Online Library of Liberty - Molinari's 5th Evening

[SUMMARY: The right to lend. –Legislation regulating lending at interest. – Definition of capital. – Motives driving capital formation. – On credit. – On interest. – On its constituent elements. – Labor. – Hardship. – Risks. – How these conditions can be alleviated. – That the laws cannot achieve this. – The disastrous results of legislation restricting the rate of interest.]


Title Page of the original 1849 edition	The photo of Molinari (1819-1912) which accompanied his obituary in the Journal des économistes

Introduction

The Fifth Evening

SUMMARY: The right to lend. –Legislation regulating lending at interest. – Definition of capital. – Motives driving capital formation. – On credit. – On interest. – On its constituent elements. – Labor. – Hardship. – Risks. – How these conditions can be alleviated. – That the laws cannot achieve this. – The disastrous results of legislation restricting the rate of interest.

THE CONSERVATIVE.

Rotten usurer! To lend money to a scatterbrain who squanders his inheritance in advance on the young ladies of the Opéra, and, heavens above, at what a rate of interest!^[161]

THE ECONOMIST.

So whom are you railing at?

THE CONSERVATIVE.

At a damned money-lender who has decided to lend a huge sum to one of my sons.

THE ECONOMIST.

At what rate?

THE CONSERVATIVE.

At 2% a month, 24% a year, no more nor less!

THE ECONOMIST.

That is not very dear. Imagine if you were still [p118] in the flower of youth, strong and healthy. Next, imagine that the law categorically forbade lending at interest. The legal rate of interest is five per cent in civil matters and six in commercial matters.^[162]

THE CONSERVATIVE.

Well it is precisely because the legal interest rate is five or six per cent that people should not be lending at twenty four.

THE ECONOMIST.

Lending happens, however. And to be wholly truthful with you I will say that I think the law counts for a part of this twenty four per cent.

THE CONSERVATIVE.

What? But does not the law authorize me to pursue this vile money-lender…. ?

THE SOCIALIST.

This capitalist bloodsucker….

THE ECONOMIST.

Who lends at above the legal rate. So this is the issue then. I will tell you what is going to happen. You are going to sue the money-lender with whom your son has allowed himself to get involved in order to anticipate his inheritance. The man will have to defend himself. The case will be judged and he will win for lack of sufficient evidence. But the proceedings will even so have cost him money. Moreover his reputation will have suffered a new blemish. All these are risks to which he would not be exposed if there were no laws limiting the rate of interest. Now a lender has to cover his risks.

THE CONSERVATIVE.

Yes, but twenty four per cent?

[p119]

THE ECONOMIST.

If we consider how short the supply of funds is today, and how risky investments are, especially if the borrower is an habitué of Breda-Street,^[163] and also how the regulatory system has inflated the cost of legal proceedings, we will find at the end of the day that twenty four per cent is not excessive.

THE CONSERVATIVE.

You’re joking. If that were the case, why should legislation have limited the legal rate of interest to five or six per cent?

THE ECONOMIST.

Because the legislator concerned was a poor economist.

THE CONSERVATIVE.

So you want usury to be permitted henceforth?

THE SOCIALIST.

And you want labor to be handed over without mercy to the tyranny of capital?

THE ECONOMIST.

On the contrary I want the rate of interest always to be as low as possible. That is why I urge lawmakers not to get involved in the matter.

THE CONSERVATIVE.

But if you put no brakes on the greed of money-lenders, where in that case will the exploitation of heads of families stop?

THE SOCIALIST.

But if the law does not limit the power of capitalists where will the exploitation of the workers stop?

[p120]

THE ECONOMIST.

Oh really!

THE CONSERVATIVE.

So justify this anarchical and immoral doctrine of laisser-faire.^[164]

THE SOCIALIST.

Yes, justify this “bankocratic”^[165] and Malthusian doctrine of laisser-faire.

THE ECONOMIST.

What a charming alliance….So tell me then, oh worthy and venerable conservative, did you not applaud the famous proposal of M. Proudhon, regarding the gradual abolition of interest?

THE CONSERVATIVE.

I? I denounced it with the full force of my indignation.

THE ECONOMIST.

You were wrong. You showed yourself to be utterly illogical in denouncing it. What did M. Proudhon want? He wanted, by means of government action, to reduce interest to zero.

THE CONSERVATIVE.

Dreadful Utopian!

THE ECONOMIST.

