The Online Library of Liberty

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• Translator's Preface
• Introduction: the Problem of Interest
• Book I: The Development of the Problem
• Book I, Chapter I: The Opposition to Interest In Classical and Mediæval Times
• Book I, Chapter II: The Defence of Interest From the Sixteenth Till the Eighteenth Century
• Book I, Chapter III: Turgot's Fructification Theory
• Book I, Chapter IV: Adam Smith and the Development of the Problem
• Book I, Chapter V: The Colourless Theories
• Book II: The Productivity Theories
• Book Ii, Chapter I: The Productive Power of Capital
• Book Ii, Chapter II: The Naïve Productivity Theories
• Book Ii, Chapter III: The Indirect Productivity Theories
• Book III: The Use Theories
• Book Iii, Chapter I: The Use of Capital
• Book Iii, Chapter II: Historical Statement
• Book Iii, Chapter III: The Plan of Criticism
• Book Iii, Chapter IV: The Use of Capital According to the Say-hermann School
• Book Iii, Chapter V: The True Conception of the Use of Goods
• Book Iii, Chapter VI: Criticism of the Say-hermann Conceptions
• Book Iii, Chapter VII: The Independent Use: an Unproved Assumption
• Book Iii, Chapter VIII: The Independent Use: Its Untenable Conclusions
• Book Iii, Chapter IX: The Independent Use: Its Origin In Legal Fiction
• Book Iii, Chapter X: Menger's Conception of Use
• Book Iii, Chapter XI: Final Insufficiency of the Use Theory
• Book IV: The Abstinence Theory
• Book Iv, Chapter I: Senior's Statement of the Theory
• Book Iv, Chapter II: Criticism of Senior
• Book Iv, Chapter III: Bastiat's Statement
• Book V: The Labour Theories
• Book V, Chapter I: [the Labour Theories]
• The English Group
• The French Group
• The German Group
• Book VI: The Exploitation Theory
• Book Vi, Chapter I: Historical Survey
• Book Vi, Chapter II: Rodbertus
• Book Vi, Chapter III: Marx
• Book VII: Minor Systems
• Book Vii, Chapter I: The Eclectics
• Book Vii, Chapter II: The Later Fructification Theory
• Conclusion

BOOK I

THE DEVELOPMENT OF THE PROBLEM

Book I, Chapter I

The Opposition to Interest in Classical and Mediæval Times

It has often been remarked that not only does our knowledge of interesting subjects gradually develop, but also our curiosity regarding these subjects. It is very rarely indeed that, when a phenomenon first attracts attention, it is seen in its full extent, with all its constituent and peculiar details, and is then made the subject of one comprehensive inquiry. Much more frequently is it the case that attention is first attracted by some particularly striking instance, and it is only gradually that the less striking phenomena come to be recognised as belonging to the same group, and are included in the compass of the growing problem.

This has been the case with the phenomenon of interest. It first became the object of question only in the form of Loan interest, and for full two thousand years the nature of loan interest had been discussed and theorised on, before any one thought it necessary to put the other question which first gave the problem of interest its complete and proper range—the question of the why and whence of Natural interest.

It is quite intelligible why this should be so. What specially challenges attention about interest is that it has its source and spring, not in labour, but, as it were, in some bounteous mother-wealth. In loan interest, and specially in loan interest derived from sums of money that are by nature barren, this characteristic is so peculiarly noticeable that it must excite question even where no close attention has been given it. Natural interest, on the other hand, if not obtained though the labour, is certainly obtained under co-operation with the labour of the capitalist-undertaker; and to superficial consideration labour and co-operation with labour are too easily confounded, or, at any rate, not kept sufficiently distinct. Thus we fail to recognise that there is in natural interest, as well as in loan interest, the strange element of acquisition of wealth without labour. Before this could be recognised, and thus before the interest problem could attain its proper compass, it was necessary that capital itself, and its employment in economic life, should take a much wider development, and that there should be some beginning of systematic investigation into the sources of this income. And this investigation could not be one that was content to point out the obvious and striking forms of the phenomenon, but one that would cast light on its more homely forms. But these conditions were only fulfilled some thousands of years after men had first expressed their wonder at loan interest "born of barren money."

The history of the interest problem, therefore, begins with a very long period in which loan interest, or usury, alone is the subject of investigation. This period begins deep in ancient times, and reaches down to the eighteenth century of our era. It is occupied with the contention of two opposing doctrines: the elder of the two is hostile to interest; the later defends it. The course of the quarrel belongs to the history of civilisation; it is deeply interesting in itself, and has besides had an influence of the deepest importance on the practical development of economic and legal life, of which we may see many traces even in our own day. But as regards the development of the theoretical interest problem, the whole period, notwithstanding its length, and notwithstanding the great number of writers who flourished during it, is rather barren. Men were fighting, as we shall see, not for the centre of the problem, but for an outpost of it which, from a theoretical standpoint, was of comparatively subordinate importance. Theory was too much the bond servant of practice. People were concerned less to investigate the nature of loan interest for its own sake than to find in theory something that would help them to an opinion on the good or evil of interest, and would give that opinion a firm root in religious, moral, or economical grounds. Since, moreover, the most active time of the controversy coincided with the active time of scholasticism, it may be guessed that the knowledge of the nature of the subject by no means ran parallel with the number of the arguments and counter-arguments that were urged.

I shall therefore not waste many words in describing these earliest phases in the development of our problem, and this all the more readily that there are already several treatises, and some of them excellent ones, relating to that period. In them the reader will find much more detail than need be introduced for our purpose, or would even be appropriate here.12 We begin, then, with some account of the hostility to loan interest.

Roscher has well remarked that on the lower stages of economical development there regularly appears a lively dislike to the taking of interest. Credit has still little place in production. Almost all loans are loans for consumption, and are, as a rule, loans to people in distress. The creditor is usually rich, the debtor poor; and the former appears in the hateful light of a man who squeezes something from the little of the poor, in the shape of interest, to add it to his own superfluous wealth. It is not to be wondered at, then, that both the ancient world and the Christian Middle Ages were exceedingly unfavourable to usury; for the ancient world, in spite of some few economical flights, had never developed very much of a credit system, and the Middle Ages, after the decay of the Roman culture, found themselves, in industry as in so many other things, thrown back to the circumstances of primitive times.

In both periods this dislike has left documentary record.

The hostile expressions of the ancient world are not few in number, but they are of trifling importance as regards development of theory. They consist partly of a number of legislative acts forbidding the taking of interest,—some of them reaching back to a very early date,13 —partly of more or less incidental utterances of philosophic or philosophising writers.

The legal prohibitions of interest may, of course, be taken as evidence of a strong and widespread conviction of the evils connected with its practice. But it can scarcely be said that they were founded on any distinct theory; at any rate no such theory has been handed down to us. The philosophic writers, again—like Plato, Aristotle, the two Catos, Cicero, Seneca, Plautus, and others—usually touch on the subject too cursorily to give any foundation in theory for their unfavourable judgment. Moreover, the context often makes it doubtful whether they object to interest as such, or only to an excess of it; and, in the former case, whether their objection is on the ground of a peculiar blot inherent in interest itself, or only because it usually favours the riches they despise.14

One passage in ancient literature has, in my opinion, a direct value for the history of theory, inasmuch as it allows us to infer what really was the opinion of its author on the economic nature of interest; that is, the often quoted passage in the first book of Aristotle's Politics. He there says: "Of the two sorts of money-making one, as I have just said, is a part of household management, the other is retail trade: the former necessary and honourable, the latter a kind of exchange which is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term Usury

which means the birth of money from money, is applied to the breeding of money, because the off-spring resembles the parent. Wherefore of all modes of making money this is the most unnatural" (Jowett's Translation, p. 19).

What this positively amounts to may be summed up thus: money is by nature incapable of bearing fruit; the lender's gain therefore cannot come from the peculiar power of the money; it can only come from a defrauding of the borrower

Interest is therefore a gain got by abuse and injustice.

That the writers of old pagan times did not go more deeply into the question admits of a very simple explanation. The question was no longer a practical one. In course of time the authority of the state had become reconciled to the taking of interest. In Attica interest had for long been free from legal restriction. The universal empire of Rome, without formally rescinding those severe laws which entirely forbade the taking of interest, had first condoned, then formally sanctioned it by the institution of legal rates.15 The fact was that economical relations had become too complicated to find sufficient scope under a system naturally so limited as that of gratuitous credit. Merchants and practical men were, without exception, steadily on the side of interest. In such circumstances, to write in favour of it was superfluous, to write against it was hopeless; and it is a most significant indication of this state of matters that almost the only quarter in which interest was still censured—and that in a resigned kind of way—was in the works of the philosophical writers.

The writers of the Christian Middle Ages had more occasion to treat the subject thoroughly.

The dark days which preceded and followed the break up of the Roman Empire had brought a reaction in economical matters, which, in its turn, had the natural result of strengthening the old hostile feeling against interest. The peculiar spirit of Christianity worked in the same direction. The exploitation of poor debtors by rich creditors must have appeared in a peculiarly hateful light to one whose religion taught him to look upon gentleness and charity as among the greatest virtues, and to think little of the goods of this world. But what had most influence was that, in the sacred writings of the New Testament, were found certain passages which, as usually interpreted, seemed to contain a direct divine prohibition of the taking of interest. This was particularly true of the famous passage in Luke: "Lend, hoping for nothing again."16 The powerful support which the spirit of the time, already hostile to interest, thus found in the express utterance of divine authority, gave it the power once more to draw legislation to its side. The Christian Church lent its arm. Step by step it managed to introduce the prohibition into legislation. First the taking of interest was forbidden by the Church, and to the clergy only. Then it was forbidden the laity also, but still the prohibition only came from the Church. At last even the temporal legislation succumbed to the Church's influence, and gave its severe statutes the sanction of Roman law.17

For fifteen hundred years this turn of affairs gave abundant support to those writers who were hostile to interest. The old pagan philosophers could fling their denunciations on the world without much proving, because they were neither inclined nor able to give them practical effect. As a "Platonic" utterance of the idealists their criticism had not sufficient weight in the world of practice to be either seriously opposed or seriously defended. But now the matter had again become practical. Once the Word of God was made victorious on earth, a hostility immediately showed itself, against which the righteousness of the new laws had to be defended. This task naturally fell to the theological and legal literature of the Church, and thus began a literary movement on the subject of loan interest which accompanied the canonist prohibition from its earliest rise far into the eighteenth century.

About the twelfth century of our era is observable a noteworthy departure in the character of this literature. Before that century the controversy is mainly confined to the theologians, and even the way in which it is treated is essentially theoiogical. To prove the unrighteousness of loan interest appeal is made to God and His revelation, to passages of Holy Writ, to the commandments concerning charity, righteousness, and so on; only rarely, and then in the most general terms, to legal and economical considerations. It is the fathers of the Church who express themselves most thoroughly on the subject, although even their treatment can scarcely be called thorough.18

After the twelfth century, however, the discussion is conducted on a gradually broadening economic basis. To proofs from Revelation are added appeals to the authority of revered fathers of the Church, to canonists and philosophers—even pagan philosophers,—to old and new laws, to deductions from the jus divinum, the jus humanum, and—what is particularly important for us as touching the economic side of the matter—to deductions from the jus naturale. And now the lawyers begin to take a more active part in the movement alongside the theologians—first the canon lawyers and then the legists.

The very ample and careful attention which these writers gave to the subject is chiefly due to the fact that the prohibition of interest pressed more hardly as time went on, and required to be more strongly defended against the reaction of the trade it oppressed. The prohibition had originally been imposed in economical circumstances of such a nature that it was easily borne. Moreover, during its first hundred years the prohibition had so little command of external force, that where practical life felt itself hampered by the restraint it could disregard it without much danger. But later, as industry and commerce grew, their increasing necessity for credit must have made the hampering effects of the prohibition increasingly vexatious. At the same time the prohibition became more felt as it extended to wider circles, and as its transgression was punished more severely. Thus it was inevitable that its collisions with the economical world should become much more numerous and much more serious. Its most natural ally, public opinion, which had originally given it the fullest support, began to withdraw from it. There was urgent need of assistance from theory, and this assistance was readily obtained from the growing science.19

Of the two phases of the canonist writings on this subject, the first is almost without value for the history of theory. Its theologising and moralising do little more than simply express abhorrence of the taking of interest and appeal to authorities.20

Of greater importance is the second phase, although neither as regards the number of its writers nor the very imposing array of arguments they introduced.21 For what originally emanated from the few was soon slavishly repeated by the many, and the stock of arguments collected by the earlier writers soon passed to the later as an heirloom that was above argument. But the greater number of these arguments are merely appeals to authority, or they are of a moralising character, or they are of no force whatever. Only a comparatively small number of them—mostly deductions from the jus naturale—can lay claim to any theoretical interest. If, even of these arguments, many should appear to a reader of to-day little calculated to convince anybody, it should not be forgotten that at that time it was not their office to convince. What man had to believe already stood fixed and fast. The all-efficient ground of conviction was the Word of God, which, as they understood it, had condemned interest. The rational arguments which were found to agree with the divine prohibition were scarcely more than a kind of flying buttress, which could afford to be the slighter that it had not to carry the main burden of proof.22

I shall very shortly state those rational arguments that have an interest for us, and verify them by one or two quotations from such writers as have given them clear and practical expression.

First of all, we meet with Aristotle's argument of the barrenness of money; only that the theoretically important point of interest being a parasite on the produce of other people's industry, is more sharply brought out by the canonists. Thus Gonzalez Tellez:23 "So then, as money breeds no money, it is contrary to nature to take anything beyond the sum lent, and it may with more propriety be said that it is taken from industry than from money, for money certainly does not breed, as Aristotle has related." And in still plainer terms Covarruvias:24 "The fourth ground is that money brings forth no fruit from itself, nor gives birth to anything. On this account it is inadmissible and unfair to take anything over and above the lent sum for the use of the same, since this is not so much taken from money, which brings forth no fruit, as from the industry of another."

The consumption of money and of other kinds of lent goods furnished a second "natural right" argument. This is very clearly and fully put by Thomas Aquinas. He contends that there are certain things the use of which consists in the consumption of the articles themselves, such as grain and wine. On that account the use of these things cannot be separated from the articles themselves, and if the use be transferred to any one the article itself must necessary be transferred with it. When an article of this sort then is lent the property in it will always be transferred. Now it would evidently be unjust if a man should sell wine, and yet separate therefrom the use of the wine. In so doing he would either sell the same article twice, or he would sell something which did not exist. Exactly in the same way is it unjust for a man to lend things of this sort at interest. Here also he asks two prices for one article; he asks for replacement of a similar article and he asks a price for the use of the article, which we call interest or usury. Now as the use of money lies in its consumption or in its spending, it is inadmissible in itself, on the same grounds, to ask a price for the use of money.25 According to this reasoning interest appears as a price filched or extorted for a thing that does not really exist, the separate and independent "use" of consumable goods.

A similar conclusion is arrived at by a third argument that recurs over and over again in stereotyped form. The goods lent pass over into the property of the debtor. Therefore the use of the goods for which the lender is paid interest is the use of another person's goods, and from that the lender cannot draw a profit without injustice. Thus Gonzalez Tellez: "For the creator who makes a profit out of a thing belonging to another person enriches himself at the hurt of another." And still more sharply Vaconius Vacuna:26 "Therefore he who gets fruit from that money, whether it be pieces of money or anything else, gets it from a thing which does not belong to him, and it is accordingly all the same as if he were to steal it."

Lastly, in a very strange argument, first, I believe, incorporated by Thomas Aquinas in the canonists' répertoire, interest is looked upon as the hypocritical and underhand price asked for a good common to all—namely, time. The usurers who receive more, by the amount of their interest, than they have given, seek a pretext to make the prohibited business appear a fair one. This pretext is offered them by time. They would have time recognised as the equivalent for which they receive the surplus income formed by the interest. That this is their intention is evident from the fact that they raise or reduce their claim of interest according as the time for which a loan is given is long or short. But time is a common good that belongs to no one in particular, but is given to all equally by God. When, therefore, the usurer would charge a price for time, as though it were a good received from him, he defrauds his neighbour, to whom the time he sells already belongs as much as it does to him, the seller, and he defrauds God, for whose free gift he demands a price.27

To sum up. In the eyes of the canonists loan interest is simply an income which the lender draws by fraud or force from the resources of the borrower. The lender is paid in interest for fruits which barren money cannot bear. He sells a "use" which does not exist, or a use which already belongs to the borrower. And finally, he sells time, which belongs to the borrower just as much as it does to the lender and to all men. In short, regard it as we may, interest always appears as a parasitic profit, extorted or filched from the defrauded borrower.

This judgment was not applied to the interest that accrues from the lending of durable goods, such as houses, furniture, etc. Just as little did it affect the natural profit acquired by personal exertions. That this natural profit might be an income distinct from that due to the undertaker for his labour, was but little noticed, especially at the beginning of the period; and, so far as it was noticed, little thought was given to it. At any rate the principle of this kind of profit was not challenged. Thus, e.g. the canonist Zabarella28 deplores the existence of loan interest on this ground among others, that the agriculturists, looking for a "more certain" profit, would be tempted to put their money out at interest rather than employ it in production, and thus the food of the people would suffer,—a line of thought which evidently sees nothing objectionable in the investment of capital in agriculture, and the profit drawn from that. It was not even considered necessary that the owner of capital should employ it personally, if only he did not let the ownership of it out of his hands. Thus profit made from a sleeping partnership was, at least, not forbidden.29 And the case where one entrusts another with a sum of money, but retains the ownership of it, is decided by the stern Thomas Aquinas in the words: that such an one may unhesitatingly appropriate the profit resulting from the sum of money. He need not want for a just title to it, "for he, as it were, receives the fruit of his own estate"—not, as the holy Thomas carefully adds, a fruit that springs directly from the coins, but a fruit that springs from those things that have been obtained in just exchange for the coins.30

Where, as not seldom occurs notwithstanding this, exception is taken to profit obtained by personal exertions, the exception is not so much to the profit as such, as to some concrete and objectionable manner of getting it: as, e.g. by business conducted in an avaricious or quite fraudulent way, or by forbidden traffic in money, and such like.

Book I, Chapter II

The Defence of Interest From the Sixteenth Till the Eighteenth Century

The canon doctrine of interest had to all appearance reached its zenith sometime during the thirteenth century. Its principles held almost undisputed sway in legislation, temporal as well as spiritual. Pope Clement V, at the Council of Vienna in 1311, could go so far as to threaten with excommunication those secular magistrates who passed laws favourable to interest, or who did not repeal such laws, where already passed, within three months.31 Nor were the laws inspired by the canon doctrine content with opposing interest in its naked and undisguised form; by the aid of much ingenious casuistry they had even taken measures to prosecute it under many of the disguises by which the prohibition had been evaded.32 Finally, literature no less than legislation fell under the sway of the canon doctrine, and for centuries not a trace of opposition to the principle of the prohibition dared show itself.

There was only one opponent that the canon doctrine had never been entirely able to subdue, the economic practice of the people. In face of all the threatened penalties of earth and heaven, interest continued to be offered and taken; partly without disguise, partly under the manifold forms which the inventive spirit of the business classes had devised, and by which they slipped through the meshes of the prohibitionist laws in spite of all their casuistry. And the more flourishing the economical condition of a country the stronger was the reaction of practice against the dominant theory.

In this battle victory remained with the more stubborn party, and that party was the one whose very existence was endangered by the prohibition.

One of its first results, not marked by much outward circumstance, but actually of great importance, was obtained even when the canon doctrine was still, to all appearance, at the height of its authority. Too weak to hazard open war against the principle of prohibition, the business world yet managed to prevent its strict and complete legal enforcement, and to establish a number of exceptions some direct and some indirect.

The following, among others, may be regarded as direct exceptions: the privileges of the Mons de Piété, the toleration of other kinds of banks, and the very extensive indulgence shown to the usury practices of the Jews—an indulgence which, here and there, was extended, at least by secular legislation, into a formal legal permission.33

Of indirect exceptions there were: the buying of annuities, the taking of land in mortgage for lent money, the use of bills of exchange, partnership arrangements, and above all, the possibility of getting compensation from the borrower in the shape of interesse on the deferred payment (damnum emergens et lucrum cessans). Independent of this, the lender had had a claim to compensation in the shape of interesse, but only in the case of a culpable neglect (technically called mora) on the part of the borrower to fulfil his contract obligations; and the existence and amount of the interesse had to be authenticated in each case. But now a step farther in this direction was taken, although under protest of the strict canonists, by the introduction of two contract clauses. Under one clause the borrower agreed beforehand that the lender should be released from the obligation of authenticating the borrower's mora; and under the other a definite rate of interesse was agreed on in advance. Practically it came to this, that the loan was given nominally without interest, but that the creditor actually received, under the name of interesse, a regular percentage for the whole period of the loan, the borrower by a fiction being put in mora for that period.34

Practical results like these had in the long run their effect on principles.

To the observer of men and things it must in time have become questionable whether the obstinate and always increasing resistance of practical life really had its root, as the canonists affirmed, only in human wickedness and hardness of heart. Those who took the trouble to go more deeply into the technicalities of business life must have seen that practice not only would not, but could not dispense with interest; that interest being the soul of credit, where credit exists to any considerable extent interest cannot be prevented; and that to suppress it would be to suppress nine-tenths of credit transactions. They must have seen, in a word, that, even in a half-developed system of economy, interest is an organic necessity. It was inevitable that the recognition of such facts that had for long been commonplaces among practical men, should in the end force its way into literary circles.

The effects which it there exerted were various.

