markitect-main/examples/infospace-with-history/artifacts/sources/book-2-chapter-04.md

id, title, book, chapter, artifact_type

id	title	book	chapter	artifact_type
book-2-chapter-04	OF STOCK LENT AT INTEREST.	2	4	content

CHAPTER IV. OF STOCK LENT AT INTEREST.

  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 repayment.

  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 greater.

  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 interest.

  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 augmented.

  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
  purchase.