This Utopian, however, was content to follow the early lead of your legislators. The only difference is that instead of holding himself to your legal limit of five or six percent, he demanded that the limit be lowered to zero.

THE CONSERVATIVE.

Is there no difference, then, between these two limits? Certainly one can fairly say to people: you will not lend at more than five or six per cent. That is a reasonable, [p121] an honest level. To oblige them to lend for nothing, however, is that not plundering them, the….Oh, those thieving socialists!

THE ECONOMIST.

It makes me very angry; but it is you who brought them into existence, those thieves. Socialism is only a radical extrapolation, though a perfectly logical one, of your laws and regulations. You decided, in the interest of society, that it should be the law which decides what happens to the estates left by heads of family. Socialism decides, in the interests of society, that it will be handed over by law to the community. You have decided that various industries shall be run and their workforce paid by the state; socialism has decided that all industries shall be run, and all their employees paid for, by the state. You decided that interest would be limited to five or six per cent; socialism decides that it shall be reduced to zero.

If you had the right to limit the rate of interest, that is to say partially to suppress interest payments, socialism has a perfect right, it seems to me, to suppress it totally.

THE SOCIALIST.

This is incontestable. We have the right, by the very reckoning of our enemies, and we use it to the full. So in what way are we blameworthy?

That conservatives show consideration towards capital, is understandable. They live on it. They have felt themselves, however, the need to put limits on capitalist exploitation;^[166] and they have protected themselves against the most wily and greedy people in their own gang. Capitalists have forbidden lending at very high interest by [ p122] condemning it as usury. We in turn have arrived on the scene, however, and recognizing the inadequacy of this law we have undertaken to cut out the evil at its root and we have said: let the legal rate of interest henceforth be lowered from five or six per cent. You protest! But if the capitalists have been able legitimately to demand the abolition of gross usury, why should we be committing a crime by demanding the suppression of petty usury? In what way is the one more legitimate than the other?

THE ECONOMIST.

Your claims are perfectly logical. The only thing is you would no more be able to reduce the rate of interest to zero than the legislators of the Empire were able to lower it to a maximum of five or six per cent. You would end up like them causing it to rise further.

THE SOCIALIST.

What do you know about it ?

THE ECONOMIST.

I could invoke the history of all such laws setting a maximum rate^[167] and prove to you consulting the evidence that each time people have wanted to limit the price of things whether labor, capital or goods, they have invariably pushed it up. I would like to get you to see, however, the why and wherefore of this rise. I prefer to explain to you how it comes about that interest should naturally be sometimes at ten, fifteen, twenty and thirty per cent, sometimes at five, four, three and two per cent and even lower; and how it arises that no ad hoc legislation can make it go below this.

Do you know what the price of things is made up of?

THE SOCIALIST.

What you economists usually say [p123] is that the price of things is constituted by their production costs.

THE ECONOMIST.

And in what do production costs consist?

THE SOCIALIST.

Again according to the Economist, production costs are made up from the labor needed to produce a given merchandise and put it on the market.

THE CONSERVATIVE.

Yes, but does the price at which things sell always represent exactly the cost of the labor required, that is their costs of production?

THE SOCIALIST.

No, not always. The costs of production represent what Adam Smith, rather wisely in my opinion, has called the natural price of things. Now this same Adam Smith notes that the price at which things sell, the market price, does not always coincide with the natural price.^[168]

THE ECONOMIST.

Yes, but Adam Smith also notes that the natural price is, as it were, the central point around which the market price gravitates constantly, and towards which it is irresistibly drawn back.

THE CONSERVATIVE.

How does that happen?

THE ECONOMIST.

When the price of a good exceeds its production costs, those who produce it or who sell it realize an exceptional return. The lure of this unusual return [p124] attracts competition and to the extent that this competition mounts, the price falls.

THE CONSERVATIVE.

Where does it all stop?

THE ECONOMIST

The limit is the costs of production. Sometimes also the price falls below these costs. In this latter case, however, production ceasing to yield a sufficient return, itself slows down, the market becomes depleted and prices rise again. Thanks to this economic gravitation, prices tend always and irresistibly, to attain their natural level; that is to say to represent exactly the amount of labor the merchandise has cost. I will have occasion to come back later to this law which is really the keystone of the economic edifice.^[169]

To resume: interest is constituted by the costs of production. The current rate of interest gravitates continuously round these production costs.

THE SOCIALIST.

And from what, may I ask, are the production costs of the rate of interest made up?

THE ECONOMIST.

