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    Book II: Chapter 4

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    The stock which is lent at interest is always considered as a capital by the
    lender. He expects that in due time it is to be restored to him, and that,
    in the mean time, the borrower is to pay him a certain annual rent for the
    use of it. The borrower may use it either as a capital, or as a stock
    reserved for immediate consumption. If he uses it as a capital, he employs
    it in the maintenance of productive labourers, who reproduce the value, with
    a profit. He can, in this case, both restore the capital, and pay the
    interest, without alienating or encroaching upon any other source of
    revenue. If he uses it as a stock reserved for immediate consumption, he
    acts the part of a prodigal, and dissipates, in the maintenance of the idle,
    what was destined for the support of the industrious. He can, in this case,
    neither restore the capital nor pay the interest, without either alienating
    or encroaching upon some other source of revenue, such as the property or
    the rent of land.

    The stock which is lent at interest is, no doubt, occasionally employed in
    both these ways, but in the former much more frequently than in the latter.
    The man who borrows in order to spend will soon be ruined, and he who lends
    to him will generally have occasion to repent of his folly. To borrow or to
    lend for such a purpose, therefore, is, in all cases, where gross usury is
    out of the question, contrary to the interest of both parties; and though it
    no doubt happens sometimes, that people do both the one and the other, yet,
    from the regard that all men have for their own interest, we may be assured,
    that it cannot happen so very frequently as we are sometimes apt to imagine.
    Ask any rich man of common prudence, to which of the two sorts of people he
    has lent the greater part of his stock, to those who he thinks will employ
    it profitably, or to those who will spend it idly, and he will laugh at you
    for proposing the question. Even among borrowers, therefore, not the people
    in the world most famous for frugality, the number of the frugal and
    industrious surpasses considerably that of the prodigal and idle.

    The only people to whom stock is commonly lent, without their being expected
    to make any very profitable use of it, are country gentlemen, who borrow
    upon mortgage. Even they scarce ever borrow merely to spend. What they
    borrow, one may say, is commonly spent before they borrow it. They have
    generally consumed so great a quantity of goods, advanced to them upon
    credit by shop-keepers and tradesmen, that they find it necessary to borrow
    at interest, in order to pay the debt. The capital borrowed replaces the
    capitals of those shop-keepers and tradesmen which the country gentlemen
    could not have replaced from the rents of their estates. It is not properly
    borrowed in order to be spent, but in order to replace a capital which had
    been spent before.

    Almost all loans at interest are made in money, either of paper, or of gold
    and silver ; but what the borrower really wants, and what the lender readily
    supplies him with, is not the money, but the money's worth, or the goods
    which it can purchase. If he wants it as a stock for immediate consumption,
    it is those goods only which he can place in that stock. If he wants it as a
    capital for employing industry, it is from those goods only that the
    industrious can be furnished with the tools, materials, and maintenance
    necessary for carrying on their work. By means of the loan, the lender, as
    it were, assigns to the borrower his right to a certain portion of the
    annual produce of the land and labour of the country, to be employed as the
    borrower pleases.