One party remained unshaken in their theoretical conviction that loan interest was a parasitic profit, admitting of no defence before any strict tribunal; but they consented to a practical compromise with the imperfection of man, on which they laid the blame of its obstinate vitality. From the standpoint of an ideal order of society, interest could not be permitted, but men being so imperfect, it cannot conveniently be eradicated, and so it were better to allow it within certain limits. This was the view taken, among others, by several of the great reformers, e.g. as Zwingli,35 by Luther in his later days (although earlier he had been a relentless enemy of usury),36 and, with still greater reserve, by Melanchthon.37

It had naturally a great effect on public opinion, and indirectly also on the later development of law, that such influential men as these declared for tolerance in the matter. However, as they were guided in their conduct not by principles, but altogether by motives of expediency, their views have no deeper importance in the history of theory, and we need not pursue them farther.

Another party of thinking and observing men went farther. Convinced by experience of the necessity of loan interest, they began to re-examine the theoretical foundations of the prohibition, and finding that these would not bear investigation, they commenced to write in opposition to the canon doctrine, basing their opposition on principles. This movement becomes observable about the middle of the sixteenth century, gathers impetus and power in the course of the seventeenth, and towards its end obtains so distinct an ascendency that during the next hundred years it has only to do battle with a few isolated writers who still represent the canon doctrine. And towards the end of the eighteenth century if any one had professed to defend that doctrine with the old specific arguments, he would have been thought too eccentric to be taken seriously.

The first combatants of the new school were the reformer Calvin and the French jurist Dumoulin (Carolus Molinaeus).

Calvin has defined his attitude towards our question in a letter to his friend Oekolampadius.38 In this letter he does not treat it comprehensively, but he is very decided. At the outset he rejects the usual authoritative foundation for the prohibition, and tries to show that, of the writings adduced in its support, some are to be understood in a different sense, and some have lost their validity through entire change of circumstances.39

The proof from authority being thus disposed of, Calvin turns to the rational arguments usually given for the prohibition. Its strongest argument, that of the barrenness of money (pecunia non parit pecuniam), he finds of "little weight." It is with money as it is with a house or a field. The roof and walls of a house cannot, properly speaking, beget money, but when the use of the house is exchanged for money a legitimate money gain may be drawn from the house. In the same way money can be made fruitful. When land is purchased for money, it is quite correct to think of the money as producing other sums of money in the shape of the yearly revenues from the land. Unemployed money is certainly barren, but the borrower does not let it lie unemployed. The borrower therefore is not defrauded in having to pay interest. He pays it ex proventu, out of the gain that he makes with the money.

But Calvin would have the whole question judged in a reasonable spirit, and he shows, by the following example, how the lender's claim of interest may, from this point of view, be well grounded.

A rich man who has plenty of landed property and general income, but little ready money, applies for a money loan to one who is not so wealthy, but happens to have a great command over ready money. The lender could with the money purchase land for himself, or he could request that the land bought with his money be hypothecated to him till the debt is wiped out. If, instead of doing so, he contents himself with the interest, the fruit of the money, how should this be blameworthy when the much harder bargain is regarded as fair? As Calvin vigorously expresses it, that were a childish game to play with God, "Et quid aliud est quam puerorum instar ludere cum Deo, cum de rebus ex verbis nudis, ac non ex eo quod inest in re ipsa judicatur."

He concludes then that the taking of interest cannot be universally condemned. But neither is it to be universally permitted, but only so far as it does not run counter to fairness and charity. In carrying out this principle he lays down a number of exceptions in which interest is not to be allowed. The most noteworthy of these are: that no interest should be asked from men who are in urgent need; that due consideration should be paid to the "poor brethren"; that the "welfare of the state" should be considered; and that the maximum rate of interest established by the laws should in no case be exceeded.

As Calvin is the first theologian, so Molinaeus is the first jurist to oppose the canon prohibition on theoretical grounds. Both writers agree in their principles, but the way in which they state them differs as widely as do their callings. Calvin goes shortly and directly at what to him is the heart of the matter, without troubling himself to refute secondary objections. Thus he gets his convictions more from impressions he receives than from logical argument. Molinaeus, on the other hand, is inexhaustible in distinctions and casuistry. He is indefatigable in pursuing his opponents in all their scholastic turnings and twistings, and takes the most elaborate pains to confute them formally and point by point. Moreover, although more cautious in expression than the impetuous Calvin, he is quite as frank, pithy, and straightforward.

The principal deliverance of Molinaeus on the subject is the Tractatus Contractuum et Usurarum redituumque pecunia Constitutorum,40 published in 1546. The first part of it has a great resemblance, perhaps accidental, to Calvin's line of argument. After a few introductory definitions, he turns to the examination of the jus divinum, and finds that the relevant passages of Holy Writ are misinterpreted. They are not intended to forbid the taking of interest in general, but only such interest as violates the laws of charity and brotherly love. And then he also introduces the effective illustration used by Calvin of the rich man who purchases land with borrowed money.41

But further on the reasoning is much fuller than that of Calvin. He points out conclusively (No. 75) that in almost every loan there is an "interesse" of the creditor—some injury caused or some use foregone,—the compensation for which is just and economically necessary. This compensation is interest or usura, in the right and proper sense of the word. The laws of Justinian which allow interest, and only limit its amount, are consequently not to be considered unjust, but actually in the interest of the borrower, inasmuch as the payment of a moderate interest gives him the chance of making a greater profit (No. 76).

Later (No. 528) Molinaeus passes under review the chief arguments of the canonists against interest, and completely refutes them by a running commentary.

To the old objection of Thomas Aquinas, that the lender who takes interest either sells the same thing twice, or sells something that has no existence at all (vide p. 22), Molinaeus answers that the use of money is a thing independent of the capital sum, and consequently may be sold independently. We must not regard the first immediate spending of the money as its use: the use that follows—the use of those goods that a man has acquired by means of the loaned money, or has got command over—is also its use (Nos. 510, 530). If, further, it be maintained that, along with the money itself, its use also has passed over into the legal property of the borrower, and that he therefore is paying in interest for his own property, Molinaeus answers (No. 530) that one is quite justified in selling another man's property if it be a debt due him, and that this is exactly the case with loans: "Usus pecuniae mihi pure a te debitae est mihi pure a te debitus, ergo vel tibi vendere possum."

Finally, to the argument of the natural barrenness of money Molinaeus replies (No. 530) that the everyday experience of business life shows that the use of any considerable sum of money yields a service of no trifling importance, and that this service, even in legal language, is designated as the "fruit" of money. To argue that money of itself can bring forth no fruit is not to the point, for even land brings forth nothing of itself without expense, exertion, and human industry. And quite in the same way does money when assisted by human effort bring forth notable fruits. The rest of the polemic against the canonists has little theoretical interest.

On the basis of this comprehensive consideration of the subject, Molinaeus ends by formulating his thesis (No. 535): First of all, it is necessary and useful that a certain practice of taking interest be retained and permitted. The contrary opinion, that interest in itself is absolutely objectionable, is foolish, pernicious, and superstitious (Stulta illa et non minus perniciosa quam superstitiosa opinio de usura de se absoluta mala) (No. 534).

In these words Molinaeus sets himself in the most direct opposition to the Church's doctrine. To modify them in some degree—as a Catholic might be compelled to do from other considerations—he makes certain practical concessions, without, however, yielding anything in principle. The most important of these is that, on grounds of expediency, and on account of prevailing abuses, he acquiesces for the present in the Church's prohibition of interest pure and simple in the shape of undisguised usury, wishing to retain only the milder and more humane form of annuities,—which, however, he rightly looks on as a "true species of usury business."42

The deliverances of Calvin and Molinaeus remained for a long time quite by themselves, and the reason of this is easily understood. To pronounce that to be right which the Church, the law, and the learned world had condemned with one voice, and opposed with arguments drawn from all sources, required not only a rare independence of intellect, but a rare strength of character which did not shrink from suspicion and persecution. The fate of the leaders in this movement showed clearly enough that there was cause for fear. Not to mention Calvin, who, indeed, had given the Catholic world quite other causes of offence, Molinaeus had much to suffer; he himself was exiled, and his book, carefully and moderately as it was written, was put on the Index. Nevertheless the book made its way, was read, repeated, and published again and again, and so scattered a seed destined to bear fruit in the end.43

Passing over the immediate disciples of Calvin, who naturally agreed with the views of their master, there were few writers in the sixteenth century who ventured to argue in favour of interest on economical grounds. Among them may be specially mentioned the humanist Camerarius,44 Bornitz,45 and above all, Besold.

Besold argues fully and ably against the canon doctrine in the dissertations entitled Questiones Aliquot de Usuris, (1598), the work with which he began his very prolific career as a writer.46 He finds the origin of interest in the institutions of trade and commerce, in which money ceases to be barren. And as every man must be allowed to pursue his own advantage, so far as that is possible without injury to others, natural justice is not opposed to the taking of interest. Like Molinaeus, whom he often quotes with approval, he adduces on its behalf the analogy between the loan against interest and the hire against payment. The loan at interest stands to the loan not at interest in the same relation as the hire against payment—which is perfectly allowable—to the Leihe, where no payment is required (commodatum). He points out very well that the height of loan interest must at all times correspond with the height of natural interest, the latter indeed being the ground and source of the former; and he maintains that, where, owing to the use of money, the current rate of profit is higher, a higher limit of loan interest should be allowed (p. 32). Finally, he is as little impressed by the passages in Holy Writ which have been interpreted as forbidding interest (p. 38, etc.) as by the arguments of the "philosophers,"—considering these arguments very weak if one looks at the matter from the proper standpoint (p. 32).

From this short abstract it will be seen that Besold is a frank and able follower of Molinaeus. From Molinaeus indeed, as the numerous quotations show, he has taken the better part of his doctrine.47 But it would be difficult to find in his writings any advance on that author.48

This is still more true of the great English philosopher Bacon, who wrote on the subject almost contemporaneously with Besold. He is not misled by the old ideas of the "unnaturalness" of interest. He has enough intellectual freedom and apprehension of the needs of economic life to weigh impartially its advantages and disadvantages, and to pronounce interest an economical necessity. But nevertheless he gives it sufferance only on the ground of expediency. "Since of necessity men must give and take money on loan, and since they are so hard of heart (sintque tam duro corde) that they will not lend it otherwise, there is nothing for it but that interest should be permitted."49

In the course of the seventeenth century the new doctrine made great strides, particularly in the Netherlands. There the conditions were peculiarly favourable to its further development. During the political and religious troubles among which the young free state was born, men had learned to emancipate themselves from the shackles of a slavish following of authority. It happened too that the decaying theory of the fathers of the Church and of the scholastics nowhere came into sharper conflict with the needs of actual life than in the Netherlands, where a highly developed economy had created for itself a complete system of credit and banking; where, consequently, transactions involving interest were common and regular; and where, moreover, temporal legislation, yielding to the pressure of practice, had long allowed the taking of interest.50 In such circumstances a theory which pronounced interest to be a godless defrauding of the debtor was unnatural, and its continuance for any length of time was an impossibility.

Hugo Grotius may be regarded as forerunner of the change.

His attitude towards our subject is peculiarly nondescript. On the one hand, he clearly recognises that it is not possible to base the prohibition theoretically in natural right, as the canonists had done. He sees no force in the argument of the barrenness of money, for "houses also, and other things barren by nature, the skill of man has made productive." To the argument that the use of money, consisting as it does in being spent, cannot be separated from money itself, and therefore cannot be paid for independently, he finds an apt rejoinder; and, speaking generally, the arguments which represent interest as contrary to natural right appear to him "not of a kind to compel assent" (non talia ut assensum extorqueant). But, on the other hand, he considers the passages in Holy Writ forbidding interest to be undoubtedly binding. So that in his conclusions he remains—in principle at least—on the side of the canonists. Practically he does resile from the principle of prohibition by allowing and approving of many kinds of compensation for loss, for renunciation of profit, for lender's trouble and risk,—describing these as "of the nature of interest."51

Thus Grotius takes a hesitating middle course between the old and the new doctrine.52

Undecided views like these were speedily left behind. In a few years more others openly threw overboard not only the rational basis of the prohibition as he had done, but the prohibition itself. The decisive point was reached shortly before the year 1640. As if the barriers of long restraint had all been torn down in one day, a perfect flood of writings broke out in which interest was defended with the utmost vigour, and the flood did not fall till the principle of interest, in the Netherlands at least, had conquered. In this abundant literature the first place, both in time and rank, was taken by the celebrated Claudius Salmasius. Of his writings, which from 1638 followed each other at short intervals, the most important are: De Usuris, 1638; De Modo Usurarum, 1639; De Foenore Trapezitico, 1640. To these may be added some shorter controversial writings that appeared under the pseudonym of Alexius a Massalia: Diatriba de Mutuo: mutuum non esse alienationem, 1640.53 These writings almost by themselves determined the direction and substance of the theory of interest for more than a hundred years, and even in the doctrine of to-day, as we shall see, we may recognise many of their after-effects. His doctrine therefore deserves a thorough consideration.

The views of Salmasius on interest are put together most concisely and suggestively in the eighth chapter of his book De Usuris. He begins by giving his own theory. Interest is a payment for the use of sums of money lent. Lending belongs to that class of legal transactions in which the use of a thing is made over by its owner to another person. In the case where the article in question is not perishable, if the use that is transferred is not to be paid for, the legal transaction is a Commodatum: if it is to be paid for, the transaction is a Locatio or Conductio. In the case where the article in question is a perishable or a fungible thing, if the use is not to be paid for, it is a loan bearing no interest (mutuum): if to be paid for, it is a loan at interest (foenus). The interest bearing loan accordingly stands to the loan which bears no interest in exactly the same relation as the Locatio to the Commodatum, and is just as legitimate as it.54

The only conceivable ground for judging differently about the allowableness of payment in the case of the Commodatum (where a non-perishable good, as a book or a slave, is lent) as compared with the Mutuum (where a fungible good, like corn or money, is lent) might be the different nature of the "use" in the two cases. In the circumstances of the latter—where a perishable or fungible good is transferred—the use consists in one complete consumption; and it might be objected that, in such a case the use of a thing could not be separated from the thing itself. But to this Salmasius answers: (1) Such an argument would lead as well to the condemning and abolition of the loan bearing no interest, inasmuch as it is impossible, in the case of a perishable thing, to transfer a "use," whose existence is denied, even if no interest is asked for it. (2) On the contrary, the perishableness of loaned goods constitutes another reason why the loan should be paid. For in the case of the hire (locatio) the lender can take back his property at any moment, because he remains the owner of it. In the case of the loan he cannot do so, because his property is destroyed in the consumption. Consequently the lender of money suffers delays, anxieties, and losses, and by reason of these the claim of the loan to payment is even more consistent with fairness than that of the Commodatum.

After thus stating his own position Salmasius devotes himself to refuting the arguments of his opponents point by point. As we read these refutations we begin to understand how Salmasius so brilliantly succeeded where Molinaeus a hundred years before had failed, in convincing his contemporaries. They are extremely effective pieces of writing, indeed gems of sparkling polemic. The materials for them were, of course, in great part provided by his predecessors, principally by Molinaeus;55 but the happy manner in which Salmasius employs these materials, and the many pithy sallies with which he enriches them, places his polemic far above anything that had gone before.

It may not be unwelcome to some of my readers to have a few complete examples of Salmasius's style. They will serve to give a more accurate idea of the spirit in which people were accustomed to deal with our problem in the seventeenth century, and far into the eighteenth, and to make the reader better acquainted with a writer whom nowadays many quote, but few read. I therefore give below in his own words one or two passages from the polemic.56

What follows has less bearing on the history of theory. First comes a long-winded, and, it must be confessed, for all its subtlety a very lame attempt to prove that in the loan there is no alienation of the thing lent—a subject to which also the whole Diatriba de Mutuo is devoted. Then follows the reply to some of the arguments based by the canonists on fairness and expediency; such as, that it is unfair to the borrower, who assumes the risk of the principal sum lent him, to burden him with interest in addition, and to make him hand over the fruit of the money to another who takes no risk; that usury would lead to the neglect of agriculture, commerce, and the other bonae artes, to the injury of the common weal, and so on. In replying to this latter argument Salmasius gets an opportunity of commending the use of competition. The more usurers there are the better; their emulation will press down the rate of interest. Then, from the ninth chapter onwards, with extraordinary display of force and erudition, with many passages full of striking eloquence, but, it must be said, with endless prolixity, comes the disproof of the argument that interest is "unnatural." Quite at the end (De Usuris, chap. xx.), the question is finally put whether interest, thus sanctioned by the jus naturale, also expresses the jus divinum, and this naturally is answered in the affirmative.

These are the essential features of Salmasius's doctrine. Not only does it indicate an advance, but it long indicates the high-water mark of the advance. For more than a hundred years any development there was consisted in nothing more than the adoption of it in wider circles, the repetition of it with more or less skilful variations, and the adapting of its arguments to the fashion of the time. But there was no essential advance on Salmasius till the time of Smith and Turgot.

As the number of those who accepted the doctrine represented by Salmasius increased, so did the number of those who adhered to the canon doctrine diminish. This defection, as may be easily understood, went on more rapidly in the Reformation countries and in those speaking the German language, more slowly in countries purely Catholic and in those speaking the Romance tongues.

In the Netherlands, as I have already said, the works of Salmasius were almost immediately followed by a whole series of writings of similar tenor. As early as the year 1640 we meet with the works of Kloppenburg, Boxhorn, Maresius, Graswinckel.57 A little later, about 1644, the Tafelhalterstreit58 gave occasion to a fiery literary feud between the two parties, and in 1658 this practically ended in a victory for the supporters of interest. Within the next few years, among the ever-increasing adherents of the new theory, stands out prominently the renowned and influential lawyer Gerhard Noodt, who in his three books, De Foenore et Usuris, discusses the whole interest question very thoroughly, and with great knowledge of facts and literature.59 After that there are fewer and fewer expressions of hostility to interest, especially from professional men; still they do occur occasionally up till the second half of the eighteenth century.60

In Germany, whose political economy during the seventeenth and even during the eighteenth century is not of much account, the Salmasian doctrine made its way slowly and unsensationally, gaining nothing in development. On German soil the power of practical life was very clearly shown. It was to its pressure that the revolution in opinion was due, theory meanwhile halting clumsily behind the reform in public opinion and legislation. Half a century before the first German lawyer, in the person of Besold, had given his approval to it, the taking of interest, or at least the claim to a fixed interesse arranged in advance (which practically came to the same thing), was allowed in much of the German local law;61 and when in 1654 the German imperial legislation followed this example,62 few theorists sided with Besold and Salmasius. So late as 1629 it was possible for one Adam Contzen to demand that lenders at interest should be punished by criminal law like thieves, and that all Jews should be hunted out of the country like venenatae bestiae.63 Not till the end of the seventeenth century does the conviction of the legitimacy of interest become firmly established in theory. The secession of such prominent men as Pufendorf64 and Leibnitz65 to the new doctrine hastened its victory, and in the course of the eighteenth century it is at last gradually taken out of the region of controversy.

In this position we find it in the two great cameralists who flourish at the end of our period, Justi and Sonnenfels. Justi's Staatswirthschaft66 does not contain a single line relating to the great question on which in former times so many bulky volumes had been written, certainly none that could be taken as a theory of interest. He tacitly assumes it as a fact requiring no explanation that interest is paid for a loan; and if in one or two short notes (vol. i. § 268) he speaks against usury, he understands by that—but still tacitly—only an excessive interest.

Sonnenfels is not so silent on the subject as Justi. But even he, in the earlier editions of his Handlungswisenschaft67 never once touches on the controversy as to the theoretic legitimacy of interest. In the fifth edition (published 1787) he refers to it, indeed, but in the kind of tone which one usually adopts towards a foregone conclusion. In a simple note on p. 496, he dismisses with a few decided words the prohibition of the canonists, ridicules their absurd way of writing, and finds it preposterous to forbid 6 per cent interest for money when 100 per cent can be got when money is changed into commodities.

Sonnenfels's contempt for the canon doctrine carries all the more weight that he has nothing good to say of interest in other respects. Influenced by Forbonnais he finds its origin in an interception of the circulation of money by the capitalists, out of whose hands it can only be attracted by a tribute in the shape of interest.68 He ascribes to it many injurious effects; such as, that it makes commodities dear, reduces the profits of industry, and allows the owner of money to share in these profits.69 Indeed in one place he speaks of the capitalists as the class of those "who do no work, and are nourished on the sweat of the working classes."70

But alongside of expressions like these we find the accepted Salmasian doctrine. In one place, quite in the spirit of Salmasius, Sonnenfels adduces as arguments for the capitalists' claim, the want of their money, their risk, and the uses they might have got by the purchase of things that produced fruit.71 In another place he recognises that a lowering of the legal rate is not the best means to repress the evils of high interest.72 At another time he finds that, since the above mentioned conditions that determine interest are variable, a fixed legal rate is generally unsuitable as being either superfluous or hurtful.73

The deep silence which Justi maintains, if considered along with the inconsistent eloquence expended by Sonnenfels, seems to me to be a very characteristic proof of two things; (1) that, when these men wrote, the Salmasian doctrine had already secured so firm a footing in Germany, that even writers who felt most hostile towards interest could not think of going back to the strict canonist standpoint, but (2) that up till now the acceptance of the Salmasian doctrine had not been accompanied by any kind of further development in it.

England appears to have been the country where the throwing off of the canon doctrine was attended with the least amount of literary excitement. Through the rapid rise of its commerce and industry, interest transactions had early entered into its economy, and its legislation had early given way to the wants of industrial life. Henry VIII had by 1545 removed the prohibition of interest, and replaced it by a simple legal rate. For a little, indeed, the prohibition was reimposed under Edward VI, but in 1571 it was once more taken off by Queen Elizabeth, and this time for ever.74 Thus the theoretical question whether loan interest was justifiable or not was practically answered before there was any theoretic economic doctrine, and when an economic literature at last emerged, the prohibition, now removed, had but little interest for it. All the more strongly was its attention drawn to a new controverted question raised by the change in legislation—the question whether there should be a legal rate, and what should be the height of it.