From the labor costs and the risks of losses or damage, from which must be deducted…

THE CONSERVATIVE.

What’s that?

THE ECONOMIST.

From the labor costs and the risks of losses or damage.

THE CONSERVATIVE.

This is what is not clear.

[p125]

THE ECONOMIST.

This will become clear shortly. First, what things does one lend?

THE CONSERVATIVE.

Well, we lend things which possess some value.

THE ECONOMIST.

Having a value means, as you know, being appropriate to the satisfaction of one or other of the needs of man. How do things acquire such appropriateness? Sometimes they possess it naturally; sometimes it is bestowed on them by labor.

The value which nature imparts to things is free. Nature works for nothing. Only man has his labor paid for, or to put it better, exchanges his labor for that of others. Things are exchanged in terms of their production costs, that is to say according to the quantities of labor which they embody.^[170] These quantities of labor are the foundation of their exchange value. The more one possesses things which embody labor, the richer one is: in fact the better one can satisfy one’s needs, either by consuming these things or exchanging them for other consumable things. If we do not want to consume them right away we can either store them or lend them.

Those things which embody useful labor are known as “capital”.

Capital is accumulated by savings.

Two motives drive man to save.

The first arises from the very nature of man. Working life scarcely stretches beyond two thirds of the human lifetime. In his infancy and in his old age, [p126] man consumes without producing. He is therefore obliged to put aside a portion of his daily labor to bring up his family and to provide for his own subsistence in his old age. Such is the first motive which leads man not to consume immediately the whole value of his labor, in other words to accumulate capital.

There is another motive as well. If need be, man can produce without capital.

THE CONSERVATIVE.

Where might that be seen?

THE ECONOMIST.

Do you think the first men were born with a bow and arrows, an axe and a plane to hand? At a pinch we can produce without capital but not on any kind of scale. In order to create many useful things in return for little effort, one needs numerous, sophisticated tools; the production of certain things demands, moreover, a lot of time. Now the producer cannot survive during this time unless he gets an advance sufficient for subsistence, unless he has a certain capital at his disposal. The individual therefore has an interest in putting by some of his output, in accumulating capital, in order to be able to increase his production while reducing his efforts, in order to render his labor more fruitful.

THE CONSERVATIVE.

That’s right.

THE ECONOMIST.

But this second motive which leads to the accumulation of capital, is far less general than the first. It acts [p127] only on industrial entrepreneurs^[171] and those who aspire to become such.

THE CONSERVATIVE.

That is to say on everybody.

THE ECONOMIST.

No! There are many laborers in manufacturing who do not dream of becoming manufacturers, many farm laborers who have no ambition to run farms, many bank clerks who do not aspire to set up a bank. And as industry develops on a bigger scale, there will be fewer and fewer such aspirants.

In the present state of affairs, the manufacturing entrepreneurs^[172] are already in a minority. If they were reduced just to their own resources, to the capital they are able to accumulate themselves, this would be completely inadequate.

THE CONSERVATIVE.

There is no doubt about that. If each manufacturing entrepreneur,^[173] manufacturer, farmer or merchant found himself reduced to his own resources; if he had at his disposal only his own capital, production would be endlessly stymied by lack of funds for lending.

THE SOCIALIST.

Whereas there would be in the hands of non-entrepreneurs,^[174] a considerable quantity of inactive capital.

THE ECONOMIST.

We have surmounted that difficulty by means of credit.

THE SOCIALIST.

Say rather that we should have surmounted it. Unfortunately society has not yet been able to bring credit under control.

[p128]

THE ECONOMIST.

Credit has taken care of itself since the beginning of the world. On the day when, for the first time one man lent to another some product of his own labor, credit was invented. Since that day it has never stopped developing. Intermediaries have set themselves up between the capitalists and the entrepreneurs. The numbers of these traders in capital, bankers or business agents, have multiplied enormously. Stock exchanges have been set up where one can sell capital wholesale and retail.

THE SOCIALIST.

Ah, the stock exchange….that vile haunt of the pimps of capital, where they gather to negotiate their foul purchases. When are we going to close these temples of usury?

THE ECONOMIST.

Then you had better close “le marché des Innocents (The Innocents’ Market),^[175] too, since theft takes place there as well…Capital lending has been organized on a huge scale and it is destined to develop much further once it has ceased to be directly and indirectly hobbled.