    The quantity of stock, therefore, or, as it is commonly expressed, of money,
    which can be lent at interest in any country, is not regulated by the value
    of the money, whether paper or coin, which serves as the instrument of the
    different loans made in that country, but by the value of that part of the
    annual produce, which, as soon as it comes either from the ground, or from
    the hands of the productive labourers, is destined, not only for replacing a
    capital, but such a capital as the owner does not care to be at the trouble
    of employing himself. As such capitals are commonly lent out and paid back
    in money, they constitute what is called the monied interest. It is
    distinct, not only from the landed, but from the trading and manufacturing
    interests, as in these last the owners themselves employ their own capitals.
    Even in the monied interest, however, the money is, as it were, but the deed
    of assignment, which conveys from one hand to another those capitals which
    the owners do not care to employ themselves. Those capitals may be greater,
    in almost any proportion, than the amount of the money which serves as the
    instrument of their conveyance; the same pieces of money successively
    serving for many different loans, as well as for many different purchases.
    A, for example, lends to W £1000, with which W immediately purchases of B
    £1000 worth of goods. B having no occasion for the money himself, lends the
    identical pieces to X, with which X immediately purchases of C another £1000
    worth of goods. C, in the same manner, and for the same reason, lends them
    to Y, who again purchases goods with them of D. In this manner, the same
    pieces, either of coin or of paper, may, in the course of a few days, serve
    as the Instrument of three different loans, and of three different
    purchases, each of which is, in value, equal to the whole amount of those
    pieces. What the three monied men, A, B, and C, assigned to the three
    borrowers, W, X, and Y, is the power of making those purchases. In this
    power consist both the value and the use of the loans. The stock lent by the
    three monied men is equal to the value of the goods which can be purchased
    with it, and is three times greater than that of the money with which the
    purchases are made. Those loans, however, may be all perfectly well secured,
    the goods purchased by the different debtors being so employed as, in due
    time, to bring back, with a profit, an equal value either of coin or of
    paper. And as the same pieces of money can thus serve as the instrument of
    different loans to three, or, for the same reason, to thirty times their
    value, so they may likewise successively serve as the instrument of

    A capital lent at interest may, in this manner, be considered as an
    assignment, from the lender to the borrower, of a certain considerable
    portion of the annual produce, upon condition that the burrower in return
    shall, during the continuance of the loan, annually assign to the lender a
    small portion, called the interest ; and, at the end of it, a portion
    equally considerable with that which had originally been assigned to him,
    called the repayment. Though money, either coin or paper, serves generally
    as the deed of assignment, both to the smaller and to the more considerable
    portion, it is itself altogether different from what is assigned by it.

    In proportion as that share of the annual produce which, as soon as it comes
    either from the ground, or from the hands of the productive labourers, is
    destined for replacing a capital, increases in any country, what is called
    the monied interest naturally increases with it. The increase of those
    particular capitals from which the owners wish to derive a revenue, without
    being at the trouble of employing them themselves, naturally accompanies the
    general increase of capitals ; or, in other words, as stock increases, the
    quantity of stock to be lent at interest grows gradually greater and

    As the quantity of stock to be lent at interest increases, the interest, or
    the price which must be paid for the use of that stock, necessarily
    diminishes, not only from those general causes which make the market price
    of things commonly diminish as their quantity increases, but from other
    causes which are peculiar to this particular case. As capitals increase in
    any country, the profits which can be made by employing them necessarily
    diminish. It becomes gradually more and more difficult to find within the
    country a profitable method of employing any new capital. There arises, in
    consequence, a competition between different capitals, the owner of one
    endeavouring to get possession of that employment which is occupied by
    another; but, upon most occasions, he can hope to justle that other out of
    this employment by no other means but by dealing upon more reasonable terms.
    He must not only sell what he deals in somewhat cheaper, but, in order to
    get it to sell, he must sometimes, too, buy it dearer. The demand for
    productive labour, by the increase of the funds which are destined for
    maintaining it, grows every day greater and greater. Labourers easily find
    employment; but the owners of capitals find it difficult to get labourers to
    employ. Their competition raises the wages of labour, and sinks the profits
    of stock. But when the profits which can be made by the use of a capital
    are in this manner diminished, as it were, at both ends, the price which can
    be paid for the use of it, that is, the rate of interest, must necessarily
    be diminished with them.

    Mr Locke, Mr Lawe, and Mr Montesquieu, as well as many other writers, seem
    to have imagined that the increase of the quantity of gold and silver, in
    consequence of the discovery of the Spanish West Indies, was the real cause
    of the lowering of the rate of interest through the greater part of Europe.
    Those metals, they say, having become of less value themselves, the use of
    any particular portion of them necessarily became of less value too, and,
    consequently, the price which could be paid for it. This notion, which at
    first sight seems so plausible, has been so fully exposed by Mr Hume, that
    it is, perhaps, unnecessary to say any thing more about it. The following
    very short and plain argument, however, may serve to explain more distinctly
    the fallacy which seems to have misled those gentlemen.

