Chapter XXXVIII: Section CLXXXI

RULE OF INTEREST IN GENERAL.--CAUSES OF DIFFERENT RATES.

The real exceptions to the above rules are caused by a prevention of the leveling influx and outflow of capital. Among nations in a low stage of civilization, there is wont to be a multitude of legal impediments in this respect. The existence of a difference of classes, of privileged corporations, etc., not only restrains the transition of workmen, but also of capital from one branch of industry to another. But even the mere routine of capitalists, that blind distrust of everything new so frequently characteristic of easily contented men, may produce the same result.[181-1] In the higher stages of civilization, patents for inventions and bank privileges, are causes of a lastingly higher rate of interest than is usual in the country.[181-2] Finally, since in many enterprises only a large amount of capital can be used at all, or at least with most advantage, the aggregation of which from many small sources is ordinarily much more difficult than the division of a large one into small fractional parts; the rate of interest for very small amounts of capital, and especially in the higher stages of civilization, is usually lower than that of large amounts of capital. We need only mention interest paid by savings-bank investments.[181-3]

If circulating capital has been changed into fixed capital, its yield will depend upon the price of the particular goods in the production of which it has been made to serve. Compared with the cost of restoration of fixed capital, this yield may, in a favorable case, constitute an extraordinarily high rate of interest, in an unfavorable a very low one; and the former of these two extremes has a greater chance of being realized, in proportion as it is difficult to multiply fixed capital of the same kind; the latter, the more exclusively it can be employed in only one kind of production, and the longer time it takes to be used up by wear.[181-4] When fixed and circulating capital coöperate in production, the latter, because it can be more easily withdrawn, but also more easily replaced, first takes out its own profit, that is the profit usual in the country and leaves all the rest to the former. When fixed capital is sold, practically no attention is paid to what it originally cost. The purchaser pays only for the prospective revenue it will yield, which he capitalizes at the rate of interest usual in the country. The seller henceforth looks upon his gain as an accretion to capital, his loss as a diminution of capital, and no longer as high or low interest.[181-5] That accretion might be considered the wages, paid once for all, for the intelligent labor which governed the original investment of the capital, and _vice versa_.

[Footnote 181-1: Thus the rate of interest in the Schappach
valley remained for a long time much lower than in the
vicinity, for the reason that the peasantry who had grown
rich through the lumber trade possessed notwithstanding
little of the spirit of enterprise. (_Rau_, Lehrbuch, I, §
233.)]

[Footnote 181-2: Here the law produces a species of
artificial fixation.]

[Footnote 181-3: _Von Mangoldt_, Unternehmergewinn, 150.]

[Footnote 181-4: In other words, the more fixed they are.
Thus, for instance, dwelling houses in declining cities,
canals, etc. which have been supplanted by better commercial
routes; or again, the shafts and stulms of a mine which has
been abandoned. When Versailles ceased to be a royal
residence, the value of inhabited houses sank to one-fourth
of what it had been. (_Zinkeisen_ in _Raumer's_ histor.
Taschenbuch, 1837, 426.) A rate of interest greater than
that usual in a country is seldom found where freedom of
competition prevails, since it is necessary there to
distinguish between rent and interest on capital. When in an
open city, the capital employed in the construction of
dwelling houses _detractis detrahendis_ pays 8 per cent.,
while the rate of interest customary in the country is only
4 per cent., the supply of houses will grow continually
greater. Only the difficulties in the way of transferring
capital from one business to another could here retard the
leveling process, which where the political prospect for
instance was bad, might last a long time--one of the
principal reasons why, in 1848, the rent of houses declined
much less than their purchase prices. The conjuncture was
not serious enough to prevent the increase of population;
but it entirely stopped the building of new houses. On the
other hand, a bridge or railroad company may maintain a high
rate of profit because competition cannot exist in the face
of the great expense such enterprises require; but
especially because the party who has here the advantage of
priority may lower the price of transportation to such a
point as to entirely discourage his rival. Compare
_Hermann_, Staatsw. Untersuchungen, 145 ff. Interesting
example of the London gas and water companies in _Senior_,
Outlines, 101.]

[Footnote 181-5: Thus, for instance, Leipzig-Dresden
railroad stock cost originally 100 thalers per share, and
was taken at that rate. The yearly dividends amounted in
1856 to 13 thalers; that is, 13 per cent. for the original
stockholders. But a person who on the 30th September, 1856,
paid 285 thalers for a share, received but an interest of
4-1/2 per cent. on his capital. It is characteristic, how
_Serra_, Sulle Cause, etc., 1613, I, 9, calls the high and
the low rate of interest _prezzo basso e alto delle
entrate_.]