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 Considerations, I, 48, 225, 385 ff. It continued at this rate of 5 per cent. with short interruptions until the revolution. (_Warnkonig_, 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 Niederlander, 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. (_Bockh_, 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 a 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 ill.u.s.tres_ 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. Schozer_, Anfangsgrunde, 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 cooperation 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 circ.u.mstances.]

[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 Gottingen 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 _Schaffle_, 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 per cent. (_Dutot_, Reflexions, 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 to 3 per cent., 57 out of 61 _conseils generaux_ 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 Reforme 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. Schlozer_, Anfangsgrunde 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 cla.s.s, but to his own advantage, by lowering the rate of interest and increasing the rate of wages, see _Senior_, Outlines, 188 ff.]

SECTION CLx.x.xVI.

HISTORY OF THE RATE OF INTEREST.--CAUSES OF A HIGH RATE IN THRIVING COMMERCIAL NATIONS.

There are, however, even where a people's economy is in a flourishing condition, many obstacles which cause the decline of the rate of interest to take a retrogressive course, or which at least may delay it for a time.

To this category belong all the modifications of a nation's economy alluded to in -- 183.[186-1] Among them, therefore, is every extension of the limits of productive land. Let us suppose a nation which, its capital and labor remaining the same in every respect, should suddenly double its territory. The less productive places where investments were made in the old province are now abandoned, and labor and capital emigrate to the new. The result is, of course, an increase of the aggregate national income, and, at the same time, a decrease of rent. (-- 157.) Hence, the interest on capital and the wages of labor, taken together, must greatly increase. Which of these two branches shall profit most and longest by the increase will depend upon whether capital or the number of workmen increases most rapidly.[186-2] A similar effect must be produced when, by changes or modifications in the commercial situation, in the tariff, etc., a nation is enabled to obtain the means of subsistence at cheaper rates from more fertile and less settled countries.[186-3]

The introduction of better methods of production has very different immediate consequences, according as these methods affect the commodities which minister to the wants peculiar to workmen as a cla.s.s, or do not. Let us suppose, as a first case, that the cost of ordinary clothing is reduced one half by reason of newly discovered material, better machines, etc. As in the case of the whole people, so also in that of the owners of capital as consumers, there is, in consequence, an addition to their enjoyment of life. Their interest as well as their capital, compared with clothing material, would have become more valuable. But the relation between capital and interest, that is, the rate of interest, could not be directly changed. (Compare _infra_, note 3.) Only when the working cla.s.s employ their materially increased wages to increase population; when in consequence hereof, their wages, estimated in money, again decline beyond what it was before; when, therefore, the price of a given quant.i.ty of labor declines, does the rate of interest rise, although a portion of that which the workmen have lost may be added to rent on account of the increased population?[186-4]

[186-5] If the applicability of the new method of production is confined to articles of luxury used by the upper cla.s.ses, for instance to fine lace, the rate of interest usual in the country will be affected thereby only to the extent that through the medium of commerce such products are exchanged with foreign nations against commodities consumed by the working cla.s.ses.

But there are very few improvements in production which have not led to a greater cheapness of those things which satisfy the wants of the working cla.s.s; and this is especially clear in the improvements in the means of transportation so usual in our day.

However, the increase of fixed capital, such as machines, railroads, etc., once they are completed, may, at first, cause a depression of the rate of wages, as well as an enhancement of the rate of interest; the former from the fact that a number of workmen is thereby, at least temporarily, thrown out of employment; the latter because the conversion of so much circulating into fixed capital must diminish the supply of the former.[186-6]

A second cla.s.s of obstacles consists in the diminution of the supply of capital. War, for instance, always causes such a destruction of capital, and at the same time for the most part renders the reproduction of capital more difficult to such a degree that the rate of interest is wont to rise greatly.[186-7] Something similar is true of other great catastrophes and of extravagance on a large scale.[186-8] Every state loan, whether intended for direct consumption or to procure capital for use (_Nutzkapitalien)_, decreases the supply of circulating capital which most directly determines the market rate of interest.[186-9] [186-10]

[Footnote 186-1: _Wolkoff_ very well shows that the economic progress of mankind is effected partly by the improvement of production, and partly by saving. The former increases the rate of interest, the latter lowers it. (Lectures, 182, 189.

