All such measures are injurious in proportion as they, by extending aid and the amount of the minimum, go beyond the limits of benevolence, and approach those of a community of goods. (§ 81 ff.) However, if they would be lasting and not pull workmen rapidly down to the very depths of universal and irremediable misery, these measures should be accompanied by the bestowal of power on the guarantor to hold the further increase of the human family within bounds.[178-4]
The condition of workmen can be continued good or materially improved only on condition that their numbers increase less rapidly than the capital destined for wages. The latter increases usually and most surely by savings. But only the middle classes are really saving. In England, for instance, the national capital increases every year by at least £50,000,000, while the working classes spend at least £60,000,000 in tobacco and spirituous liquors,i. e., in numberless instances, only for a momentary injurious enjoyment by the adult males of the class, one in which their families have almost no share. According to this, every compulsory rise in wages would be a taking away from the saving class and a giving to a class thateffect no savings. Is not this to act after the manner of the savages who cut down a fruit tree in order more conveniently to relish its fruit?[178-5]
Benjamin Franklin calls out to workmen and says: If any one tells you that you can become rich in any other way than through industry and frugality, do not listen to him; he is a poisoner! And, in fact, only those changes permanently improve the condition of the working classes which are useful to the whole people: enhanced productiveness of every branch of business in the country, increased capital, the growth (also relative) of the industrial middle classes, the greater education, strength of character, skill and fidelity in labor of workmen themselves. Much especially depends upon their foresight and self-control as regards bringing children into the world. Without this latter virtue even the favorable circumstances would be soon trifled away.[178-6]
[178-1]Compare, besides, the Prussian A. L. R., II, 19, 2. InTurgot,droit du travail, anddroit au travailare still confounded one with the other. Œuvres éd.Daire, II, 302 ff; especially 306. In such questions, people generally think only of factory hands. But have not writers just as good adroit au travailto readers whom the state should provide them with, lawyers to clients and doctors to patients?
[178-2]L. Fauchercalls thedroit au travailworse than the equal and compulsory distribution of all goods, because it lays hands on not only present products but even on the productive forces. It supposes that unlimited production is possible; that the state may regulate the market at pleasure to serve its purposes; that, in fact, the state can give without having first taken what it gave. (Mélanges d'Economie politique, II, 148 ff.) The French national assembly rejected the "right to labor" on the 15th of September, 1848, by 596 ayes to 187 nays, after the provisional government had proclaimed it, February 25. Le Droit au Travail à l'Assemblée nationale avec des Observations deFaucher, Wolowski, Bastiatetc., byJ. Garnier, Paris, 1848.
[178-3]L. Blanc, De L'Organization du Travail, 1849.
[178-4]"Every one has a right to live. We will suppose this granted. But no one has a right to bring creatures into life to be supported by other people. Whoever means to stand upon the first of these rights must renounce all pretension to the last.... Posterity will one day ask with astonishment what sort of people it could be among whom such preachers could find proselytes." (J. S. Mill, Principles, II, ch. 12.)
[178-5]CompareMorrison, loc. cit. Quarterly Rev., Jan. 1872, 260. The English savings in the savings banks, between 1839 and 1846, increased yearly in amount only £1,408,630, and scarcely half of this came from wages-workmen in the narrower sense of the term. What the latter contribute to the fund for the old and sick is not really productive capital but only individually deferred consumption. Let us suppose that a man had an income of $3,000 a year, of which he laid out yearly $2,000 ($1,000 for wages, $1,000 for rent and interest[TN 18]on capital), and that he capitalizes $1,000. If now this man were, either through philanthropy or in furtherance of socialism, to double the wages he paid, the result would not be detrimental to the economic interests of the whole country only on the supposition that working classes who received the increased wages should either save what he is no longer able to save, or that by inventions or greater personal skill, etc., they should increase the national income.
[178-6]According toHildebrand'sJahrbb., 1870, I, 435, 193, North American workmen, the quality of work being supposed the same, now accomplish from 20 to 30 per cent. less than before 1860. Thus, in 1858, in New York, a steam engine was manufactured for $23,000, in 2,323 work days. In 1869, a similar one was built for $40,000 in 3,538 days. In the former case, the manufacturer made a profit. In the latter, he lost $5,000.
John Stuart Mill, II, ch. 13. Against the "philanthropists" who find it hard to preach to the poor, the only efficacious means of improving their condition,Dunoyer, L. du T., IV, ch. 10, says: The richdoemploy it, although they have much less need of it! EvenMarloadmits that a guaranty of the right to labor, without any measures to limit population, would, in a short time, and irredeemably lead the country to destruction. (Weltökonomie, I, 2, 357.)von Thünen, der isolirte Staat., II, 1, 81 ff., would take a leap out of the vicious circle that those who live by the labor of their hands can produce no rise in their wages, because they are too little educated to hold their increase properly in check; and that, on the other hand, they cannot give their children a decent education, because their wages are too low; by suggesting that educational institutions should be established by the state, and that these should elevate the subsequent generation of workmen intellectually.
SECTION CLXXIX.
THE RATE OF INTEREST IN GENERAL.
Interest on capital,[179-1]or the price paid for the use of capital, should not be confounded with the price of money (§ 42); although in common life people so frequently complain of want of money where there is only a want of capital, and sometimes even when there is a superabundance of money.[179-2]This error is connected with the fact, that for the sake of convenience, loans of capital are so often effected in the form ofmoney and that they are always at least estimated in money; but neither of these things is essential.
In reality, however, we as seldom meet with interest[179-3]pure and simple, as we do with rent pure and simple. A person who works with his own capital can, at best, by a comparison with others, determine where, in the returns of his business, wages stop and interest begins.[179-4]And even in the loaning of capital, it depends largely on supply and demand, whether the creditor shall suffer a deduction in consequence of the absence of care and labor attending his gain, and whether the debtor, in order to get some capital at all, shall sacrifice a part of the wages of his labor.[179-5]When Adam Smith assumes it to be the rule that the "profit of stock" is about twice as great as the "interest of money,"[179-6]it is evident that a considerable amount of what is properly wages or profit ofthe employer (Uhternekmer= undertaker) is included in the former.
