Chapter XI: Introduction (2)

If it be true, as I believe it is, that in states where credit is so well established, that their funds or public debts are commonly negotiated abroad, there is an average fixed for the value of money, by the operations of credit over the commercial world: and if it be true, that no law can be framed so as to restrain mercantile people, and those who make a trade of money, from turning it to the best account; then all that should be proposed by government, is, to preserve the value of it at home, within that standard. For which purpose, nothing more is necessary than to prevent the competition of the dissipating class of inhabitants, from disturbing the rate which commerce may establish from time to time. This is accomplished by the methods above hinted at, and which in the next chapter shall be more largely insisted on. If, by prudent management, the _conventional_ rate of interest, can thus be brought below the _legal_, then there will be no harm in diminishing the latter by statute, not however _quite_ so low as the conventional standard; but to leave a reasonable latitude for gentle fluctuations above it. From what I have said, I still think I had reason to object to Child’s plan for forcing down the interest by statute: and had he lived at this time, I am persuaded he would have come into that opinion.

------------------------------------------------------------------------

CHAP. VII.
_Methods of bringing down the Rate of Interest, in Consequence of the
Principles of Demand and Competition._

I hope the arguments used in the foregoing chapter will not be construed as an apology for the high interest of money.

I entirely agree with Sir Josiah Child, that low interest is the soul of trade; the most active principle for promoting industry, and the improvement of land; and a requisite, without which it is hardly possible that foreign commerce can long be supported.

This proposition I take to be at this time universally admitted to be true; and did there remain, concerning it, the vestige of a doubt in the mind of any one, the writings of many, much more capable than I can pretend to be, and among the rest the author just now cited, are sufficiently capable to remove it. I shall not therefore trouble my reader with a chapter upon that head, but only observe, that the terms _high_ and _low_ are constantly relative. Here the relation must be understood to regard other states, because when we speak of a _rate_ of interest, we are supposed to mean something general in the country we are speaking of: accordingly, if we could suppose that, within the same state, the rate of interest should be lower in one city than any where else, that circumstance would give an advantage to that city in all its mercantile operations.

I must farther observe, for the sake of connecting this part of our subject with our general plan, that the low interest for money is most essential to such states as carry on the most extensive foreign commerce.

In the infancy of industry, and before trade comes to be established, it is very natural that the coin of the country should be found in a great measure locked up in treasures: high interest tends to bring it forth, and in that respect works a good effect.

In proportion as alienation augments, money comes to be multiplied, by the melting down of solid property, as has been explained; and then the business of a statesman is to contrive expedients for bringing the rate of it as low as possible, in order to support foreign trade, and to rival all neighbouring nations, where interest is higher. When foreign trade again comes to decline, from the multiplication of abuses introduced by luxury, low interest still continues useful, for supporting public credit, so necessary for defending a nation against her enemies.

If money consisted only in the precious metals, which are not to be found in every country, but must be purchased with the produce of industry, and brought from far; and if no other expedient could be fallen upon to supply their place for the uses of circulation; then the possessors of these metals would in a manner be masters to establish what rate of interest they thought fit for the use of them.

But if that be not the case, and if money can be made of paper, to the value of all the solid property of a nation, (so far as occasion is found for it, by the owners of that property) the use of the metals comes to be in a manner reduced to that of serving as a standard, for ascertaining the value of the denominations of money of accompt; perhaps for facilitating the circulation of small sums, and for paying a balance of trade to other nations.

When this is the case, a statesman has it in his power to increase or diminish the extent of credit and paper money in circulation, by various expedients, which greatly influence the rate of interest.

The progress of credit has been very rapid since the beginning of this century. This has been almost entirely owing to the mechanical combinations of trading men. Lawgivers have hitherto had but imperfect notions concerning the nature of it; and there still remains, in the womb of nature, some mighty genius, born to govern a commercial nation, who alone will be able to set it on its true principles. Let us in the mean time speculate concerning them.

We have said, and every body feels, that interest falls in proportion to the redundancy of money to be lent.

Now what is this money but property, of one kind or other, thrown into circulation? I speak of trading nations, who are not confined to the quantity of their specie alone.

When a man of property wants money, does he not go to a bank, which lends upon mortgage, and by pledging his security, does he not receive money, which is in the same instant created for his use? Do not those notes circulate as long as they are found necessary for carrying on the affairs of the nation? that is to say, the accompts of debtors and creditors of all denominations; and as soon as the quantity of them exceeds that proportion, they stagnate, and return on the debtors in them, (the bank) who is enabled to realize them, because the original security is still in their hands, which was at first pledged when the notes were issued. This realization is commonly made in the metals; because they are the money of the world: they are real and true riches, as much as land; and they have this advantage over land, that they are transportable every where.