    Before the discovery of the Spanish West Indies, ten per cent. seems to have
    been the common rate of interest through the greater part of Europe. It has
    since that time, in different countries, sunk to six, five, four, and three
    per cent. Let us suppose, that in every particular country the value of
    silver has sunk precisely in the same proportion as the rate of interest;
    and that in those countries, for example, where interest has been reduced
    from ten to five per cent. the same quantity of silver can now purchase just
    half the quantity of goods which it could have purchased before. This
    supposition will not, I believe, be found anywhere agreeable to the truth ;
    but it is the most favourable to the opinion which we are going to examine;
    and, even upon this supposition, it is utterly impossible that the lowering
    of the value of silver could have the smallest tendency to lower the rate of
    interest. If £100 are in those countries now of no more value than £50 were
    then, £10 must now be of no more value than £5 were then. Whatever were the
    causes which lowered the value of the capital, the same must necessarily
    have lowered that of the interest, and exactly in the same proportion. The
    proportion between the value of the capital and that of the interest must
    have remained the same, though the rate had never been altered. By altering
    the rate, on the contrary, the proportion between those two values is
    necessarily altered. If £100 now are worth no more than £50 were then, £5
    now can be worth no more than £2:10s. were then. By reducing the rate of
    interest, therefore, from ten to five per cent. we give for the use of a
    capital, which is supposed to be equal to one half of its former value, an
    interest which is equal to one fourth only of the value of the former

    An increase in the quantity of silver, while that of the commodities
    circulated by means of it remained the same, could have no other effect than
    to diminish the value of that metal. The nominal value of all sorts of goods
    would be greater, but their real value would be precisely the same as
    before. They would be exchanged for a greater number of pieces of silver;
    but the quantity of labour which they could command, the number of people
    whom they could maintain and employ, would be precisely the same. The
    capital of the country would be the same, though a greater number of pieces
    might be requisite for conveying any equal portion of it from one hand to
    another. The deeds of assignment, like the conveyances of a verbose
    attorney, would be more cumbersome; but the thing assigned would be
    precisely the same as before, and could produce only the same effects. The
    funds for maintaining productive labour being the same, the demand for it
    would be the same. Its price or wages, therefore, though nominally greater,
    would really be the same. They would be paid in a greater number of pieces
    of silver, but they would purchase only the same quantity of goods. The
    profits of stock would be the same, both nominally and really. The wages of
    labour are commonly computed by the quantity of silver which is paid to the
    labourer. When that is increased, therefore, his wages appear to be
    increased, though they may sometimes be no greater than before. But the
    profits of stock are not computed by the number of pieces of silver with
    which they are paid, but by the proportion which those pieces bear to the
    whole capital employed. Thus, in a particular country, 5s. a-week are said
    to be the common wages of labour, and ten per cent. the common profits of
    stock ; but the whole capital of the country being the same as before, the
    competition between the different capitals of individuals into which it was
    divided would likewise be the same. They would all trade with the same
    advantages and disadvantages. The common proportion between capital and
    profit, therefore, would be the same, and consequently the common interest
    of money; what can commonly be given for the use of money being necessarily
    regulated by what can commonly be made by the use of it.

    Any increase in the quantity of commodities annually circulated within the
    country, while that of the money which circulated them remained the same,
    would, on the contrary, produce many other important effects, besides that
    of raising the value of the money. The capital of the country, though it
    might nominally be the same, would really be augmented. It might continue to
    be expressed by the same quantity of money, but it would command a greater
    quantity of labour. The quantity of productive labour which it could
    maintain and employ would be increased, and consequently the demand for that
    labour. Its wages would naturally rise with the demand, and yet might appear
    to sink. They might be paid with a smaller quantity of money, but that
    smaller quantity might purchase a greater quantity of goods than a greater
    had done before. The profits of stock would be diminished, both really and
    in appearance. The whole capital of the country being augmented, the
    competition between the different capitals of which it was composed would
    naturally be augmented along with it. The owners of those particular
    capitals would be obliged to content themselves with a smaller proportion of
    the produce of that labour which their respective capitals employed. The
    interest of money, keeping pace always with the profits of stock, might, in
    this manner, be greatly diminished, though the value of money, or the
    quantity of goods which any particular sum could purchase, was greatly