These circumstances have left their stamp on the interest literature of England during the seventeenth and eighteenth centuries. We find numerous and eager discussions as to the height of interest, as to its advantages and disadvantages, and as to the advisability, or otherwise, of limiting it by law. But they now touch only rarely, and then, as a rule, quite casually, on the question of its economic nature, of its origin, and of its legitimacy. One or two short proofs of this stage in the development of the problem will suffice.

Of Bacon, who flourished very shortly after the age of the prohibition, and had avowed himself, on very shallow practical grounds, in favour of interest, we have already spoken.75 Some twenty years later, Sir Thomas Culpepper, himself a violent opponent of interest, does not venture to put forward the canon arguments under his own name, but characteristically passes over the subject with the remark that he leaves it to the theologians to prove the unlawfulness of interest, while he will limit himself to showing how much evil is done by it.76 In doing so, however, he directs his attacks not so much against interest in general as against high interest.77

In the same way another writer, very unfavourably disposed towards interest, Josiah Child, will no longer meddle with the question of its lawfulness, but simply refers78 the reader who wishes to go deeper into the matter to an older and apparently anonymous work, which appeared in 1634 under the title of "The English Usurer." Further, he frequently calls interest the "price of money,"—an expression which certainly betrays no deep insight into its nature; expresses his opinion in passing that through it the creator enriches himself at the expense of the debtor; but all the same contents himself with pleading for the limitation of the legal rate, not for entire abolition.79

His opponent, again, North, who takes the side of interest, conceives of it quite in the manner of Salmasius, as a "rent for stock," similar to land-rent; but cannot say anything more, in explanation of either of them, than that owners hire out their superfluous land and capital to such as are in want of them.80

Only one writer of the seventeenth century forms any exception to this superficial treatment of the problem, the philosopher John Locke.

Locke has left a very remarkable tract on the origin of loan interest, entitled "Some Considerations of the Consequences of lowering the Interest and raising the Value of Money" 1691. He begins with a few propositions that remind one very much of the canonists' standpoint. "Money,"81 he says, "is a barren thing, and produces nothing; but by compact transfers that profit, that was the reward of one man's labour, into another man's pocket." Nevertheless Locke finds that loan interest is justified. To prove this, and to bridge over his own paradox, he uses the complete analogy that, in his opinion, exists between loan interest and land-rent. The proximate cause of both is unequal distribution. One has more money than he uses, and another has less, and so the former finds a tenant for his money82 for the very same reason as the landlord finds a tenant for his land, namely, that the one has too much land, while the other has too little.

But why does the borrower consent to pay interest for the money lent? Again, on the same ground as the tenant consents to pay rent for the use of land. For money—of course only through the industry of the borrower, as Locke expressly adds—is able when employed in trade to "produce" more than 6 per cent to the borrower, just in the same way as land, "through the labour of the tenant," is able to produce more fruit than the amount of its rent. If, then, the interest which the capitalist draws from the loan is to be looked on as the fruit of another man's labour, this is only true of it as it is true of rent. Indeed, it is not so true. For the payment of land-rent usually leaves the tenant a much smaller proportion of the fruit of his industry than the borrower of money can save, after paying the interest, out of the profit made with the money. And so Locke comes to the conclusion: "Borrowing money upon use is not only, by the necessity of affairs and the constitution of human society, unavoidable to some men; but to receive profit from the loan of money is as equitable and lawful as receiving rent for land, and more tolerable to the borrower, notwithstanding the opinion of some over-scrupulous men" (p. 37).

It will scarcely be maintained that this theory is particularly happy. There is too marked a contrast between its starting-point and its conclusion. If it be true that loan interest transfers the hard-earned wage of the man who works into the pocket of another man who does nothing, and whose money besides is a "barren thing," it is absolutely inconsistent to say that loan interest is nevertheless "equitable and lawful." That there is undoubtedly an analogy between interest and the profit from land rent, was very likely to lead logically to a conclusion involving land rent in the same condemnation as interest. To this Locke's theory would have presented sufficient support, since he expressly declares rent also to be the fruit of another man's industry. But with Locke the legitimacy of rent appears to have been beyond question.

But, however unsatisfactory Locke's theory of interest may be, there is one circumstance at any rate that confers on it an important interest for us; in the background of it stands the proposition that human labour produces all wealth. In the present case Locke has not expressed the proposition so much as made use of it, and has not, indeed, made a very happy use of it. But in another place he has given it clear utterance where he says: "For it is labour indeed that put the difference of value on everything."83 We shall soon see how great a place this proposition is to have in the later development of the interest problem.

A certain affinity to Locke's conception of loan interest is shown somewhat later by Sir James Steuart. "The interest," he writes, "they pay for the money borrowed is inconsiderable when compared with the value created (as it were) by the proper employment of their time and talents." "If it be said that this is a vague assertion, supported by no proof, I answer, that the value of a man's work may be estimated by the proportion between the manufacture when brought to market and the first matter."84

The words I have emphasised indicate that Steuart, like Locke, looks upon the whole increment of value got by production as the product of the borrower's labour, and on loan interest, therefore, as a fruit of that labour.

If, however, both Locke and Steuart were quite uncertain as to the nature of that which we now call the borrower's natural profit, they were far from making any mistake about the fact that loan interest has its origin and its foundation in this profit. Thus Steuart in one place writes: "In proportion, therefore, to the advantages to be reaped from borrowed money, the borrowers offer more or less for the use of it."85

Generally speaking, in England the literature on the subject took great pains to discuss the connection between loan interest and profit. In doing so it certainly did not surpass the Salmasian doctrine in clearness as to principles, but it enriched it by extending its knowledge of details. The favorite inquiry was, whether a high loan interest is the cause or the effect of a high profit. Hume passes judgment on the controversy by saying that they are alternately cause and effect "It is needless," he says, "to inquire which of these circumstances, to wit, low interest or low profits, is the cause and which the effect. They both arise from an extensive commerce, and mutually forward each other. No man will accept of low profits where he can have high interest; and no man will accept of low interest where he can have high profits."86

Of more value than this somewhat superficial opinion is another discovery associated with the name of Hume. It was he who first clearly distinguished the conception of money from that of capital, and showed that the height of the interest rate in a country does not depend on the amount of currency that the country possesses, but on the amount of its riches or stocks.87 But it was not till a later period that this important discovery was applied to the investigation of the source of interest.

How strange in the meantime the once widespread doctrine of the canonists had become to the busy England of the eighteenth century may be seen by the manner in which Bentham could treat the subject, towards the end of that century, in his Defence of Usury, 1787. He no longer thinks of seriously attempting to justify the taking of interest. The arguments of the ancient writers and of the canonists are only mentioned to afford welcome matter for witty remarks, and Aristotle, as the discoverer of the argument of the sterility of money, is bantered in the words: "As fate would have it, that great philosopher, with all his industry and all his penetration, notwithstanding the great number of pieces of money that had passed through his hands (more perhaps than ever passed through the hands of philosopher before or since), and notwithstanding the enormous pains he had bestowed on the subject of generation, had never been able to discover in any piece of money any organs for generating any other such piece."

Italy stood immediately under the eye of the Roman church. But Italy was the country in Europe that earliest attained a great position in trade and commerce; and on that account it was bound to be the first to find the pressure of the canon prohibition unbearable. The general attitude towards it may be explained by two considerations; that nowhere in Europe did the prohibition of interest remain in fact more inoperative, and that nowhere in Europe was it so late before the theorists ventured to oppose the Church's statute.

Everything that could be done to evade the formally valid prohibition was done; and it seems that these attempts were sufficiently successful for all the requirements of practical life. The most convenient forms of evasion were offered by the traffic in bills, which had its home in Italy, and by the stipulation of interesse for "indemnification." The temporal legislation offered ready and willing assistance to such evasion from a very early period by allowing the interest to be arranged beforehand, at a fixed rate of percentage on the capital lent. It only fixed a maximum which could not be exceeded.88

On the other hand, no Italian writer appears to have made any open theoretic attack on the canon doctrine before the eighteenth century. Galiani in 1750 mentions Salmasius as the first who had given a complete statement of the doctrine of interest from the new point of view; and, in Italian literature previous to that time, the only mention he can find of the subject is the quarrel which had flared up a little before between the Marchese Maffei and the preaching monk Fra Daniello Concina.89 Other prominent writers of the same period usually quote among their predecessors Salmasius as most important, and after him some other foreigners, as Locke, Hume, and Forbonnais; but the first name that occurs among native writers is the Marchese Maffei.90 Here again, in Italy also, we find Salmasius accepted as the pioneer of the new views.

The tardy acceptance which his doctrine met in that country does not appear to have been attended by any special improvement on it. There is only one writer who can be excepted from this criticism, Galiani. But he deals with the question of the nature and legitimacy of loan interest in a way that is altogether peculiar.

If interest, he says,91 really were what it is usually taken to be, a profit or an advantage which the lender makes with his money, then indeed it would be objectionable, for "whatever profit, be it great or small, that is yielded by naturally barren money, is objectionable; nor can any one call such a profit the fruit of exertion, when the one who puts forth the exertion is the one who takes the loan, not the one who gives it" (p. 244).

But interest is not a true profit at all; it is only a supplementing of that which is needed to equalise service and counter-service. Properly speaking, service and counter-service should be of equal value. Since value is the relation in which things stand to our needs, we should be quite mistaken were we to seek for such an equivalence in an equality of weight, or in number of pieces, or in external form. What is required is simply an equality of use. Now in this respect present and future sums of money of equal amount are not of equal value, just as in bill transactions equally large sums of money are not of equal value at different places. And just as the profit of exchange (cambio), notwithstanding that it seems to be an additional sum (soprappiù), is in truth an equalisation, which, when added sometimes to the money on the spot, sometimes to the foreign money, establishes the equality of real value between the two, so is loan interest nothing else than the equalisation of the difference there is between the value of present and future sums of money (p. 243, etc.)

In this interesting idea Galiani has hit on a new method of justifying loan interest, and one which relieves him from a certain doubtful line of argument that his predecessors were obliged to take. Salmasius and his followers, to avoid the reproach of destroying the equality between service and counter-service, were obliged to attempt to prove that in perishable as well as in durable things, and even in articles actually consumed at the beginning of the loan period, there is an enduring use which may be separately transferred, and for which a separate remuneration, namely, interest, is rightly claimed. This line of reasoning, always somewhat fatal, was rendered superfluous by the aspect which Galiani now gave to the argument.

But unfortunately the inference which Galiani draws from this idea is very unsatisfactory. The reason that present sums of money are, as a rule, more valuable than future sums he finds exclusively in the different degree of their security. A claim to future payment of a sum of money is exposed to many dangers, and on that account is less valued than an equally large present sum. In so far as interest is paid to balance these dangers, it appears in the light of an insurance premium. Galiani gives this conception very strong expression by speaking in one place of the "so-called fruit of money" as a price of heart-beats (prezzo del batticuore), p. 247; and at another time he uses the very words that that thing which is called the fruit of money might be more properly called the price of insurance (p. 252). This was of course thoroughly to misunderstand the nature of loan interest.

The way in which later Italian authors of the eighteenth century treated the interest problem is less worthy of notice. Even the more prominent men among them, such as Genovesi92 and Beccaria,93 as also those who wrote monographs on the subject, like Vasco,94 follow for the most part in the tracks of the Salmasian doctrine, now become traditional.

The most worthy of mention among those is Beccaria. He draws a sharp distinction between interesse and usura. The former is the immediate use of a thing, the latter is the use of a use (l'utilità dell' utilità). An immediate use (interesse) is rendered by all goods. The special interesse of money consists of the use which the goods represented by it may render, for money is the common measure and representative of the value of all other goods. Since, in particular, every sum of money represents, or may represent, a definite piece of land, it follows that the interesse of the money is represented by the annual return of that land. Consequently it varies with the amount of this return, and the average rate of money-interesse is equalised with the average return of land (p. 116).

In this analysis the word interesse evidently means the same thing as we should call natural profit, and in it accordingly we may find an attempt—although a primitive one—to explain the existence and amount of natural interest by the possibility of a purchase of land. As we shall see later, however, the same thought had already, some years before, received much fuller treatment from another writer.

In one place Beccaria also touches on the influence of time, first brought forward by Galiani, and speaks of the analogy between exchange interest, which is an interesse of place, and loan interest, which is an interesse of time (p. 122), but he passes over it much more cursorily.

Catholic France was all this time far behind, both in theory and practice. Its state legislation against interest enjoyed for centuries the reputation of being the severest in Europe. At a time when in other countries it had been agreed either to allow the taking of interest quite openly, or to allow it under the very transparent disguise of previously arranged interesse, Louis XIV thought fit to renew the existing prohibition, and to extend it in such a way that even interest for commercial debts was forbidden,95 Lyons being the only market exempted. A century later, when in other countries the long obsolete prohibitions of interest were scoffed at in the tone of a Sonnenfels or a Bentham, they remained in force and in baneful activity among the tribunals of France. It was only in the year 1789, when so many institutions that still breathed the spirit of the middle ages were cleared away, that this institution also was got rid of. By a law of 12th October 1789 the prohibition of interest was formally rescinded, and its place taken by a maximum rate of 5 per cent.

French theory, like French legislation, held most religiously by the strictest standpoint of the canon. How little success Molinaeus had in the middle of the sixteenth century we have already seen. At the end of that century a writer so enlightened in other respects as Johannes Bodinus finds the prohibition fully justified; praises the wisdom of those legislators who publish it; and considers it safest to destroy it root and branch (usurarum non modo radices sed etiam fibras omnes amputare).96 In the seventeenth century, it is true, the French Salmasius wrote brilliantly on the side of interest, but that was outside of France. In the eighteenth century the number of writers who take this side increases. Law already contends for the entire freeing of interest transactions, even from the fixed rate.97 Melon pronounces interest a social necessity that cannot be refused, and leaves it to the theologians to reconcile their moral scruples with this necessity.98 Montesquieu declares that lending a man money without interest is indeed a very good action, but one that can only be a matter of religious consideration, and not of civil law.99 But notwithstanding, there are always writers who oppose such ideas, and contend for the old strict doctrine.

Among these late champions of the canon two are particularly prominent: the highly esteemed jurist Pothier and the physiocrat Mirabeau.

Pothier succeeded in collecting the most tenable arguments from the chaotic répertoire of the canon, and working them up with great skill and acuteness into a doctrine in which they really became very effective. I have added below the characteristic passage which has already attracted the attention of several writers on our subject.100

He was seconded—with more zeal than success—by the author of the Philosophie Rurale, Mirabeau.101 Mirabeau's lucubrations on interest are among the most confused that have ever been written on the subject. A fanatical opponent of loan interest, he is inexhaustible in his arguments against it. He argues, among other things, that loaned money has no legitimate claim on payment. For, first, money has no natural use, but only represents. "But to obtain a profit from this representative character is to seek in a glass for the figure it represents." It is no argument then for the owners of money to say that they must live from the produce of their money, for to this it may be answered that they could change the money into other goods, and live from the produce obtained by hiring out those goods! Lastly, there is not the same wear and tear in the case of money as there is in the case of houses, furniture, and such like, and for that reason there should not, properly speaking, be any charge made to cover wear and tear.102

Probably the reader will think these arguments weak enough. But Mirabeau, in his blind zeal, gets still deeper. He cannot help seeing that the debtor, by employing the money (emploi), may obtain means to pay interest for the capital borrowed. But even this he turns against interest. He argues from it that the borrower must always suffer injury, because it is impossible to establish an equality between interest and emploi. One does not know how much agriculture will yield to the borrowing agriculturist. Unforeseen accidents happen, and on that account the borrower will always lose!103 And more than this. In one place, from the very natural fact that any private person is more willing to take interest than to pay it, he deduces, in all seriousness, an argument to prove that the paying of interest must be hurtful to the borrower!104

Fortified by reasoning like this, his condemnation of money interest is not lacking in vigour. "Take it all in all," he says,105 "money interest ruins society by giving incomes into the hands of people who are neither owners of land nor producers, nor industrial workers, and these people can only be looked upon as hornets, who live by robbing the hoards of the bees of society."

But for all that Mirabeau cannot avoid admitting that interest may be justified in certain cases. Sorely against his inclination, therefore, he is compelled to break through the principle of the prohibition and make some exceptions, the selection of which is based on quite arbitrary and untenable distinctions.106

Seldom can there have been a more grateful task than was the refutation of this doctrine in the second half of the eighteenth century. Long ago smitten with internal decay—detested by some, despised by others—forced to lean on very pitiful scientific props—it had long outlived its life, and only raised its head in the present like some old ruin. The task was taken up by Turgot, and performed with ability as remarkable as its results were brilliant. His Mémoire sur les Prêts d'Argent107 may be named as companion-piece to Salmasius's writings on Usury. It is true that the student of to-day will find in his reasoning some good arguments, and not a few bad ones. But, good and bad alike, they are given with so much verve and acuteness, with such rhetorical and dialectical skill, and with such striking play of fancy, that we can easily understand how the effect on his times was nothing less than triumphant.

As the charm of his work lies not so much in the ideas themselves,—which for the most part we have already discussed in the arguments of his predecessors,—as in the charming way in which they are put, it would only repay us to go thoroughly into the contents of the Mémoire if a great deal of it were reproduced in his own words, which space forbids. I content myself, therefore, with bringing out some of the more marked features of Turgot's treatment.

The weightiest justification of interest he finds in the right of property which the creditor has in his own money. In virtue of this he has an "inviolable" right to dispose of the money as he will, and to lay such conditions on its alienation and hire as seem to him good—e.g. the condition of interest being duly paid (§ 23, etc.) Evidently a crooked argument which might prove the legitimacy and inoffensiveness of a usurious interest of 100 per cent, just as well as the legitimacy of interest in general.

The argument based on the barrenness of money Turgot dismisses on the same grounds as those taken by his predecessors (§ 25).

He gives special attention to the reasoning of Pothier just mentioned. Pothier's thesis that, in justice, service and counter-service should be equal to each other, and that this is not the case in the loan, he answers by saying that objects which, freely and without fraud or force, are exchanged against each other always have, in a certain sense, equal value. To the fatal argument that, in the case of a perishable thing, it is not possible to conceive of any use separate from the thing itself, he answers by charging his opponents with legal hair-splitting and metaphysical abstraction, and brings forward the old and favourite analog between the hiring of money and the hiring of any durable thing like a diamond. "What!" he says, "that some one should be able to make me pay for the petty use that I make of a piece of furniture or a trinket, and that it should be a crime to charge me anything for the immense advantage that I get from the use of a sum of money for the same time; and all because the subtle intellect of a lawyer can separate in the one case the use of a thing from the thing itself, and in the other case cannot! It is really too ridiculous!" (p. 128).

But a moment later Turgot himself does not hesitate at metaphysical abstraction and legal hair-splitting. To refute the argument that the debtor becomes proprietor of the borrowed money, and that its use consequently belongs to him, he makes out a property in the value of the money, and distinguishes it from the property in the piece of metal; the latter of course passing over to the debtor, the former remaining behind with the creditor.

Very remarkable, finally, are some passages in which Turgot, following Galiani's example, emphasises the influence of time on the valuation of goods. In one place he draws the parallel already familiar to us between exchange and loans. Just as in exchange transactions we give less money in one place to receive a greater sum in another place, so in the loan we give less money at one point of time to receive more money at another point of time. The reason of both phenomena is, that the difference of time, like that of place, indicates a real difference in the value of money (§ 23). On another occasion he alludes to the notorious difference that exists between the value of a present sum and the value of a sum only obtainable at a future period (§ 27); and a little later he exclaims: "If these gentlemen suppose that a sum of 1000 francs and a promise of 1000 francs possess exactly the same value, they put forward a still more absurd supposition; for if these two things were of equal value, why should any one borrow at all?"

Unfortunately, however, Turgot has not followed out this pregnant idea. It is, I might say, thrown in with his other arguments, without having any organic connection with them; indeed, properly speaking, it stands in opposition to them. For if interest and the replacement of capital only make up together the equivalent of the capital that was lent, the interest is then a part equivalent of the principal sum. How then can it be a payment for a separate use of the principal sum, as Turgot has just taken so much trouble to prove?

We may look on Turgot's controversy with Pothier as the closing act of the three hundred years' war which jurisprudence and political economy had waged against the old canon doctrine of interest. After Turgot the doctrine disappeared from the sphere of political economy. Within the sphere of theology it dragged out a kind of life for some twenty years longer, till, finally, in our century this also ended. When the Roman Penitentiary pronounced the taking of interest to be allowable, even without any peculiar title, the Church itself had confirmed the defeat of its erstwhile doctrine.108

Pausing for a moment, let us look back critically over the period we have traversed. What are its results; what has science gained during it towards the elucidation of the interest problem?

The ancient and the canon writers had said, Loan interest is an unjust defrauding of the borrower by the lender, for money is barren, and there is no special "use" of money which the lender may justly sell for a separate remuneration. In opposition to this the new doctrine runs, Loan interest is just; for, first, money is not barren so long as, by proper employment, the lender might make a profit with it, and by lending it gives up the possibility of this profit in favour of the borrower; and, second, there is a use of capital that is separable from capital itself, and may be sold separately from it.

If we put aside in the meantime the latter more formal point—it will come up again later in another connection—the central idea of the new doctrine is the suggestion that capital produces fruits to him who employs it. After an immense expenditure of ingenuity, dialectic, polemic, and verbiage, at bottom it is the emergence of the same idea that Adam Smith in his wonderfully simple way expressed shortly afterwards in the words that contain his solution of the whole question whether interest is justifiable or not: "As something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it."109 Translated into our modern terminology, this idea would run, "There is loan interest because there is natural interest."

Thus the theory of Salmasius and his followers in substance amounts to explaining contract interest or loan interest from the existence of natural interest.