Now, does it not appear evident, that what we have been describing is a round-about operation, which it is possible to shorten?

I beg of my reader, that he may attend to one thing; which is, that I am not here treating of, or proposing a plan, but labouring in the deduction of principles in an intricate subject.

I say, when landed men go to such a bank, and receive paper for a land security, that this operation may be shortened.

Do not the notes he gets stand (though that is not expressed) upon the security of his land? Now, can any man assign any other reason but custom, why his own notes, carrying expresly in their bosom the same security, might not be issued, without his being obliged to interpose the bank between the public and himself: And for what does he pay that interest? Not that he has gratuitously received any value from the bank; because in his obligation he has given a full equivalent for the notes; but the obligation carries interest, and the notes carry none. Why? Because the one circulates like money, the other does not. For this advantage, therefore, of circulation, not for any additional value, does the landed man pay interest to the bank.

Had landed men, and not merchants, invented this method of turning their property into circulation, and had they been all assembled in one body, with a legislative authority, I imagine they would have had wit enough to find out that a land bank was a thing practicable in its nature.

Suppose they had agreed that all their lands should be let by the acre, and that land property should be esteemed at a certain number of years purchase, in proportion to the rate of interest at the time, where would be the great difficulty in paying in lands?

This is only a hint, to which a thousand objections may be made, as matters stand: all I say, is, that there is nothing here against principles; and though there might, in every way such a plan could be laid down, result inconveniencies to the landed interest, yet still these inconveniencies would hardly counterbalance that of their being obliged to pay interest for every penny they borrow.

It is demanded, what advantage would result to the nation from such a regulation?

I answer, that by it all the borrowings of landed men would be struck out of the competition at the money-market. The money’d interest alone would borrow among themselves for the purposes of trade, (for money’d men do not borrow to squander) and landed men would consequently pay with their own paper, in every case, where now they borrow in order to pay. Thus interest would be regulated by the demands of trade, and the rate of it would not be disturbed by the competition of spendthrifts.

Who can say how far the consequences of such a scheme might reach? Might not landed men begin in time to issue notes by way of loan, at a very inconsiderable interest? But I do not incline to carry my speculations farther: perhaps what has been said may appear sufficiently aerial.

If a statesman shall find every modification of this idea impracticable; either from his own want of power, or of combination, or, which is more probable, from the opposition of the money’d interest, he must take other measures for striking out, as much as possible, the competition of spendthrifts at the money-market. Entails, and lame securities, are good expedients; though they are productive of many inconveniencies. His own frugal œconomy in state affairs will go much farther than any such trifling expedients.

Did a nation enjoying peace, although indebted perhaps 140 millions sterling, begin by paying off but 2 _per cent._ of their capital yearly, besides the current interest; while no neighbouring state was borrowing any; what would interest fall to in a short time! It may be answered, that the consequence would be, to enrich other nations; because the regorging money would be sent abroad. Is any state ever enriched by their borrowing? And in what does such lending to foreigners differ from the nation’s paying off their foreign creditors? Will not the return of interest from abroad compensate, _pro tanto_, the sums sent out for the like purpose?

But if it be said, that the consequence will be to enable other nations to bring down their own rate of interest; I allow it to be so; and so much the better, as long as it remains proportionally lower with us; which it must do, as long as we can lend abroad. We have said, and I believe with truth, that as credit is now extended, a general average is struck every where upon the value of money: consequently, the lower interest is found abroad, the lower still it will remain at home, as long as merchants and exchangers subsist.

From this circumstance of the average on the rate of interest, the Dutch must, I think, have lost the great advantage they formerly enjoyed, from the low rate of it in Holland, in proportion to their neighbours.

In Child’s time, they were familiarly buying up sugars in London, above the price paid by English sugar-bakers; and, notwithstanding the additional freight and charges, they grew rich by their trade, while the others were hardly making any profit. This he accounts for, from the low rate of their interest. He supposes both Dutch and English to have carried on this trade with borrowed money; for which the first paid 3 _per cent._ and the other 6 _per cent._

But at present, were it possible to get 6 _per cent._ for money in London, what Dutchman would lend his father a shilling at 3 _per cent._? The English stocks are as currently bought and sold, nay, all the stockjobbing tricks are practised with the same subtlety at Amsterdam as in Change-Alley: from which I conclude, that a great part of the advantage of low interest is now lost to that nation; and I conclude farther, that it is the common interest of all trading nations to bring it as low as possible every where.