Capital is accumulated in all its forms. In what form however is it accumulated most willingly? In the form of durable objects, not cumbersome and easily exchanged. Certain objects combine these qualities to a higher degree than all the others; I mean precious metals. The price of precious metals has consequently become the bench mark for all prices. When somebody lends his capital in a less durable and more readily depreciating form, the borrower has to be paid compensation for this difference in durability and tendency to depreciation. Furnishings and houses [p129] are let out more expensively than a sum of money of the same value. When someone lends capital in the form of precious metal, the price of the loan takes the name interest, when the loan is transacted in another form, when people are lending land, houses, furniture, the price is called rent.

Interest is therefore the sum we pay for the use of a certain quantity of labor accumulated in the most durable form, the least inconvenient and the most freely exchangeable.

Sometimes this use of capital costs more, sometimes less, sometimes it is free and sometimes the capitalists even pay a premium to those to whom they entrust their capital.

THE CONSERVATIVE.

Are you joking? Wherever can lenders be seen paying interest to their borrowers? The world would be upside down!

THE ECONOMIST.

Do you know on what conditions the first deposit banks which were established in Amsterdam, Hamburg and Genoa took in capital deposits?^[176] In Amsterdam the capitalists first of all paid a premium of ten florins when an account was opened for them; next they paid an annual maintenance duty of one per cent. Moreover the various monies at that time being subject to sizeable depreciations, the bank levied a variable charge on the sum deposited. In Amsterdam this charge was commonly 5%. Well, despite the harshness of these conditions, the capitalists preferred to entrust their funds to a bank, rather than keeping them or lending them directly to people who had need of them.

THE SOCIALIST.

At that time interest was less.

THE ECONOMIST.

That is right. Well, as in all eras, the man who has accumulated capital has to engage in a certain supervision and to run certain risks if he looks after it himself; since it can happen that it is less trouble and he runs fewer risks if he lends it, interest can therefore, at any time, fall to zero or even below zero.

You also understand, however, that if this negative portion of the costs of production were to become very substantial; if holding capital were subject to very great risks, such as a lack of security or excessive taxation; if lending too offered only inadequate security, accumulation would come to a halt. People would stop saving their funds if they could no longer count on consuming them themselves, at least for the most part. Man would start living from day to day, ceasing to care for his old age and for the future of his family, without concerning himself any more with perfecting or expanding his production. Civilization would regress rapidly under such a regime.

The weaker the negative tendency of interest, the more powerful is the stimulus which drives man to save.

Let us have a look now at the positive aspect of interest.

This latter represents labor, damages and risk.

If you go to a certain amount of trouble, if you experience certain losses, if you run certain risks in [p131] the keeping of your own capital, you are routinely obliged to take even more care, to sustain even more damage and run even more risks if you lend it.

In what circumstances are you, as a capitalist, disposed to lend out funds?

It is when you have no outlet for them at present. You lend money willingly until the time comes when you need it yourself. Two borrowers, two men with a present need for capital, approach you: with which one will you deal? You will choose, will you not, the one who gives you the better financial and moral guarantees, the richer and more upright of the two, the one who will reimburse you the more reliably? Unless, however, his competitor happens to offer you a higher price, in which case you will weigh the difference in risk and rates offered and then decide. If you go for the second, it will be because the better rate seems to you to balance and go a little beyond balancing, the difference in financial and moral guarantees.

Thus the function of interest payments is to cover risks.

You lend your capital for a pre-arranged period; but are you quite sure you will not need it during this period? Could not some accident come your way obliging you to seek access to your savings? Does it not also happen, rather frequently, that we lend funds which we need ourselves? In the first case the harm is only potential; in the second it is real; but whether real or potential, does it not require some payment?

Interest serves therefore to compensate for such losses.

[p132]

You keep your wealth in a safe, or a barn or elsewhere. If you lend it out, you will have to go to some trouble, that is do a certain amount of work, moving it and having the loan regularized, as well inspecting the use to which the loan will be put. These tasks must be paid for.

Interest therefore serves to pay for this labor.

A premium serving to cover risk, a compensatory payment to cover damages, a cash sum to pay for work done: such are the positive elements in the production costs of interest payments.

These three elements appear, in different degrees, in all loans made at interest.

THE SOCIALIST.

We would suppress them if we socialized credit.^[177]

THE ECONOMIST.

Really? Are there any risks? If you are a lender you can do as much as you like, whether you are banker, a financial agent, a supplier of capital, or a saver, but you will still always be at risk when you lend.

