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• Introduction, By Henry Higgs
• Previous Editions, By Henry Higgs
• Essay On the Nature of Trade In General
• Part One
• Part I, Chapter I: Of Wealth
• Part I, Chapter II: Of Human Societies
• Part I, Chapter III: Of Villages
• Part I, Chapter IV: Of Market Towns
• Part I, Chapter V: Of Cities
• Part I, Chapter VI: Of Capital Cities
• Part I, Chapter VII: The Labour of the Husbandman Is of Less Value Than That of the Handicrafts-man
• Part I, Chapter VIII: Some Handicrafts-men Earn More, Others Less, According to the Different Cases and Circumstances
• Part I, Chapter IX: The Number of Labourers, Handicraftsmen and Others, Who Work In a State Is Naturally Proportioned to the Demand For Them
• Part I, Chapter X: The Price and Intrinsic Value of a Thing In General Is the Measure of the Land and Labour Which Enter Into Its Production
• Part I, Chapter XI: Of the Par Or Relation Between the Value of Land and Labour
• Part I, Chapter XII: All Classes and Individuals In a State Subsist Or Are Enriched At the Expense of the Proprietors of Land
• Part I, Chapter XIII: The Circulation and Exchange of Goods and Merchandise As Well As Their Production Are Carried On In Europe By Undertakers, and At a Risk
• Part I, Chapter XIV: The Fancies, the Fashions, and the Modes of Living of the Prince, and Especially of the Landowners, Determine the Use to Which Land Is Put In a State and Cause the Variations In the Market-prices of All Things
• Part I, Chapter XV: The Increase and Decrease of the Number of People In a State Chiefly Depend On the Taste, the Fashions, and the Modes of Living of the Proprietors of Land
• Part I, Chapter XVI: The More Labour There Is In a State the More Naturally Rich the State Is Esteemed
• Part I, Chapter XVII: Of Metals and Money, and Especially of Gold and Silver
• Part Two
• Part Ii, Chapter I: Of Barter
• Part Ii, Chapter II: Of Market Prices
• Part Ii, Chapter III: Of the Circulation of Money
• Part Ii, Chapter IV: Of Further Reflection On the Rapidity Or Slowness of the Circulation of Money In Exchange
• Part Ii, Chapter V: Of the Inequality of the Circulation of Hard Money In a State
• Part Ii, Chapter VI: Of the Increase and Decrease In the Quantity of Hard Money In a State
• Part Ii, Chapter VII: Continuation of the Same Subject
• Part Ii, Chapter VIII: Further Reflection On the Same Subject
• Part Ii, Chapter IX: Of the Interest of Money and Its Causes
• Part Ii, Chapter X: Of the Causes of the Increase and Decrease of the Interest of Money In a State
• Part Three
• Part Iii, Chapter I: Of Foreign Trade
• Part Iii, Chapter II: Of the Exchanges and Their Nature
• Part Iii, Chapter III: Further Explanations of the Nature of the Exchanges
• Part Iii, Chapter IV: Of the Variations In the Proportion of Values With Regard to the Metals Which Serve As Money
• Part Iii, Chapter V: Of the Augmentation and Diminution of Coin In Denomination
• Part Iii, Chapter VI: Of Banks and Their Credit
• Part Iii, Chapter VII: Further Explanations and Enquiries As to the Utility of a National Bank
• Part Iii, Chapter VIII: Of the Refinements of Credit of General Banks
• Richard Cantillon and the Nationality of Political Economy, By W. Stanley Jevons
• Life and Work of Richard Cantillon, By Henry Higgs
• Appendix a
• Appendix B: Bibliography

Part II, Chapter X

Of the Causes of the Increase and Decrease of the Interest of Money in a State

It is a common idea, received of all those who have written on Trade, that the increased quantity of currency in a State brings down the price of Interest there, because when Money is plentiful it is more easy to find some to borrow. This idea is not always true or accurate. For proof it needs only to be recalled that in 1720, nearly all the money in England was brought to London and over and above this the number of notes put out accelerated the movement of money extraordinarily. Yet this abundance of money and currency instead of lowering the current rate of interest which was before at 5 per cent. and under, served only to increase the rate which was carried up to 50 and 60 per cent. It is easy to account for this increased rate of interest by the principles and the causes of Interest laid down in the previous Chapter. The reason is that everybody had become an Undertaker in the South Sea scheme and wanted to borrow money to buy Shares, expecting to make an immense profit out which it would be easy to pay this high rate of Interest.

If the abundance of money in the State comes from the hands of money-lenders it will doubtless bring down the current rate of interest by increasing the number of money-lenders: but if it comes from the intervention of spenders it will have just the opposite effect and will raise the rate of interest by increasing the number of Undertakers who will have employment from this increased expense, and will need to borrow to equip their business in all classes of interest.

Plenty or Scarcity of Money in a State always raises or lowers the price of everything in bargaining without any necessary connection with the rate of interest, which may very well be high in States where there is plenty of money and low in those where money is scarcer: high where everything is dear, and low where everything is cheap: high in London, low in Genoa.

The rate of interest rises and falls every day upon mere rumours which tend to diminish or increase the security of Lenders, without the prices of things in exchange being affected thereby.