Another cause of high interest proceeds from certain clogs laid upon circulation, which proceed merely from custom and prejudice. Of this nature is the obligation of debtors to pay in the metals, nothing but coin being a legal tender.

The only foundation for such a regulation was the precariousness of credit in former times. Were all the circulating paper in a nation secured by law, either upon the lands or revenue of the country appropriated for that purpose, there could be no injustice or inconvenience in making paper (so secured) a legal tender in all payments. Again, how extraordinary must it appear to any reasonable man, that the same paper which passes on one side of a river, should not pass on its opposite bank, though running through the same country?

The reason indeed is very plain: the subaltern jurisdictions are different; and the debtors in the paper are different: but if the paper of both stood upon a security equally good, what is to hinder both to be received as a legal tender in all payments over the kingdom? Should not little private objects of profit among bankers (who are the servants of the state, and who are so well paid for their service) be over-ruled, when the consequences of their disputes are found to be so hurtful? But of this more, when we come to speak of banks.

The only occasion where coin is necessary in the liquidation of paper, is for payment of the balance of trade with foreign nations. Of this also we shall treat more at large, when we come to the doctrine of exchange. But surely nothing is so ill judged, as to create an imaginary balance within the same state; or rather, to permit money-jobbers to create it; at the expence of raising interest, and hurting trade, in the very places where it stands in the greatest need of encouragement.

From these principles, and others which naturally flow from them, may a statesman steer a very certain course, towards bringing the rate of interest as low as the prosperity of trade requires, or the principles of double competition between borrowers and lenders will permit.

------------------------------------------------------------------------

CHAP. VIII.
_Is the Rate of Interest the sure Barometer of the State of Commerce?_

Some political writers are fond of every expedient to reduce within a narrow compass many questions, which being involved in intricate combinations, cannot be reduced to one principle. This throws them into what I call systems; of which we have an example in the question now before us.

There is nothing more difficult than to determine when commerce runs favourably, and when unfavourably for a nation. This would not be the case, were the rate of interest the just barometer of it. I have found it however advanced, that nothing more is necessary to be known, in order to estimate the relative profits upon the foreign trade of two nations, than to compare the common rate of interest in both, and to decide the preference in favour of that nation where it is found to be lowest.

We may say of this proposition, as of the course of exchange; the lowness of interest and exchange are both exceedingly favourable to trade; but they are no adequate measure of the profits arising from it.

The best argument in favour of this opinion with regard to interest is, that the nation which sells the cheapest at foreign markets is constantly preferred; and, consequently, where the use of money is the lowest, the merchant can sell the cheapest.

I answer, that this consequence _would_ be just, were all trade carried on with borrowed money, and were the difference of the price of the materials or first matter, the ease in procuring them, the promptitude of payments, the industry of the manufacturer, and his dexterity, reckoned for nothing. But such advantages are frequently found in these articles, as to be more than sufficient to counterbalance the additional interest which is paid for the money employed in trade. This is so true, that we see the dexterity alone of the workman (living in an expensive capital, where the charge of living may be double of what it is in the country) enabling him to undersell his competitors every where: the same may be true with regard to the other articles. Farther, how far is it not from truth to say, that all _trade_ is carried on with borrowed money? When the term _trade_ here made use of, is properly understood, we shall see, that a very inconsiderable part of its object is carried on with borrowed money, in any country in Europe; and that part which is carried on with borrowed money is not so much clogged by the high rate of interest, as by want of punctuality in payments. A merchant who can turn his money in three months, borrows as cheaply at 6 _per cent._ as another who turns his in six months, when he borrows at 3 _per cent._

The object of trade is produce and manufacture. If any one will consider the value of these two articles, before they come into the hands of merchants, and compare this with the money borrowed by farmers and manufacturers, in order to bring them to market, the proportion will be very small.

Do we not see every day, that ingenious workmen, who obtain credit for very small sums, are soon enabled, by the means of their own industry, to produce a surprizing value in manufactures, and not only to subsist, but to increase in riches? The interest they pay for the money borrowed is inconsiderable, when compared with the value, created (as it were) by the proper employment of their time and talents.

