may be judged of from this, that there were collected by excises only £10,200,000, and by tonnage and poundage £5,700,000. The opulence which industry had been collecting for ages, was thus brought into circulation by means of the tax-gatherer; and the evils resulting from the dormant hoards of country gentlemen, and other descriptions of individuals, remedied, in a great measure, by the liberality with which they contributed to the wants of the sovereign.
In consequence of these and other causes, the legal rate of interest was reduced in 1651 to six per cent. And the same rate was continued by a law of Charles II., passed soon after the Restoration.
The activity and ardour which the civil commotions of the country had excited, began now to be turned to the arts of peace. The several manufactures and new productions of husbandry that were introduced from abroad, before the Revolution, not only formed a new epoch, but evince a vigorous application to the useful arts, in the intermediate period. The common highways were repaired and enlarged, and rivers were deepened for the purposes of water conveyance, while foreign trade was increased by opening new markets, and by withdrawing the alien duties, which had always obstructed the vent of native manufactures.
But above all, says Mr. Chalmers, the change of manners, and the intermixture of the higher and middle ranks by marriages, induced the gentry, and even the younger branches of the nobility, to bind their sons apprentices to merchants, and thereby to ennoble a profession that was before only gainful, to invigorate traffic by their greater capitals, and to extend its operation by their superior knowledge. And accordingly, Child, Petty, and Davenant, agree in asserting that the commerce and riches of England did never, in any former age, increase so fast as in the busy period from the Restoration to the Revolution. From an authentic account of the customs, (referred to by Mr. Chalmers,) it appears that they were more than doubled during this short interval; and we are told by Dr. Davenant, that the tonnage of the merchant ships was, in the year 1688, double of what it had been in 1666; and the tonnage of the Royal Navy, which in 1660 was only 62,594 tons, was in 1688 increased to 101,032 tons.1
Towards the end of King William’s reign, the interest of money began to fall; and it continued so low, even amid the pressures of the subsequent war, that Parliament enacted in 1713, that the legal interest should not rise higher than five per cent. after September 1714. This law continues in force in the present times; and since the period it was enacted, the market rate seems to have been, on the whole, below the legal rate, notwithstanding the effects of the funding system, and of some other accidental circumstances in keeping up the rate of interest. About seven years ago, the Bank of England was in the practice of discounting bills at four per cent. And in the reign of George I., the natural rate of interest fell to three per cent., while the Government seldom borrowed at more than four.2
The effects produced on the market rate of interest by public loans, and more particularly by those high gratuities which, in times of difficulty, Government is under the necessity of giving, are sufficiently evident. But on this subject I shall not enlarge at present; although it is of great importance, not only in consequence of its connexion with the variations of interest in this country, but with those general principles which influence the progress of national improvement.
During the whole period which has been now under our review, from the reign of Henry VIII. till the present century, while the interest of money has been gradually diminishing, the wages of labour (which may be expected always to increase with the increase of national stock) have been continually rising.
Agreeably to the same general principles, we find a small difference in the market rate of interest in the two United Kingdoms, corresponding to their unequal measures of national prosperity. The market rate of interest in Scotland is rather higher than in England, although the legal rate of interest be the same in both. In the latter country, the competition of great and numerous stocks in every branch of trade, must necessarily diminish the profits of the trader; and the diminution is still farther aggravated by that increase in the wages of labour which a superabundance of stock produces. In Scotland, the comparative poverty of the country is accompanied with consequences precisely opposite.
In Ireland the legal rate of interest is six per cent. An attempt was made a few years ago to lower it to five, but without success. I am not acquainted with the arguments which were employed on the opposite sides of the question; but the consideration which appears to have had the chief weight was, that a considerable portion of the stock and capital of the kingdom was English; that the only temptation the proprietors had to lay it out in Ireland was the additional interest paid there, and that if this were reduced the greater part of it would be withdrawn.1
In France, the legal rate of interest has not been always regulated by the market rate, during the course of the present century, but has been, in several instances, violently altered by Government for political purposes. In 1720, it was reduced from five to two per cent. In 1724, it was raised to three and one-third per cent. In 1725, it was again raised to five per cent. In 1766, during the administration of M. Laverdi, it was reduced to four per cent. The Abbé Terray raised it afterwards to the old rate of five per cent. Although, however, the legal rate of interest in France has frequently been lower than in England, the market rate has generally been higher, the ingenuity of borrowers and lenders being employed there as in other countries, to evade the law, where it did not happen to be accommodated to the commercial circumstances of the nation. From this statement of the comparative market rates of interest in France and in England, it would appear that the profits of trade were higher in the former country than in the latter; a conclusion which is strongly corroborated by another well-known fact, that many British subjects have chosen to employ their capitals rather there than at home, notwithstanding the low degree of importance which was attached in France to mercantile opulence. If the foregoing principles concerning interest be just, we must also conclude from these facts, that the accumulation of stock in France was less than in England, or at least, that the national prosperity was not so rapidly advancing; and, accordingly, we find, that the wages of labour were lower, and the condition of the common people greatly inferior, in respect of the comforts and accommodations of life.
