Chapter XXXVII: Section CLXXX: Rate of Interest in General.--Its Level

Within the limits of the same national-economic territory, the different employments of capital tend uniformly to pay the same rate of interest.[180-1] If one branch of business were much more profitable than another, it would be to the interest of the owners of capital to allow it to flow into the former and out of the latter, until a level was reached.[180-2]

The most noticeable exception to this rule is only an apparent one. The revenue (_Nutzung_) derived from the use of capital must not be confounded with its partial restoration.[180-3] Thus, for instance, the rent of a house, if the entire capital is not to be sooner or later consumed entirely, must embrace, besides a payment for the use of the house, a sum sufficient to defray the expenses of repairing it, and even to effect a gradual accumulation of capital for the purpose of rebuilding. The risk attending the investment of capital plays a very large part and must be taken into special consideration. If the risk in a business be so great that ten who engage in it succeed and ten fail, the returns of the former, which are more than double those usual in the country, in reality pay, when the ten who failed are taken into the account, only the rate of interest customary in the country. The risk may depend on the uncertainty of the person to whom the capital is confided;[180-4] on the uncertainty of the branch of business in which it is intended to employ it,[180-5] or on the uncertainty of the commercial situation in general; but especially may it depend on the uncertainty of the laws.[180-6] The temporary lying idle of capital, for instance, in dwelling houses at bathing places during the winter season, increases the rate of interest much more than it does the rate of wages in the corresponding case of the lying idle of labor; for the reason that there is something pleasurable in the repose of the latter. (_Senior._) On the whole, the vanity of mankind has an effect upon the rate of interest similar to that which it has on the rate of wages. (See § 168.) It causes the small chances of loss to be estimated below their real value, and the extraordinary chances of gain above it.[180-7]

[Footnote 180-1: Compare _Harris_, Essay on Money and Coins,
13. _Per contra, Ganilh_, Dictionnaire analyt., 107.
According to _Hermann_, Staatsw. Untersuchungen, 147, a
product which withdraws an amount of capital = _a_ from the
immediate use of its owner for _n_ months must bring in in
its price a surplus, over and above the outlay of capital,
which would bear the same ratio to the profit from another
product which employed an amount of capital = _b_, _m_
months, that _an_ bears to _bm_.]

[Footnote 180-2: The class of bankers, etc. which precisely
in the higher stages of civilization is one so highly
developed, is called upon to adjust these differences.]

[Footnote 180-3: Life annuities and annual revenues, _à
fonds perdu_.]

[Footnote 180-4: Hence, for instance, good men engaged in
industrial pursuits who employ borrowed capital productively
pay lower interest than idlers who are suspected of desiring
only to spend it in dissipation. High house-rent usually
paid by proletarians.]

[Footnote 180-5: Thus even in _Anderson's_ time, it was
necessary that the profit of one good year in the whale
fishery should compensate for the damage caused by six bad
ones. (Origin of Commerce, III, 184.) Slave-traders made
their calculations to lose from three to four out of five
expeditions. (Athenæum, May 6, 1848) Similarly in smuggling
and contraband. High rate of interest in gross adventure
trade and bottomry contracts, frequently 30 and even 50 per
cent.; in ancient Athens, for a simple voyage to the Black
Sea, 36 per cent., while the rate of interest customary in
the country was only from 12 to 18 per cent.; the interest
paid by rented houses only 8-1/7, and by land leases only 8
per cent. (_Bockh_, Staatshaushalt der Athener, I, 175 ff.;
_Isaeus de Hagn._, Hered., 293) In Rome, before Justinian's
time, maritime interest was unlimited. (_Hudtwalker_, De
Foenore nautico Romano, 1810.) And so in the manufacture of
powder, the frequent explosion of the mills has to be taken
into account: in France and Austria, 16 per cent. per annum.
(_Hermann_, Principien, 119.) Here belong those new
enterprises which, when they succeed, pay a high profit.
_Thaer_, in reference to this insurance premium, says: if
the capital employed to purchase a landed estate yields 4
per cent., the inventory (_Inventar_) should bring in at
least 6, and the working capital 12 per cent. (Ration.
Landwirthschaft.)]

[Footnote 180-6: Compare _supra_, § 91; _infra_, §§ 184,
188.]

[Footnote 180-7: Thus _Friedr. Perthes_, in _Politz_,
Jarhbüchern, Jan., 1829, 42, thinks that the publication of
scientific books in Germany, since 1800, caused, on the
whole, a loss of capital. In the Canadian lumber trade,
also, speculators, in the aggregate, lost more than was
gained. Yet the business goes on because of its lottery
character. (_John Stuart Mill_, II, ch. 15, 4.) In
lotteries, it is certain that the aggregate of players lose.
So too in speculation in English stocks, on account of the
costs to be paid the state. In the case of frightful losses,
which may afford food for the imagination, the reverse is
found. Thus, for instance, in England, fire insurance, stamp
duties included, was paid for at a rate five times as high
as mathematical calculation showed it to be worth.
(_Senior_, Outlines, 212 ff.) Much here depends naturally on
national character, which, in England for instance, or in
the United States, is much more adventurous than in many
quiet regions of continental Europe.]