Chapter XLII: Section CLXXXV

HISTORY OF THE RATE OF INTEREST.--INFLUENCE OF AN ADVANCE IN CIVILIZATION.

With an advance in civilization, the rate of interest is wont to decline.[185-1] [185-2] One of the chief causes of this phenomenon is the necessity, as population and consumption increase, to employ capital in the fertilization of less productive land, and in less profitable investments.[185-3] An increase in the stock of money does not necessarily depreciate the rate of interest. If this increase comes in connection with a corresponding depreciation of the individual pieces of metal, it cannot be said that the nation has thereby become richer in capital. All that would be required in such case is only a greater number of pounds of gold or silver, or more paper bills to represent the same capital.[185-4] Only during the transition-period, during which the depreciation of money is still incomplete, is the rate of interest wont to be lowered; and all the more, since loaned capital is generally offered and sought after in the form of money.[185-5] [185-6]

The decline of the rate of interest generally shows itself earliest in the large cities, which are everywhere the national organ, in which the good and bad symptoms of later civilization may be soonest observed.[185-7]

Moreover, the condition of capitalists is not necessarily made worse by a decline of the rate of interest. It is possible that, for a long time, the increase of capital should continue more rapid than the decrease of interest for each individual. (If, indeed, the aggregate interest of capital should become absolutely smaller, there is always a pleasant remedy available, viz.: to consume a part of the capital!) But, however, a decline of the rate of interest is nearly always followed by increased activity on the part of capitalists; and they come to the resolve to retire later to enjoy the results of their previous labors. In Holland, after the time of Louis XIV., no branch of business was wont to pay more than from two to three per cent. In the case of the purchase of land, no one calculated on more than two per cent. Hence it was scarcely possible for small capitalists there to live on their interest; and the good sense of the people so well adapted itself to this state of things that to live in leisure on one's rents was considered a not entirely honorable mode of existence.[185-8] The lower the rate of interest, the larger, in highly civilized countries, is the stock on hand of cash apt to become, for the reason that business men then hope to gain more by the advantages of cash payments than by the saving of interest.[185-9] [185-10]

[Footnote 185-1: _Proudhon's_ idea, that this decline might
at last bring about a total abolition of interest, is based
on the same error as this other: that since a man may keep
diminishing his per diem quantum of food, he might finally
dispense with food altogether. _Proudhon's_ Banque du
Peuple--People's Bank--which, by gradually diminishing the
interest on its loans to the minimum cost of its
administration, should compel other capitalists to follow
its example.]

[Footnote 185-2: Thus, in England, by virtue of 37 Henry
III., c. 9, the legal interest was = 10 per cent.; by 21
James I, c. 17 = 8; about 1651 = 6 per cent. (confirmed in
1660); by 12 Anne, ch. 16 = 5 per cent. In the time of
George II., where the security was good, only 3 per cent.
was, as a rule, paid. In France, the legal rate of interest,
at the beginning of the 16th century, was 1/10 of the
capital; after 1657, 1/12; 1601 (_Sully_), 1/16; 1634
(_Richelieu_), 1/18; 1665 (_Colbert_), 1/20. Compare
_Forbonnais_ Recherches et Considérations, I, 48, 225, 385
ff. It continued at this rate of 5 per cent. with short
interruptions until the revolution. (_Warnkönig_, Franz.
Staats. und Rechtsgeschichte, II, 588 seq.)

The rates of interest in Russia, in the 16th century, had
already declined to 20 per cent. (_Herberstein_, Reise, 41
ff.; _Karamsin_, Russ. Geschichte, VII, 169.) In Holland, in
1623, it was estimated that land purchases paid 3 per cent.;
hypothecations, 4 to 6; deposits, 5 to 6; a flourishing
business, 10 per cent. Compare _Usselinx_ in _Laspeyres_,
Geschichte der volkswirthschaftl. Anschauungen der
Niederländer, 76. About 1660, the rate of interest usual in
Italy and Holland was at most 3 per cent. (in war times, 4);
in France, 7; in Scotland, 10; in Ireland, 12; in Spain, 10
to 12; in Turkey, 20 per cent. (_Sir J. Child_, Discourse on
Trade, French translation, 75 ff.) Side by side with 6 per
cent. as the rate of interest in England, it was (a little
later) 10 in Ireland. _Petty_, Political Anatomy of Ireland,
74.

The same course of things is to be observed in ancient
times. In _Solon's_ time, and again in that of _Lysias_, it
was 18 per cent. (_Böckh_, Staatshaushalt der Athener, I,
143 ff.) I am of opinion that the rate of interest declined
during this long interval, but rose again in consequence of
the Peloponnesian war. Among friends, in the time of
_Demosthenes_, 10 per cent. (adv. Onetor., I, 386.)
_Aristotle_, Rhet., III, 10, mentions 12 per cent., which
_Aeschines_, adv. Ctes., 104, and _Demosthenes_, adv. Aph.,
I, 820, 824, call low. The rate of commercial interest in
Egypt (146 before Christ) seems to have been 12 per cent.
per annum. (_Letronne_, Recompense promise à celui, etc.,
1833, 7.) Contemporaneously in Rome, a similar rate of
interest must have been considered usurious. (_Cicero_, ad.
Att., I, 12.) Under the emperor _Claudius_, 6 per cent.
(_Columella_, De Re rust., III, 3.) _Justinian_ allowed _to
personae illustres_ 4 per cent. per annum. (L. 26 Cod., IV,
32.)]