    In some countries the interest of money has been prohibited by law. But as
    something can everywhere be made by the use of money, something ought
    everywhere to be paid for the use of it. This regulation, instead of
    preventing, has been found from experience to increase the evil of usury.
    The debtor being obliged to pay, not only for the use of the money, but for
    the risk which his creditor runs by accepting a compensation for that use,
    he is obliged, if one may say so, to insure his creditor from the penalties
    of usury.

    In countries where interest is permitted, the law in order to prevent the
    extortion of usury, generally fixes the highest rate which can be taken
    without incurring a penalty. This rate ought always to be somewhat above the
    lowest market price, or the price which is commonly paid for the use of
    money by those who can give the most undoubted security. If this legal rate
    should be fixed below the lowest market rate, the effects of this fixation
    must be nearly the same as those of a total prohibition of interest. The
    creditor will not lend his money for less than the use of it is worth, and
    the debtor must pay him for the risk which he runs by accepting the full
    value of that use. If it is fixed precisely at the lowest market price, it
    ruins, with honest people who respect the laws of their country, the credit
    of all those who cannot give the very best security, and obliges them to
    have recourse to exorbitant usurers. In a country such as Great Britain,
    where money is lent to government at three per cent. and to private people,
    upon good security, at four and four and a-half, the present legal rate,
    five per cent. is perhaps as proper as any.

    The legal rate, it is to be observed, though it ought to be somewhat above,
    ought not to be much above the lowest market rate. If the legal rate of
    interest in Great Britain, for example, was fixed so high as eight or ten
    per cent. the greater part of the money which was to be lent, would be lent
    to prodigals and projectors, who alone would be willing to give this high
    interest. Sober people, who will give for the use of money no more than a
    part of what they are likely to make by the use of it, would not venture
    into the competition. A great part of the capital of the country would thus
    be kept out of the hands which were most likely to make a profitable and
    advantageous use of it, and thrown into those which were most likely to
    waste and destroy it. Where the legal rate of interest, on the contrary, is
    fixed but a very little above the lowest market rate, sober people are
    universally preferred, as borrowers, to prodigals and projectors. The person
    who lends money gets nearly as much interest from the former as he dares to
    take from the latter, and his money is much safer in the hands of the one
    set of people than in those of the other. A great part of the capital of the
    country is thus thrown into the hands in which it is most likely to be
    employed with advantage.

    No law can reduce the common rate of interest below the lowest ordinary
    market rate at the time when that law is made. Notwithstanding the edict of
    1766, by which the French king attempted to reduce the rate of interest from
    five to four per cent. money continued to be lent in France at five per
    cent. the law being evaded in several different ways.

    The ordinary market price of land, it is to be observed, depends everywhere
    upon the ordinary market rate of interest. The person who has a capital from
    which he wishes to derive a revenue, without taking the trouble to employ it
    himself, deliberates whether he should buy land with it, or lend it out at
    interest. The superior security of land, together with some other advantages
    which almost everywhere attend upon this species of property, will generally
    dispose him to content himself with a smaller revenue from land, than what
    he might have by lending out his money at interest. These advantages are
    sufficient to compensate a certain difference of revenue; but they will
    compensate a certain difference only ; and if the rent of land should fall
    short of the interest of money by a greater difference, nobody would buy
    land, which would soon reduce its ordinary price. On the contrary, if the
    advantages should much more than compensate the difference, everybody would
    buy land, which again would soon raise its ordinary price. When interest was
    at ten per cent. land was commonly sold for ten or twelve years purchase. As
    interest sunk to six, five, and four per cent. the price of land rose to
    twenty, five-and-twenty, and thirty years purchase. The market rate of
    interest is higher in France than in England, and the common price of land
    is lower. In England it commonly sells at thirty, in France at twenty years
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