Chapter XL: Section CLXXXIII: Effect of Increased Demand for Loans

The price paid for the use of capital naturally depends on the relation between the supply and demand, and especially of circulating capital. The increase of the supply need no more unconditionally lower the rate of interest than the price of any other commodity. If 50 hunters kill 1,000 deer yearly, and give 100 deer per annum as interest to the capitalists who provided them with ammunition and rifles, a second capitalist with an equal number of rifles and an equal amount of ammunition may appear on the scene. If now 2,000 deer a year are killed, the rate of profit of the capitalists will probably remain the same. But if the woods are not rich enough in game for this, or the hunters not numerous enough, too indolent, or too easily satisfied, the rate of interest falls.[183-1]

The difficulties in the way of the desired increase of capital are here of great importance. The smaller the surplus over and above their absolutely necessary wants, which the people produce, the less their tendency to make savings, the less the inclination to capitalization; and the less the security afforded by the law is, the higher must the rate of interest be to induce people to face these difficulties. We may very well transfer the idea of cost of production to this condition.[183-2]

The demand for capital depends, on the one hand, on the number and the solvability of borrowers, especially of non-capitalists like landowners and workmen; and, on the other hand, on the value in use of the capital itself. Hence the growth of population is, other circumstances being the same, a means to raise the rate of interest; because it infallibly increases the competition of borrowers of capital, even if the increased rate must take place at the expense of wages. The solvability or paying capacity of the land-owning class as contrasted with the capitalists can, in the last analysis, depend only on the extent and fertility of their lands and on the quality of their agricultural husbandry; the solvability or paying capacity of the working class, only on their skill and industry. Where these have grown, an increase of the rate of interest may be found in connection with an absolute growth of the rate of wages and of rent, because the aggregate income of the nation has become greater.

The value in use of capital, which is more homogeneous in proportion as it has the character of circulating capital (_res fungibiles_) is, in most instances, synonymous with the skill of the working class, and the richness of the natural forces connected with it. The deciding element, therefore, is the yield of the least productive investment of capital which must be made to employ all the capital seeking employment. This least productive employment of capital must determine the rate of interest customary in a country precisely as cost of production on the most unfavorable land determines the price of corn (§§ 110, 150), and as the result of the work of the laborer last employed does the rate of wages. (§ 165.)

What portion of the total national income, after deduction is made of rent, shall go to the capitalists and what portion to the working class, will depend mainly on whether the capitalists compete more greedily for labor or the laboring classes for capital.[183-3] If, for instance, capital should increase more rapidly than population, there must be a relative increase in wages, and _vice versa_.[183-4] This is true especially of that peculiar kind of higher wages which we shall (§ 145, ff.) designate as the "undertaker's profit." The smaller the number of persons engaged in enterprises is, in comparison with the number of retired persons who live on their rents, incomes, etc., the smaller is the portion of the so-called net profit of enterprise the latter must be satisfied with in the shape of interest.[183-5]

[Footnote 183-1: It is one of _Ricardo's_ (Principles, ch.
21) chief merits, that he demonstrated the groundlessness of
the opinion that the mere increase of capital must, on
account of the competition of capitalists, lower the rate of
interest, as is assumed by _Adam Smith_, I, ch. 9, _J. B.
Say_, Traité, II, 8, and others. Compare also, _John Stuart
Mill_, Principles, IV, ch. IV, 1.]

[Footnote 183-2: _Storch_, Handbuch, II, 20.]

[Footnote 183-3: Frequent withdrawals of capital must, other
circumstances being the same, temporarily raise the rate of
interest. In the long run, however, the question is decided
by this: whether public opinion considers labor a greater
sacrifice than the saving of capital. Compare _Roesler_,
loc. cit., 8.]

[Footnote 183-4: Compare _Hermann_, Staatsw. Unters., 240
ff. Very much depends on whether the new increased
consumption (of workmen when wages are rising, of
capitalists when wages are declining) is of goods which are
mainly the product of large capital, large factories, etc.,
or chiefly of common labor, (_von Mangoldt_, Grundriss, 155
seq.) When _Adam Smith_ suggests that the relation between
wages and the profit of capital is determined by this:
whether there is a market demand for more work or more
commodities, for more "work to be done" or "work done" (I,
ch. 7), he is, spite of appearances, very unsatisfactory.
_Malthus_ distinguishes a restrictive principle of the rate
of interest, viz.: the return made to the least productive
agricultural capital, and a regulative one, viz.: the
reciprocal relation between demand and supply of capital and
labor. (Principles, ch. 5, sec. 4.) _Ricardo_, ch. 6, makes
the profit of capital at all times and in every country
depend on the quantity of labor which it is necessary to
expend on the land which pays no rent, in order to satisfy
the wants of workmen--a very correct theory.

Only _Ricardo_ himself (ch. 21) and his school postulate
altogether too unconditionally that their wants would always
coincide with the minimum of maintenance or support. Thus,
for instance, _J. S. Mill_, Principles, IV, ch. 3, 4.
However, _Mill_ instead of _Ricardo's_ "wages" employs the
better expression, "cost of labor." _Senior_ teaches that
the distribution of the aggregate result between laborers
and capitalists depends on the anterior course of both
classes: on the value of the capital previously employed by
capitalists to produce the means of satisfying working men's
wants, and on the number of workmen which the previous
laboring population have brought into existence. (Outlines,
188 ff.) Concerning _von Thünen's_ vain attempt at a general
formula, see _supra_, § 173. _Fourier's_ idea that 5/12 of
the product should be distributed among labor, 3/12 among
talent, and 4/12 among capital, is entirely baseless. (N.
Monde, 309 ff.) _Considérant_, Destinée sociale, 192 ff. As
early a writer as _H. Boden_, Fürstliche Machtkunst, 1700
and 1740, 42, came strikingly near the truth. According to
him, a low rate of interest is produced by four
circumstances: surplus capital, a dearth of landed estates,
a want of credit and exact justice, and lastly, the heavy
taxation of capital.]

[Footnote 183-5: Thus, in the last century, Spanish
capitalists loaned capital readily to sure commercial
companies, at from 2 to 3 per cent. per annum. (_Bourgoing,_
Tableau de l'Espagne, I, 248.) The contemporary low rates of
interest in Hannover, _Büsch_, Geldumlauf, VI, 4, 12,
endeavors to explain by the absence of opportunities for
investment, as no one dared to loan to any extent on fiefs
or on the land of the peasantry, and because there was no
law governing bills of exchange, etc.]