Chapter XXXII: Part I: Of the Interest of Money

[Sidenote: INTROD.]

I introduce the subject of credit and debts, by giving a general idea of its extent. It comprehends the method of establishing a solid security for money borrowed; of extending the object of such security in proportion to circumstances; of supporting the credit of the borrowers, when over-stretched; and of preventing, as far as possible, the fatal consequences of a bankruptcy, when it can be no longer supported.

I shew how all mysteries relating to credit proceed from our ignorance only of its true nature; which is confidence established upon a visible and palpable fund of payment. I observe how delicate a thing credit is, and how gently it must be dealt with; how incompatible the forms of common law are with the discussion of questions which arise between merchants; how necessary it is to form a jurisprudence peculiar to trade, and to support it by manners more than by authority; and when credit is once set upon its true basis, how all aerial schemes, bubbles, and public bankruptcies will be avoided.

CHAP. I. Here I shew how impossible it is to establish credit by authority; how inseparably it is connected with liberty and independence; and still how compatible it may be with that supreme power which is vested in every government.

CHAP. II. The object of credit is money lent; the basis of loan is the payment of interest. If money be wanting, credit will die; consequently, there must be a method found for augmenting and diminishing the quantity of money in proportion to the demand for it. It is augmented, by converting land into paper-money; it is diminished, by relieving the land of the engagement upon it, and extinguishing the paper-money. This is no more than a contrivance for turning into a _circulating value_, which is the principal characteristic of _money_, the obligations of private men, which in all countries are considered to be of an equal value with any coin.

I here explain what is meant by money _stagnated_, and by money _realized_. Money, while it is employed in circulation, can carry no interest; the moment it lies idle to one man, were it but for a day, it may be worth interest to another, who willingly pays for the use of it, when he has occasion either to buy what he wants, or to pay what he owes. If no body be found who wants it, then it is said to _stagnate_ in the hands of the proprietors. This denotes that circulation is full. He therefore desires to _realize_ it; that is, to purchase with it some kind of income. For this purpose, if it be coin, he sends it to some place where coin is wanted. If it be paper, he demands of the debtor in the paper either to give him an interest for it, or to convert it into coin, which is the money of the world. Both are called realizing; and in proportion as money is realized, circulation diminishes.

Hence I conclude, that as the use of circulating money is to carry on alienation, so the use of stagnated money is to produce an interest; consequently, a perpetual interest is better than money, when it is not wanted for the use of circulation. If therefore, by the policy of a country, the capital of every perpetual interest can be immediately converted into money for the use of circulation, the inconvenience of capitals not demandable is removed; because although you cannot make the debtor pay, you can sell what he owes you to another, who will; and this equally suits your convenience.

CHAP. III. The simplicity of manners among the primitive christians, circumscribing very much the uses for money in circulation, a great quantity of the coin was consequently locked up. Paper money _then_ was superfluous; because even coin itself so far exceeded all the uses of their circulation, that it was considered in the light of jewels and plate with us.

Taking interest for it, when lent, appeared to them as unreasonable, as if a lady, in these times, were to ask a price for lending her jewels to a friend.

However, as money was necessary on many occasions to those who had none locked up, the Jews, who have always despised land-property, made a trade of lending; and this drew an odium upon the practice. I can ascribe it to no other cause. Our manners are totally changed; and Christians lend money at interest as well as Jews. Neither trade, industry, or credit, can subsist without it; and as money cannot be lent, without allowing interest to be taken, interest is become the basis of the whole system of credit, and comes to be examined in the following chapters.

CHAP. IV. Before industry was established, the calls for money to borrow were few, and chiefly confined to Princes in time of war, and prodigal proprietors of land in time of peace. Their demands were urgent, and the interest they paid was in proportion. The lenders possessed but a small part of the coin of the country; because the bulk of the people locked up all they could. Those who hoarded, would not lend; and this greatly diminished the fund of borrowing: besides, Princes and prodigals had no sooner spent the money borrowed, than it fell again into the hands of those who hoarded; and the lenders found, no doubt, great difficulties in procuring fresh supplies.

When industry and trade brought money out of its repositories, when the necessity of permitting interest appeared evident to the church, the coin then began to make its appearance, and was ready to be lent. This opened a market for money. The price of money is the rate of interest. At this market, the borrowers and lenders appear in competition among themselves, according to circumstances. If more money is demanded to be borrowed than is offered to be lent, the competition takes place among the borrowers, and interest rises. If more is offered to be lent than is demanded to be borrowed, interest falls. Those who borrow money may be divided into two classes, viz. those who intend to spend it, and those who intend to trade with it.