Many businesses have the reputation of paying a very large interest on the capital employed in them, when in reality they only pay the undertaker of them wages unusually high as compared with the amount of capital employed in them. Apothecaries, for instance, are called in some places "ninety-niners," because it is said that they earn 99 per cent. To discover the error, it would be sufficient to inquire the rate of interest on the capital borrowed by the apothecary on hypothecation, for instance, to enlarge his industry. But on the other hand, such a man who has more than any other manufacturer to do with the most delicate materials and with them in greater variety, requires proportionately greater caution and knowledge. Besides, as the guardian of the health and life of so many, and even as the comptroller of physicians, he should be a man who inspired universal and unqualified confidence.[179-7]By the rate of interest customary in a country, we mean the average rate of the interest on money-capital employed safely and without trouble.
[179-1]In the case of fixed capital, we generally speak of rent; in the case of circulating capital, of interest. If interest be conceived as a fractional part of the capital itself, the relation between the two is called "the rate of interest," most generally expressed as a percentage, and for one year.
[179-2]In Russia, great depreciation of the assignats, and yet the people complained of a "want of money." (Storch, Handbuch, II, 15.) According to the San Francisco correspondent of the Times, Jan. 31, 1850, one per cent. a day discount was paid there! CompareNorth, Discourse on Trade, 11 seq.
[179-3]Gross interest and net interest corresponding to the difference between gross product and net product.
[179-4]This is the natural rent of capital in contradistinction to the stipulated rent. (Rau, Lehrbuch, I, § 223.)
[179-5]Thus, for instance, a so-called beginner who is conscious of possessing great working capacity, but who possesses for the time being little credit.Tooke, Considerations on the State of the Currency, 1826, distinguishes three kinds of capitalists: a, those who are averse to running any risk whatever or incurring any trouble, or are not able to incur any risk or trouble, for whom every great increase of the sinking fund lowers the rate of interest, and every war loan raises it; b, those who will run no risk, but who are not averse to the trouble of looking after their investments and of endeavoring to obtain a higher rate of interest; c, such as, to obtain a higher rate of interest, unhesitatingly risk something. Borrowers he divides thus: a, those who employ the borrowed capital and their own in such a way as to enable them to meet their obligations and besides to earn a reasonable profit; b, those who need others' capital to make up for the momentary failure of the productiveness of their own; lastly c, unproductive consumers.
[179-6]Wealth of Nat., I, ch. 9. The gross product of English cotton industry was, in 1832, estimated at £32,000,000, viz: £8,000,000 worth of material, £20,000,000 wages, £2,000,000 interest, £2,000,000 undertaker's profits. (Schön, Nat. Oek, 104.)
[179-7]Adam Smith, I, ch. 10, 1: where the reasons why a shop-keeper in a small town apparently gets a larger interest than one in a large city, and yet gets rich less frequently, are developed. The high profit made from industrial secrets, Adam Smith very correctly considers wages (I, ch. 7). Why not also that made by inn-keepers? (I, ch. 10, 1.) When the returns of a business differ according to circumstances which depend on the person of the conductor of the business himself, and may by him be transferred into another business, etc.; when the competition in it is determined by personal agreeableness or disagreeableness, it is evident that the larger returns are to be ascribed rather to the highness of wages than of the rate of interest. The profit also which a second-hand hirer makes is wages. (Riedel, Nat. Oek., 376.)
SECTION CLXXX.
RATE OF INTEREST IN GENERAL.—ITS LEVEL.
Within the limits of the same national-economic territory, the different employments of capital tend uniformly to pay thesame rate of interest.[180-1]If one branch of business were much more profitable than another, it would be to the interest of the owners of capital to allow it to flow into the former and out of the latter, until a level was reached.[180-2]
The most noticeable exception to this rule is only an apparent one. The revenue (Nutzung) derived from the use of capital must not be confounded with its partial restoration.[180-3]Thus, for instance, the rent of a house, if the entire capital is not to be sooner or later consumed entirely, must embrace, besides a payment for the use of the house, a sum sufficient to defray the expenses of repairing it, and even to effect a gradual accumulation of capital for the purpose of rebuilding. The risk attending the investment of capital plays a very large part and must be taken into special consideration. If the risk in a business be so great that ten who engage in it succeed and ten fail, the returns of the former, which are more than double those usual in the country, in reality pay, when the ten who failed are taken into the account, only the rate of interest customary in the country. The risk may depend on the uncertainty of the person to whom the capital is confided;[180-4]on the uncertainty of the branch of business in which it is intended to employ it,[180-5]or on the uncertainty of the commercialsituation in general; but especially may it depend on the uncertainty of the laws.[180-6]The temporary lying idle of capital, for instance, in dwelling houses at bathing places during the winter season, increases the rate of interest much more than it does the rate of wages in the corresponding case of the lying idle of labor; for the reason that there is something pleasurable in the repose of the latter. (Senior.) On the whole, the vanity of mankind has an effect upon the rate of interest similar to that which it has on the rate of wages. (See § 168.) It causes the small chances of loss to be estimated below their real value, and the extraordinary chances of gain above it.[180-7]
[180-1]CompareHarris, Essay on Money and Coins, 13.Per contra, Ganilh, Dictionnaire analyt., 107. According toHermann, Staatsw. Untersuchungen, 147, a product which withdraws an amount of capital =afrom the immediate use of its owner fornmonths must bring in in its price a surplus, over and above the outlay of capital, which would bear the same ratio to the profit from another product which employed an amount of capital =b,mmonths, thatanbears tobm.
[180-2]The class of bankers, etc. which precisely in the higher stages of civilization is one so highly developed, is called upon to adjust these differences.
[180-3]Life annuities and annual revenues,à fonds perdu.
[180-4]Hence, for instance, good men engaged in industrial pursuits who employ borrowed capital productively pay lower interest than idlers who are suspected of desiring only to spend it in dissipation. High house-rent usually paid by proletarians.