In earlier times the case was different. About the period when Elizabeth fixed the rate of interest at ten per cent., Henry IV. of France reduced it from eight and one-third per per cent. (at which it was fixed by Francis I., anno 15221 ) to six and one-half per cent; a fact which Mr. Hume refers to in his History, as evincing the great advance of France above England in commerce about the middle of the sixteenth century. In the Appendix to the twenty-fifth volume of the MonthlyReview, a writer who professes to speak from good information concerning the present state of that kingdom, (1798,) assures us, that the interest of money is from six to seven per cent., all restraints upon usury being now taken away. The same writer tells us, that the wages of labour have in general risen greatly of late, and that in some places the wages of rustic labour have been nearly doubled. These facts, supposing them to be accurately stated, afford no exception to our general principles; for the interest of money appears to have risen in a very inconsiderable proportion when compared with the wages of labour, more particularly when it is considered that, even under the old Government, the market rate of interest was higher than in England. Indeed, there can be little doubt that in our own country, the market rate of interest would be at present six or seven per cent. if the legal restraints were abolished.
If we extend our view to our West Indian colonies, we find the same general principles apply, although the results are somewhat different, in consequence of particular combinations of circumstances. As a new colony must always for some time be more understocked in proportion to the extent of its territory, than the greater part of other countries, the stock which exists, as Mr. Smith has remarked,* is applied to the cultivation only of what is most fertile and most favourably situated, the lands near the sea-shore, and along the banks of navigable rivers—lands, too, which are frequently purchased at a price below the value even of their natural produce. Stock employed in the purchase and improvement of such lands must yield a very large profit, and consequently afford to pay a very large interest. As the colony increases, the profits of stock gradually diminish. When the most fertile and best situated lands have been all occupied, less profit can be made by the cultivation of what is inferior both in soil and situation, and less interest can be afforded for the stock which is employed. In the greater part of our colonies, accordingly, both the legal and the market rate of interest have been considerably reduced during the course of the present century. As riches, improvement, and cultivation have increased, interest has sunk; so that, although still higher than in this part of the world, it is low when compared with what it was at a more early period. It runs in general from six to eight per cent.
But although the rate of interest in these colonies is plainly regulated by the general principles formerly explained, it must be confessed, that it does not appear, on a superficial view, to bear the same relation to the wages of labour which it does in Europe. The truth is, (as Mr. Smith has further observed,* ) that new colonies are not only understocked, in proportion to the extent of their territory, but underpeopled in proportion to the extent of their stock. The rapid accumulation of their stock, at the same time, enables the planters to increase the number of their hands faster than they can find them in a new settlement, and, of consequence, those whom they do find are very liberally rewarded. This combination of high wages of labour and of high profits of stock, is seldom to be found but in the peculiar circumstances of new colonies. And even in these, as improvement goes on, their mutual relation comes to approach more and more to the general theory. Thus, in the West Indies, while the profits of stock have gradually diminished during the last hundred years, the wages of labour continue unabated. The reason, according to Mr. Smith, is obvious, for “the demand for labour increases with the increase of stock, whatever be its profits; and after these are diminished, stock may not only continue to increase, but to increase much faster than before.”† The connexion between the increase of stock, and that for the demand for useful labour, is fully explained by Mr. Smith in that part of his work where he treats of the accumulation of stock.‡ The further illustration of it has no connexion with our present subject.