Unless:

1.You are dealing with people of absolute integrity and perfect knowledge;

2. You are dealing with people whose work is not exposed, directly or indirectly, to any chance catastrophe.

Short of this, you are running risks, and people will have to pay you a premium to cover them.

THE SOCIALIST.

I agree; but if industry were less [p133] risky, this premium could be considerably reduced.

THE ECONOMIST.

Yes, considerably. So rather than setting up commercial banks, study the real causes which make industry a risky undertaking and study also the causes which change a population’s morality or lessen its knowledge.

THE CONSERVATIVE.

This is a point of view which seems to me rather novel. Interest rates can be lower, then, in a country which has high standards of morality and practical knowledge than in a country where these qualities are scarce.

THE ECONOMIST.

Say rather that they must be lower? Do you not lend more happily to an honest man than to some fellow who is half rogue?

THE CONSERVATIVE.

That goes without saying.

THE ECONOMIST.

Well what you do, everyone else does too. The rate of interest rises in proportion as morality declines. It also rises as knowledge is lessened or is mistaken. Take these economic maxims to heart and know how to apply them opportunely. The risks which undoubtedly constitute the most considerable element in the costs of production of interest, can fall very significantly indeed, but I doubt whether they can vanish completely.

[p134]

THE SOCIALIST.

If memory serves me well, one of the notables of the School of Saint-Simon, M. Bazard, thought quite the opposite.^[178]

THE ECONOMIST.

You are muddling things. Here is what M. Bazard wrote in his preface to the French translation of Bentham’s Defense of Usury:^[179]

“…It is permissible to conclude that interest, as representing the rent accruing to the tools of production, has a tendency to disappear completely, and that of the elements which compose it today, the insurance premium is the only one which has to remain, while itself diminishing, because of progress in industrial organization, as compared to solely those risks which can be regarded as beyond the foresight and wisdom of human beings”.^[180]

Like M. Bazard, I doubt whether the risks of lending can ever disappear completely; for I do not think we can ever succeed in eliminating all the accidents, natural or otherwise, which threaten capital lending. Those who use capital, those who risk its destruction, will always have to pay an insurance premium to cover this risk.

THE SOCIALIST.

But a mutual benefit insurance company….

THE ECONOMIST.

No such company could prevent real risks from falling on people. You lend money to a farmer whose work-sheds may [p135] be destroyed by a fire or whose harvests may be ravaged by hail, or weevils, or some other thing. Consequently you are running various risks. These risks must be covered, otherwise, you do not lend.

THE SOCIALIST.

But what if the farmer is insured against fire, hail and weevils?

THE ECONOMIST.

He will still pay an annual premium on the capital you have lent him to increase his equipment and expand his cultivation; only instead of paying you he will pay it to underwriters. He will pay them less, since insurance is their speciality and it is not yours; but he will pay it to them. The parts of the interest he will pay annually to have the use of your capital are separate but they will subsist on it nonetheless.

THE CONSERVATIVE.

And the rent; do you agree with M. Bazard that it could disappear?

THE ECONOMIST.

The rent, as defined by M. Bazard, is the portion of the production costs of interest representing compensation for damages and loss and the payment of labor.^[181]

Can one relinquish capital, without experiencing any damage as a consequence of its absence? Yes, if one is sure of not having need of it until the time when it will be reimbursed,^[182] or perhaps again of being able to recover it or realize it without loss. Will these two circumstances happen one day in an orderly, normal, [p136] permanent way? Will it turn out that all the capital used in production will be reimbursable or realizable without loss at the behest of the lenders?

THE CONSERVATIVE.

Pure daydreaming!

THE ECONOMIST.

I would not be so sure. We should note that all the capital employed or even employable in production, does not constitute all the capital at society’s disposal. One generally lends only such capital as one does not need at present. Well it could turn out that we do not lend any other kind of capital. In this case we will not be undergoing any real risk by lending. Will it be feasible likewise to eliminate potential damage? Will the development of capital one day operate sufficiently perfectly that the exit of capital from production will routinely be compensated for, by capital entry? I could not say but this is possible. If the production and circulation of capital were not slowed and harassed by a thousand obstacles, we would soon be fully informed in this regard.

There remain the payments remunerating the labor involved in the loan, the trouble the lender has to go to in undertaking the loan. The work is real and, like all real work, merits payment.