[180-5]Thus even inAnderson'stime, it was necessary that the profit of one good year in the whale fishery should compensate for the damage caused by six bad ones. (Origin of Commerce, III, 184.) Slave-traders made their calculations to lose from three to four out of five expeditions. (Athenæum, May 6, 1848) Similarly in smuggling and contraband. High rate of interest in gross adventure trade and bottomry contracts, frequently 30 and even 50 per cent.; in ancient Athens, for a simple voyage to the Black Sea, 36 per cent., while the rate of interest customary in the country was only from 12 to 18 per cent.; the interest paid by rented houses only 8-1/7, and by land leases only 8 per cent. (Bockh, Staatshaushalt der Athener, I, 175 ff.;Isaeus de Hagn., Hered., 293) In Rome, before Justinian's time, maritime interest was unlimited. (Hudtwalker, De Foenore nautico Romano, 1810.) And so in the manufacture of powder, the frequent explosion of the mills has to be taken into account: in France and Austria, 16 per cent. per annum. (Hermann, Principien, 119.) Here belong those new enterprises which, when they succeed, pay a high profit.Thaer, in reference to this insurance premium, says: if the capital employed to purchase a landed estate yields 4 per cent., the inventory (Inventar) should bring in at least 6, and the working capital 12 per cent. (Ration. Landwirthschaft.)
[180-6]Comparesupra, § 91;infra, §§ 184, 188.
[180-7]ThusFriedr. Perthes, inPolitz, Jarhbüchern, Jan., 1829, 42, thinks that the publication of scientific books in Germany, since 1800, caused, on the whole, a loss of capital. In the Canadian lumber trade, also, speculators, in the aggregate, lost more than was gained. Yet the business goes on because of its lottery character. (John Stuart Mill, II, ch. 15, 4.) In lotteries, it is certain that the aggregate of players lose. So too in speculation in English stocks, on account of the costs to be paid the state. In the case of frightful losses, which may afford food for the imagination, the reverse is found. Thus, for instance, in England, fire insurance, stamp duties included, was paid for at a rate five times as high as mathematical calculation showed it to be worth. (Senior, Outlines, 212 ff.) Much here depends naturally on national character, which, in England for instance, or in the United States, is much more adventurous than in many quiet regions of continental Europe.
SECTION CLXXXI.
RULE OF INTEREST IN GENERAL.—CAUSES OF DIFFERENT RATES.
The real exceptions to the above rules are caused by a prevention of the leveling influx and outflow of capital. Among nations in a low stage of civilization, there is wont to be a multitude of legal impediments in this respect. The existence of a difference of classes, of privileged corporations, etc., not only restrains the transition of workmen, but also of capital from one branch of industry to another. But even the mere routine of capitalists, that blind distrust of everything new so frequently characteristic of easily contented men, may produce the same result.[181-1]In the higher stages of civilization, patents for inventions and bank privileges, are causes of a lastingly higher rate of interest than is usual in the country.[181-2]Finally, since in many enterprises only a large amount of capital can be used at all, or at least with most advantage, the aggregation of which from many small sources is ordinarily much more difficult than the division of a large one into small fractional parts; the rate of interest for very small amounts of capital, and especially in the higher stages of civilization, is usually lower than that of large amounts of capital. We need only mention interest paid by savings-bank investments.[181-3]
If circulating capital has been changed into fixed capital, its yield will depend upon the price of the particular goods in the production of which it has been made to serve. Comparedwith the cost of restoration of fixed capital, this yield may, in a favorable case, constitute an extraordinarily high rate of interest, in an unfavorable a very low one; and the former of these two extremes has a greater chance of being realized, in proportion as it is difficult to multiply fixed capital of the same kind; the latter, the more exclusively it can be employed in only one kind of production, and the longer time it takes to be used up by wear.[181-4]When fixed and circulating capital coöperate in production, the latter, because it can be more easily withdrawn, but also more easily replaced, first takes out its own profit, that is the profit usual in the country and leaves all the rest to the former. When fixed capital is sold, practically no attention is paid to what it originally cost. The purchaser pays only for the prospective revenue it will yield, which he capitalizes at the rate of interest usual in the country. The seller henceforth looksupon his gain as an accretion to capital, his loss as a diminution of capital, and no longer as high or low interest.[181-5]That accretion might be considered the wages, paid once for all, for the intelligent labor which governed the original investment of the capital, andvice versa.
[181-1]Thus the rate of interest in the Schappach valley remained for a long time much lower than in the vicinity, for the reason that the peasantry who had grown rich through the lumber trade possessed notwithstanding little of the spirit of enterprise. (Rau, Lehrbuch, I, § 233.)
[181-2]Here the law produces a species of artificial fixation.
[181-3]Von Mangoldt, Unternehmergewinn, 150.
[181-4]In other words, the more fixed they are. Thus, for instance, dwelling houses in declining cities, canals, etc. which have been supplanted by better commercial routes; or again, the shafts and stulms of a mine which has been abandoned. When Versailles ceased to be a royal residence, the value of inhabited houses sank to one-fourth of what it had been. (ZinkeiseninRaumer'shistor. Taschenbuch, 1837, 426.) A rate of interest greater than that usual in a country is seldom found where freedom of competition prevails, since it is necessary there to distinguish between rent and interest on capital. When in an open city, the capital employed in the construction of dwelling housesdetractis detrahendispays 8 per cent., while the rate of interest customary in the country is only 4 per cent., the supply of houses will grow continually greater. Only the difficulties in the way of transferring capital from one business to another could here retard the leveling process, which where the political prospect for instance was bad, might last a long time—one of the principal reasons why, in 1848, the rent of houses declined much less than their purchase prices. The conjuncture was not serious enough to prevent the increase of population; but it entirely stopped the building of new houses. On the other hand, a bridge or railroad company may maintain a high rate of profit because competition cannot exist in the face of the great expense such enterprises require; but especially because the party who has here the advantage of priority may lower the price of transportation to such a point as to entirely discourage his rival. CompareHermann, Staatsw. Untersuchungen, 145 ff. Interesting example of the London gas and water companies inSenior, Outlines, 101.
[181-5]Thus, for instance, Leipzig-Dresden railroad stock cost originally 100 thalers per share, and was taken at that rate. The yearly dividends amounted in 1856 to 13 thalers; that is, 13 per cent. for the original stockholders. But a person who on the 30th September, 1856, paid 285 thalers for a share, received but an interest of 4½ per cent. on his capital. It is characteristic, howSerra, Sulle Cause, etc., 1613, I, 9, calls the high and the low rate of interestprezzo basso e alto delle entrate.