Another case is mentioned by the same ingenious and profound writer, as affording an apparent exception to the foregoing doctrine; I mean the case of a country whose state has been suddenly altered by the acquisition of new territory, or of new branches of trade. Here “the profits of stock, and with them the interest of money, may rise, even although the country is fast advancing in the acquisition of riches. The stock of the country not being sufficient for the whole accession of business, which such acquisitions present to the different people among whom it is divided, is applied to those particular branches only which afford the greatest profit. Part of what before had been employed in other trades, is of course withdrawn from them, and turned into some of the new and more profitable ones. In all those old trades, therefore, the competition comes to be less than before; and as the market is less fully supplied with the different sorts of goods, their price rises more or less, and yields a greater profit to those who deal in them, and who can therefore afford to borrow at a higher interest. . . . This accession of business, to be carried on by the old stock, must diminish the quantity employed in a great number of particular branches in which the competition being less, the profits must be greater.”* So that, through all the different branches of trade, both old and new, the demand for borrowed money must necessarily yield a higher interest to the lenders.
In Bengal, and the other British settlements in the East Indies, the wages of labour are very low, while the profits of stock and the interest of money are very high. The truth is, that the same cause which lowers the wages of labour, viz., the diminution of the capital stock of the society, or of the funds destined for the maintenance of industry, raises the profits of stock. By the wages of labour being lowered, the owners of what stock remains in the society can bring their goods cheaper to market than before, and at the same time they can sell them dearer, as the market is not so well supplied. These unnatural profits, arising from the ruined state of these countries, afford of consequence a proportionally exorbitant interest. “In Bengal,” according to Mr. Smith, “money is frequently lent to the farmers at forty, fifty, and sixty per cent., and the succeeding crop is mortgaged for the payment. As the profits which can afford such an interest must consume almost the whole rent of the landlord, so such enormous usury must in its turn eat up the greater part of these profits.”* And hence, on the one hand, the rapid accumulation of wealth by our countrymen in that part of the world; and on the other, the oppressed and impoverished condition of the natives.
In a country which had obtained that complete measure of opulence and of population of which its physical advantages admitted, and which at the same time was not on the decline, both the wages of labour and the profits of stock would probably be very low. The country being, by the supposition, fully peopled, the competition for employment would reduce the wages of labour to that minimum which was just sufficient to prevent the race of labourers from diminishing; and the stock being fully adequate to all the business that could be transacted, the competition would be as great, and consequently the rate of profit as low as possible.
It may be doubted, however, whether this hypothetical case was ever realized in its full extent in the history of mankind. At first view, perhaps, China may appear to approach to the description; and undoubtedly it seems to have continued longer in a stationary condition, than any other country with which we are acquainted. It is, however, very well remarked by Mr. Smith, that although China may have acquired that full complement of riches which is consistent with the nature of its laws and institutions, there is the greatest reason to believe that this complement is far short of what its physical advantages might admit under a different system of policy. Of this a judgment may be formed from the contempt in which foreign commerce is held; from the exclusion of foreign vessels from all the ports, one or two excepted; and above all, from the oppressive extortions to which men of small capital are liable from the inferior mandarins. This last circumstance of itself, added to the comparative security of the rich, must establish a monopoly in favour of the latter, and increase greatly the profits of trade. Accordingly twelve per cent. is said to be the common interest of money in China.1 The wages of labour are no higher than what is sufficient for the most scanty subsistence of the labourer, the population being incomparably beyond what the stock engaged in business is able to employ.
In what has now been said, we have considered the riches or poverty of a country as the only causes which influence the rate of interest. It is possible, however, that other adventitious circumstances may operate to the same effect. When the law, for example, does not enforce the performance of contracts, the precariousness of repayment places all debtors in the same situation with persons of doubtful credit, and subjects them to the same usurious conditions. In accounting for the high rate of interest during the earlier periods of the modern history of Europe, this cause ought not to be overlooked.
The same effect takes place in a still greater degree where the law absolutely prohibits interest. Necessity must frequently produce evasions of the law; and in such cases a premium will be expected, not only in proportion to the profits to be made by the use of the money, but to the danger to which the lender is exposed in the event of a discovery.
From the general principles which we have now been endeavouring to illustrate, it is easy to conceive in what manner the prices of commodities may sometimes continue stationary while the wages of labour are progressive; for the same cause which raises the wages of labour, (viz., the increase of national stock,) has a tendency to lower the profits of the merchant, and, consequently, the variations in these two elements of price may so balance each other, as to bring the commodity to the market at the same rate as before.