How much did the elucidation of the interest problem gain by this? That the gain was not inconsiderable is attested by the fact that the intellectual labour of centuries was needed to secure credence for the new doctrine, in the face of opposing impressions and prejudices. But just as certain is it that, when this explanation was given, much remained still to be done. The problem of loan interest was not solved; it was only shifted a stage farther back. To the question, Why does the lender get from his loaned capital a permanent income not due to work? the answer was given, Because he could have obtained it if he had employed the capital himself. But why could he have obtained this income himself? This last question obviously is the first to point to the true origin of interest; but, in the period of which we have been speaking, not only was this question not answered, it was not even put.

All attempts at explanation got the length of this fact, that the man who has a capital in his hand can make a profit with it. But here they halt. They accept this as a fact without in the least attempting to further explain it. Thus Molinaeus, with his proposition that money, assisted by human exertion, brings forth fruit, and with his appeal to everyday experience. Thus Salmasius himself, with his delightful badinage over the fruitfulness of money, where he simply appeals to the fact without explaining it. And thus too even the later and most advanced economists of the whole period; such men as Locke, Law, Hume, James Steuart, Justi, Sonnenfels. Now and then they advance extremely clear and thorough statements of how loan interest is bound to emerge from the possibility of making a profit, and in the amount of that profit must find the measure of its own amount.110 But not one of them ever comes to the question as to the why and wherefore of that profit.111

What Salmasius and his time had done for the interest problem cannot be better illustrated than by comparing it with the problem of land-rent. Salmasius—of course under accessory circumstances that made it much more difficult—did for the interest problem what never required to be done for the land-rent problem, just because it was too self-evident; he proved that the hirer pays the rent he has agreed to pay because that which is hired produces it. But he failed to do for the interest problem—indeed, did not in the least try to do—the one thing that required scientific effort in the sphere of land-rent; he did not explain why that which bears a rent when hired out should bear a rent if it remain in the hands of its owner.

Thus everything that had been done in the period we have just been considering was, as it were, the driving back of an advanced post on the main army. The problem of loan interest is pursued till it falls in with the general problem of interest. But this general problem is neither mastered nor even attacked; at the end of the period the heart of the interest problem is as good as untouched.

All the same, the period was not quite barren of results as regards the solution of the chief problem; it at least prepared the way for future work by elevating natural interest, the real subject of the problem, out of confused and hesitating statements, and bringing it gradually to clear presentation. The fact that every one who works with a capital makes a profit had long been known. But it was a long time before any one clearly distinguished the nature of this profit, and there was a tendency to ascribe the whole of it to the undertaker's activity. Thus Locke himself looks on the interest which the borrower pays to the lender as the "fruit of another man's labour," and, while conceding that the borrowed money employed in business may produce fruit, expressly ascribes the possibility of this to the exertion of the borrower. Now when, in justifying interest, one was led to accent the influence of capital in the emergence of such profits, he was bound in the end to come to see clearly that a part of the undertaker's profit was a branch of income sui generis, not to be confounded with the produce of labour—was, in fact, a peculiar profit of capital. This insight, which is to be found quite clearly in germ in Molinaeus and Salmasius, comes out with perfect distinctness at the end of the period in the writings of Hume and others. But once attention was called to the phenomenon of natural interest, it was inevitable that, sooner or later, people should begin to ask about the causes of this phenomenon. And with this the history of the problem entered on a new epoch.

Book I, Chapter III

Turgot's Fructification Theory

So far as my knowledge of economical literature goes, I am bound to consider Turgot as the first who tried to give a scientific explanation of Natural Interest on capital, and accordingly as the first economist who showed the full extent of the problem.

Before Turgot the times had been quite unfavourable to any scientific investigation into natural interest. It was only very recently that people had come to clear consciousness that in this they had to deal with an independent and peculiar branch of income. But besides—and this was of still greater moment—there had been no outward occasion to draw discussion to the nature of this income. The problem of loan interest had been worked at from very early times, because loan interest had been attacked from the field of practical life; and it was thus early attacked because there had been from the beginning a hostile tension between the interests of the parties concerned in the loan contract, the creditors and the debtors. It was quite different in this respect with natural interest. People had scarcely learned to distinguish it with certainty from the reward due to the employer's personal labour, and in any case they were still indifferent about it. The power of capital was yet insignificant. Between capital and labour, the two parties concerned in natural interest, scarcely any opposition had yet shown itself; at all events it had not developed into any sharp opposition of classes. So far, therefore, no one was hostile to this form of profit on capital, and consequently no one had any occasion from outside to defend it, or to make any thorough inquiry into its nature. If, under such circumstances, there was any one to whom it occurred to do so, it could only be some systematic thinker with whom theorising was a necessity that took the place of the external impulse. But up till that time there had been no true systematiser of political economy.

The Physiocrats were the first to bring in a real system. For a long time, however, even they passed over our problem without consideration. Quesnay, the founder of the school, so little comprehends the nature of natural interest that he sees in it replacement costs—a kind of reserve fund, out of which the loss, in wearing out of capital and by unforeseen accidents, is to be defrayed—rather than a net income of the capitalist.1

Mercier de la Rivière,2 more correctly, recognises that capital produces a net profit; but he only points out that there must be this profit on the capital that is employed in agriculture, if agriculture is not to be abandoned for other pursuits. He does not go on to ask why capital in general should yield interest. As little does Mirabeau, who, as we saw, has written a great deal on the subject of interest, and has written very badly.3

It was Turgot, then, the greatest of the physiocrats, who was also first among them to seek for a fuller explanation of the fact of natural interest. Even his way of treating the problem is modest and naïve enough: it is easy to see that it was not the fiery zeal in a great social problem that forced him to take up the pen, but only the need for clear consistency in his ideas—a need that would, if necessary, be content with an explanation of very moderate depth, provided only it found a plausible formula.

In the Mémoire sur les Prêts d'Argent, already known to us, Turgot simply deals with the question of loan interest. His more comprehensive interest theory is developed in his chief work, Réflexions sur la Formation et la Distribution des Richesses.4 To be correct, it is not so much developed as contained in it; for Turgot does not put the question as to the origin of interest formally, nor is the consideration he devotes to it a very connected one. What we find is a number of separate paragraphs (§§ 57, 58, 59, 61, 63, 68, and 71), containing a series of observations, out of which we have to put together his theory on the origin of interest for ourselves.5

Seeing that this theory bases the entire interest of capital on the possibility always open to the owner of capital to find for it an ulterior fructification though the purchase of rent-bearing land, I propose to call it shortly the Fructification theory.

The argument is as follows. The possession of land guarantees the obtaining of a permanent income without labour, in the shape of land-rent. But since movable goods, independently of land, also permit of being used, and on that account obtain an independent value, we may compare the value of both classes of goods; we may price land in movable goods, and exchange it for them. The exchange price, as in the case of all goods, depends on the relation of supply and demand (§ 85). At any time it forms a multiple of the yearly income that may be drawn from the land, and it very often gets its designation from this circumstance. A piece of land, we say, is sold for twenty or thirty or forty years' Purchase, if the price amounts to twenty or thirty or forty times the annual rent of the land. The amount of the multiple, again, depends on the relation of supply and demand; that is, whether more or fewer people wish to buy or sell land (§ 88).

In virtue of these circumstances every sum of money, and, generally speaking, every capital, is the equivalent of a piece of land yielding an income equal to a certain percentage on capital (§ 59).

Since in this way the owner of a capital, by buying land, is able to obtain from it a permanent yearly income, he will not be inclined to put his capital in an industrial (§ 61), agricultural (§ 63), or commercial (§ 68) undertaking, if he cannot—leaving out of account compensation for all ordinary kinds of costs and trouble—expect just as large a profit from his capital thus employed as he could obtain through the purchase of land. On that account capital, in all these branches of employment, must yield a profit.

Thus, then, is the economical necessity of natural interest on capital first explained. Loan interest is deduced from it simply in this way: the undertaker without capital finds himself willing, and economically too may find himself willing, to give up to him who trusts him with a capital a part of the profit which the capital brings in (§ 71). So in the end all forms of interest are explained as the necessary result of the circumstance, that any one who has a capital may exchange it for a piece of land bearing a rent.

It will be noticed that in this line of thought Turgot takes for his foundation a circumstance which had been appealed to for some centuries by the defenders of loan interest, from Calvin downward. But Turgot makes an essentially different and much more thorough-going use of this circumstance. His predecessors availed themselves of it occasionally, and by way of illustration. Turgot makes it the centre of his system. They did not see in it the sole ground of loan interest, but co-ordinated with it the possibility of making a profit from capital engaged in commerce, industry, etc. Turgot puts it by itself at the head of everything. Finally, they had only used it to explain loan interest. Turgot explains the entire phenomenon of interest by it. Thus was built up a new doctrine, although out of old materials,—the first general theory of interest.

As regards the scientific value of this theory, the fate which has befallen it is very significant. I cannot recollect ever reading a formal refutation of it: people have tacitly declared it unsatisfactory, and passed on to seek for other explanations. It seems too plausible to be refuted; too slight to base anything on. We leave it with the feeling that it has not got down to the last root of interest, even if we cannot give any very accurate account of why and where it fails.

To supply such an account seems to me at the present time by no means a work of superfluity. In doing so I shall not be merely fulfilling a formal duty which I imposed on myself when I undertook to write a critical history of theory. In pointing out where and how Turgot failed I hope to make perfectly clear what the heart of the problem is, and what it is that every earnest attempt at solution must reckon with, and thus to prepare the way for the profitable pursuit of our future task. The example of a very lively writer of our own day shows that we are not yet so far past Turgot's line of thought as we might perhaps think.6

Turgot's explanation of interest is unsatisfactory, because it is an explanation in a circle. The circle is only concealed by the fact that Turgot breaks off his explanation at that very point where the next step would inevitably have brought him back to the point from which he stated.

The case stands thus. Turgot says: A definite capital must yield a definite interest, because it may buy a piece of land bearing a definite rent. To take a concrete example. A capital of £10,000 must yield £500 interest, because with £10,000 a man can buy a piece of land bearing a rent of £500.7

But the possibility of such a purchase is not in itself an ultimate fact, nor is it a fact that carries its explanation on its face. Thus we are forced to inquire further: Why can a person with a capital of £10,000 buy a rent-bearing piece of land in general and a piece of land bearing £500 rent in particular? Even Turgot feels that this question may be put, and must be put, for he attempts to give an answer to it. He appeals to the relation of demand and supply, as at any moment furnishing the ground for a definite relation of price between capital and land.8

But is this a full and satisfactory answer to our question? Certainly not. The man who, when asked what determines a certain price, answers, "Demand and supply," offers a husk for a kernel. The answer may be allowable in a hundred cases, where it can be assumed that the one who asks the question knows sufficiently well what the kernel is, and can himself supply it. But it is not sufficient when what is wanted is an explanation of a problem of which we do not yet know the nature. If it were sufficient, we might be quite content to settle the whole problem of interest simply by the formula; demand and supply regulate the prices of all goods in such a way that a profit always remains over to the capitalist. For the interest problem throughout relates to phenomena of price; e.g. to the fact that the borrower pays a price for the "use of capital"; or to the fact that the price of the finished product is higher than the price of its costs, in virtue of which a profit remains over to the undertaker. But certainly no one would find this a satisfactory explanation.

We must therefore ask further, What deeper causes lie behind demand and supply, and govern their movements in such a way that a capital of £10,000 can regularly be exchanged for a rent-bearing piece of land in general, and a piece of land bearing £500 rent in particular? To this question Turgot gives no answer, unless we care to look on the somewhat vague words at the beginning of § 57 as such; and if so the answer cannot in any way be thought satisfactory: "Those who had much movable wealth could employ it not only in the cultivation of land, but also in the different departments of industry. The facility of accumulating this movable wealth, and of making a use of it quite independent of land, had the effect that one could value the pieces of land, and compare their value with that of movable wealth."

But if we take up the explanation at the point where Turgot broke off, and carry it a little farther, we shall discover that this interest, which Turgot thought to explain as the result of the exchange relation between land and capital, is in reality the cause of this exchange relation. That is to say, whether it is twenty or thirty or forty times the annual rent that is asked or offered for a piece of land, depends chiefly on the percentage which the capital that buys it would obtain if otherwise employed. That piece of land which yields £500 rent will be worth £10,000 if and because the rate of interest on capital amounts to 5 per cent. It will be worth £5000 if and because the interest rate is 10 per cent. It will be worth £20,000 if and because capital bears only 2½ per cent interest. This, instead of the existence and height of interest being explained by the exchange relation between land and capital, this exchange relation itself must be explained by the existence and height of interest. Nothing has been done, therefore, to explain interest, and the whole argument moves in a circle.

I should have confidence in finishing my criticism of Turgot's doctrine at this point, if I did not feel myself bound to be more than usually careful in all cases where the nature of reciprocal action between economic phenomena is concerned. For I know that, in the complexity of economical phenomena, it is exceedingly difficult: to determine with certainty the starting-point of a chain of reciprocal causes and effects, and I am aware that, in deciding on such points, we are particularly exposed to the danger of being misled by dialectic. I should not like, therefore, to force on the reader the opinion that Turgot here made a mistake, without having removed every suspicion on the point by going over the proof again; particularly as this will give us a good opportunity of putting the character of our problem in a clearer light.

Accidents apart, a piece of land will yield its rent for a practically infinite series of years. The possession of it assures the owner and his heirs the amount of the yearly use, not for twenty or forty times only, but for many hundred times—almost for an infinite number of times. But as a matter of common experience this infinite series of uses, which, added together, represent a colossal sum of income, is regularly sold for a fraction of this sum—for twenty up to forty times the year's use—and this is the fact we wish explained.

In explanation it cannot be enough to point in a superficial way to the state of demand and supply. For if demand and supply are at all times in such a position that this remarkable result takes place, the regular recurrence must rest on deeper grounds, and these deeper grounds demand investigation.

In passing I may dismiss the hypothesis, which may have occurred to the reader, that the reason of the low purchase price is that the owner only takes into consideration those uses which he himself may hope to obtain from the land, and neglects all that lie outside and beyond these. If this hypothesis were correct, then, seeing that the average life of man, and therefore of landowners, has not varied very much in historical times, the proportion of the value of land to the rent of land must have remained tolerably constant. But this is by no means the case. Indeed we see that proportion varying from ten to fifty fold, in visible sympathy with the rate of interest at the time.

There must, therefore, be another reason for this striking phenomenon.

I think we should all agree in pointing to the following as the true reason;—in valuing a piece of land, we make a discounting calculation. Thus we value the many hundred years' use of a piece of land at only twenty times the annual use when the rate of interest is 5 per cent, and at only twenty-five times the annual use when the rate is 4 per cent, because we discount the value of the future uses; that is, we estimate them in to-day's value at a smaller amount, pro rata temporis et usurarum, exactly on the same principle as we estimate the present capital value of a limited or perpetual claim on rent.

If this is so, and I do not think it will be doubted, then the capital valuation of land to which Turgot appealed in explanation of the phenomenon of interest, is itself nothing more than one of the many forms in which that phenomenon meets us in economic life. For that phenomenon is protean. It meets us sometimes as the explicit payment of a loan interest; sometimes as payment of a hire which leaves a "net use" to the owner after deduction of a quota for wear and tear; sometimes as the difference in price between product and costs, which falls to the undertaker as profit; sometimes as the prior deduction by the creditor from the amount of the loan granted to the debtor; sometimes as the raising of the purchase money in cases of postponed payment; sometimes as the limitation of the purchase money for claims, prerogatives, and privileges not yet due; sometimes, finally—to mention an instance closely related, indeed essentially the same—as the lowering of the purchase money paid for uses inseparable from a piece of land, but only available at a later date.

To trace the profit that capital obtains in commerce and industry to the possibility of acquiring land in exchange for definite sums of capital, is, therefore, nothing else than to refer from one phenomenal form of interest to another which is as much in need of explanation as the first. Why do we obtain interest on capital? why do we discount the value of future rates of payment or rates of use? These are evidently only two different forms of the question which puts the same riddle. And the solution of it gains nothing from a kind of explanation that begins with the former question, only to come to a stand before the latter one.

Book I, Chapter IV

Adam Smith and the Development of the Problem

It has never, I think, been the good fortune of any founder of a scientific system to think out to the very end even the more important ideas that constitute his system. The strength and lifetime of no single man are sufficient for that. It is enough if some few of the ideas which have to play the chief part in the system are put on a perfectly safe foundation, and analysed in all their ramifications and complexities. It is a great deal if, over and above that, an equal carefulness falls to the lot of a few other favoured members of the system. But in all cases the most ambitious spirit must be content to build up a great deal that is insecure, and to fit into his system, on cursory examination, ideas which it was not permitted him to work out.

We must keep these considerations before us if we would rightly appreciate Adam Smith's attitude towards our problem.

Adam Smith has not overlooked the problem of interest; neither has he worked it out. He deals with it as a great thinker may deal with an important subject which he often comes across, but has not time or opportunity to go very deeply into. He has adopted a certain proximate but still vague explanation. The more indefinite this explanation is, the less does it bind him to strict conclusions; and a many-sided mind like Adam Smith's, seeing all the many different ways in which the problem can be put, but lacking the control which the possession of a distinct theory gives, could scarcely fail to fall into all sorts of wavering and contradictory expressions. Thus we have the peculiar phenomenon that, while Adam Smith has not laid down any distinct theory of interest, the germs of almost all the later and conflicting theories are to be found, with more or less distinctness, in his scattered observations. We find the same phenomenon in Adam Smith as regards many other questions.

The line of thought which seems to commend itself principally to him as explaining natural interest occurs in very similar language in the sixth and eighth chapters of book i. of the Wealth of Nations. It amounts to this, that there must be a profit from capital, because otherwise the capitalist would have no interest in spending his capital in the productive employment of labourers.9

General expressions like these have of course no claim to stand for a complete theory.10 There is no reasoned attempt in them to show what we are to represent as the actual connecting links between the psychological motive of the capitalist's self-interest and the final fixing of market prices which leave a difference between costs and proceeds that we call interest. But yet, if we take those expressions in connection with a later passage,11 where Smith sharply opposes the "future profit" that rewards the resolution of the capitalist to the "present enjoyment" of immediate consumption, we may recognise the first germs of that theory which Senior worked out later on under the name of the Abstinence theory.

In the same way as Adam Smith asserts the necessity of interest, and leaves it without going any deeper in the way of proof, so does he avoid making any systematic investigation of the important question of the source of undertaker's profit. He contents himself with making a few passing observations on the subject. Indeed in different places he gives two contradictory accounts of this profit. According to one account, the profit of capital arises from the circumstance, that, to meet the capitalist's claim to profit, buyers have to submit to pay something more for their goods than the value which these goods would get from the labour expended on them. According to this explanation, the source of interest is an increased value given to the product over that value which labour creates; but no explanation of this increase in value is given. According to the second account, interest is a deduction which the capitalist makes in his own favour from the return to labour, so that the workers do not receive the full value created by them, but are obliged to share it with the capitalist. According to this account, profit is a part of the value created by labour and kept back by capital.

Both accounts are to be found in a great number of passages; and these passages, oddly enough, sometimes stand quite close to each other, as, e.g. in the sixth chapter of the first book.

Adam Smith has been speaking in that chapter of a past time,—of course a mythical time,—when the land was not yet appropriated, and when an accumulation of capital had not yet begun, and has made the remark that, at that time, the quantity of labour required for the production of goods would be the sole determinant of their price. He continues: "As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in this adventure."

This sentence, when taken with the opposite remark of the previous paragraph (that, in primitive conditions, labour is the sole determinant of price), very clearly expresses the opinion that the capitalist's claim of interest causes a rise in the price of the product, and is met from this raised price. But Adam Smith immediately goes on to say: "The value which the workman adds to the material, therefore, resolves itself in this case into two parts, of which the one pays the wages, the other the profits of the employer upon the whole stock of materials and wages which he advanced." Here again the price of the product is looked upon as exclusively determined by the quantity of labour expended, and the claim of interest is said to be met by a part of the return which the worker has produced.

We meet the same contradiction, put even more strikingly, a page farther on.

"In this state of things," says Adam Smith, "the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him." This is an evident paraphrase of the second account. But immediately after that come the words: "Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour." He could scarcely have said more plainly that the effect of a claim of interest is to raise prices without curtailing the wages of labour.

Later on he says alternately: "As in a civilised community there are but few commodities of which the exchangeable value arises from labour only, rent and profit contributing largely to that of the far greater part of them, so the annual produce of its labour will always be sufficient to purchase or command a much greater quantity of labour than was employed in raising, preparing, and bringing that produce to market" (first account, chap. vi.) "The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be completed. He shares in the produce of their labour, or in the value which it adds to the materials upon which it is bestowed; and in this consists his profit" (second account, chap. viii.)

"High or low wages and profit are the causes of high or low price; high or low rent is the effect of it" (first account, chap. xi.)

Contradictions like these on the part of such an eminent thinker admit, I think, of only one explanation;—that Adam Smith had not thoroughly thought out the interest problem; and—as is usual with those who have only imperfectly mastered a subject—was not very particular in his choice of expressions, but allowed himself to be swayed very much by the changing impressions which the subject may have made on him from time to time.

Adam Smith, then, has no perfected theory of interest.12 But the suggestions he threw out were all destined to fall on fruitful soil. His casual remark on the necessity of interest was developed later into the Abstinence theory. In the same way the two accounts he gave of the source of interest were taken up by his followers, logically carried out, and raised into principles of independent theories. With the first account—that interest is paid out of an additional value which the employment of capital calls into existence—are connected the later Productivity theories. With the second account—that interest is paid out of the return to labour—are connected the Socialist theories of interest. Thus the most important of later theories trace their pedigree back to Adam Smith.