Since the invention and multiplication of banks this labor has been displaced or split up. The capitalist who sends his money to a bank now incurs very little inconvenience. On the other hand the bank which lends this money to an industrial entrepreneur^[183] carries out serious work and accumulates very considerable costs. This work must be paid for and these costs must be covered. Who should [p137] pay? Obviously he who uses the capital, provided that he can pass them on to the consumer of the goods produced with the aid of the capital.

Can it be supposed that these costs will ever disappear? No! While they can fall as a result of the proliferation of specialist intermediaries working in the field of capital lending, they could not be eliminated. A bank has to pay and will always have to pay for its premises and pay its employees etc. There at least, we see one part of the production costs of interest that is indestructible.

THE CONSERVATIVE.

This is most fortunate.

THE ECONOMIST.

Why would you say this? Is not the society which consumes the products of labor also interested in their selling at the lowest possible price? Well, the interest on capital figures to a greater or lesser extent in the prices of all things. If it did not exist or were smaller, one could buy these things in exchange for a smaller amount of labor, because they would contain less labor.

The general affluence of populations grows in proportion as interest rates fall; it would be at its maximum if interest came to fall naturally to zero.

THE SOCIALIST.

I grasp perfectly this analysis of the costs of the production of interest; I see that interest is composed of real parts which must be covered, without which….without which….

THE ECONOMIST.

…the capitalists would not lend their capital, or if they were forced to lend would cease to accumulate, [p138] would cease to save. Now since capital, with the exception of precious metals and a few other goods, is essentially destructible, the material capital of society today – fields of wheat, pasturage, vineyards, houses, furniture, tools, provisions – would just disappear in a very few years if we did not take care to renew them by means of work and savings.

THE SOCIALIST.

You have successfully conveyed my own thinking. I also understand that these different parts of the costs of production tend naturally to fall. But is the current rate of interest therefore always the exact representation of the elements or costs of production of interest?

THE ECONOMIST.

The same holds for capital as for everything. When people are offering more capital than is demanded, the present rate of interest will fall. Even so, it could never fall much below the production costs of interest, for we would rather hang on to capital than lend it out at a loss. The price could rise above these costs when demand for capital is greater than its supply. If the disproportion becomes too marked, however, the capital attracted by the increasingly large premium offered to it, will soon come flooding into the market and equilibrium will reestablish itself. The market price will in this case converge once again with the natural price.

This equilibrium establishes itself spontaneously, unless artificial obstacles prevent its doing so. I will talk about these obstacles when we are considering the banks.^[184] In the main, however, it is on the costs of production that we must make an impact if we have to act to lower [p139] the rate of interest in an ordered and lasting way. The fact is that these costs could not be lowered, either in whole or in part, by means of a law.

THE CONSERVATIVE.

So here we are, back with the legal rate!

THE ECONOMIST.

One can no more say to a capitalist: “You will not lend your capital at above a maximum interest rate of five or six per cent”, than you can to a merchant: “You will not sell your sugar for more than a maximum price of eight sous a pound”. If at eight sous the merchant cannot cover the production costs of the sugar and remunerate his own labor, he will stop selling sugar. Likewise, if being subject to an interest rate maximum of five or six per cent, the capitalist is not covering the risks of the loan, nor the damage resulting from going a while without his capital, nor the work he had to put in to his lending, he will cease lending.

THE CONSERVATIVE.

But they do not stop. My usurer…

THE ECONOMIST.

Or if he continues to lend, will he not be obliged to add to the interest he is making, a premium for the extra risks he runs in breaking the law? This is just what your usurer has not failed to do. If there were no law limiting the rate of interest, he might have charged only twenty per cent or even less.

THE CONSERVATIVE.

What? You think that the production costs of the interest on the capital lent to my son really amount to twenty per cent?

THE ECONOMIST.

Yes, I think so. There are great risks in lending to the youthful customers of Breda Street. Will you not admit that these friendly discounters of the right to an inheritance do not supply moral guarantees of a very substantial sort.^[185]

THE SOCIALIST.

All things considered, though, the laws against usury cannot have had really catastrophic effects. They are so easily evaded.

THE ECONOMIST.

Do not be so sure! Many men find themselves in a situation such that they cannot borrow, short of paying heavy interest. Well, the law having banned so-called usurious loans, the people who conform religiously to the present law, whether it be good or bad, abstain from lending to these needy men. The latter are reduced to approaching certain individuals not burdened with these scruples, men who profit from being few in number and from the urgency of their clients’ needs by raising the rate of interest yet again.