SECTION CLXXXII.
VARIATIONS OF THE RATE OF DISCOUNT.
The fact that in commerce, etc., the rate of interest on capital loaned for short periods of time (discount) is subject to great fluctuations, while the mortgage rate of interest, for instance, remains the same throughout, depends on similar causes.[182-1]Yet there are contingencies in trade which, when taken immediate advantage of, promise enormous profits, butwhich may disappear within a month; risks of the most dangerous kind which can be conjured only by the immediate aid of capital. These are both sufficient grounds of a high rate of interest. Again, there are times of the profoundest calm in the commercial world, during which capitalists are perfectly willing to make loans at a low rate of interest, provided they are sure to be able to get back their capital with the first favorable breeze that blows. Agriculture is too immovable to come opportunely to the assistance of capitalists, here as a receiver and there as a loaner of capital. As the cycle of its operations is gone through usually only in a series of years, sudden influxes or outflows of capital would cause it the greatest injury.[182-2]
[182-1]Nebenius, Oeff. Credit, I, 74 ff. Thus, Hamburg discount towards the end of the last century fluctuated between 2½ and 12 per cent., while the capital invested in agriculture brought an interest almost invariably of 4 per cent. (Büsch, Geldumlauf, VI, 4, 19.) At the same time, in Pennsylvania, the usual rate of interest was 6 per cent. per annum, and the rate of discount not unfrequently from 2 to 3 per cent. a month. (EbelingGeschichte und Erdbeschreib. von Amerika, IV, 442.) During the crisis of 1837, it happened that ¼ per cent. a day was paid. (Rau, Archiv. N. F. IV, 382.) In the Prussian ports, during the crisis of 1810, it is said that in July the rate of discount was 2½ per cent. a month. (Tooke, Thoughts and Details, I, 111.) In Hamburg and Frankfort the rate of discount rose in the spring of 1848, but declined in June to 2; until December it was 1¼, until the summer of 1849, ¾ per cent. (Tüb. Zeitschr., 1856, 95.) Rate of discount in France, about 1798, at least 2 per cent. a month. (Büsch, loc. cit., IV, 52.) Half a year previous, capital employed in the purchase of land paid an interest of from 3 to 4 per cent. Legal interest was 5 per cent.; discount, at most, 6 per cent.; in very prosperous times 8-9, per cent. (Forbonnais, Recherches et Considérations, I, 372.)
[182-2]Remarkable case inCicero'stime in which bribery, carried on on a large scale, raised the rate of discount from 4 to 8 per cent.Ciceroad. Quint. M, 15; ad. Att. IV, 15.
SECTION CLXXXIII.
EFFECT OF INCREASED DEMAND FOR LOANS.
The price paid for the use of capital naturally depends on the relation between the supply and demand, and especially of circulating capital. The increase of the supply need no more unconditionally lower the rate of interest than the price of any other commodity. If 50 hunters kill 1,000 deer yearly, and give 100 deer per annum as interest to the capitalists who provided them with ammunition and rifles, a second capitalist with an equal number of rifles and an equal amount of ammunition may appear on the scene. If now 2,000 deer a year are killed, the rate of profit of the capitalists will probably remain the same. But if the woods are not rich enough in game for this, or the hunters not numerous enough, too indolent, or too easily satisfied, the rate of interest falls.[183-1]
The difficulties in the way of the desired increase of capital are here of great importance. The smaller the surplus over and above their absolutely necessary wants, which the people produce, the less their tendency to make savings, the less the inclination to capitalization; and the less the security afforded by the law is, the higher must the rate of interest be to induce people to face these difficulties. We may very well transfer the idea of cost of production to this condition.[183-2]
The demand for capital depends, on the one hand, on the number and the solvability of borrowers, especially of non-capitalists like landowners and workmen; and, on the other hand, on the value in use of the capital itself. Hence the growth of population is, other circumstances being the same, a means to raise the rate of interest; because it infallibly increases the competition of borrowers of capital, even if the increased rate must take place at the expense of wages. The solvability or paying capacity of the land-owning class as contrasted with the capitalists can, in the last analysis, depend only on the extent and fertility of their lands and on the quality of their agricultural husbandry; the solvability or paying capacity of the working class, only on their skill and industry. Where these have grown, an increase of the rate of interest may be found in connection with an absolute growth of the rate of wages and of rent, because the aggregate income of the nation has become greater.
The value in use of capital, which is more homogeneous in proportion as it has the character of circulating capital (res fungibiles) is, in most instances, synonymous with the skill of the working class, and the richness of the natural forces connected with it. The deciding element, therefore, is the yield of the least productive investment of capital which must be made to employ all the capital seeking employment. This least productive employment of capital mustdetermine the rate of interest customary in a country precisely as cost of production on the most unfavorable land determines the price of corn (§§ 110, 150), and as the result of the work of the laborer last employed does the rate of wages. (§ 165.)
What portion of the total national income, after deduction is made of rent, shall go to the capitalists and what portion to the working class, will depend mainly on whether the capitalists compete more greedily for labor or the laboring classes for capital.[183-3]If, for instance, capital should increase more rapidly than population, there must be a relative increase in wages, andvice versa.[183-4]This is true especially of that peculiarkind of higher wages which we shall (§ 145, ff.) designate as the "undertaker's profit." The smaller the number of persons engaged in enterprises is, in comparison with the number of retired persons who live on their rents, incomes, etc., the smaller is the portion of the so-called net profit of enterprise the latter must be satisfied with in the shape of interest.[183-5]
[183-1]It is one ofRicardo's(Principles, ch. 21) chief merits, that he demonstrated the groundlessness of the opinion that the mere increase of capital must, on account of the competition of capitalists, lower the rate of interest, as is assumed byAdam Smith, I, ch. 9,J. B. Say, Traité, II, 8, and others. Compare also,John Stuart Mill, Principles, IV, ch. IV, 1.
[183-2]Storch, Handbuch, II, 20.
