Chapter XXXVI: Section CLXXIX: The Rate of Interest in General

Interest on capital,[179-1] or the price paid for the use of capital, should not be confounded with the price of money (§ 42); although in common life people so frequently complain of want of money where there is only a want of capital, and sometimes even when there is a superabundance of money.[179-2] This error is connected with the fact, that for the sake of convenience, loans of capital are so often effected in the form of money and that they are always at least estimated in money; but neither of these things is essential.

In reality, however, we as seldom meet with interest[179-3] pure and simple, as we do with rent pure and simple. A person who works with his own capital can, at best, by a comparison with others, determine where, in the returns of his business, wages stop and interest begins.[179-4] And even in the loaning of capital, it depends largely on supply and demand, whether the creditor shall suffer a deduction in consequence of the absence of care and labor attending his gain, and whether the debtor, in order to get some capital at all, shall sacrifice a part of the wages of his labor.[179-5] When Adam Smith assumes it to be the rule that the "profit of stock" is about twice as great as the "interest of money,"[179-6] it is evident that a considerable amount of what is properly wages or profit of the employer (_Uhternekmer_ = undertaker) is included in the former.

Many businesses have the reputation of paying a very large interest on the capital employed in them, when in reality they only pay the undertaker of them wages unusually high as compared with the amount of capital employed in them. Apothecaries, for instance, are called in some places "ninety-niners," because it is said that they earn 99 per cent. To discover the error, it would be sufficient to inquire the rate of interest on the capital borrowed by the apothecary on hypothecation, for instance, to enlarge his industry. But on the other hand, such a man who has more than any other manufacturer to do with the most delicate materials and with them in greater variety, requires proportionately greater caution and knowledge. Besides, as the guardian of the health and life of so many, and even as the comptroller of physicians, he should be a man who inspired universal and unqualified confidence.[179-7] By the rate of interest customary in a country, we mean the average rate of the interest on money-capital employed safely and without trouble.

[Footnote 179-1: In the case of fixed capital, we generally
speak of rent; in the case of circulating capital, of
interest. If interest be conceived as a fractional part of
the capital itself, the relation between the two is called
"the rate of interest," most generally expressed as a
percentage, and for one year.]

[Footnote 179-2: In Russia, great depreciation of the
assignats, and yet the people complained of a "want of
money." (_Storch_, Handbuch, II, 15.) According to the San
Francisco correspondent of the Times, Jan. 31, 1850, one per
cent. a day discount was paid there! Compare _North_,
Discourse on Trade, 11 seq.]

[Footnote 179-3: Gross interest and net interest
corresponding to the difference between gross product and
net product.]

[Footnote 179-4: This is the natural rent of capital in
contradistinction to the stipulated rent. (_Rau_, Lehrbuch,
I, § 223.)]

[Footnote 179-5: Thus, for instance, a so-called beginner
who is conscious of possessing great working capacity, but
who possesses for the time being little credit. _Tooke_,
Considerations on the State of the Currency, 1826,
distinguishes three kinds of capitalists: a, those who are
averse to running any risk whatever or incurring any
trouble, or are not able to incur any risk or trouble, for
whom every great increase of the sinking fund lowers the
rate of interest, and every war loan raises it; b, those who
will run no risk, but who are not averse to the trouble of
looking after their investments and of endeavoring to obtain
a higher rate of interest; c, such as, to obtain a higher
rate of interest, unhesitatingly risk something. Borrowers
he divides thus: a, those who employ the borrowed capital
and their own in such a way as to enable them to meet their
obligations and besides to earn a reasonable profit; b,
those who need others' capital to make up for the momentary
failure of the productiveness of their own; lastly c,
unproductive consumers.]

[Footnote 179-6: Wealth of Nat., I, ch. 9. The gross product
of English cotton industry was, in 1832, estimated at
£32,000,000, viz: £8,000,000 worth of material, £20,000,000
wages, £2,000,000 interest, £2,000,000 undertaker's profits.
(_Schön_, Nat. Oek, 104.)]

[Footnote 179-7: _Adam Smith_, I, ch. 10, 1: where the
reasons why a shop-keeper in a small town apparently gets a
larger interest than one in a large city, and yet gets rich
less frequently, are developed. The high profit made from
industrial secrets, Adam Smith very correctly considers
wages (I, ch. 7). Why not also that made by inn-keepers? (I,
ch. 10, 1.) When the returns of a business differ according
to circumstances which depend on the person of the conductor
of the business himself, and may by him be transferred into
another business, etc.; when the competition in it is
determined by personal agreeableness or disagreeableness, it
is evident that the larger returns are to be ascribed rather
to the highness of wages than of the rate of interest. The
profit also which a second-hand hirer makes is wages.
(_Riedel_, Nat. Oek., 376.)]