The law restricting the rate of interest establishes, you see, a real monopoly in favor of the least scrupulous lenders, and to the detriment of the poorest borrowers. It is thanks to this absurd law that the shady lenders or usurers bleed dry the workers or shopkeepers who incur short-term debts, or traders who have just experienced losses, and many others.

Do you now understand that political economy takes a stand, in the interests of the masses, against this [p141] limitation on the right to lend, and undertakes the defense of usury?

THE SOCIALIST.

Yes, I understand. I see that the law does not prevent usury and that, on the contrary, it makes it more bitter. I see that if this restrictive law were to be abolished, the most needy borrowers would pay smaller premiums to the lenders.

THE ECONOMIST.

That would be an immense benefit to the poorest classes in society. Let us therefore demand the abolition of legal interest. It would be the best way of getting the better of the usurers and of putting an end to usury.

Endnotes

^[161] Molinari wrote the article on “Usure” (Usury) for the DEP (1852), vol. 2, pp. 790-95. The main article on “Intérêt” (Interest) was written by Léon Faucher, ibid., vol. 1, pp. 953-70. Both referred to the attack on the charging of interest made by P.-J. Proudhon and the exchange between him and Bastiat in late 1849 which was published as Gratuité du crédit. Discussion entre MM. Bastiat et Proudhon (Paris: Guillaumin, 1850) where Proudhon argued for a Peoples Bank which would lend at a maximum interest rate of 1%. It began as a reply to Bastiat’s pamphlet on Capital et rente which was published in February 1849. Molinari reviewed Bastiat’s pamphlet critically in the JDE in June 1849. He believed that Bastiat had ignored the opportunity costs and the risks faced by those lending the capital.

^[162] In 1789 Turgot wrote a Mémoire on interest for the Constituent Assembly in which he advocated the complete liberalization of the laws regarding the charging of interest. The Assembly passed legislation legalizing the charging of interest but allowed the state to set the maximum allowed rate. The Law of 1807 set the rate for civil transactions at 5% and for commercial transactions at 6%.

^[163] Prostitutes or "lorettes” frequented the quartier Bréda in the 9th arrondissement in Paris during the July Monarchy. They got their name from the church, the "Notre-Dame-de-Lorette” which was located there. Molinari uses “Breda-Street” in the original.

^[164] This is one of the half dozen or so references in the Soirées to the doctrine of “laissez-faire” or the idea that there should be no government intervention in economic matters whatsoever. [See the glossary entry on “Laissez-faire” and Molinari’s use of this expression throughout Les Soirées.]

^[165] GdM puts the made-up word “bancocratique” into the mouth of the Socialist. It means “rule by the bankers.”

^[166] The Socialist uses the expression “l’exploitation capitaliste” (capitalist exploitation) which has become the standard expression to describe their theory that workers do not receive the full value of their labour in the form of wages, and are thus “exploited” by the capitalist. Socialists also believe that workers are also exploited by other forms of “unearned income” in the form of interest and rent. The Economists, on the other hand, also had a theory of “exloitation” (although they did not call it that). They believed that an individual’s property was unjustly taken from them in the form of taxes, tithes, and tariffs and other interventions by the state. They called this “legal plunder” (spoliation) to use the terminology developed by Frédéric Bastiat. [See the glossary entry on “Plunder”.]

^[167] The most notorious “lois de maximum”was enacted in 1793 by the Convention to prevent price rises of food caused by war shortages, a failed harvest, and inflation caused by the issuing of the Assignat paper currency. [See the classic work by Andrew D. White, Fiat Money Inflation in France, How it came, what it brought and how it ended (New York: D. Appleton & Co., 1896). </title/1948>. See also Charles Coquelin, “Assignats”, DEP, vol. 1, pp. 77-78.]

^[168] In the Wealth of Nations, Book I, chap. VII, Adam Smith states that "The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price. The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither.” </title/220/217397/2312908>.

^[169] Molinari has an extended discussion of the tendency of market prices to approach the natural price in Soirée 12 where he discusses his theory of rent.

^[170] Here Molinari is expounding a “labor theory of value”which was very much part of the classical school’s theory of economics. It was taken up later by Karl Marx as the justification for the kind of redistribution of profit and interest which the Socialist here is demanding. At the very time Molinari is writing the Soirées Bastiat was trying to reformulate the classical theory to avoid these difficulties by setting the idea of the mutual exchange of “services” at the heart of production and exchange rather than “labor”. These services were “estimated” or valued by each individual consumer and producer according to their particular needs and situation, thus hinting at a “subjectivist”or “Austrian” view of the matter which was to emerge in the 1870s during the so-called “Marginal Revolution.” [See Bastiat’s discussion in Economic Harmonies the first part of which was published in early 1850, chap. 5 “On Value,” pp. 103 ff. (FEE edition).]