Before leaving this part of our subject, it may be worth while to add, that the ordinary market price of land is regulated, in every commercial country, by the ordinary market rate of interest. If the return to be expected from vesting a capital in land, were equal to what could be obtained by lending the same sum upon interest, the superior security, together with the other advantages connected with landed property, would induce every person who wished to derive an income from his money without superintending the employment of it himself, to prefer the former species of income to the latter. The truth is, that these advantages are such, as to compensate a certain difference in the pecuniary return, and accordingly the market rent of land may be always expected to fall short of the market interest of money. What the difference between them is, in particular cases, will no doubt depend somewhat on the judgment or fancy of the individual; but it is evident that there are certain limits within which it must be confined. If the pecuniary difference was very great, the market would be glutted with land, its ordinary price would fall, and the balance would be restored. On the other hand, if the advantages of landed property were more than sufficient to compensate the pecuniary difference, everybody would buy land, and the rise in its price would restore the natural proportion between the rent of a capital so employed and the market rate of interest. When interest was at ten per cent., land was commonly sold for ten and twelve years’ purchase. As interest sunk to six, five, and four per cent., the price of land rose to twenty, five-and-twenty, and thirty years’ purchase; so that, in general, the price of land may be expected to vary inversely with the value of money.
In farther illustration of this subject, I may observe, that land, when let on lease, may be considered as so much capital let out by landlords to the farmers; and consequently, a very close analogy must exist between the condition of the capitalist, or landed interest, and that of the properties of disengaged capital, or monied interest. A pecuniary augmentation of rent, however, is not an augmentation of the rent of the capital alone, but of the capital itself, being immediately convertible into property, by a rate determined by the number of years’ purchase which land may be worth in the market. In this respect, too, the same general principles apply to the rent of land, and to the interest of money, any additional annual dividend declared by our chartered companies instantly resolving itself into capital.
This doctrine, at the same time, it is necessary to remark, although just and unquestionable in the main, must be understood with certain limitations. Landed property has many circumstances peculiar to itself, which, by stamping upon it a value independent of the pecuniary returns it affords, prevents its price from being regulated by the same general principles which apply to other articles of commercial speculation. Local causes, for example, may, in particular districts, alter the general proportion of buyers to sellers, and may thus occasion a local rise or fall in the price of land, while the market rate of interest is nearly the same over the whole kingdom.1 In places where thriving manufactures have been established, land has been observed to sell more briskly, and for more years’ purchase than in other districts, for there the number of buyers may be expected to exceed the number of sellers. In such manufacturing districts, the riches of one set of men not arising from the extravagance and waste of another, as it does in other places where men live idly on the produce of their land, the industrious part of the community brings an increase of wealth from a distance, without injuring the interests of their neighbours. And when the thriving tradesman has got more than he can well employ in trade, his next thoughts are to look out for a purchase in the vicinity, where the estate may be under his eye, and may remove neither himself nor his children from the business to which they have been accustomed. The extraordinary demand for land, therefore, in such situations, must occasion an extraordinary enhancement of its price.
In regulating the proportion, too, between the price of land and the value of money, a good deal, it is evident, will depend on the habits of the landed gentry in point of frugality or of dissipation. Where it is fashionable for them to live beyond their income, debts will increase and multiply, and lay them under a necessity, first of encumbering and then of selling their estates. This is generally the cause why men part with their land, for it happens rarely that a clear and unencumbered estate is exposed to sale merely for a pecuniary profit. Mr. Locke remarks, that “there is scarce one in a hundred that thinks of selling his patrimony, till mortgages have pretty well eat into the freehold, and the weight of growing debts force the proprietor, whether he will or no, out of his possessions. . . . . It is seldom,” he adds, “that a thriving man turns his land into money, to make the greater advantage; the examples of it are so rare, that they are scarce of any consideration in the number of sellers.”