[183-3]Frequent withdrawals of capital must, other circumstances being the same, temporarily raise the rate of interest. In the long run, however, the question is decided by this: whether public opinion considers labor a greater sacrifice than the saving of capital. CompareRoesler, loc. cit., 8.
[183-4]CompareHermann, Staatsw. Unters., 240 ff. Very much depends on whether the new increased consumption (of workmen when wages are rising, of capitalists when wages are declining) is of goods which are mainly the product of large capital, large factories, etc., or chiefly of common labor, (von Mangoldt, Grundriss, 155 seq.) WhenAdam Smithsuggests that the relation between wages and the profit of capital is determined by this: whether there is a market demand for more work or more commodities, for more "work to be done" or "work done" (I, ch. 7), he is, spite of appearances, very unsatisfactory.Malthusdistinguishes a restrictive principle of the rate of interest, viz.: the return made to the least productive agricultural capital, and a regulative one, viz.: the reciprocal relation between demand and supply of capital and labor. (Principles, ch. 5, sec. 4.)Ricardo, ch. 6, makes the profit of capital at all times and in every country depend on the quantity of labor which it is necessary to expend on the land which pays no rent, in order to satisfy the wants of workmen—a very correct theory.
OnlyRicardohimself (ch. 21) and his school postulate altogether too unconditionally that their wants would always coincide with the minimum of maintenance or support. Thus, for instance,J. S. Mill, Principles, IV, ch. 3, 4. However,Millinstead ofRicardo's"wages" employs the better expression, "cost of labor."Seniorteaches that the distribution of the aggregate result between laborers and capitalists depends on the anterior course of both classes: on the value of the capital previously employed by capitalists to produce the means of satisfying working men's wants, and on the number of workmen which the previous laboring population have brought into existence. (Outlines, 188 ff.) Concerningvon Thünen'svain attempt at a general formula, seesupra, § 173.Fourier'sidea that 5/12[TN 19]of the product should be distributed among labor, 3/12 among talent, and 4/12 among capital, is entirely baseless. (N. Monde, 309 ff.)Considérant, Destinée sociale, 192 ff. As early a writer asH. Boden, Fürstliche Machtkunst, 1700 and 1740, 42, came strikingly near the truth. According to him, a low rate of interest is produced by four circumstances: surplus capital, a dearth of landed estates, a want of credit and exact justice, and lastly, the heavy taxation of capital.
[183-5]Thus, in the last century, Spanish capitalists loaned capital readily to sure commercial companies, at from 2 to 3 per cent. per annum. (Bourgoing,Tableau de l'Espagne, I, 248.) The contemporary low rates of interest in Hannover,Büsch, Geldumlauf, VI, 4, 12, endeavors to explain by the absence of opportunities for investment, as no one dared to loan to any extent on fiefs or on the land of the peasantry, and because there was no law governing bills of exchange, etc.
SECTION CLXXXIV.
HISTORY OF THE RATE OF INTEREST.
Among barbarous nations, the loaning of capital is wont to happen so seldom, and to be limited so strictly to near relations, that it does not yet occur to any one to stipulate for a regular compensation therefor.[184-1]But, however, when they pass from this state to interest proper, the rate must be, of course, very high.[184-2]The premium for insurance is here verygreat, the possibility and inclination to accumulate capital exceedingly small. Even of the existing supply of capital, agreat part remains idle, because the faculty and the institutions necessary to concentrate it and permit it to flow are wanting. (§ 43.) The unskillfulness of labor is more than overcome by the excess of fertile and naturally productive land, of rich sites still unoccupied, the cream of which, as it were, needs only to be culled. Population is indeed sparse, but the usually prevailing absence of freedom of the lower classes prevents wages claiming the full benefit of competition.[184-3]This last circumstance is especially important.[184-4]For a given amount of the national income and of rent, every depression of wages must obviously raise the rate of interest, and every enhancement of wages lower it.[184-5]
[184-1]Tacit., Germ., 26;Marculf, Form., 18, 25 ff., 35;Savigny, Ueber das altrömische Schuldrecht, in the transactions of the Berlin Academy, 1833, 78 seq.
[184-2]According to the Lex Visig., V, 5, § 8, the maximum rate of interest allowed on loans of money was 12½ per cent., and on otherres fungibiles, 50 per cent. From the 12th to the 14th century, the Lombards and the Jews in France and England took generally (?) 20 per cent. a year. (Anderson, Origin of Commerce,a., 1300.) Philip V. of France, in 1311, fixed the rate of interest at the fairs in Champagne at 15 per cent. (a species of discount) at most, and at a maximum everywhere of 20 per cent. (Ordonnances de la France, I, 484, 494, 508.) The legal rate of interest in Verona, in 1288, was fixed at a maximum of 12½ per cent.; in Modena, 1270, at 20 per cent. (Muratori, Antiquitt. Ital., I, 894); in Bresica, 1268, at 10 per cent. (v. Raumer, Geschichte der Hohenstaufen, V, 395 ff.) Frederick II. wished to reduce it to 10 per cent. for Naples, but failed. (Bianchini, Storia delle Finanze di Nap., I, 299.) The tables ofCibrario, Economia polit. del medio Evo., III, 380, for 1306-1399, show for upper Italy interest to have been at 20, 15, 14, 10, and also 5½ per cent. About 1430 the Florentines, in order to moderate the enormously high rate of interest, called Jews to their city, and the latter promised not to charge over 20 per cent. (Cibrario, III, 318.) In the Rhine country, the Kowerzens, during the 14th century, took from 60 to 70 per cent., for which they had, however, to pay a heavy tax to the archbishop. (Bodmann, Rh. Alterthümer, 716.) Of Jewish maximum rates of interest, in the 14th and 15th centuries, seeStobbe, Juden in Deutschland während des M. Alters, 103, 110, 234 seq.;Hegel, Strassb. Chr., II, 977, 984.
