Chapter XLV: Section CLXXXVIII

HISTORY OF THE RATE OF INTEREST.--EFFECT OF A LOW RATE ON STATIONARY NATIONS.

Beneficial as the spur of a low rate of interest is for countries capable of development, it is a heavy drag on a stationary people, and more so on those who have lost a portion of the field for the investment of their capital by the competition of too powerful rivals.[188-1] A real superabundance of capital is attended with cares and temptations for the middle classes very similar to those caused by a so-called over-population, especially to dishonesty and extravagance.[188-2] When capital, population and the skillfulness of labor remaining the same, continues to increase, the enlarged capital may very readily have every succeeding year only the same return to divide among its owners, that the smaller had in previous years.[188-3] Hence additional saving here would produce no real enrichment of the people; and it might even happen that the instinct to accumulate capital might in the future become torpid to a greater degree than the capital itself had increased. In any case, however, the decline of the rate of interest can continue only to a certain point. There are numberless persons who would rather consume their capital, or invest it in hazardous speculations than put it out at interest at one per cent. a year.[188-4] At least, the tendency of a decline in the rate of interest is, in the case of the richer, to increase the amount of capital consumed as compared with productive capital. The more moderate, sober and provident a people are, the lower may the rate of interest decline without producing this effect. And so, the more the capital of a nation is concentrated in the hands of a few; because then the owners of capital are all the later forced to break in upon it, for the sake of subsistence.[188-5] [188-6]

Among nations which have totally declined, the rate of interest is wont to reach a high point once more; the natural result of great losses of capital and men, while, at the same time, the freedom of the lower classes and the security of property have been either curtailed or lost. The weakness of age is, in many respects, even in the case of nations, a second childhood.[188-7]

[Footnote 188-1: _Temple_, Works I, 102, assures us that the
Dutch in his time considered the payment of the principal of
a public debt a real misfortune: "they receive it with
tears, not knowing how to dispose of it to interest with
such safety and ease." On Italy, see _Bandini_ (ob. 1760),
Sopra le Maremme Sienese, 154 seq.; earlier _Montanari_,
Della Moneta, 57. In the England of the present time, small
capitalists especially belong to the so-called "uneasy"
classes.]

[Footnote 188-2: Numberless bankrupts and unbounded
extravagance in Holland. (Richesse de Hollande, II, 168.) In
England, the hazardous enterprises of 1825 were very much
promoted by the action of the government which a short time
before reduced the interest on its state debt. (_Tooke_,
History of Prices, II, 148 ff.)]

[Footnote 188-3: _J. S. Mill_, IV, ch. 4, 4. When _Ricardo_,
ch. 6, says that every increase of productive capital must
enhance the value in use, and still more the value in
exchange, of a nation's property, but under such
circumstances only to the advantage of the working class,
and still more of the land owning class, he at least
apparently presupposes an improvement, or increase of
labor.]

[Footnote 188-4: Think only of the so-called commercial
crises, the speculation-rage preceding which is excited by
the lowness of the rate of interest, the destruction of
capital in which makes the rate of interest to retrograde
materially. However, this very decline is, in itself, only a
spur to speculation in evidences of national indebtedness,
stocks, etc., in commodities, only where, without such
speculation, a rise in prices was to be expected. Thus, for
instance, the great English periods of speculation: 1796
ff., in colonial products; 1808 ff., in raw materials in
general; 1814, in articles of export, were times in which
there was not the slightest facility in obtaining credit.
(_Tooke_, History of Prices, III, 159.)]

[Footnote 188-5: Between 1829 and 1849, the highest rate of
interest paid by English capital employed in cotton
industries was little over 2-1/2 per cent. (Edinb. Rev.,
April, 1849, 429.)]

[Footnote 188-6: As the symptoms of a condition are very
frequently mistaken for its cause, there have been many
writers who, blinded especially by the contemplation of
Holland, considered the lowness of the rate of interest as
the _causa causans_ of all wealth, and who promised really
magical results from its legislative regulation by the
state. Thus _Sir Thomas Culpeper_, A Tract against the high
Rate of Usury, 1623; continuation 1630; _Sir J. Child_,
Brief Observations concerning Trade and the Interest of
Money, 1668; Discourse of Trade, 1690. _Anderson_ (ob.
1765), was of a similar opinion: Origin of Commerce, a.
1601, 1651; and even _Ganilh_, Dictionnaire analytique, 99
seq. (_Infra_, § 162.) Per _contra_, the anonymous essay,
Interest of Money mistaken, 1668, and _Locke_,
Considerations of the Consequences of the Lowering of
Interest and Raising the Value of Money, 1691. Most moderns
have considered the decline of the rate of interest an evil.
Thus, for instance, _Canard,_ Principes, ch. 5, who
uniformly makes this the starting point of a nation's
downfall. See also _McCulloch_, Principles, III, 8.
_Malthus_ draws a comparison between the saving of capital
and the generation of children: only a high rate of interest
makes the former really useful, and a high rate of wages the
latter.

Even great destruction and disturbances of capital by war,
by loans to the state, for instance, are soon made good,
provided the sources of the saving of capital are not dried
up. (Principles, III, 370 ff., 401, ff.) _John Stuart Mill_
expressly counsels rich and highly civilized nations not to
neglect beneficent enterprises, although economically
unproductive, because capital might be lost in them. The
result of such a loss would, under certain circumstances,
simply be that less capital would be exported or wasted in
speculation. (Principles, II, ch. 5, 1.) Similarly _Canard_,
who, therefore, compares state loans with blood-letting, as
a remedy for a plethoric disease. (Ch. 9.) _Turgot_
confounded cause and effect when he compared a high rate of
interest to an inundation, below the level of which nothing
can be produced; and which, the lower it became, the more
dry ground there was for men to work on. (Sur la Formation,
etc., § 89.)]

[Footnote 188-7: Rate of interest in Persia from 40 to 50
per cent. a year. (Ausland, 1844, No. 208.) In Tripoli,
Christians and Jews alike loan the Arabs at the rate of 5
per cent. a month; at least 1-1/2 or 2. (_Rohlfs_, von
Tripolis nach Alexandrien, 1871, I, 22.) In most of the East
Indian kingdoms, the rate of interest is so high for the
government itself that when the creditor, even without a
return of the capital, gets the interest only for a few
years, he is considered passably well indemnified. (_J. S.
Mill_, II, ch. 15, 2.) In China, 12 to 15 per cent.; 36
nothing unheard of. (_Barrow_, China, 562.)]