If it be said, that this is a vague assertion, supported by no proof; I answer, that the value of a man’s work may be estimated by the proportion between the manufacture when brought to market, and the first matter. Nothing but the first matter, and the instruments of manufacture, can be considered as the objects of borrowed money; unless we go so far as to estimate the nourishment, and every expence of the manufacturer, and suppose that these are also supplied from borrowed money. To affirm that, would be turning arguments into cavil.

The object, therefore, of borrowed money for carrying on trade, is more relative to the merchant than to the manufacturer. Borrowing is necessary for collecting all this product and manufacture into the hands of merchants. This, no doubt, is very commonly the operation of credit: interest of money, here, comes in, to indemnify the giver of credit, for the use of his money: but this interest is only due from the time the borrower pays those from whom he collects, to the time he receives payment from those to whom he sells. This interval it is of the highest importance to the merchant to shorten. In proportion as it is long, and in proportion to the rate of interest, he must raise his profits; and in proportion as payments are quick and regular, and interest low, he may diminish them. Whether merchants do regulate their profits, in all commercial nations, according to the exact proportion of the respective rates of interest, and promptitude of payments among them; or whether these are determined by the circumstances of demand and competition in the several foreign markets where the trade is carried on, I leave to merchants to determine. All I shall remark is, that a well founded credit, and prompt payments, will do more service to trade, than any advantage trading men can reap from the different rate of interest in different countries.

It must not be concluded from this, that low interest is not a very great advantage to trade; all I contend for, is, that it is not the barometer of it.

Another circumstance which puts nations, in our days, much more on a level than they were in former times, I have already hinted at. It is _that general average_ which the great loads of national debts, and the extension of credit, through the several nations of Europe, who pay annually large sums of interest to their creditors, has established. Let me suppose the Dutch, for example, to have fixed, by placard, the rate of their interest at 3 _per cent._ I say, that so soon as the _general average_ of interest comes to stand above that rate, from the price of public funds in England and France, we may safely conclude, that their trade cannot be carried on with any very considerable sum of money borrowed at 3 _per cent._ The consequence then must be, to send the money which regorges in the hands of the frugal Dutch, into other countries, where it can produce a better return, exclusive of all expences of remitting and drawing. What the consequences of this lending to foreigners may be to Holland, shall be afterwards examined.

To conclude; I believe it will be found, that what has led some to believe that low interest is the barometer of commerce, has been owing to this; that in some of the most commercial countries and cities interest has been found to be lower than in great kingdoms: but _that_, I imagine, is entirely owing to the frugality of their manners, which cuts off the borrowing of the rich for the sake of dissipation. When this is accomplished, trade alone being what absorbs the stagnations of the frugal, the price of interest will fall to that rate which is the best proportioned to the profits upon it: but this also will be less and less the case every day, in proportion to the credit and circulation of public funds in different nations.

------------------------------------------------------------------------

CHAP. IX.
_Does not Interest fall in Proportion as Wealth increases?_

I answer in the affirmative: providing it be supposed that dissipation does not increase in proportion to the wealth. Now in a general proposition, such as this which stands at the head of our chapter, that very necessary proviso is not attended to, and thus people are led to error. It is the manners of a people, not their external circumstances as to riches, which render them frugal or extravagant. What, therefore, depends upon the spirit of a people, cannot be changed, but in consequence of a change of that spirit.

If the rate of interest be high, from a taste of dissipation, let foreign trade throw in what loads of money it may, interest will still stand high, until manners change. Every class of a people has their peculiar spirit. The frugal merchant will accumulate wealth, and the prodigal lord will borrow it. In this situation, internal circulation will be rapid, and lands will shift hands. If this revolution should prove a corrective to dissipation, by vesting property in those who have contracted a firm habit of frugality, then an augmentation of wealth may sink the rate of interest. But if, on the contrary, the laws and manners of the country do distinguish classes by their manner of living, and mode of expence, it is ten to one that the industrious and frugal merchant will put on the prodigal gentleman, the moment he gets into a fine country seat, and hears himself called Your honour. In certain countries, the memory of past industry carries a dreg along with it, which nothing but expensive living has power to purge away.

Let this suffice at present upon the subject of interest: it is so connected with the doctrine of credit, that it will recur again at almost every step as we go along.

END OF THE FIRST PART.

------------------------------------------------------------------------

AN

INQUIRY

INTO THE

PRINCIPLES OF POLITICAL OECONOMY.

------------------------------------------------------------------------

BOOK IV. | OF CREDIT AND DEBTS.

PART IV. | OF PUBLIC CREDIT.

------------------------------------------------------------------------

BOOK IV. | OF CREDIT AND DEBTS.