The position taken by Adam Smith towards the question may be called that of a complete neutrality. He is neutral in his theoretical exposition, for he takes the germs of distinct theories and puts them beside each other, without giving any one of them a distinct prominence over the others. And he is neutral in his practical judgment, for he maintains the same reserve, or rather the same contradictory hesitancy, both in praise and blame of interest. Sometimes he commends the capitalists as benefactors of the human race, and as authors of enduring blessing;13 sometimes he represents them as a class who live on deductions from the produce of other people's labour, and compares them significantly with people "who love to reap where they never sowed."14

In Adam Smith's time the relations of theory and practice still permitted such a neutrality, but it was not long allowed to his followers. Changed circumstances compelled them to show their colours on the interest question, and the compulsion was certainly not to the disadvantage of the science.

The special requirements of economic theory could not any longer put up with uncertain makeshifts. Adam Smith had spent his life in laying down the foundations of his system. His followers, finding the foundations laid, had now time to take up those questions that had been passed over. The development now reached by the related problems of land-rent and wages gave a strong inducement to pursue the interest problem. There was a very complete theory of land-rent; there was a theory of wages scarcely less complete. Nothing was more natural than that systematic thinkers should now begin to ask in earnest about the third great branch of income—the whence and wherefore of the income that comes from the possession of capital.

But in the end practical life also began to put this question. Capital had gradually become a power. Machinery had appeared on the scene and won its great triumphs; and machinery everywhere helped to extend business on a great scale, and to give production more and more of a capitalist character. But this very introduction of machinery had begun to reveal an opposition which was forced on economic life with the development of capital, and daily grew in importance, the opposition between capital and labour.

In the old handicrafts undertaker and wage-earner, master and apprentice, belonged not so much to different social classes as simply to different generations. What the one was the other might be, and would be. If their interests for a time did diverge, yet in the long run the feeling prevailed that they belonged to one station of life. It is quite different in great capitalist industry. The undertaker who contributes the capital has seldom or never been a workman; the workman who contributes his thews and sinews will seldom or never become an undertaker. They work at one trade like master and apprentice; but not only are they of two different ranks, they are even of different species. They belong to classes whose interests diverge as widely as their persons. Now machinery had shown how sharp could be the collision of interest between capital and labour. Those machines which bore golden fruit to the capitalist undertaker had, on their introduction, deprived thousands of workers of their bread. Even now that the first hardships are over there remains antagonism enough and to spare. It is true that capitalist and labourer share in the productiveness of capitalist undertaking, but they share in this way, that the worker usually receives little—indeed very little—while the undertaker receives much. The worker's discontent with his small share is not lessened, as it used to be in the case of the handicraft assistant, by the expectation of himself in time enjoying the lion's share; for, under large production, the worker has no such expectation. On the contrary, his discontent is aggravated by the knowledge that to him, for his scanty wage, falls the harder work; while to the undertaker, for his ample share in the product, falls the lighter exertion—often enough no personal exertion whatever. Looking at all these contrasts of destiny and of interest, if there ever came the thought that, at bottom, it is the workers who bring into existence the products from which the undertaker draws his profit—and Adam Smith had come wonderfully near to such a thought in many passages of his widely read book—it was inevitable that some pleader for the fourth estate should begin to put the same question with regard to Natural interest as had been put many centuries earlier, by the friends of the debtor, with regard to Loan interest, Is interest on capital just? Is it just that the capitalist-undertaker, even if he never moves a finger, should receive, under the name of profit, a considerable share of what the workers have produced by their exertions? Should not the entire product rather fall to the workers?

The question has been before the world since the first quarter of our century, at first put modestly, then with increasing assertiveness; and it is this fact that the interest theory has to thank for its unusual and lasting vitality. So long as the problem interested theorists alone, and was of importance only for purposes of theory, it might have slumbered on undisturbed. But it was now elevated to the rank of a great social problem which the science neither could nor would overlook. Thus the inquiries into the nature of Natural interest were as numerous and solicitous after Adam Smith's day as they had been scanty and inadequate before it.

It must be admitted that they were as diverse as they were numerous. Up till Adam Smith the scientific opinion of the time had been represented by one single theory. After him opinion was divided into a number of theories conflicting with each other, and remaining so with rare persistence up till our own day. It is usually the case that new theories put themselves in the place of the old, and the old gradually yield the position. But in the present case each new theory of interest only succeeded in placing itself by the side of the old, while the old managed to hold their place with the utmost stubbornness. In these circumstances the course of development since Adam Smith's time presents not so much the picture of a progressive reform as that of a schismatic accumulation of theories.

The work we have now before us is clearly marked out by the nature of the subject. It will consist in following the development of all the diverging systems from their origin down to the present time, and in trying to form a critical opinion on the value, or want of value, of each individual system. As the development from Adam Smith onwards simultaneously pursues different lines, I think it best to abandon the chronological order of statement which I have hitherto observed, and to group together our material according to theories.

To this end I shall try first of all to make a methodical survey of the whole mass of literature which will occupy our attention. This will be most easily done by putting the characteristic and central question of the problem in the foreground. We shall then see at a glance how the theory differentiates itself on that central question like light on the prism.

What we have to explain is the fact that, when capital is productively employed, there regularly remains over in the hands of the undertaker a surplus proportional to the amount of this capital. This surplus owes its existence to the circumstance that the value of the goods produced by the assistance of capital is regularly greater than the value of the goods consumed in their production. The question accordingly is, Why is there this constant surplus value?

To this question Turgot had answered, There must be a surplus, because otherwise the capitalists would employ their capital in the purchase of land. Adam Smith had answered, There must be a surplus, because otherwise the capitalist would have no interest in spending his capital productively.

Both answers we have already pronounced insufficient. What then are the answers given by later writers?

At the outset they appear to me to follow five different lines.

One party is content with the answers given by Turgot and Smith, and stands by them. This line of explanation was still a favourite one at the beginning of our century, but has been gradually abandoned since then. I shall group these answers together under the name of the Colourless theories.

A second party says, Capital produces the surplus. This school, amply represented in economic literature, may be conveniently called that of the Productivity theories. I may here note that in their later development we shall find the productivity theories splitting up into many varieties; into Productivity theories in the narrower sense, that assume a direct production of surplus on the part of capital; and into Use theories, which explain the origin of interest in the roundabout way of making the productive use of capital a peculiar element in cost, which, like every other element of cost, demands compensation.

A third party answers, Surplus value is the equivalent of a cost which enters as a constituent into the price, viz. abstinence. For in devoting his capital to production the capitalist must give up the present enjoyment of it. This postponement of enjoyment, this "abstinence," is a sacrifice, and as such is a constituent element in the costs of production which demands compensation. I shall call this the Abstinence theory.

A fourth party sees in surplus value the wage for work contributed by the capitalist. For this doctrine, which also is amply represented, I shall use the name Labour theory.

Finally, a fifth party—for the most part belonging to the socialist side—answers, Surplus value does not correspond to any natural surplus whatever, but has its origin simply in the curtailment of the just wage of the workers. I shall call this the Exploitation theory.

These are the principal lines of explanation. They are certainly numerous enough, yet they are far from exhibiting all the many forms which the interest theory has taken. We shall see rather that many of the principal lines branch off again into a multitude of essentially different types; that in many cases elements of several theories are bound up in a new and peculiar combination; and that, finally, within one and the same theoretical type, the different ways in which common fundamental thoughts are formulated, are often so strongly contrasted and so characteristic that there would be some justification in recognising individual shades of difference as separate theories. That our prominent economic writers have exerted themselves in so many different ways for the discovery of the truth is an eloquent witness of its discovery being no less important than it is hard.

We begin with a survey of the Colourless theories.

Book I, Chapter V

The Colourless Theories

The revolution spoken of at the end of last chapter, which was to elevate the long underrated question of interest into a social problem of the first rank, was not sudden enough to prevent a number of writers remaining content with the somewhat patriarchal treatment that the subject had received at the hands of Turgot and Adam Smith. It would be a great mistake to suppose that among these stragglers we should only meet with men of no independence, writers of second and third rank. Of course there is the usual crowd of little men who always appear in the wake of a pioneering genius, and find their mission in popularising the new doctrine. But besides these we find many a distinguished thinker who passes over our problem from motives very similar to those of Adam Smith.

It is easy to see that the opinions which those "colourless" writers, as I shall call them, have expressed on the subject of interest have exerted but little influence on the development of the theory as a whole. This circumstance will justify me in passing rapidly over the majority of them, and giving a complete account only of the few who may attract our interest either by their personality or by the peculiarity of their doctrine.

Any one familiar with the character of German political economy at the end of the past, and at the beginning of the present century, will not be astonished to meet in it a singularly large number of colourless writers. Their indifference to the subject is not without a certain variety. Some who remain faithful to Adam Smith copy also his vague suggestions about interest almost literally; in particular his remark that, if there were no interest, the capitalist would have no inducement to spend his capital productively. Thus Sartorius,15 Lueder,16 and Kraus.17 Some take the same fundamental idea, but treat it more freely, as Hufeland18 and Seuter.19 Others assume that interest requires no explanation, and say nothing about it, as Pölitz,20 and, somewhat later, Murhard.21 Others, again, give reasons for it that are certainly peculiar, but these so superficial and trifling that they can scarcely lay claim to the honourable name of theories. Thus Schmalz, who argues in a circle and explains the existence of natural interest by the possibility of lending capital to others at interest.22

Count Cancrin's explanation of the matter is peculiarly naïve. For curiosity's sake, I give the short passage in his own words: "Every one knows," he says,23 "that money bears interest, but why? If two owners of real capital wish to exchange their products, each of them is disposed to demand for the labour of storing, and as profit, as much over the intrinsic value of the product as the other will grant him; necessity, however, makes them meet each other half way. But money represents real capital: with real capital a profit can be made; and hence interest."

The words printed in italics are meant to explain the existence of natural interest, the others the existence of loan interest; and the author considers this explanation so satisfactory that in a later passage he refers back to it with complacency: "Why capital bears interest, in the form of a definite rate per cent in the case of money values, in the form of the prices of commodities in the case of real capital, has been already made clear" (p. 103).

More attention is due to certain authors who give a stronger emphasis to Adam Smith's other suggestion that profit is a share in the product of labour diverted by the capitalist.

One of these writers, Count Soden,24 sharply contrasts capital, as simple material on which "productive power" works, with the productive power itself. He traces profit to the fact that the owner of "capital-material" is able to "put the power of others in motion for himself, and therefore to share the profit on this power with the isolated producer, the wage-earner" (vol. i. p. 65). That some such sharing does take place Soden regards as a self-evident result of the relations of competition. Without giving himself the trouble of a formal explanation, the expression repeatedly escapes him that the small number of the capitalists, as compared with the great numbers of the wage-earners, must always make it possible for the capitalist to buy wage-labour at a price which leaves him a "rent" (pp. 61, 138). He thinks this quite fair (e.g. p. 65, onwards), and consequently gives his advice against attempting to raise wages by legal regulation. "For if, in the price thus regulated, the owner of the material comes to find that he gets no profit from the power of others, all material which he cannot himself work up he will leave dead" (p. 140). Soden, however, wishes that the "price" of wages should be brought up to their "true value." What level of wage it is that corresponds to this true value remains very obscure, in spite of the thorough discussion which the author devotes to the question of the value of the productive power (p. 132). The only thing certain is that, in his opinion, even when the productive power is compensated at its full value, there must still remain a rent to the capitalist.

The impression one gets from all this is, that the first part of the argument, where interest is explained to be a profit obtained from the power of others, would lead us to expect a very different conclusion from that come to in the second part; and that the reasons given for this change of front are much too vague to be satisfactory.

Lotz lays himself open to similar criticism.

This acute writer, in his Handbuch der Staatswissenschaftslehre, Erlangen, 1821, goes very exhaustively into the subject of interest. He argues with great vigour against the doctrine which Say had meantime put forward, that capital possesses an independent productive power. "In themselves all capitals are dead," and "there is no truth in the assertion of their independent labour": they are never anything else than tools of human labour (vol. i. p. 65, etc.) In the very notable passage which follows, the "rent" of capital is criticised from this point of view.

Since capitals are only instruments for furthering labour, and themselves do no labour, Lotz finds that the capitalist "from the return to labour, and from the amount of goods gained or produced by it, has no claim to anything more than the amount of expense which the furnishing of the capital has caused him; or, more plainly, the amount of the labourer's subsistence, the amount of the raw material given out to him, and the amount of the tools properly so called that are worn out by the worker during his work. This, strictly speaking, would be distinctively the rent appropriate to capital which the capitalist may claim from the labourer who works for him; and further, this is distinctively the appropriate quota of the quantity of goods produced by the labourer, or won from nature, that might belong of right to the capitalist. If this then be the appropriate sense of the term, there is no place for what is usually called profit, viz. a wage obtained by the capitalist for advancing his capital such as guarantees a surplus over the expenses. If labour returns more than the amount of the capitalist's expenditure, this return, and all the income that comes out of it, belongs distinctively to the labourer alone, as wages of his labour. For in point of fact it is not the capitalist who creates the labourer's products; all that the labourer, with the assistance of capital, may produce or win from nature belongs to himself. Or if the power which manifests its activity in the worker at his work be looked upon as a natural fund belonging to the entire industrial mass of mankind, then all that the labourer produces belongs to humanity as a whole" (p. 487, onwards).

In this acute and remarkable passage Lotz comes very near to the later Exploitation theory of the socialists. But all of a sudden he breaks away from this line of argument, and swings back into the old colourless explanation of Adam Smith by going on to say: "If, however, the capitalist were limited to a simple replacement of what he may have furnished, from his accumulated stock of wealth, to the worker during his work, and for his work—if the capitalist were so hardly treated, he would scarcely decide to advance anything from his stock on behalf of the worker and his work. He would perhaps never decide to accumulate capital at all; for there would not be many capitals accumulated if the accumulator had not the prospect of a wage for the trouble of this accumulating in the shape of the expected interest. If, therefore, the worker, who has none of the requisites and conditions necessary for the exercise of his power, is to hope and expect that owners will consent to furnish their capital, and so make it possible for him to exert the productive power that resides in him, or lighten the exertion for him, then he must of necessity submit to give up to the capitalists something of the return to his labour."

In what follows Lotz somewhat expands this vague explanation by suggesting, as a fair ground for the capitalist's claim, that, without the support of capital, the work which guarantees that there is a return to be divided could never have been done at all by the labourer, or, at any rate, could not have been so well done. This also gives him a standard for the "true and appropriate extent" of rent of capital; it should be calculated, that is to say, in proportion to the support which the worker has enjoyed at his work by the use of the capital. In explaining this method of calculation by several examples Lotz shows how nearly extremes may meet. A few pages before, he has said that the whole "return to labour, and all the income that comes out of it, belongs peculiarly to the labourer alone, as wages of his labour." He now goes on to show how in certain circumstances the owner of a labour-saving machine may claim for himself, and that rightly, nine-tenths of the return to labour!

It is easy to see that the contrast here between the starting-point and the conclusion is even more striking than it is with Soden, and that the argument relied on to explain and connect the two does not carry much more weight. At bottom it says nothing else than that the capitalist would like to get interest, and that the workers may consent to its deduction. But how far this "explanation" is from being really a theory of interest is forcibly illustrated if we put a parallel case in regard to the land-rent problem. Lotz's explanation does for the problem of interest exactly what would be done for the problem of rent, if one were to say that landowners must obtain a rent, because otherwise they would prefer to leave their ground uncultivated; and that it is a fair thing for the agricultural labourers to consent to the deduction of rent, because without the co-operation of the soil they could not get any return to divide, or could not get so good a return. Lotz, however, evidently never suspected that the essence of the problem is not even touched by any such explanation.25

A last group of Colourless writers takes a hesitating middle course between Adam Smith's views and the Productivity theory which Say had meantime put forward. They take some features from both, but do not expand any of them into a complete theory. From Say these authors usually take the recognition of capital as an independent factor in production; and they adopt perhaps one or other of Say's ways of speaking that suggest the "productive power" of capital. From Adam Smith they take the appeal to the motive of the capitalist's self-interest. But one and all of them avoid any precise formulation of the interest problem.

In this group we find Jakob,26 who at times recognises as the ultimate source of all useful things only nature and industrial activity (§ 49), and traces the profit of capital to a capability on the part of labour to produce a surplus product (§§ 275, 280); but at other times points to profit as that "which is produced by a capital over its own value" (§ 277), designates capital by Say's term of "productive instrument" (§ 770), and often speaks of the owners of capital as immediate producers, who are called to take part in the original division of the product in virtue of the direct share which they have taken in the production of goods by contributing their capital.27 Then we have Fulda,28 who looks upon capital as a special though derived source of wealth, and, moreover, likens it to a machine which when properly employed not only pays for its own upkeep, but makes something more in addition; he does not attempt, however, to give any explanation of this (p. 135). Then comes Eiselen,29 whose want of clearness at once comes out in his first recognising only two ultimate sources of wealth, nature and labour (p. 11), and then later looking upon nature, labour, and capital as "fundamental powers of production," from the co-operation of which the value of all products proceeds (§ 372). Eiselen, moreover, finds that the function of capital is to increase the return to labour and natural powers (§ 497 and other places); but in the end he can find nothing better to say in explanation of interest than that interest is necessary as an incentive to the accumulation of capital (§ 491; similarly §§ 517, 555, etc.)

Besides these we meet in the same group the gallant old master in political economy, Rau. It is singular that Rau, to the very end of his long scientific career, ignored the imposing number of distinct theories on interest which he saw springing up, and held by the simple way of explanation that had been customary in the days of his youth. Even in the eighth and last edition of his Volkswirthschaftslehre, which appeared in 1868, he contented himself with touching on the interest problem in a few cursory remarks, containing in substance the old self-interest motive introduced by Adam Smith. "If he (the capitalist) is to resolve to save wealth, accumulate it, and make it into capital, he must get an advantage of another sort; viz. a yearly income lasting as long as his capital lasts. In this way the possession of a capital becomes to individuals... the source of an income which is called rent of capital, rent of stock, or interest."30

On Rau's works the rich development which the literature of interest had taken before 1868 has scarcely left a trace. Of Say's Productivity theory he has only adopted this much; that, like Say, he recognises capital to be an independent source of wealth; but he immediately weakens this concession by rejecting as inappropriate the expression "productive service," which Say used for the co-operation of this source of wealth, and by putting capital among "dead auxiliaries," in contrast to the producing forces of wealth (vol. i. § 84). And on one occasion, in a note, he quotes Senior's Abstinence theory, but without adding a single word either of agreement or criticism (vol. i. § 228).

When we turn from Germany to England our attention is first claimed by Ricardo.

In the case of this distinguished thinker we find the same phenomenon we have already noticed in the case of Adam Smith, that, without putting forward any theory of his own, he has had a deep influence on the development of the interest theory. I must classify him among the Colourless writers, for although he takes up the subject of interest at some length, he treats it only as a self-explanatory, or almost self-explanatory phenomenon, and passes over its origin in a few cursory remarks, to take up at greater length a number of concrete questions of detail. And although he treats these questions most thoroughly and intelligently, it is in such a way that their investigation throws no light on the primary theoretical question. But, exactly as in the case of Adam Smith, his doctrine contains propositions on which distinct theories could have been built, if only they had been worked out to all their conclusions. In fact, later on, distinct theories were built on them, and not the least part of their support consists in the authority of Ricardo, to whom the advocates of these theories were fond of appealing as their spiritual father.

The passages in which Ricardo makes reference to interest are very numerous. Apart from scattered observations, they are to be found principally in chapters i, vi, vii, and xxi of his Principles of Political Economy and Taxation.31 The contents of these passages, so far as they refer to our subject, may best be ascertained if we divide them into three groups. In the first group I shall place Ricardo's direct observations on the origin of interest; in the second, his views on the causes that determine its amount; in the third, his views on the connection of interest with the value of goods. It should be premised, however, that Ricardo, like the majority of English writers, makes no distinction between interest on capital and undertaker's profit, but groups both under the word Profit.

(1) The first group is very thinly represented. It contains a few passing remarks to the effect that there must be interest, because otherwise capitalists would have no inducement to accumulate capital.32 These remarks have an evident connection with the analogous expressions of Adam Smith, with which we are familiar, and come under the same criticism. There is some warrant for seeing in them the primary germs from which the Abstinence theory has since been developed, but in themselves they do not represent a theory.

The same remark is true of another observation. In chap. i. § 5, p. 25, he says that, where production demands an employment of capital for a longer period, the value of the goods produced must be greater than the value of goods which have required exactly the same amount of labour, but where the employment of capital has extended over a shorter period; and concludes: "The difference in value is only a just compensation for the time that the profits were withheld." One might possibly find in these words a still more direct agreement with the Abstinence theory, but in themselves they do not contain any finished theory.

(2) On the amount or rate of profit Ricardo's views (principally contained in chapters vi. and xxi.) are very interesting both as regards originality and self-consistency. As they arise out of his theory of land-rent, it will be necessary to give some account of that theory.

According to Ricardo, on the first settling of a country the most fruitful lands are taken into cultivation. So long as there is a superfluity of land of the "first quality" no rent is paid to the owner of the ground, and the whole revenue falls to the cultivators as wages of labour and profit of capital.

Later on, as population increases, the increasing demand for land products demands extended cultivation. This extended cultivation is of two kinds: sometimes the lands of inferior quality, despised up till now, are cultivated; sometimes the lands of first quality already in cultivation are cultivated with more intensiveness—farmed at a greater expenditure of capital and labour. In both cases—assuming that the state of agricultural technique remains unchanged—the increase in land products is only obtained at increased cost; and the last employed capital and labour are consequently less productiveless productive, that is to say, over the whole field, as the more favourable opportunities of cultivation are successively exhausted, and the less favourable must be resorted to.