[Footnote 185-3: A Huron with his bow and arrow kills 12
pieces of game; the European, with a much better capital,
his rifle, only 5. Compare _v. Schözer_, Anfangsgründe, I,
28. _Mallthus_, Principles, ch. 5. According to _Ricardo_,
ch. 6, the decline of the rate of interest because of the
necessity of carrying on agriculture under harder
conditions, must make all capital of which raw material
forms a part more valuable; while the possessors of
money-capital particularly find no indemnification.
_Wakefield_, England and America, 1853, accounts for it by
saying that production, besides the coöperation of capital
and labor, needs "a field of employment;" and _Bastiat_,
Harmonies, ch. 5, 13, by saying that with the advance of
civilization, the results of former services lose in value
as compared with later ones, because performed under less
favorable circumstances.]

[Footnote 185-4: _D. Hume_, Discourses No. 4 On Interest.
Per contra, see _Locke_, Considerations of the Consequences
of the Lowering of Interest; _Law_, sur l'Usage des Monaies,
1697 (Daire); and _Montesquieu_, Esprit des Lois XXII, 6.
_Cantillon_ draws a very nice distinction: If the increased
amount _of_ money in a state comes into the hands of
loaners, it will decrease the current rate by increasing the
number of loaners; but if it comes into the hands of
consumers, the rate rises, because now the demand _for_
commodities is so much greater. (Nature du Commerce, 284.)]

[Footnote 185-5: The reviews in the Göttingen G. Anz., 1777,
and of _von Iselin_, in the Ephemeriden der Menschheit, II,
170 ff., 177, question _Adam Smith's_ (Wealth of Nat., II,
ch. 4) entirely too positive denial of the influence of the
American production of gold and silver on the diminution of
the rate of interest, a view which was shared also by
_Turgot_, Form. et Distr., § 78. See a beautiful comparison
between a declining of the prices of the currency which,
promotes production, with the phenomena attending the growth
of a tree, in _Schäffle_, N. Oek., II, Aufl., 249.]

[Footnote 185-6: Thus the rate of interest in Rome fell from
12 to 4 per cent. when Octavian suddenly threw the treasures
of conquered Egypt upon the market, and the price of
commodities only doubled. When later commerce had divided
this amount of money among the provinces, it rose again.
(_Sueton._, Oct., 41; _Dio C._, LI, 17, 21; Oros, IV, 19.)
_Law's_ emissions of paper, in colossal amounts, depressed
the rate of interest to 1-1/4 per cent. (_Dutot_,
Réflexions, 990--Daire.) But as soon as the paper money had
lost its value, the former condition returned. Similar
observations in Rio de Janeiro: _Spix_ und _Martius_, Reise,
I, 131.]

[Footnote 185-7: While in Paris the capital safely invested
paid 2-1/2 to 3 per cent., 57 out of 61 _conseils généraux_
declared, in 1845, that the rate of interest on
hypothecations, in their departments, was always over 5 per
cent.; 17 estimated it at an average of from 6 to 7 per
cent.; 12 at from 7 to 10; some said 12 and 15, and even 22
per cent. in the case of small sums loaned for a short time.
(_Chegarny_, Rapport au Nom de la Commission de la Réforme
hypoth., 29 Avril, 1851.) In Russia, at the beginning of
this century, the rate of interest in the Baltic provinces
was 6 per cent.; in Moscow, 10; in Taurien, 25; in Astracan,
30 per cent. (_v. Schlözer_, Anfangsgründe I, 102.) In 1750,
in Naples, the rate of interest was from 3 to 5 per cent.,
in the provinces from 7 to 9 per cent. (_Guliani_, della
Moneta, IV, 1.) In Trajan's time in Rome, 6; in Bithynia, 12
per cent. (_Plin._, Epist. VII, 18; X, 62.)]

[Footnote 185-8: _Delacourt_ Aanwysing, 1669, I, 7.
_Temple_, Observations on the U. Provinces, ch. 6, Works L.
1854. Even _Descartes_ says of Holland's _ubi nemo non
exercet mercaturam_. Compare per contra, _H. Grotius_, Jus
Belli et Pacis, II, 12, 22. Very large capitalists, in
_Smith's_ time, certainly lived generally on the interest of
their money: Richesse de Hollande, II, 172. In England, at
the present day, likewise, a vast number of persons who live
on the interest of their money, occasionally take part in
the speculation in commodities; which explains why so-called
commercial crises are incomparably more extensive there, and
reach incomparably deeper, than in Germany. Similarly,
according to _Conring_, De Commercii, 1666, c. 36, in Venice
and Genoa.]

[Footnote 185-9: Hence the larger cash balances in England
at the present day, which, however, are not kept in the form
of coin, but of bank notes and bankers' deposits.]

[Footnote 185-10: As to how every frugal capitalist works to
the injury of capitalists as a class, but to his own
advantage, by lowering the rate of interest and increasing
the rate of wages, see _Senior_, Outlines, 188 ff.]