The rate of interest usual in these countries must not however be calculated from the data furnished by these usurious rates and fixed rates of interest, simply. In Germany, the rate of interest promised by princes in the 13th and 14th centuries was usually 10 per cent. The Frankfort municipal loans made by Jews in the 14th century bore interest at the rate of 9, 11-2/3, 13, 18, 26, and even 45 per cent. (Kriegk, F.'s Bürgerzwiste, 343, 539.) The rate of interest in the purchase of annuities continually declined between 1300 and 1500, especially in the time of the emancipation of manual laborers. Old Base documents give, between 1284 and 1580, as the highest rate, 11-3/9, and as the least, 5 per cent. The latter became more and more usual later, especially in the sale of house-rents (Hauszins), so that in 1841 all annuities (Renten) might be canceled by a payment of their amounts multiplied by 20. Until the beginning of the 15th century, in the city, the rule was 6 to 7 per cent.; outside of it, 8 to 10 per cent. (Arnold, Geschichte des Eigenthums in den deutschen Städten, 222 seq., 227 seq.) According to the Bremen Jahrb. of 1784, 164 seq., the rate of interest in the case ofHandfesten,in 1295, = 10 per cent., gradually sank: in the 15th century it was never over 6-2/3; after 1450, generally 5; in 1511 only 4 per cent. In 1441 ff., in Augsburg, people were satisfied with a business profit of 7-2/3 per cent., while the usual rate of interest paid by house-rent, etc. was 5 per cent. (Hegel, Augsb. Chr., II, 134 seq., 157.) Handsome tables in the rate of interest in the purchase of annuities for all Germany, from 1215 to 1620, give as the rule, 7 to 10, scarcely ever over 15 per cent., inM. Neumann, Geschichte des Wuchers, 266 ff. For the upper Rhine, compareMone'sZeitschr., 26 ff. Among the Fathers of the councils of Constance and Basil 5 per cent. was considered equitable. CompareF. Hammerlin, 1389-1457, De Emtione et Venditione unius pro viginti. Russian interest at 40 per cent., according to the laws of Jaroslaw (ob. 1054 after Christ).Karamsin, Russ. Gesch., II, 47.
[184-3]The high rate of interest in many countries at present may be thus accounted for. In the United States, during the last century, less than 8 per cent. was seldom paid. (Ebeling, III, 152.) According toM. Chevalier, Lettres sur l'Amérique du Nord, 1836, I, 59, the rate of interest in Pennsylvania was 6, in New York, 7, in most of the slave states, 8-9; in Louisiana, 10 per cent. In South Australia (1850) it was, with full security, 15-20 per cent. (Reimer, Südaustralien, 39.) In the West Indies, about the end of the last century, a strong negro might produce a revenue equal to one-fourth of his capital value. (B. Edwards, History of the British West Indies, II, 129.) In Brazil, the lowest rate of interest was at 9 per cent., and 12-18 per cent. was nothing unusual. (Wappäus, M. and S. Amerika, 1871, 1413.) In Cuba, for the government 10, for private parties, 12 to 16 per cent. (Humboldt, Cuba, I, 231.) In Potosi, in 1826, Temple got 30 per cent. interest on chattel mortgage, and from 2 to 4 per cent. a month was offered, while the rate of interest in Buenos Ayres amounted to 15 per cent. per annum. (Temple, Travels, II, 217.) In Russia,Storch, Handbuch,[TN 20]I, 262, speaks of 8-10 per cent. According tov. Haxthausen, it was, in the interior, never less than from 8 to 12 per cent. per annum; at Kiew and Odessa, 1¼, 1½ and 2 per cent. per month. (Studien, I, 58, 467; II, 495.) InGreece, the rate of interest on first mortgages is at least 10, on a second, 15-18 per cent. (Ausland, 1843, No. 82.)
[184-4]Nebenius, Oeff. Credit, I, 55.
[184-5]Only in this particular instance is whatRicardoso frequently insists on true, viz: that the rate of wages can be increased only at the expense of the profit of capital, andvice versa.
SECTION CLXXXV.
HISTORY OF THE RATE OF INTEREST.—INFLUENCE OF AN ADVANCE IN CIVILIZATION.
With an advance in civilization, the rate of interest is wont to decline.[185-1][185-2]One of the chief causes of this phenomenon isthe necessity, as population and consumption increase, to employ capital in the fertilization of less productive land, and in less profitable investments.[185-3]An increase in the stock of money does not necessarily depreciate the rate of interest. If this increase comes in connection with a corresponding depreciation of the individual pieces of metal, it cannot be said that the nation has thereby become richer in capital. All that would be required in such case is only a greater number of pounds of gold or silver, or more paper bills to represent the same capital.[185-4]Only during the transition-period, during which the depreciation of money is still incomplete, is the rate of interest wont to be lowered; and all the more, since loaned capital is generally offered and sought after in the form of money.[185-5][185-6]
The decline of the rate of interest generally shows itself earliest in the large cities, which are everywhere the national organ, in which the good and bad symptoms of later civilization may be soonest observed.[185-7]
Moreover, the condition of capitalists is not necessarily made worse by a decline of the rate of interest. It is possible that, for a long time, the increase of capital should continue more rapid than the decrease of interest for each individual. (If, indeed, the aggregate interest of capital should become absolutely smaller, there is always a pleasant remedy available, viz.: to consume a part of the capital!) But, however, a decline of the rate of interest is nearly always followed by increased activity on the part of capitalists; and they come tothe resolve to retire later to enjoy the results of their previous labors. In Holland, after the time of Louis XIV., no branch of business was wont to pay more than from two to three per cent. In the case of the purchase of land, no one calculated on more than two per cent. Hence it was scarcely possible for small capitalists there to live on their interest; and the good sense of the people so well adapted itself to this state of things that to live in leisure on one's rents was considered a not entirely honorable mode of existence.[185-8]The lower the rate of interest, the larger, in highly civilized countries, is the stock on hand of cash apt to become, for the reason that business men then hope to gain more by the advantages of cash payments than by the saving of interest.[185-9][185-10]
[185-1]Proudhon'sidea, that this decline might at last bring about a total abolition of interest, is based on the same error as this other: that since a man may keep diminishing his per diem quantum of food, he might finally dispense with food altogether.Proudhon'sBanque du Peuple—People's Bank—which, by gradually diminishing the interest on its loans to the minimum cost of its administration, should compel other capitalists to follow its example.