The capitals thus employed in circumstances unequally favourable obtain at first unequal results. But these unequal results cannot permanently remain attached to particular capitals. The competition of capitalists will soon bring the rate of profit on all capitals engaged in agriculture to the same level. The standard, indeed, is given by the profit obtainable in the least remunerative employment of capital. All surplus return which the more favourably situated capitals yield in virtue of the better quality of the co-operating powers of the soil, falls into the lap of the landowners as rent.

The extent of profit and wage taken together is thus always determined by the return to the least productive employment of capital; for this return pays no rent, and is divided entirely as profit on capital and wage of labour.

Now of these two factors one, the wage of labour, follows a hard and fast law. Wages are necessarily at all times equal to the amount of the necessary cost of subsistence of the worker. They are high if the value of the means of subsistence be high; low if the value of the means of subsistence be low. As then the capitalist receives what remains over, profit finds the line that determines its height in the height of wages at the time. In this connection between interest and wage Ricardo finds the true law of interest. He brings it forward with emphasis in a great many passages, and opposes it to the older view, particularly to that represented by Adam Smith, that the extent of profit is determined by the amount and competition of capitals.

In virtue of this law, Ricardo now goes on to argue, profit must tend to sink steadily with increasing economic cultivation. For in order to obtain means of subsistence for the increasing population, man must resort to conditions of cultivation that are always more and more unfavourable, and the decreasing product, after deduction of the wages of labour, leaves always less and less for profit. True, although the amount of the product diminishes, its value does not fall. For, according to Ricardo's well-known law, the value of products is at all times related by the quantity of labour employed in their production. Therefore if, at a later point of time, the labour of ten men brings forward only 150 quarters of corn, while at an earlier period it had brought forward 180, the 150 quarters will now have exactly the same value as the 180 before had, because in both is embodied the same quantity of labour—that is, the labour of ten men over a year. But now of course the value of the single quarter of wheat will rise. With it necessarily rises the amount of value which the worker requires for his subsistence, and, as a further result, his wages must also rise. But if, for the same amount of value which the lessened quantity of product represents, a higher wage must be paid to labour, there naturally remains over a less amount for profit.

Were man finally to extend cultivation to lands so unfruitful that the product obtainable was entirely required for the labourers' subsistence, profit would fall to zero. That is, however, impossible, because the expectation of profit is the one motive to the accumulation of capital, and this motive becomes weakened with the gradual lowering of profit; so that, before zero is reached, the further accumulation of capital, and with it the advance of wealth and of population, would come to a standstill.

The competition of capitalists, on which Adam Smith lays so much weight, can, according to Ricardo, only temporarily lower the profit of capital, when (in accordance with the well-known wage fund theory) the increased quantity of capital at first raises wages. But very soon the labouring population increases in proportion to the increased demand for labour, and wages tend to sink to the former level while profit tends to rise. The only thing that will finally reduce profit is when the means of support necessary for the increased population can be obtained only by the cultivation of less productive lands and at increased cost; and when, in consequence, the finished product leaves a smaller surplus after paying the necessary wages of labour. This will not be in consequence of competition, but in consequence of the necessity of having recourse to less fruitful production. Only from time to time does the tendency of profit to sink with progressive economical development experience a check through improvements in agricultural technique, which allow of equal quantities of product being obtained with less labour than before.

If we take the substance of this theory we find that Ricardo explains the rate of profit from the rate of wages; the rate of wages is the cause, the rate of profit the effect.33

Criticism may approach this theory from different sides. It has, it need scarcely be said, no validity whatever for those who, like Pierstorff, hold Ricardo's rent theory to be fundamentally untrue. Further, that portion of the argument which rests on the wage fund theory will be exposed to all the objections raised to that theory. I shall put on one side, however, all those objections which relate to assumptions outside the interest theory, and direct my criticism simply to the theory itself.

I ask, therefore, Assuming the correctness of the rent theory and of the wage fund theory, is the rate of profit, or, for that matter, the existence of profit, explained by Ricardo's theory?

The answer will be in the negative, and that because Ricardo has mistaken what are simply accompanying circumstances of the phenomenon for its cause. The matter stands thus.

It is quite right to say that wage, profit, and return of production do, after deduction of possible land-rent, stand in an iron connection. It is quite right to say that the profit of capital can never amount to more, and never to less, than the difference between return and wage. But it is false to interpret this connection as implying that the amount of the return and the amount of the wage are the determining, and the amount of profit simply the determined. Just as plausibly as Ricardo has explained the rate of profit as a result of the rate of wages might he have explained the rate of wages as a result of the rate of profit. He has not done so because he rightly recognised that the rate of wages rests on independent grounds, and grounds peculiar to the factor, labour. But what Ricardo recognised in the case of wages he has overlooked in the case of profit. Profit, too, has grounds that determine its amount arising out of circumstances peculiar to itself. Capital does not simply take what remains over; it knows how to exact its own proper share. Now an efficient explanation of profit would have to bring into prominence just those considerations that appear on the side of the factor "capital," and prevent the absorption of profit by wages just as effectually as, e.g. the labourer's necessity subsistence prevents the absorption of wages by interest. But Ricardo entirely fails to give this prominence to the specific grounds that determine the rate of interest.

Only once does he notice the existence of any such grounds, when he remarks that profit can never sink to zero, because, if it did so, the motive for the accumulation of capital, and with it the accumulation of capital itself, would come to an end.34 But this thought, which, logically expanded, might have afforded material for a really original theory of interest, he does not follow up. He continues to look for the circumstances that determine the rate of profit exclusively in the field of the competing factors; and he assiduously points out, as its decisive causes, sometimes the rate of wages, sometimes the degree of productivity of the most unproductive labour, sometimes even—in a way that breathes of the physiocrat, but still is in harmony with the whole doctrine just expounded—the natural fruitfulness of the soil.35

This criticism of Ricardo appears of course to be itself exposed to a very obvious objection. If, as we have assumed with Ricardo in the whole course of our argument, wage claims for itself an absolutely determined quantity,—the amount of the costs of subsistence, it appears as if, at the same time, the amount which remains over for profit is so strictly determined that there is no room for the working of any independent motives on the side of profit. Say, e.g. that the return to production ready for division is 100 quarters. If the workers occupied in producing these 100 quarters require 80 quarters, the share of capital is certainly fixed at 20 quarters, and could not be altered by any motive acting from the side of capital.

This objection, which is conceivable, will not, however, stand examination. For, to keep entirely to Ricardo's line of thought, the return which the least productive labour yields is not fixed but elastic, and is capable of being affected by any peremptory claims of capital and of labour. Just as effectually as the claims of the worker may and do prevent cultivation being extended to a point at which labour does not obtain even its own costs of subsistence, may the claims of capital prevent an excessive extension of the limits of cultivation, and actually do prevent it. For instance, suppose that these motives to which interest, generally speaking, owes its origin, and which Ricardo unfortunately does so little to explain, demand for a capital of definite amount a profit of 30 quarters, and that the workers employed by this capital need for their subsistence in all 80 quarters; then cultivation will require to call a halt at that point where the labour of so many men as can live on 80 quarters produces 110 quarters. Were the "motives of accumulation" to demand only a profit of 10 quarters, then cultivation could be extended till such time as the least productive labour would produce 90 quarters. But the cultivation of land less productive than this will always be economically impossible, and at the same time the limit to the further increase of population will be for the moment reached.36

That the claims of capital may exert this limiting influence Ricardo himself allows, as we have seen, in the very extreme case where profit threatens to disappear altogether. But naturally those circumstances to which capital owes its existence in general put forth their energies not only in the very extreme cases, but permanently. They do not simply prevent the entire disappearance of profit; they keep it constantly in competition with the other factors, and help to determine its amount. So that profit no less than wages may be said to rest on independent determining grounds. To have entirely ignored these grounds is the decisive blunder of Ricardo.

The peculiar nature of this blunder explains also quite naturally the phenomenon that otherwise would be very striking; that the comprehensive investigations, which so distinguished a thinker as Ricardo devoted to the question of the rate of profit, remain so entirely unfruitful as regards the principal question, the causes of profit.

(3) Finally, a third group of observations relating to profit is interwoven with Ricardo's views on the value of goods. This is a subject which generally gives its writers opportunity to express themselves directly or indirectly as to the source whence profit comes. Does the capitalist's claim of profit make the exchange value of goods higher than it would otherwise have been, or not? If it does, profit is paid out of a special "surplus value," without taking anything from those who own the co-operating productive powers; in particular, without taking anything from the wage-worker. If not, it is got at the expense of the other participants. On this Ricardo also has expressed himself, and his opinion is that an addition is made to the value of goods by the employment of capital; still he expresses himself in a somewhat cautious way.

He distinguishes between two different epochs of history. In the first, the primitive epoch—when there is very little capital and no private property in land—the exchange value of goods is exclusively determined by the quantity of labour expended on them.37 In the second epoch, to which modern economy belongs, there emerges a modification through the employment of capital. The undertaker-capitalists ask, for the capital employed by them in production, the usual rate of profit, calculated according to the amount of the capital and the length of time during which it is employed. But the amount of capital and the duration of its employment are different in the different branches of production, and the claims of profit differ with them. One branch requires more circulating capital, which quickly reproduces itself in the value of the product; another requires more fixed capital, and this again of greater or less durability,—the rapidity of the reproduction in the value of the products being in inverse ratio to the durability. Now the various claims of profit are equalised by the fact that those goods the production of which has required a comparatively greater share in capital, obtain a relatively higher exchange value.38

In this passage one can see that Ricardo decidedly inclines to the view that interest arises out of a special surplus value. But the impression we get that Ricardo held this decided opinion is not a little weakened by certain other passages; partly by the numerous passages where Ricardo brings profit and wages into connection, and makes the increase of one factor come out of the loss or curtailment of the other; partly by the previous pure "labour principle" of the primitive epoch of industry, which is inconsistent with that view. It must be said too that he is much more interested and cordial in his exposition of this latter principle than in that of its capitalist modification; a circumstance which cannot but arouse the suspicion that he considered the original state of things the natural one. In fact, the later socialist writers have represented the "labour principle" as Ricardo's real opinion, and the capitalist modification which he conceded as simply an illogical conclusion.39

Thus also on the question whence profit comes we see Ricardo take an undecided position; not hesitating so markedly as his master, Adam Smith, but undecided enough to warrant his retention in the ranks of the Colourless theorists.

Ricardo's great contemporary, Malthus, has not expressed himself much more distinctly than Ricardo on the subject of interest. Yet there are certain expressions in his writings which allow us to separate him from the entirely Colourless writers, and class him among the Productivity theorists.

The epithet colourless applies, however, with peculiar appropriateness to Torrens.40 This diffuse and short-sighted writer brings forward his views on the subject of interest for the most part in the course of an argument against the theory which Malthus had promulgated shortly before, that profit forms a constituent portion of the costs of production, and therefore of the natural price of goods. In opposition to this Torrens, with perfect correctness, but at intolerable length, points out that profit represents a surplus over costs, not a part of costs. He himself, however, has nothing better to put in place of Malthus's theory.

He makes a distinction between Market price and Natural price. Natural price is "that which we must give in order to obtain the article we want from the great warehouse of nature, and is the same thing as the cost of production" (p. 50); by which expression Torrens means "the amount of capital, or the quantity of accumulated labour expended in production" (p. 34). Market price and natural price in no way tend, as is usually affirmed, to a common level. For profit never makes any part of the expense of production, and is not therefore an element of natural price. But "market price must always include the customary rate of profit for the time being, otherwise industry would be suspended. Hence market price, instead of equalising itself with natural price, will exceed it by the customary rate of profit."

Torrens has thus eliminated profit from the determinants of natural price, and put it instead among the determinants of market price. This change, it is easy to see, is purely formal. It rests simply on the use of a different terminology. The economists whom he attacked had meant that profit is a determinant of the height of the average price of goods, and had called this average or permanent price "natural price." Torrens means exactly the same thing; only he calls the permanent price the "market price," and reserves the name of natural price for what is not a price at all, namely, the capital expended in production.

As to what really is the chief question—Why the actual prices of goods, whether they are called natural or market prices, leave over a profit to capital?—Torrens has almost nothing to say. He evidently considers profit to be a thing so self-explanatory that any detailed explanation of it is quite unnecessary. He contents himself with a few unsatisfactory formulas,—formulas, moreover, which contradict each other, as they point to lines of thought that are entirely distinct. One of these formulas is the often recurring observation that the capitalist must make a profit, otherwise he would have no inducement to accumulate capital, or lay it out in any productive undertaking (pp. 53, 392). Another, pointing in quite a different direction, is that profit is a "new creation" produced by the employment of capital (pp. 51, 54). But how it is created we are not told; he gives us a formula, not a theory.

But no member of the English school has been so unhappy in his treatment of the subject, and has done such ill service to the theory of interest, as M'Culloch.41 He comes near quite a number of diverging opinions, but only gets deep enough in them to fall into flagrant self-contradiction; he does not expand any one of them sufficiently to form a theory that even approaches consistency. We find only one exception to this; but the theory which is there advanced is the most absurd that could possibly occur to any thinker. Even this, however, in later editions of his work he abandons, although not without allowing traces of it to remain and contrast equally with facts and with the context. Thus M'Culloch's utterances on the subject are one great collection of incompleteness, irrationality, and inconsistency.

Since, however, M'Culloch's views have obtained extensive circulation, and command a certain respect, I cannot shirk the somewhat thankless task of justifying these strictures.

M'Culloch starts with the proposition that labour is the only source of wealth. The value of goods is determined by the quantity of labour required for their production. This he considers true not only of primitive conditions, but also of modern economic life, where capital, as well as direct labour, is employed in production; for capital itself is nothing else than the product of previous labour. It is only necessity to add to the labour which is embedded in the capital the labour immediately expended, and the sum of these determines the value of all products.42 Consequently it is labour alone, even in modern economic life, which constitutes the entire cost of production.43

But only a few lines before this definition of costs as "identical with the quantity of labour," M'Culloch has included profit, as well as labour, among the costs;44 and almost immediately after he has said that the quantity of labour alone determines value, he shows how a rise in the wages of labour, associated with a fall in profit, alters the exchange value of goods,—raising the value of those goods in the production of which capital of less than average durability is employed, and reducing the value of those goods in the production of which capital of more than average durability is employed.45

And, again, M'Culloch has no scruple in defining profit as an "excess of produce," as a "surplus," as "the portion of the produce of industry accruing to the capitalists after all the produce expended by them is fully replaced,"—in short, as a surplus pure and simple, although not long before he had pronounced it a constituent part of the costs. Here are almost as many contradictions as propositions!

Nevertheless M'Culloch is at great pains, at least in the first edition of his Principles, to appear logical. To this end he avails himself of a theory by which he traces profit to labour. Profits are, as he emphasises with italics on p. 291 of his first edition, "only another name for the wages of accumulated labour." By this explanation he contrives to bring all those cases where profit exerts an influence on value under the law he has just enunciated, that the value of all goods is determined by labour. We shall see how he carries this out.

"Suppose," he says, "to illustrate the principle, that a cask of new wine, which cost £50, is put into a cellar, and that at the end of twelve month it is worth £55, the question is, Whether ought the £5 of additional value, given to the wine, to be considered as a compensation for the time the £50 worth of capital has been locked up, or ought it to be considered as the value of additional labour actually laid out on the wine?" M'Culloch concludes for the latter view, "for this most satisfactory and conclusive reason," that the additional value only takes place in the case of an immature wine, "on which, therefore, a change or effect is to be produced," and not in the case of a wine which has already arrived at maturity. This seems to him "to prove incontrovertibly that the additional value acquired by the wine during the period it has been kept in the cellars is not a compensation or return for time, but for the effect or change that has been produced on it. Time cannot of itself produce any effect; it merely affords space for really efficient causes to operate, and it is therefore clear it can have nothing to do with value."46

In these words M'Culloch, with almost startling naïvety, concludes his demonstration. He seems to have no suspicion that, between what he wished to show and what he has shown, there is a very great difference. What he had to show was that the additional value was caused by an addition of labour, of human activity; what he has shown at most is, that the additional value was not given by time, but by some kind of "change" in the wine. But that this change itself was effected by an addition of labour is not only not shown, but by hypothesis could not be shown; for during the whole intervening time the wine lay untouched in the cellar.

He himself appears, however, to be sensible, to some small extent, of the weakness of this first demonstration; for, "still better to illustrate this proposition," he adds example to example, although it must be said that, the more clear and exact these are meant to be as demonstrations of his thesis, the more obscure and impossible they actually are.

In the next illustration he supposes the case of an individual who has two capitals, "one consisting of £1000 worth of new wine, and the other consisting of £900 worth of leather, and £100 worth of money. Suppose now that the wine is put into a cellar, and that the £100 is paid to a shoemaker, who is employed to convert the leather into shoes. At the end of a year this capitalist will have two equivalent values—perhaps £1100 worth of wine and £1100 worth of shoes." Therefore, concludes M'Culloch, the two cases are parallel, and "both shoes and wine are the result of equal quantities of labour."47

Without doubt! But does this show what M'Culloch meant to show—that the additional value of the wine was the result of human labour expended on it? Not in the least. The two cases are parallel; but they are parallel also in this, that each of them includes an increment in value of £100, which is not explained by M'Culloch. The leather was worth £900. The £100 of money were exchanged for labour of equal value; and this labour, one would think, added £100 in value to the raw material. Therefore the total product, the shoes, should be worth £1000. But they are worth £1100. Whence comes the surplus value? Surely not from the labour of the shoemaker! For in that case the shoemaker, who was paid £100 in wages, would have added to the leather a surplus value of £200, and the capitalist, in this branch of his business, would have obtained a profit of fully 100 per cent, which is contrary to hypothesis. Whence then comes the surplus value? M'Culloch gives no explanation in the case of the leather, and still less, therefore, in the case of the wine, which was to have been explained by analogy with the leather.

But M'Culloch is indefatigable. "The case of timber," he says, "affords a still better example. Let us suppose that a tree which is now worth £25 or £30 was planted a hundred years ago at an expense of one shilling; it may be easily shown that the present value of the tree is owing entirely to the quantity of labour laid out on it. A tree is at once a piece of timber and a machine for manufacturing timber; and though the original cost of this machine be but small, yet, as it is not liable to waste or decay, the capital vested in it will, at the end of a distant period, have operated a considerable effect, or, in other words, will have produced a considerable value. If we suppose that a machine, which cost only one shilling, had been invented a hundred years since; that this machine was indestructible, and consequently required no repairs; and that it had all the while been employed in the weaving of a quantity of yarn, gratuitously produced by nature, which was only now finished, this cloth might now be worth £25 or £30. But, whatever value it may be possessed of, it is evident (!) it must have derived it entirely from the continued agency of the machine, or, in other words, from the quantity of labour expended on its production" (p. 317).

That is to say, a tree has cost a couple of hours' labour, worth a single shilling. At the present moment the same tree, without other human labour being expended on it in the interval, is worth not one shilling, but £25 or £30. And M'Culloch does not bring this forward as disproving, but as proving the proposition that the value of goods invariably adapts itself to the quantity of labour which their production has cost! Any further commentary is superfluous.48

In later editions of his Principles M'Culloch has dropped all these impossible illustrations of the proposition that profit is wage of labour. In the corresponding passage in the fifth edition (pp. 292-294) he mentions the illustration of the wine, which evidently causes him a certain amount of perplexity; but he contents himself with the negative statement that the surplus value is not produced by the activity of natural powers, as natural powers work gratuitously. The only positive statement he makes is, that the increment of value is a "result of the profit" which accrues to the capital required for carrying on the process; but he does not explain the nature of that profit. On p. 277, however, the proposition that profit is only another name for the "wages of anterior labour," remains unaltered.

I may conclude this criticism by quoting an expression of M'Culloch, which will illustrate his untrustworthiness in matters of theory.

To add to the chaos of his incoherent opinions, in one place he takes Adam Smith's old self-interest argument,49 and as if not content with the confusion prevailing in his theory of interest, and anxious to throw his tolerably clear theory of wages into the same confusion, he pronounces the labourer himself to be a capital, a machine, and calls his wages a profit of capital in addition to a sum for wear and tear of the "machine called man!"50

Passing by another set of writers like Whately, Jones, and Chalmers, who contribute nothing of great consequence to our subject, we come to M'Leod.51

This eccentric writer is remarkable for the naïvety with which he treats the interest problem, not only in his earlier work of 1858, but in his later work of 1872, although in the fourteen years that intervened the problem had very greatly developed. For M'Leod there is absolutely no problem. Profit is simply a self-explanatory and necessary fact. The price of commodities sold, the hire of concrete capital lent, the interest on sums of money borrowed, "must," over and above costs, deterioration, and premium on risk, contain the "necessary" profit.52 Why they should do so is not once asked, even in the most superficial way.

If on one occasion M'Leod describes the origin of loan interest, the immediate circumstances of the illustration in which he does so are selected in such a way that the obtaining of an "increase" from the capital lent admits of being represented as a natural self-intelligible thing, requiring no explanation. He makes the capitalist lend seed and sheep,53 but even where the capital lent is one that does not consist of naturally fruitful objects, he considers the emergence of an increase as equally self-explanatory. That any one should think otherwise—that any one should even doubt the justifiability of profit, he appears, in spite of the wide dissemination of socialistic ideas in his time, to have no suspicion. To him it is perfectly clear that "when a man employs his own capital in trade he is entitled to retain for his own use all the profit resulting from such operations, whether these profits be 20 per cent, 100 per cent, or 1000 per cent; and if any one of superior powers of invention were to employ his capital in producing a machine, he might realise immense profits and accumulate a splendid fortune, and no one in the ordinary possession of their senses would grudge it him."54

At the same time M'Leod plays the severe critic on other interest theories. He rejects the doctrine that profit is a constituent of the costs of production.55 He controverts Ricardo's statement that the height of profit is limited by the height of wages.56 He condemns alike M'Culloch's strange Labour theory and Senior's acute Abstinence theory.57 And yet these critical attacks never seem to have suggested to him one single view which might be put in place of the opinions he rejects.