^[171] Molinari uses the word entrepreneur many times in the Soirées, most without any qualification, as in simply "entrepreneur", but also many times with some qualification or description, as in "entrepreneur d'industrie” (industrial entrepeneur) or "entrepreneur d'education” (entrepreneur in the education business). We will indicate in a footnote when this is the case. [See the glossary entry "Entrepreneur” and the different kinds of entrepreneurs Molinari discusses.]

^[172] “Entrepreneurs de production” (manufacturing entrepreneurs). [See the glossary entry "Entrepreneur” and the different kinds of entrepreneurs Molinari discusses.]

^[173] “Entrepreneur de production” (manufacturing entrepreneur). [See the glossary entry "Entrepreneur” and the different kinds of entrepreneurs Molinari discusses.]

^[174] “Non-entrepreneurs” is the original French which requires no translation. [See the glossary entry "Entrepreneur” and the different kinds of entrepreneurs Molinari discusses.]

^[175] The "marché des Innocents” was a vegetable market established in 1789 in central Paris on the site of the Cemetery of the Innocents. It was expanded under Napoleon in 1808 and eventually became the central food market for Paris (Les Halles). When Molinari was writing, an architectural competition was underway in order to design a much larger structure to house the markets. Construction began in 1852.

^[176] [See the article on “Banque”by Charles Coquelin in DEP, vol. 1, pp. 107-45, especially section 4 “Revue historique - Les banques de dépôt: Venise, Gênes, Amsterdam, Hambourg”, pp. 120 ff.]

^[177] The expression Molinari puts into the mouth of the Socialist is “en organisant le crédit” (by organizing credit), that is by having the state provide credit at a subsidized level. For many working men and women a common source of small loans was the government monopoly pawn shops or "monts-de piété". The name is a corruption of the Italian "monte di pietà” or "mercy loan” which were bodies established in the 15th century to provide loans to the poor. The monts-de piété were formerly established in France in 1777 as a state privileged institution with a monopoly of the pawn broking business which could lend at 10% interest. During the inflation of the early part of the French Revolution the monts-de piété were forced to close in 1795, only to reopen in 1797, and were re-regulated under the Empire in year XII. In 1844 the monts-de piété of Paris lent fr. 25.6 million. By 1847 there were 45 monts-de piété across France which loaned a total of fr. 48.9 million. Horace Say described them as "ne sont autre chose que des banques privilégiées de prêts sur gages” (nothing more than state privileged banks in the pawn broking business). [See Horace Say, "Monts-de piété,” DEP, vol. 2, pp. 229-35.]

^[178] Saint-Armand Bazard (1791-1832) was a member of Saint-Simonian school of socialism. [See the glossary entry on “Saint-Simon” and “The Socialist School”.].

^[179] Bazard translated Bentham's Defence of Usury (1787) in 1828. His edition also included Turgot's Mémoire sur les prêts d'argent (1789).

^[180] GdM - Preface to the Défence de usure by Jeremy Bentham. Mélanges d’Économie politique, T. II, p. 518, Édition Guillaumin.

^[181] Molinari has his own theory of rent which he presents in the final 12th Soirée and in his Cours d’économie politique in 1855).

^[182] This is the first hint by Molinari that time might be a factor in the price of interest but he does not develop it further. The idea of “time preference”, that one places a higher value on goods or money at the present time than one does on the same goods or money at some future time, was an insight of the Austrian school later in the 19th century. He is still trying to explain interest with reference primarily to labor costs, although he has also introduced Turgot’s ideas of opportunity cost and risk as additional factors in determining the amount of interest charged.

^[183] “Entrepreneur d’industrie”. [See the glossary entry "Entrepreneur” and the different kinds of entrepreneurs Molinari discusses.]

^[184] [See the discussion in Soirée 9 below.]

^[185] Molinari is arguing that the young men who expect to inherit as a right (“le droit à l’héritage”) can go to lenders who would be willing to lend them money in anticipation of their inheriting their father’s estate, but only at a high interest rate or “discount”. [See the previous footnote on the difference between “le droit à l’héritage” (the right to an inheritance) and “le droit de l’héritage” (the right to bequeath one’s estate to whomever one chooses).]