[185-2]Thus, in England, by virtue of 37 Henry III., c. 9, the legal interest was = 10 per cent.; by 21 James I, c. 17 = 8; about 1651 = 6 per cent. (confirmed in 1660); by 12 Anne, ch. 16 = 5 per cent. In the time of George II., where the security was good, only 3 per cent. was, as a rule, paid. In France, the legal rate of interest, at the beginning of the 16th century, was 1/10 of the capital; after 1657, 1/12; 1601 (Sully), 1/16; 1634 (Richelieu), 1/18; 1665 (Colbert), 1/20. CompareForbonnaisRecherches et Considérations, I, 48, 225, 385 ff. It continued at this rate of 5 per cent. with short interruptions until the revolution. (Warnkönig, Franz. Staats. und Rechtsgeschichte, II, 588 seq.)
The rates of interest in Russia, in the 16th century, had already declined to 20 per cent. (Herberstein, Reise, 41 ff.;Karamsin, Russ. Geschichte, VII, 169.) In Holland, in 1623, it was estimated that land purchases paid 3 per cent.; hypothecations, 4 to 6; deposits, 5 to 6; a flourishing business, 10 per cent. CompareUsselinxinLaspeyres, Geschichte der volkswirthschaftl. Anschauungen der Niederländer, 76. About 1660, the rate of interest usual in Italy and Holland was at most 3 per cent. (in war times, 4); in France, 7; in Scotland, 10; in Ireland, 12; in Spain, 10 to 12; in Turkey, 20 per cent. (Sir J. Child, Discourse on Trade, French translation, 75 ff.) Side by side with 6 per cent. as the rate of interest in England, it was (a little later) 10 in Ireland.Petty, Political Anatomy of Ireland, 74.
The same course of things is to be observed in ancient times. InSolon'stime, and again in that ofLysias, it was 18 per cent. (Böckh, Staatshaushalt der Athener, I, 143 ff.) I am of opinion that the rate of interest declined during this long interval, but rose again in consequence of the Peloponnesian[TN 21]war. Among friends, in the time ofDemosthenes, 10 per cent. (adv. Onetor., I, 386.)Aristotle, Rhet., III, 10, mentions 12 per cent., whichAeschines, adv. Ctes., 104, andDemosthenes, adv. Aph., I, 820, 824, call low. The rate of commercial interest in Egypt (146 before Christ) seems to have been 12 per cent. per annum. (Letronne, Recompense promise à celui, etc., 1833, 7.) Contemporaneously in Rome, a similar rate of interest must have been considered usurious. (Cicero, ad. Att., I, 12.) Under the emperorClaudius, 6 per cent. (Columella, De Re rust., III, 3.)Justinianallowedto personae illustres4 per cent. per annum. (L. 26 Cod., IV, 32.)
[185-3]A Huron with his bow and arrow kills 12 pieces of game; the European, with a much better capital, his rifle, only 5. Comparev. Schözer, Anfangsgründe, I, 28.Mallthus, Principles, ch. 5. According toRicardo, ch. 6, the decline of the rate of interest because of the necessity of carrying on agriculture under harder conditions, must make all capital of which raw material forms a part more valuable; while the possessors of money-capital particularly find no indemnification.Wakefield, England and America, 1853, accounts for it by saying that production, besides the coöperation of capital and labor, needs "a field of employment;" andBastiat, Harmonies, ch. 5, 13, by saying that with the advance of civilization, the results of former services lose in value as compared with later ones, because performed under less favorable circumstances.
[185-4]D. Hume, Discourses No. 4 On Interest. Per contra, seeLocke, Considerations of the Consequences of the Lowering of Interest;Law, sur l'Usage des Monaies, 1697 (Daire); andMontesquieu, Esprit des Lois XXII, 6.Cantillondraws a very nice distinction: If the increased amountofmoney in a state comes into the hands of loaners, it will decrease the current rate by increasing the number of loaners; but if it comes into the hands of consumers, the rate rises, because now the demandforcommodities is so much greater. (Nature du Commerce, 284.)
[185-5]The reviews in the Göttingen G. Anz., 1777, and ofvon Iselin, in the Ephemeriden der Menschheit, II, 170 ff., 177, questionAdam Smith's(Wealth of Nat., II, ch. 4) entirely too positive denial of the influence of the American production of gold and silver on the diminution of the rate of interest, a view which was shared also byTurgot, Form. et Distr., § 78. See a beautiful comparison between a declining of the prices of the currency which, promotes production, with the phenomena attending the growth of a tree, inSchäffle, N. Oek., II, Aufl., 249.
[185-6]Thus the rate of interest in Rome fell from 12 to 4 per cent. when Octavian suddenly threw the treasures of conquered Egypt upon the market, and the price of commodities only doubled. When later commerce had divided this amount of money among the provinces, it rose again. (Sueton., Oct., 41;Dio C., LI, 17, 21; Oros, IV, 19.)Law'semissions of paper, in colossal amounts, depressed the rate of interest to 1¼ per cent. (Dutot, Réflexions, 990—Daire.) But as soon as the paper money had lost its value, the former condition returned. Similar observations in Rio de Janeiro:SpixundMartius, Reise, I, 131.
[185-7]While in Paris the capital safely invested paid 2½ to 3 per cent., 57 out of 61conseils générauxdeclared, in 1845, that the rate of interest on hypothecations, in their departments, was always over 5 per cent.; 17 estimated it at an average of from 6 to 7 per cent.; 12 at from 7 to 10; some said 12 and 15, and even 22 per cent. in the case of small sums loaned for a short time. (Chegarny, Rapport au Nom de la Commission de la Réforme hypoth., 29 Avril, 1851.) In Russia, at the beginning of this century, the rate of interest in the Baltic provinces was 6 per cent.; in Moscow, 10; in Taurien, 25; in Astracan, 30 per cent. (v. Schlözer, Anfangsgründe I, 102.) In 1750, in Naples, the rate of interest was from 3 to 5 per cent., in the provinces from 7 to 9 per cent. (Guliani, della Moneta, IV, 1.) In Trajan's time in Rome, 6; in Bithynia, 12 per cent. (Plin., Epist. VII, 18; X, 62.)