This appears to me due to two peculiarities of his doctrine. The first of these lies in the extraordinary vagueness of his conception of capital. Capital, in its original and primary sense, he takes to mean "circulating power." It is only in a "secondary and metaphorical sense" that it is applied to commodities. But when so applied it embraces things so incongruous as tools and commodities, skill, capacities, education, land, and good character,58 —a collection which, we must admit, makes it difficult to class the incomes that flow from all those different kinds of things under one category, and explain them by one definite theory. The second of these peculiarities is the exaggerated opinion he entertains of the theoretical value of the formula of supply and demand to explain the various phenomena of price. When he has succeeded in tracing back any phenomenon of value whatever to the relation of supply and demand,—or, as he likes to express it in his own terminology, to the relation between "the intensity of the service performed and the power of the buyer over the seller,"—he thinks that he has done enough. And thus, perhaps, he really thought it sufficient to say of interest on capital: "All value arises exclusively from demand, and all profit originates in the value of a commodity exceeding its costs of production."59

While in Germany and England there were a good many prominent writers who, for some considerable time, took an undecided attitude on the interest problem, we have only a few Colourless writers to record in the literature of France. The principal reason of this difference is that in France J. B. Say, who was one of the first to take up Adam Smith's doctrine, had already propounded a definite theory of interest, and popularised it simultaneously with Adam Smith's doctrine; while in Germany and England Adam Smith himself, and after him Ricardo, remained for a long time at the head of the general development of economic literature; and both of these, as we know, neglected the interest problem.

From French literature of that period there are, then, only three names which need be mentioned, two of them before the date of J. B. Say—Germain Garnier, Canard, and Droz.

Garnier,60 still half entangled in the doctrine of the physiocrats, like them asserts the earth to be the only source of all wealth, and labour the instrument by which men obtain it from this source (p. 9). Capital he identifies with the "advances" that the undertaker must make, and profit he defines as the indemnification which he receives for these advances (p. 35). In one place he designates it with more significance as the "indemnification for a privation and a risk." He nowhere, however, goes any deeper into the matter.

To indicate Canard's61 derivation of interest I must shortly refer to the general principles of his doctrine.

In the labour of man Canard sees the means to his support and development. One portion of human labour must be spent simply in the support of man; that Canard calls "necessary labour." But happily the whole labour of man is not necessary for this; the remainder, "superfluous labour," may be employed in the production of goods which go beyond the immediately necessary, and create for their producer a claim to get, by way of exchange, the command of just as much labour as the production of these goods has cost. Labour is thus the source of all exchange value; goods which have value in exchange are nothing else than accumulation of superfluous labour.

It is the possibility of accumulating superfluous labour that humanity has to thank for all economic progress. Through such accumulation lands are made fruitful, machines built, and, generally speaking, all the thousand and one means obtained which serve to increase the product of human labour.

Now the accumulation of superfluous labour is also the source of all rents. It may yield these rents by being employed in any of three ways. First, in manuring and improving the land; the net return arising from this is land-rent (rente foncière). Second, in the acquisition of personal skill, learning of an art or a handicraft; the skilled labour (travail appris) which is the result of such an expenditure must, beyond the wage of "natural" labour, yield a rent to that fund which had to be devoted to the acquisition of the knowledge. Finally, all the products of labour that proceed from these first two "sources of rent" must be divided out, so as to be employed by individuals in the satisfaction of their wants. This requires that a third class of owners should invest "superfluous labour" in the institutions of commerce. This accumulated labour also must bear a rent, the rente mobilière, commonly called money interest.

But as to why labour accumulated in these three forms should bear rent we are told almost nothing by Canard. Land-rent he accepts as a natural fact not requiring explanation.62 In the same way he treats the rente industrièlle, contenting himself with saying that "skilled labour" must produce the rent of the capital that has been devoted to the acquisition of knowledge (p. 10). And for the rente mobilière, our interest on capital, he lays down a proposition which explains nothing, and embellishes it with details evidently intended to accompany an explanation. "Commerce, accordingly, like the other two sources of rent, presupposes an accumulation of superfluous labour which must, in consequence, bear a rent" (qui doit par conséquent produire une rente), p. 12. But there is nothing whatever to justify this par conséquent, unless Canard, perhaps, considers that the bare fact of labour having been accumulated is sufficient ground for its obtaining a rent; and so far he has not said so. He has certainly said that all rents are traceable to accumulated labour, but he has not said that all accumulated labour must bear a rent—a proposition which, in any case, is quite different from the other, and would have been a matter for proof as well as assertion.

If we take an analysis which follows later (p. 13), to the effect that all three kinds of rent must stand equal in importance, then undoubtedly we can make out a certain foundation for interest, although Canard has not put it into words; a foundation which would agree in essence with Turgot's Fructification theory. If it is a natural fact that capital invested in land bears rent, then all capitals otherwise invested must bear rent, or else everybody would invest in land. But if this be Canard's explanation—and it may at least be read between the lines—we have already, when speaking of Turgot, shown its insufficiency as the sole explanation.

Droz, who writes some thirty years later (Economie Politique, Paris, 1829), has to choose between the English view, according to which labour is the sole productive power, and the theory of Say, in which capital represents an independent productive power. In each of these views, however, he finds something to object to, and accepts neither of them, but puts forward a third view, in which saving (l'épargne) takes the place of capital as an elementary productive power. He thus recognises three productive powers: the Labour of Nature, the Labour of Man, and the Saving which accumulates capitals (p. 69, etc.)

If Droz had followed this line of thought, belonging primary to the theory of production, into the sphere of distribution, and made use of it to examine accurately the nature of income, he would have arrived at a distinctive theory of interest. But he did not go far enough for that. In his distribution theory he devotes almost all his attention to contract or loan interest, where there is not much to explain, and in a few words disposes of natural interest, where there is everything to explain. In these few words he gives himself no chance of going any deeper into the nature of interest by treating it as interest on loans which the capitalist pays to himself (p. 267). Thus Droz, in introducing the productive power of "saving," begins well, but all the same he does not escape from the category of the Colourless writers.

[12.] From the abundant literature that treats of interest and usury in ancient times, may be specially mentioned the following:—

Böhmer, Jus Ecclesiasticum Protestantium, Halle, 1736, vol. v. tit. 19. Rizy, Ueber Zinstaxen and Wuchergesetze, Vienna, 1859. Wiskemann, Darstellung der in Deutschland zur Zeit der Reformation herrschenden national-ökonomischen Ansichten (Prize Essays of the Fürstliche Jablonowski'sche Gesellschaft, vol. x. Leipzig, 1861). Laspeyres, Geschichte der volkwirthschaftlichen Ansichten der Niederländer (vol. xi. of same Prize Essays, Leipzig, 1863). Neumann, Geschichte des Wuchers in Deutschland, Halle, 1865. Funk, Zins und Wucher, Tübingen, 1868. Knies, Der Kredit, part i., Berlin, 1876, p. 328, etc.Above all, the works of Endemann on the canon doctrine of economics, Die national-ökonomischen Grundsätze der kanonistischen Lehre, Jena, 1863, and his Studien in der romanisch-kanonistischen Wirthschafts-und Rechtslehre, vol. i. Berlin, 1874;vol. ii. 1883.

[13.]E.g. the prohibition of interest by the Mosaic Code, which, however, only forbade lending at interest between Jews, not lending by Jews to strangers, Exodus xxii. 25;Leviticus xxv. 35-37;Deuteronomy xxiii. 19, 20. In Rome, after the Twelve Tables had permitted an Undarum Foenus, the taking of interest between Roman citizens was entirely forbidden by the Lex Genucia, B.C. 322. Later, by the Lex Sempronia and the Lex Gabinia, the prohibition was extended to Socii and to those doing business with provincials. See also Knies, Der Kredit, part i. p. 328, etc., and the writers quoted there.

[14.] I may append some of the passages oftenest referred to. Plato in the Laws, p. 742, says: "No one shall deposit money with another whom he does not trust as a friend, nor shall he lend money upon interest." Aristotle, Nichomachean Ethics, iv. § 1: "Such are all they who ply illiberal trades; as those, for instance, who keep houses of ill-fame, and all persons of that class; and usurers who lend out small sums at exorbitant rates: for all these take from improper sources, and take more than they ought." Cicero, De Officiis, ii. at end: "Ex quo genere comparationis illud est Catonis senis:a quo cum quaereretur, quid maxime in re familiari expediret, respondit, bene pascere. Quid secundum?Satis bene pascere. Quid tertium?Male pascere. Quid quantum?Arare.... Et, cum ille, qui quaesierat, dixisset, quid foenerari?Tum Cato, quid hominem, inquit, occidere?"Cato, De Re Rustica:"Majores nostri sic habuerunt et ita in legibus posuerunt, furem dupli condemnare, foeneratorem quadrupli. Quanto pejorem civem existimarunt foeneratorem quam furem, hinc licet existimari." Plautus, Mostellaria, Act iii. scene 1:"Videturne obsecro hercle idoneus, Danista qui sit? genus quod improbissimum est.... Nullum edepol hodie genus est hominum tetrius, nec minus bono cum jure quam Danisticum." Seneca, De Beneficiis, vii. 10:"Quid enim ista sunt, quid foenus et calendarium et usura, nisi humanae cupiditatis extra naturam quaesita nomina?... quid sunt istae tabellae, quid computationes, et venale tempus et sanguinolentae centesimae?voluntaria mala ex constitutione nostra pendentia, in quibus nihil est, quod subici oculis, quod teneri manu possit, inanis avaritiae somnia."

[15.] See also Knies, Der Kredit, i. p. 330, etc.

[16.]Luke vi. 35. On the true sense of this passage see Knies as before, p. 333, etc.

[17.] On the spread of the prohibition of interest see Endemann, National-ökonomische Grundsätze, p. 8, etc.; Studien in der romanisch-kanonistischen Wirthschafts-und Rechtslehre, p. 10, etc.

[18.]See below.

[19.] See Endemann, Studien, pp. 11-13, 15, etc.

[20.] To give the reader some idea of the tone which the fathers of the Church adopted in dealing with the subject I append some of their most quoted passages. Lactantius, book vi. Divin. Inst. chap. xviii. says of a just man: "Pecuniae, si quam crediderit, non accipiet usuram:ut et beneficium sit incolume quod succurat necessitati, et abstineat se prorsus alieno in hoc enim genere officii debet suo esse contentus, quam oporteat alias ne proprio quidem parcere, ut bonum faciat. Plus autem accipere, quam dederit, injustum est. Quod qui facit, insidiatur quodam modo, ut ex alterius necessitate praedetur." Ambrosius, De Bono Mortis, chap. xii.:"Si quis usuram acciperit, rapinam facit, vita non vivit." The same De Tobia, chap. iii.:"Talia sunt vestra, divites!beneficia. Minus datis, et plus exigitis. Talis humanitas, ut spolietis etiam dum subvenitis. Foecundus vobis etiam pauper est ad quaestum. Usurarius est egenus, cogentibus nobis, habet quod reddat:quod impendat non habet." So also chap. xiv.:"Ideo audiant quid leg dicat:Neque usuram, inquit, escarum accipies, neque omnium rerum." Chrysostom on Matthew xvii. Homily 56: "Noli mihi dicere, quaeso, quid gaudet et gratiam habet, quod sibi foenore pecuniam colloces: id enim crudelitate tua coactus fecit." Augustine on Psalm cxxviii.:"Audent etiam foeneratores dicere, non habeo aliud unde vivam. Hoc mihi et latro diceret, deprehensus in fauce: hoc et effractor diceret... et leno... et maleficus." The same (quoted in the Decret. Grat. chap. i. Causa xiv. quaest. 3): "Si plus quam dedisti expectas accipere foeneratores, et in hoc improbandus, non laudandus."

[21.]Molinaeus, in a work that appeared in 1546, mentions a writer who had shortly before collected no less than twenty-five arguments against interest (Tract. Contract. No. 528).

[22.]See Endemann, Grundsätze, pp. 12, 18.

[23.]Commentaria perpetua in singulos textus quinque librorum Decretalium Gregorii IX. v. chap. iii.;De Usuris, v. chap. xix. No. 7.

[24.]Variorum Resolutionum, iii. chap. i. No. 5.

[25.]Summa totius Theologiae, ii. chap. ii. quaest. 78, art. 1. Similarly Covarruvias: "Accipere lucrum aliqod pro usu ipsius rei, et demum rem ipsam, iniquum est et prava commutatio, cum id quod non est pretio vendatur... aut enim creditor capit lucrum istud pro sorte, ergo bis capit ejus aestimationem, vel capit injustum sortis valorem. Si pro usu rei, is non potent seorsum a sorte aestimari, et sic bis sors ipsa venditur."

[26.]Lib. i. Nov. Declar. Jus. Civ. chap. xiv. quoted in Böhmer's Jus Eccles. Prot. Halle, 1736, p. 340.

[27.]Thomas Aquinas, De Usuris, i. chap. iv.

[28.]Secundo (usura est prohibita) ex fame, nam laborantes rustici praedia colentes libentius ponerent pecuniam ad usuras, quam in laboratione, cum sit tutius lucrum, et sic non curarent homines seminare seu metere." See Endemann, National-ökonomische Grundsätze, p. 20.

[29.]Endemann, Studien, i. p. 361.

[30.]De Usuris, ii. chap. iv. qu. 1.

[31.]Clem. c. un. de Usuris, 5. 5.

[32.]See Endemann, Grundsätze, pp. 9, 21.

[33.]The opinion very commonly held that the Jews were generally exempted from the Church's prohibition of interest is pronounced erroneous by the late and very complete work of Endemann (Studien, ii. p. 383, etc.)

[34.]Endemann, Studien, ii. pp. 243, 366.

[35.]Wiskemann, Darstellung der in Deutschland zur Zeit der Reformation herrschenden national-ökonomischen Ansichten (Prize Essays of the Jablonowski'sche Society, vol. x. p. 71).

[36.]Wiskemann, p. 54. Neumann, Geschichte des Wuchers, p. 480, etc.

[37.]Wiskemann, p. 65.

[38.]Ep. 383, in the collection of his letters and answers, Hanover, 1597.

[39.]"Ac primum nullo testimonio Scripturae mihi constat usuras omnino damnatas esse. Illa enim Christi sententia quae maxime obvia et aperta haberi solet: Mutuum dato nihil inde sperantes, male huc deterta est.... Lex vero Mosis politica cum sit, non tenemur illa ultra quam aequitas ferat atque humanitas. Nostra conjunctio hodie per omnia non respondet...."

[40.]Previous to this, in the same year, was published the Extricatio Labyrinthi de eo quod Interest, in which the question of interesse was freely handled, but no definite side taken on the interest question.—See Endemann, Studien, i. p. 63.

[41.]Tractatus, No. 10.

[42.]"Ea taxatio" (the fixing of a maximum rate which was attached to the principle of the permission of interest in Justinian's Code) "nunquam in se fuit iniqua. Sed ut tempore suo summa et absoluta, ita processu temporis propter abusum hominum nimis in quibusdam dissoluta et vaga inventa est, et omnino super foenore negociativo forma juris civilis incommoda et perniciosa debitoribus apparuit. Unde merito abrogata fuit, et alia tutior et commodior forma inventa, videlicet per abalienationem sortis, servata debitori libera facultate luendi. Et haec forma nova, ut mitior et civilior, ita minus habet de ratione foenoris, propter alienationem sortis, quam forma juris civilis. Est tamen foenus large sumptum, et vera species negociationis foenoratoriae...." (No. 536)

[43.]Endemann, Studien, i. p. 64, etc. Endemann, however, underrates the influence that Molinaeus had on the later development. See below.

[44.]In his notes on Aristotle's Politics; see Roscher, Geschichte der National-Oekonomik in Deutschland, p. 54.

[45.]Roscher, Ibid. p. 188.

[46.]Besold resumed the discussion later, in an enlarged and improved form, as he says, in another work, Vitae et Mortis Consideratio Politica (1623), in which it occupies the fifth chapter of the first book. I had only this latter work at my disposal, and the quotations in the text are taken from it.

[47.]There is a long quotation even in the first chapter of the first book (p. 6). In the fifth chapter the quotations are numerous.

[48.]I think Roscher (Geschichte der National-Oekonomik, p. 201) does Besold too much honour when, in comparing him with Salmasius and Hugo Grotius, he gives him the honourable position of a forerunner on whom Salmasius has scarcely improved, and to whom Grotius is even inferior. Instead of Besold, who drew at second hand, Roscher should have named Molinaeus. Besold is not more original than Salmasius, and certainly less adroit and ingenious.

[49.]Sermones Fideles, cap. xxxix. (1597)

[50.]See Grotius, De Jure Pacis ac Belli, book ii. chap. xii. p. 22.

[51.]De Jure Pacis ac Belli, book ii. cap. xii. pp. 20, 21.

[52.]Thus it is not possible to regard Grotius as a pioneer of the new theory. This view, held among others by Neumann, Geschichte des Wuchers in Deutschland, p. 499, and by Laspeyres, Geschichte, pp. 10 and 257, is anthoritatively corrected by Endemann, Studien, I. p. 66, etc.

[53.]The list of writing in which our extremely prolific author expatiates on the subject of interest is by no means exhausted by the works mentioned in the text. There is, e.g. a Disquisitio de Mutuo, qua probatur non esse alienationem, of the year 1645, whose author signs with the initials S. D. B., a signature which points, as does the whole style of writing, to Salmasius (Dijonicus Burgundus). There is besides in the same year an anonymous writing, also undoubtedly traceable to Salmasius, Confutatio Diatribae de Mutuo tribus disputationibus ventilatae, auctore et preside Jo. Jacobo Vissembachio, etc. Those named in the text, however, were the first to break ground.

[54.]"Quae res facit ex commodato locatum, eadem praestat, ut pro mutuo sit foenus, nempe merces. Qui eam in commodato probant, cur in mutuo improbent, nescio, nec ullam hujus diversitatis rationem video. Locatio aedium, vestis animalis, servi, agri, operae, operis, licita erit; non erit foeneratio quae proprie locatio est pecuniae, tritici, hordei, vini, et aliarum hujusmodi specierum frugumque tam arentium quam humidarum?"

[55.]To prove the relation in which Salmasius stands to Molinaeus, it may not be superfluous, considering the explicit statement of Endemann (Studien, i. p. 65) that Salmasius does not quote Molinaeus, to establish the fact that such quotations do exist in considerable number. The list of authors appended to the works of Salmasius shows three quotations from Molinaeus for the book De Usuris, twelve for the De Modo Usurarum, and one for the De Foenore Trapezitico. These quotations are principally taken from Molinaeus's chief work on the subject, the Contractus Contractuum et Usurarum. One of them (De Usuris, p. 21) refers directly to a passage which stands in the middle of the most pertinent of his writings (Tractatus, No. 529. Nos. 528, etc., contain the statement and refutation of the arguments of the ancient philosophy and of the canonists against interest). There can, therefore, be no doubt that Salmasius accurately knew the writings of Molinaeus, and it is just as much beyond doubt—as indeed his substantial agreement would lead us to suspect—that he has drawn from them. In the Confutatio Diatribae mentioned above (p. 36) it is said in one place (p. 290) that Salmasius at the time when, under the pseudonym of Alexis a Massalia, he wrote the Diatriba de Mutuo, was not acquainted with the similar writings of Molinaeus in his Tractatus de Usuris. But this expression must only relate to his ignorance of those quite special passages in which Molinaeus denies the nature of the loan as an alienation, or else, if what I have said be true, it is simple incorrect. [Note from Econlib Editor: Original reads "simple incorrect," not "simply incorrect."]

[56.]Salmasius begins with the argument of the improper double claim for one commodity. His opponents had contended that whatever was taken over and above the principal sum lent could only be taken either for the use of a thing which was already consumed—that is for nothing at all—or for the principal sum itself, in which case the same thing was sold twice. To this replies Salmasius: "Quae ridicula sunt, et nullo negotio difflari possunt. Non enim pro sorte usura exigitur, sed pro usu sortis. Usus autem ille non est nihilum, nec pro nihilo datur. Quod haberet rationem, si alicui pecunism mutuam darem, ea lege ut statim in flumen eam projiceret aut alio modo perderet sibi non profuturam. Sed qui pecuniam ab alio mutuam desiderat, ad necessarios sibi usus illam expetit. Aut enim aedes inde comparat, quas ipse habitet, ne in conducto diutius maneat, vel quas alii cum fructu et compendio locet: aut fundum ex ea pecunia emit salubri pretio, unde fructus et reditus magnos percipiat: aut servum, ex cujus operis locatis multum quaestus faciat: aut ut denique alias merces praestinet, quas vili emptas pluris vendat" (p. 195).