The most regular cause of a high rate of interest in a State is the great expense of Nobles and Landowners or other rich people. Undertakers and Master-Craftsmen are in the custom of supplying the great Houses in all their branches of expenditure. These Undertakers have nearly always need to borrow money in order to supply them: and when the Nobility consume their revenues in advance and borrow money they contribute doubly to raise the rate of interest.

On the contrary when the Nobility of the State live oeconomically and buy at first hand so far as they can, they get through their servants many things without their passing through the hands of Dealers, they diminish the profits and numbers of the Undertakers in the State and therefore of Borrowers as well as the rate of interest, because this class of Undertakers working on their own capital borrow the least they can, and contenting themselves with small profits prevent those who have no capital from embarking in these enterprises on borrowed money. Such is today the position of the Republics of Genoa and Holland, where interest is sometimes at 2 per cent. or under in the highest class, whilst in Germany, Poland, France, Spain, England and other countries the easiness and expense of Noblemen and Landowners always keep the Undertakers and Master Craftsmen of the country accustomed to large profits enabling them to pay a high rate of interest, which is higher still when they import everything from abroad with attendant risk.

When the Prince or the State incurs heavy expense, such as making war, the rate of interest is raised for two reasons: the first is that this multiplies the number of Undertakers by several new large enterprises for war supplies, and so increases borrowing. The second is because of the greater risk which war always involves.

On the contrary when the War is over risk diminishes, the number of Undertakers is lessened and War-contractors ceasing to be so retrench their expenses and become Lenders of the money they have gained. If now the Prince or State offer to repay part of the debt it will considerably reduce the rate of interest, and this will have a more assured result if part of the debt can be really paid off without borrowing elsewhere, because the repayments increase the number of lenders in the highest class of interest which will affect all the other classes.

When the plentifulness of money in the State is due to a continuous Balance of Trade, this money first passes through the hands of Undertakers, and although it increases consumption it does not fail to bring down the rate of interest, because most of the Undertakers then acquire enough Capital to carry on their business without money, and even become lenders of the sums they have gained beyond what they need to carry on their trade. If there are not in the State a great number of Noblemen and rich people who spend heavily then the abundance of money will certainly bring down the rate of interest, while increasing the price of goods and merchandise in exchange. This is what usually happens in Republics which have neither much Capital nor considerable landed property and grow rich merely by foreign trade. But in States which have a large Capital and great Landowners the money brought in by foreign trade increases their Rents, and enables them to incur heavy expenditure which maintains several Undertakers and Mechanicks besides those who trade with the foreigner. This always keeps interest at a high rate in spite of the abundance of money.

When the Nobility and Landowners ruin themselves by extravagances, the Money lenders who have mortgages on their lands often acquire the absolute ownership of them, and it may well arrive in the State that the lenders are creditors for much more money than there is circulating there, in which case one may consider them as subaltern Owners of the land and goods mortgaged for their security. If not their capital will be lost by bankruptcies.

In the same way one may consider the owners of shares and public funds as subaltern Owners of the revenues of the State devoted to payment of their interest. But if the Legislature were compelled by the necessities of the State to employ these revenues for other purposes, the shareholders or Owners of public funds would lose everything without the money circulating in the State being diminished on that account by a single liard.

If the Prince or Administrators of the State wish to regulate the current rate of interest by law, the regulation must be fixed on the basis of the current market rate in the highest class, or thereabout. Otherwise the law will be futile, because the Contracting parties, obedient to the force of competition or the current price settled by the proportion of Lenders to Borrowers, will make secret bargains, and this legal constraint will only embarrass trade and raise the rate of interest instead of settling it. The Romans of old after several laws to restrict interest passed one to forbid altogether the lending of money. This law had no more success than its predecessors. The law of Justinian to restrain patricians from taking more than 4 per cent., those of a lower order 6 per cent., and traders 8 per cent. was equally amusing and unjust, whilst it was not forbidden to make 50 and 100 per cent. profit in all sorts of business.

If it is allowable and respectable for a Landlord to let a Farm to a poor Farmer at a high Rental, risking the loss of the Rent of a whole year, it seems that it should be permissible to a Lender to advance his money to a needy Borrower, at the risk of losing not only his Interest or Profit but also his Capital, and to stipulate for so much interest as the Borrower will freely consent to pay him. It is true that Loans of this character make more people wretched. Making away with both capital and interest they are more impotent to recover themselves than the Farmer who does not carry off the Land. But the Bankruptcy laws being favourable enough to Debtors to allow them to start again it seems that Usury laws should always be adjusted to market rates, as in Holland.

The current rate of Interest in a State seems to serve as a basis and measure for the purchase price of Land. If the current interest is 5 per cent. or one-twentieth part the price of Land should be the same. But as the ownership of Land gives a standing and a certain jurisdiction in the State it happens that when interest is one-twentieth part, the price of Land is at 1/24 or 1/25, though mortgages on the same Land hardly pass the current rate of interest.

After all, the price of Land, like all other prices, naturally settles itself by the proportion of Sellers to Buyers, etc.; and as there will be many more Buyers in London, for example, than in the Provinces, and as these Buyers who live in the Capital will prefer to buy land in their locality rather than in distant Provinces, they will rather buy land in the vicinity at 1/30 or 1/35 than land at a distance at 1/25 or 1/22. There are often other reasons of expediency affecting the price of Land, unnecessary to mention here, since they do not invalidate our explanations of the nature of Interest.

End of the second Part.

PART THREE