[185-8]DelacourtAanwysing, 1669, I, 7.Temple, Observations on the U. Provinces, ch. 6, Works L. 1854. EvenDescartessays of Holland'subi nemo non exercet mercaturam. Compare per contra,H. Grotius, Jus Belli et Pacis, II, 12, 22. Very large capitalists, inSmith'stime, certainly lived generally on the interest of their money: Richesse de Hollande, II, 172. In England, at the present day, likewise, a vast number of persons who live on the interest of their money, occasionally take part in the speculation in commodities; which explains why so-called commercial crises are incomparably more extensive there, and reach incomparably deeper, than in Germany. Similarly, according toConring, De Commercii, 1666, c. 36, in Venice and Genoa.
[185-9]Hence the larger cash balances in England at the present day, which, however, are not kept in the form of coin, but of bank notes and bankers' deposits.
[185-10]As to how every frugal capitalist works to the injury of capitalists as a class, but to his own advantage, by lowering the rate of interest and increasing the rate of wages, seeSenior, Outlines, 188 ff.
SECTION CLXXXVI.
HISTORY OF THE RATE OF INTEREST.—CAUSES OF A HIGH RATE IN THRIVING COMMERCIAL NATIONS.
There are, however, even where a people's economy is in a flourishing condition, many obstacles which cause the decline of the rate of interest to take a retrogressive course, or which at least may delay it for a time.
To this category belong all the modifications of a nation's economy alluded to in § 183.[186-1]Among them, therefore, is every extension of the limits of productive land. Let us suppose a nation which, its capital and labor remaining the same in every respect, should suddenly double its territory. The less productive places where investments were made in the old province are now abandoned, and labor and capital emigrate to the new. The result is, of course, an increase of the aggregate national income, and, at the same time, a decrease of rent. (§ 157.) Hence, the interest on capital and the wages of labor, taken together, must greatly increase. Which of these two branches shall profit most and longest by the increase will depend upon whether capital or the number of workmen increases most rapidly.[186-2]A similar effect must be produced when, by changes or modifications in the commercial situation, in the tariff, etc., a nation is enabled to obtain the means of subsistence at cheaper rates from more fertile and less settled countries.[186-3]
The introduction of better methods of production has very different immediate consequences, according as these methods affect the commodities which minister to the wants peculiar to workmen as a class, or do not. Let us suppose, as a first case, that the cost of ordinary clothing is reduced one half by reason of newly discovered material, better machines, etc. As in the case of the whole people, so also in that of the owners of capital as consumers, there is, in consequence, an addition to their enjoyment of life. Their interest as well as their capital, compared with clothing material, would have become more valuable. But the relation between capital and interest, that is, the rate of interest, could not be directly changed. (Compareinfra, note 3.) Only when the working class employ their materially increased wages to increase population; when in consequence hereof, their wages, estimated in money, again decline beyond what it was before; when, therefore, the price of a given quantity of labor declines, does the rate of interest rise, although a portion of that which the workmen have lost may be added to rent on account of the increased population?[186-4][186-5]If the applicability of the new method of production is confined to articles of luxury used by the upper classes, for instance to fine lace, the rate of interestusual in the country will be affected thereby only to the extent that through the medium of commerce such products are exchanged with foreign nations against commodities consumed by the working classes. But there are very few improvements in production which have not led to a greater cheapness of those things which satisfy the wants of the working class; and this is especially clear in the improvements in the means of transportation so usual in our day.
However, the increase of fixed capital, such as machines, railroads, etc., once they are completed, may, at first, cause a depression of the rate of wages, as well as an enhancement of the rate of interest; the former from the fact that a number of workmen is thereby, at least temporarily, thrown out of employment; the latter because the conversion of so much circulating into fixed capital must diminish the supply of the former.[186-6]
A second class of obstacles consists in the diminution of the supply of capital. War, for instance, always causes such a destruction of capital, and at the same time for the most part renders the reproduction of capital more difficult to such a degree that the rate of interest is wont to rise greatly.[186-7]Something similar is true of other great catastrophes and of extravagance on a large scale.[186-8]Every state loan, whether intendedfor direct consumption or to procure capital for use (Nutzkapitalien), decreases the supply of circulating capital which most directly determines the market rate of interest.[186-9][186-10]
[186-1]Wolkoffvery well shows that the economic progress of mankind is effected partly by the improvement of production, and partly by saving. The former increases the rate of interest, the latter lowers it. (Lectures, 182, 189. Comparesupra, § 45.)
[186-2]Thus the rate of interest in Russia rose, after Catherine II. had conquered the provinces situated on the Black Sea. (Storch, Handbuch, II, 34.) The same is still more strikingly apparent in the judicious planting of agricultural colonies.
[186-3]Abolition of the English corn laws! Foreign commerce when very advantageous, always adds to the well-being of the people; to the rate of interest, however, only to the extent that articles which are calculated to satisfy the wants of the working class become cheaper in consequence; and this in turn lowers the rate of wages. Let us suppose that a country had hitherto purchased yearly 10,000 barrels of wine for $1,000,000. It might now happen that, in consequence of an advantageous commercial treaty, for instance, the 10,000 barrels might be obtained for $500,000. If, after this, wine-drinkers want to spend $1,000,000 for wine as they did before, they of course double their consumption of wine, but the rate of interest remains unchanged. If, on the other hand, they leave their consumption of wine where it was before and apply the saved half million to effect an increased demand for home products, the capital required for this production is set free at the same time. Hence, the relation between the supply and demand for capital has not changed, abstraction made of certain difficulties in the transaction. CompareRicardo, Principles, ch. 7, rectifyingAdam Smith, Wealth of Nat., I, ch. 9.
[186-4]An increase in the rate of interest caused by a diminution in the rate of wages does not last long. Capital now increases more rapidly, and the increase is accompanied by an increased demand for labor. If, in the mean time, workmen have become accustomed to a lower standard of life, the increasing wages are followed by an increase of population: then the necessity of having recourse to the cultivation of land of a worse quality is an additional cause of a decreasing rate of interest. (Edinb. Rev., March, 1824, 26.)