“This I think may be the reason,” continues the same writer, “why, in Queen Elizabeth’s days, (sobriety, frugality, and industry, bringing in daily increase to the growing wealth of the kingdom,) land kept up its price, and sold for more years’ purchase than corresponded to the interest of money, then busily employed in a thriving trade, which made the natural interest much higher than it is now, as well as the legal rate fixed by Parliament.”1
In these observations of Mr. Locke there is much truth and good sense, but I apprehend that they are by no means so strictly applicable to the present state of our country as they were at the time when he wrote. The attachment to landed property is now greatly diminished. The personal consideration arising from it has sunk in the public estimation, in consequence of the progress of commerce and of luxury, and the rank of an individual is measured chiefly by the extent of his expenditure. The extravagance and dissipation of the metropolis, are preferred to the simple and frugal enjoyments of the country; and land, like any other article of property, is valued chiefly in proportion to the revenue it affords. Although, therefore, it still possesses, and must necessarily possess, certain advantages over every other species of property, these advantages are not so great now as they formerly were, and consequently the price of land may be expected to be more accurately regulated by the interest of money, than when the feudal ideas were more prevalent, and the commerce of England comparatively in its infancy.
The question concerning the expediency of subjecting the commerce of money to the regulation of law is to be considered in another part of the course.
In the observations which I have hitherto made on National Wealth, my principal object has been, to illustrate some of the most important elementary principles connected with that article of Political Economy, with a view chiefly to facilitate and assist your studies in the perusal and examination of Mr. Smith’s Inquiry. The greater part of these disquisitions have been entirely of a speculative nature, aiming merely to analyze and explain the actual mechanism of society, without pointing out any of the conclusions, susceptible of a practical application, to which they may lead. A few disquisitions of this last description may, indeed, have insensibly blended themselves with our analytical inquiries; but in these instances I have departed from my general plan, and my only apology is, that the limits of my course left me little prospect of being able to resume, in a systematical order, the consideration of the questions which gave occasion to these digressions.*
To B. I. Ch. ii. § 3.
[* ] [Réflexions sur la Formation et la Distribution des Richesses, lxi.; Œuvres, Tome V. pp. 65-67.]
[* ] [Essays, Vol. I. Of Interest.]
[† ] [Ibid.]
[* ] [Wealth of Nations, Book II. chap. iv.; Vol. II. p. 39, seq., tenth edition.]
[† ] [Essays, Vol. I. Of Interest.]
[* ] [Ibid.]
[1 ] See Pinkerton, [History of Scotland, 1797, Vol. I. p. 148, and p. 25.]
[2 ] Ibid. p. 433.
[3 ] Ibid. pp. 435, 436.
[1 ] Smith, Vol. II. p. 120, Irish Edition. [Wealth of Nations, Book II. chap. iv.; Vol. II. p. 35, seq., tenth edition.]
[* ] [Ibid.]
[1 ] If the foregoing observations be well founded, they lead to a limitation or correction of the terms in which Hume states the First cause he assigns for the low interest of money,—a small demand for borrowing; for this cause operates in the way he mentions, only in a country where the mercantile interest bears but a small proportion to the rest of the community. I would propose, therefore, to add to his words; a small demand for borrowing among those classes who live by their revenue.
[* ] [Essays, Vol. I. Of Interest.]
[1 ] Dirom’s Inquiry, &c. [Lond. 1796.]
[1 ] Postlethwayt, [Dictionary, &c., Art. Interest.]
[1 ] Guthrie, [History, &c.]: Chalmers’s Estimate, p. 29.
[1 ] Eden, [State of the Poor,] Vol. I. p. 146; Chalmers’s Estimate, p. 37, second edition.
[1 ] Guthrie, [History, &c.] p. 311.
[2 ] Chalmers’s Estimate, &c., p. 98.
[1 ] Crumpe’s Essay, &c., [1796,] p. 340. (In pencil.—Mem.—To inquire about the Register of Mortgages in Ireland and in England.—Lord Mansfield.)
[1 ] Sir James Steuart’s Political Œconomy, [Book IV. chap. iv.; Works, Vol. III. p. 156.]
[* ] [Wealth of Nations, Book I. chap. ix.; Vol. I. p. 140, seq., tenth edition.]
[* ] [Ibid.] (In pencil.—Memorandum.—Consult Bryan Edwards.)
[† ] [Ibid.]
[‡ ] [Ibid. Book II., passim.]
[* ] [Ibid. Book I. chap. ix.; Vol. I. p. 142, tenth edition.]
[* ] [Ibid. p. 143.]
[1 ] (In pencil)—Postlethwayt states the rate of interest in China at thirty per cent. See Dictionary, Article, Interest.—Consult Sir G. Staunton.
[1 ] See Locke, Vol. II. p. 20. [(First) Considerations on Interest and Money.]
[1 ] Vol. II. p. 26. [Ibid.]
[* ] [Book II. is concluded in the ensuing Volume.]