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

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