And after showing that one who lends money to an undertaking is not under any obligation to inquire whether it is usefully employed by the borrower, any more than the hirer of a house need make similar inquiry, he continues: "Hoc non est sortem bis vendere, nec pro nihilo aliquid percipere. An pro nihilo computandum, quod tu dum meis nummis uteris, sive ad ea quae tuae postulant necessitates, sive ad tua compendia, ego interim his careo cum meo interdum damno et jactura? Et cum mutuum non in sola sit pecunia numerata, sed etiam in aliis rebus quae pendere et mensura continentur, ut in frugibus humidis vel aridis, an, qui indigenti mutuum vinum aut triticum dederit, quod usurae nomine pro usu eorum censequetur, pro nihilo id capere existimabitur? Qui fruges meas in egestate sua consumpserit, quas care emere ad victum coactus esset, aut qui eas aliis care vendiderit, praeter ipsam mensuram quam accepit, si aliquid vice mercedis propter usum admensus fuerit, an id injustum habebitur? Atqui poteram, si eas servassem, carius fortasse in foro vendere, et plus lucri ex illis venditis efficere, quam quantum possim percipere ex usuris quas mihi reddent" (p. 196, etc.) Particularly biting is his reply to the argument of the unfruitfulness of money: "Facilis responsio. Nihil non sterile est, quod tibi sterile esse volueris. Ut contra nihil non fructuosum, quod cultura exercere, ut fructum ferat, institueris. Nec de agrorum fertilitate regeram, qui non essent feraces nisi humana industria redderet tales.... Magis mirum de aëre, et hunc quaestuosum imperio factum. Qui

imposuerunt vectigal singulis domibus Constantinopolitani imperatores, aërem sterilem esse pati non potuerunt. Sed haec minus cum foenore conveniunt. Nec mare hic sollicitandum, quod piscatoribus, urinatoribus, ac nautis ad quaestum patet, ceteris sterilitate occlusum est. Quid sterilius aegroto? Nec ferre se, nec movere interdum potest. Hunc tamen in redditu habet medicus. Una res est aegroto sterilior, nempe mortuus.... Hic tamen sterilis non est pollinctoribus, neque sardapilonibus, neque vespillonibus, neque fossariis. Immo nec praeficis olim, nec nunc sacerdotibus, qui eum ad sepulcrum cantando deducunt. Quae corpus alit corpore, etiamsi liberos non pariat, non tamen sibi infecunda est. Nec artem hic cogites; natura potius victum quaerit. Meretricem me dicere nemo non sentit.... De pecunia quod ajunt, nihil ex se producere natura, cur non idem de ceteris rebus, et frugibus omne genus, quae mutuo dantur, asserunt? Sed triticum duplici modo frugiferum est, et cum in terram jacitur, et cum in foenus locatur. Utrobique foenus est. Nam et terra id reddit cum foenore. Cur natura aedium, quas mercede pacta locavero, magis potest videri foecunda, quam nummorum quos foenore dedero? Si gratis eas commodavero, aeque ac si hos gratis mutuo dedero, tum steriles tam hi quam illae mihi evadent. Vis scire igitur, quae pecunia proprie sterilis sit dicenda, immo et dicta sit? Illa certe, quae foenore non erit occupata, quaeque nihil mihi pariet usuraram, quas et propterea Graeci

nomine appellarunt" (p. 198). The third argument of his opponents, that the loan should not bear interest because the things lent are a property of the debtor, Salmasius finds "ridiculous": "At injustum est, ajunt, me tibi vendere quod tuum est, videlicet usum aeris tuae. Potens sane argumentum. Atqui non fit tuum, nisi hac lege, ut pro eo, quod accepisti utendum, certam mihi praestes mercedem, usurae nomine, absque qua frustra tuum id esse cuperes. Non igitur tibi, quod tuum est, vendo, sed, quod meum est, ea conditione ad te transfero, ut pro usu ejus, quamdiu te uti patiar, mihi, quod pactum inter nos est, persolvas."

[57.]Laspeyres, p. 257.

[58.]Very fully described by Laspeyres, p. 258, etc.

[59.]Noodt is very much quoted as an authority in the learned literature of the eighteenth century; e.g. by Böhmer, Protest. Kirchenrecht, vol. v. p. 19 passim. Barbeyrac, the editor of several editions of Hugo Grotius, says that, on the matter of interest, there is an "opus absolutissimum et plenissimum summi jurisconsulti et non minus judicio quam eruditione insinis, Clariss. Noodtii" (De Jure Belli ac Pacis: edition of Amsterdam, 1720, p. 384).

[60.]Laspeyres, p. 269.

[61.]Neumann, Geschichte des Wuchers in Deutschland, p. 546, mentions permissions by local law of contract interest about the years 1520-30. Endemann, it is true (Studien, ii. pp. 316 and 365, etc.) would interpret these permissions as applying only to stipulated interesse, which, theoretically at least, was different from interest proper (usura). In any case the taking of interest had thus practically received toleration from the state.

[62.]In the last Reichsabschied. On the disputed interpretation of the passages referred to, see Neumann, p. 559, etc.

[63.]Roscher, Geschichte, p. 205.

[64.]Ibid. p. 312, etc.

[65.]Ibid. p. 338, etc.

[66.]Second edition, 1758.

[67.]Second edition, Vienna, 1771.

[68.]Ibid. pp. 419, 425, etc.

[69.]Ibid. p. 427.

[70.]Ibid. p. 430.

[71.]Ibid. p. 426, etc.

[72.]Ibid. p. 432, etc.

[73.]Fifth edition, p. 497.

[74.]See Schanz, Englische Handelspolitik, Leipzig, 1881, vol. i. p. 552, etc.

[75.]See above, p. 34. [Book I, Chapter II. pars. I.II.31.—Econlib Ed.]

[76.]Tract against the high rate of usury, 1621.

[77.]E.g. in "A Small Treatise against Usury," annexed to Child's Discourses, 1690, p. 229: "It is agreed by all the Divines that ever were, without exception of any; yea, and by the Usurers themselves, that biting Usury is unlawful: Now since it hath been proved that ten in the hundred doth bite the Landed men, doth bite the Poor, doth bite Trade, doth bite the King in his Customs, doth bite the Fruits of the Land, and most of all the Land itself: doth bite all works of Piety, of Vertue, and Glory to the State; no man can deny but ten in the hundred is absolutely unlawful, howsoever happily a lesser rate may be otherwise."

[78.]In his introduction to Brief Observations concerning Trade, 1668.

[79.]"New Discourse of Trade," 1690. See Roscher, p. 59, etc.

[80.]Roscher, p. 89.

[81.]I quote from the collected edition of Locke's works, London, 1777, vol. ii. p. 24. "Some Considerations," p. 36.

[82.]In other places (e.g. p. 4) Locke calls interest a price for the "hire of money."

[83.]Of Civil Government, vol. ii. chap. v. § 40. See also Roscher, p. 95, etc.

[84.]Inquiry into the Principles of Political Economy, 1767, vol ii. book iv. part i. chap. viii. p. 137.

[85.]Inquiry into the Principles of Political Economy, 1767, vol. ii. book iv. part i. chap. iv. p. 117.

[86.]"Of Interest," Essays, part. ii. chap. iv.[See Hume, Of Interest, par. II.IV.14.—Econlib Ed.]

[87.]Ibid. passim.

[88.]See the historical works of Vasco, L'Usura Libera (Scrittori Classici Italiani Parte Moderna, vol. xxxiv. p. 182, etc.; particularly pp. 195, 198, etc., 210, etc.)

[89.]Galiani, Della Moneta (Scritt. Class. Ital. Parte Moderna, vol. iv. p. 240, etc.)

[90.]Impiego del Danaro. Unfortunately I have not seen the book.

[91.]Della Moneta, book v. chap. i.

[92.]Lezioni di Economia Civile, 1769 (Scritt. Class. Ital. Parte Moderna, vol. ix. part ii. chap. xiii.)

[93.]Elementi di Economia Pubblica, written 1769-71; first printed, l804, in the Section of the Scrittori, vols. xi. and xii., particularly part iv. chaps. vi. and vii.

[94.]L'Usura Libera, vol. xxxiv. of above collection.

[95.]Vasco, p. 209.

[96.]De Republica, second edition, 1591, v. ii. p. 799, etc.

[97.]E.g.IIde. Mémoire sur les Banques; Economistes Financiers du xviii. Siècle, Edition Daire, Paris, 1851, p. 571.

[98.]Essai Politique sur le Commerce, ebenda p. 742.

[99.]Esprit des Lois, xxii.

[100.]The passage has been quoted by Rizy; by Turgot, Mémoire sur les Prêts d'Argent, § 26; and also by Knies, Kredit, part i. p. 347. It runs thus: "It is a fair claim that the values given in the case of a contract which is not gratuitous should be equal on either side, and that no party should give more than he has received, or receive more than he has given. Everything, therefore, that the lender may demand from the borrower over and above the principal sum, he demands over and above what he has given; for, if he get repayment of the principal sum, he receives the exact equivalent of what he gave. For things that can be used without being destroyed a hire may certainly be demanded, because, this use being separable at any moment (in thought at least) from the things themselves, it can be priced; it has a price distinct from the thing. So that, if I have given a thing of this sort to any one for his use, I am able to demand the hire, which is the price of the use that I have allowed him in it beyond the restitution of the thing itself, the thing having never ceased to be my property.

"It is not the same, however, with those objects that are known to lawyers as fungible goods—things that are consumed in the using. For since, in the using, these are necessarily destroyed, it is impossible in regard to them to imagine a use of the thing as distinct from the thing itself, and as having a price distinct from the thing itself. From this it follows that one cannot make over to another the using of a thing without making over to him wholly and entirely the thing itself, and transferring to him the property in it. If I lend you a sum of money for your use under the condition of paying me back as much again, then you receive from me simply that sum of money, and nothing more. The use that you will make of this sum of money is included in the right of property that you acquire in this sum. There is nothing that you have received outside of the sum of money. I have given you this sum, and nothing but this sum. I can therefore ask you to give me back nothing more than this amount lent, without being unjust; for justice would have it that only that should be claimed which was given."

[101.]Amsterdam, 1764.

[102.]P. 269, etc.

[103.]Pp. 257-262.

[104.]P. 267.

[105.]P. 284.

[106.]See particularly pp. 276, 290, 292, 298, etc.

[107.]Written in 1769; published twenty years later, 1789. I quote from the collected edition of Turgot's work, Daire, Paris, 1844, vol. i. pp. 106-152.

[108.]Funk, Zins und Wucher, Tübingen, 1868, p. 116. On the reception that this liberal decision of Rome, 18th August 1830, met from a portion of the French clergy, see Molinari, Cours d'Economie Politique, second edition, vol. i. p. 333.

[109.]Wealth of Nations, book ii. chap. iv.

[110.]E.g. Sonnenfels, Handlung, fifth edition, pp. 488, 497; Steuart, book iv. part i. p. 24; Hume, as above, p. 60. See above, pp. 42, 47. [Book I, Chapter II. pars. I.II.47-49, I.II.64-66.—Econlib Ed.]

[111.]Some historians of theory, who are at the same time adherents of the Productivity theory (which we have to examine later), such as Roscher, Funk, and Endemann, are fond of ascribing to the writers of this period "presentiments" of the "productivity of capital," even "insight" into it; and of claiming them as forerunners of that theory. I think this is a misunderstanding. These writers do speak of the "fruitfulness" of money, and of all sorts of other things, but this expression with them serves rather to name the fact that certain things bring forth a profit than to explain it. They simply call everything "fruitful" that yields a profit or a "fruit," and it does not occur to them to give any formal theoretical explanation of the origin of these profits. This is very plain from the writings of Salmasius on the subject. When Salmasius calls air, disease, death, prostitution, "fruitful" (see note to p. 39 above), it is evidently only a strong way of putting the fact that the state which lays taxes on the air, the physician, the gravedigger, the prostitute, all draw a profit from the things just named. But it is just as evident that Salmasius did not in the least seriously think of deriving the sexton's fee from a productive power that resides in death. And the fruitfulness of money, which Salmasius wished to illustrate by comparing it with these, is not to be taken any more seriously.

[1.]"Les intérêts des avances de l'établissement des cultivateurs doivent donc être compris dans leur reprises annuelles. Ils servent à faire face à ces grands accidents et à l'entretien journalier des richesses d'exploitation, qui demandent à être réparés sans cesse" (Analyse du Tableau Economique, Edition Daire, p. 62). See also the more detailed statement that precedes the passage quoted.

[2.]L'Ordre Naturel, Edition Daire, p. 459.

[3.]On his attitude towards loan interest see above, p. 53. As regards natural interest, he approves of interest as regards capital invested in agriculture (Philosophie Rurale, p. 83, and then p. 295) without going any deeper in explanation; but he speaks of what is gained in commerce and industry in hesitating terms, looking on it rather as a fruit of activity, de la profession, than of capital (p. 278).

[4.]First published in 1776. I quote from Daire's collected edition of Turgot's works, Paris, 1844, vol. i.

[5.]The outward want of form in Turgot's explanation of interest has led a usually exact investigator of his works to maintain that Turgot does not explain interest (Sivers, Turgots Stellung, etc., Hildebrand's Jahrbücher, vol. xxii. pp. 175, 183, etc.) This is a mistake. It is, however true, as we shall see, that his explanation does not go particularly deep.

[6.]See the chapter on Henry George's Later Fructification theory.

[7.]Usually the rent of land is somewhat less than interest on the price paid. But this circumstance, fully explained by Turgot (Réflexions, § 84), has no influence at all on the principle, and may here be simply neglected.

[8.]"If four bushels of wheat, the net product of an arpent of land, be worth six sheep, the arpent which produced them might have been given for a certain value—a greater value of course, but always easy to determine in the same manner as the price of all other commodities, i.e. first by discussion between the two contracting parties, and afterwards by the price current established by the competition of those who wish to exchange lands against cattle, and of those who wish to give cattle to get lands (§ 57). It is evident, again, that this price, or this number of years' purchase, ought to vary according as there are more or less people who wish to sell or buy land, just as the price of all other commodities varies by reason of the different proportion between supply and demand" (§ 58).

[9.]"In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in the adventure.... He could have no interest to employ them unless he expected from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one unless his profits were to bear some proportion to the extent of his stock" (M'Culloch's edition of 1863, p. 22). The second passage runs: "And who would have no interest to employ him unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit" (p. 30).

[10.]See also Pierstorff, Lehre vom Unternehmergewinn, Berlin, 1875, p. 6; and Platter, "Der Kapitalgewinn bei Adam Smith" (Hildebrand's Jahrbücher, vol. xxv. p. 317, etc.)

[11.]Book ii. chap. i. p. 123, in M'Culloch's edition.

[12.]When Platter in the essay above mentioned (p. 71) comes to the conclusion that, "if Smith's system be taken strictly, profit on capital appears unjustifiable," it could only be by laying all the weight on the one half of Smith's expressions, and leaving the other out of account as contradictory to his other principles.

[13.]Book ii. chap. iii.

[14.]Book i. chap. vi. The sentence was written primarily about landowners, but in the whole chapter interest on capital and rent of land are treated as parallel as against wages of labour.

[15.]Handbuch der Staatswirthschaft, Berlin, 1796, particularly §§ 8 and 23. Even his later Abhandlungen die Elemente des Nationalreichthums und die Staatswirthschaft betreffend (Göttingen, 1806) does not take an independent view of our subject.

[16.]Ueber Nationalindustrie und Staatswirthschaft, 1800-1804 particularly pp. 82, 142.

[17.]Staatswirthschaft, Auerswald's edition, 1808-11, particularly vol. i. pp. 24, 150; and the very naïve expressions, vol. iii. p. 126.

[18.]Neue Grundlegung, Vienna, 1815, p. 221.

[19.]Die National-Oekonomie, Ulm, 1823, p. 145. See also p. 164, where the causal connection is reversed and natural interest deduced from loan interest.

[20.]Staatswissenschaften im Lichte unserer Zeit, part ii. Leipzig, 1823, p. 90. Here Pölitz only takes the trouble to show that profit, assumed as already existing, must fall to the owner of capital.

[21.]Theorie des Handels, Göttingen, 1831.

[22.]Handbuch der Staatswirthschaft, Berlin, 1808, §§ 110 and 120. See also § 129, where even contract "rents" are no better explained, but simply spoken of as facts. Schmalz's other writings are not more instructive.

[23.]Die Oekonomie der menschlichen Gesellschaften und das Finanzwesen, Stuttgart, 1845, p. 19.

[24.]Die National-Oekonomie, Leipzig, 1805-1808. I quote from a reprint published in Vienna, 1815.

[25.]In Lotz's former work, the Revision der Grundbegriffe, 1811-14, there are some rather interesting remarks on our subject, although they are full of inconsistency; among others, an acute refutation of the productivity theories (vol. iii. p. 100, etc.), an explanation of interest as "an arbitrary addition to the necessary costs of production," and as a "tax which the selfishness of the capitalist forces from the consumer" (p. 338). This tax is found, not necessary indeed, but "very fair." At p. 339 and at p. 323 Lotz considers it a direct cheating of the capitalist by the labourer if the former does not receive in interest as much as "he may be justified in claiming as the effect of those tools used up by the worker on his activity and on its gross return." It is very striking that in the second last of the passages quoted Lotz puts interest to the account of the consumer, and in the last of them to the account of the labourer; he thus exactly repeats Adam Smith's indecision on the same point.

[26.]Grundsätze der National-Oekonomie, Halle, 1805; third edition, Halle, 1825. I quote from the latter.

[27.]§§ 211, 711, 765, particularly marked in sect; 769.

[28.]Grundsätze der ökonomisch-politischen oder Kameralwissenschaften, second edition, Tübingen, 1820.

[29.]Die Lehre von der Volkswirthschaft, Halle, 1843.

[30.]Volkswirthschaftslehre, vol. i. § 222. Similarly, but more generally, vol. i. § 138.

[31.]London, 1817, third edition, 1821. I quote from M'Culloch's edition. John Murray, 1886.

[32.]The most complete of these runs thus: "For no one accumulates but with a view to make his accumulation productive, and it is only when so employed that it operates on profits. Without a motive there could be no accumulation, and consequently such a state of prices" (as show no profit to the capitalist) "could never take place. The farmer and manufacturer can no more live without profit than the labourer without wages. Their motive for accumulation will diminish with every diminution of profit, and will cease altogether when their profits are so low as not to afford them an adequate compensation for their trouble, and the risk which they must necessarily encounter in employing their capital productively" (chap. vi. p. 68; similarly p. 67; chap. xxi. p. 175, and other places).

[33.]Ricardo puts the same causal relation very strongly in chap. i. § 4, when he gives the height of the "value of labour" as a secondary cause of the value of goods, in addition to the quantity of labour expended in the production,—having in his eye the influence exerted on the value of goods by the capitalist's claims to profit. The height of profit is to him only a dependent, secondary cause, in place of which he prefers to put the final cause of the whole relation, and this final cause he finds in the varying height of wages.

[34.]Chap. vi, p. 67 and passim.

[35.]Chap. vi, towards the end, p. 70.

[36.]The careful reader will easily convince himself that the result remains the same, if we vary the form of the question, and look at the value instead of the amount of the product and wages. In that case, indeed, the value of the return remains fixed (see p. 90 [Book I, Chapter V. pars. I.V.29-31.—Econlib Ed.]), while wages are an elastic quantity, and the proposition expressed in the text, changed only in expression, not in reality, will run thus: cultivation must call a halt at that point where the wages of labour, increased by the increasing costs of cultivation, leaves over to the capitalist from the value of the product no more than enough to satisfy his claims on profit.

[37.]Chap. i. § 1.

[38.]Chap. i. §§ 4, 5.

[39.]So also Bernhardi, Kritik der Gründe, etc., 1849, p. 310, etc.

[40.]An Essay on the Production of Wealth, London, 1821.

[41.]Principles of Political Economy, first edition, Edinburgh, 1825; fifth edition 1864.

[42.]Pp. 61, 205, 289 of first edition; fifth edition, pp. 6, 276.

[43.]"The cost of producing commodities is, as will be afterwards shown, identical with the quantity of labour required to produce them and bring them to market" (first edition, p. 250). Almost in the same words in fifth edition, p. 250: "The cost or real value of commodities is, as already seen, determined by the quantity of labour," etc.

[44.]"But it is quite obvious that if any commodity were brought to market and exchanged for a greater amount, either of other commodities or of money, than was required to defray the cost of its production, including in that cost the common and average rate of net profit at the time," etc. (first edition, p. 249; fifth edition, p. 250).

[45.]First edition, p. 298; fifth edition, p. 283.

[46.]First edition, p. 313.

[47.]Pp. 313-315.

[48.]It would to some extent modify this judgment of M'Culloch if we could assume that, in the above argument, he has used the word Labour in that vague and confused sense in which he uses it later (note 1 to his edition of Adam Smith, Edinburgh, 1863, p. 435) as meaning "every kind of activity,"—not only that exerted by men, but that of animals, machines, and natural powers. Of course by such a watering down of its fundamental conception his theory of value would be stripped of every peculiar characteristic, and reduced to an idle play upon words; but at least he might be spared the reproach of logical nonsense. However, he cannot be allowed the benefit even of this small modification. For M'Culloch expresses himself too often, and too decidedly, to the effect that interest is to be traced to the human labour employed in the production of capital. Thus, e.g. in note 1 on p. 22 of his edition of Adam Smith, where he explains interest to be the wage of that labour which has been originally expended in the formation of capital, and where obviously the "labour" of the machine itself cannot possibly be understood; and, particularly, in the passage (Principles, fifth edition, pp. 292-294) where, in regard to the illustration of the wine, he expressly declares that its surplus value is not produced by the powers of nature as these work gratuitously.

[49.]First edition, p. 221, in note; and similarly fifth edition, p. 240, at end.

[50.]First edition, p. 319; second edition, p. 354; fifth edition, pp. 294, 295.

[51.]Elements of Political Economy, London, 1858; Principles of Economical Philosophy, second edition, London, 1872.

[52.]Elements, pp. 76, 77, 81, 202, 226, etc.

[53.]Ibid. p. 62.

[54.]Ibid. p. 216.

[55.]Economical Philosophy, i. p. 638.

[56.]Elements, p. 145.

[57.]Economical Philosophy, i. p. 634; ii. p. 62.

[58.]Elements, pp. 66, 69.

[59.]Principles of Economical Philosophy, ii. p. 66.

[60.]Abrégé Elémentaire des Principes de l'Economie Politique, Paris, 1796.

[61.]Principes d'Economie Politique, Paris, 1801.

[62.]"The earth has only been cultivated because its product was able, not only to compensate the annual labour of cultivation, but also to recompense the advances of labour which its first and original cultivation cost. This superfluity it is which forms the rent of land" (p. 5).