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 th

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 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.