When more money is to be lent than the first class demands, the rate of interest will be regulated by what merchants _can_ give for it: when there is less, it will rise to what the prodigals _will_ give for it.

But this first class must have good credit, or their borrowing will be cut off. When therefore a statesman finds, that the borrowing of such people hurts the commercial interest of his country, by keeping interest high, he should weaken their credit, by tying up their lands by entails. When their borrowing becomes necessary for the encouragement of industry, and for bringing all the money there is into circulation, then their credit should be enlarged, by promoting an expeditious sale of every branch of their property.

CHAP. V. Thus, without the aid of law, the interest of money is regulated by demand. But a state must not totally overlook the interest of the class who spend more than their incomes. It would be inhuman to throw them into the jaws of usurers. Statutes therefore prevent interest from rising above a certain rate. This preserves them, and renders the dissipation of their fortunes more gradual.

But although a statesman has it in his power to guard his people against the oppression of usury, by preventing the rate of money from rising above the ordinary standard of demand, he cannot equally force it down below this standard, even although the interests of trade should require it: because if the monied men can lend their capitals abroad, at a higher interest than they can procure for them at home, they will distress the landed interest, by demanding what they owe, and all the money will be sent abroad, as was the case in Scotland in 1762.

This was not the case a hundred years ago. No money then could be lent abroad by Englishmen; because those who would give high interest had no credit. Thus government could bring it down at will; monied men were forced to consent; and the price of land rose in proportion as interest fell.

As it is the extravagance of men of property which raises the rate of money above what is consistent with the interest of trade, the expedients to bring it down, are, 1. To circumscribe borrowing by the prodigal: 2. To suspend borrowing by the state: and 3. To throw as much public money as possible into the market, by paying off debts. When a statesman has by such measures brought the rate of money considerably below the legal price, he may, by a new statute, prevent its rising again so high as formerly; but still he must keep in his eye the rate of money, and state of credit in rival nations, in order to avoid the inconveniences already mentioned.

CHAP. VI. If Great Britain were to regulate the rate of money below what the fluctuations of demand are commonly found to carry it, then in time of war, as soon as demand, which can be subject to no statute, got up to the high standard, the whole landed interest would be torn to pieces by their creditors: for the debtors could not borrow from one to pay another, because no man would give them credit. This would put an end to all their expence; the funds which supply it at present (the land-rents) would be carried off by creditors; and all the industrious who serve such proprietors of land would suffer considerably for want of employment. The conclusion which the generality of people would draw from this phænomenon would be, that high interest, instead of being hurtful, is advantageous to trade.

CHAP. VII. Hence we may conclude, that low interest is principally advantageous for carrying on foreign commerce, and that the best method to keep it low, is to keep circulation full, by facilitating the melting down of property.

This expedient has been contrived by merchants in the establishment of banks upon mortgage; and there is a possibility that landed men, some centuries hence, may find out that they may imitate the example of traders, and contrive the means of borrowing cheaper than they can do at present.

Were a particular nation to carry such expedients into execution with success, it would have the effect of bringing down the rate of money every where. This would sink the general average of the whole, but never would prevent the operation of those principles by which it had been brought down; and the most intelligent nations would still have the same advantages as before, of keeping their interest low relatively to their neighbours, which is the great _desideratum_ for the support of public credit, as well as of foreign trade.

CHAP. VIII. But although it is of very great advantage to trade to have interest low, we cannot judge of the prosperity of trade from this circumstance alone.

That nation gains the most upon her trade who draws the greatest balance from the rest of the world. Now the balance cannot be judged of by the rate of interest; because this depends more upon manners and policy than upon the state of industry. Industry must be supported by superior dexterity, natural advantages, and promptitude of payments, as well as by low interest. Prompt payment alone, is of more consequence to the industrious populace, than a small difference upon the rate of interest. That encourages the whole class of manufacturers. Low interest is principally an advantage to the merchants who are obliged to employ credit for collecting their work; and merchants themselves who trade upon credit, often gain more by quick returns than what will compensate a considerable difference in the rate of interest. Low interest may more properly be called the barometer of public credit than of foreign commerce.

CHAP. IX. From what has been said, I conclude, that the rate of interest does not sink as wealth increases; because it is influenced by many circumstances, which do not depend upon opulence. It depends upon the spirit and manners of a people, and will fluctuate with them.

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