Compare _supra_, -- 45.)]

[Footnote 186-2: Thus the rate of interest in Russia rose, after Catherine II. had conquered the provinces situated on the Black Sea. (_Storch_, Handbuch, II, 34.) The same is still more strikingly apparent in the judicious planting of agricultural colonies.]

[Footnote 186-3: Abolition of the English corn laws! Foreign commerce when very advantageous, always adds to the well-being of the people; to the rate of interest, however, only to the extent that articles which are calculated to satisfy the wants of the working cla.s.s become cheaper in consequence; and this in turn lowers the rate of wages. Let us suppose that a country had hitherto purchased yearly 10,000 barrels of wine for $1,000,000. It might now happen that, in consequence of an advantageous commercial treaty, for instance, the 10,000 barrels might be obtained for $500,000. If, after this, wine-drinkers want to spend $1,000,000 for wine as they did before, they of course double their consumption of wine, but the rate of interest remains unchanged. If, on the other hand, they leave their consumption of wine where it was before and apply the saved half million to effect an increased demand for home products, the capital required for this production is set free at the same time. Hence, the relation between the supply and demand for capital has not changed, abstraction made of certain difficulties in the transaction. Compare _Ricardo_, Principles, ch. 7, rectifying _Adam Smith_, Wealth of Nat., I, ch. 9.]

[Footnote 186-4: An increase in the rate of interest caused by a diminution in the rate of wages does not last long.

Capital now increases more rapidly, and the increase is accompanied by an increased demand for labor. If, in the mean time, workmen have become accustomed to a lower standard of life, the increasing wages are followed by an increase of population: then the necessity of having recourse to the cultivation of land of a worse quality is an additional cause of a decreasing rate of interest. (Edinb.

Rev., March, 1824, 26.)]

[Footnote 186-5: According to this, it is easy to tell what influence the increasing skill or activity of the working cla.s.s (for instance by a decrease in the number of holidays, cooperation of wife and child) must have. Where there has been no accompanying and corresponding elevation of the standard of life, and of the want of the cla.s.s, the gain soon falls to the lot of the capitalists or landowners.]

[Footnote 186-6: See the very clear but not entirely complete discussion in _John Stuart Mill_, Principles, IV, ch. 3 ff. When new railways, machines, etc., before they are complete, simultaneously increase the rate of interest and the rate of wages, and even sometimes rent, although they do not immediately increase the national income in any way, the phenomena are to be explained, not by a distribution of income, but as the result of an advance of capital made.]

[Footnote 186-7: Compare _supra_, -- 184. The rise of the rate of interest in Basil, between 1370 and 1393, _Arnold_ (loc. cit.) accounts for by the wars and defeats of the upper German cities. Similarly in Zurich, 1457. (_Joh.

Muller_, Schweizer Geschichte, IV, 211.) During the time immediately following the Spanish war of succession, the _usuriers les flus moderes_ in France got 12-15 per cent. a year. (_Dutot_, Reflexions, 1866.) In Russia the rate of interest, after the war of 1805-15, rose by 4-5 per cent.

(_Storch_, Handbuch, 35 seq.) Per contra, _Nebenius_, ff.

Credit., 70 seq.]

[Footnote 186-8: Thus the Hamburg conflagration, combined with the bad harvests of 1841, raised the rate of interest in Mecklenburg for a long series of years. Similarly in Wurtemburg, the many bad harvests from 1845 to 1853, which are said to have caused a deficiency of 50,000,000 florins.

(Tubinger Zeitschr., 1856, 568.)]

[Footnote 186-9: In bad times, state loans are usually effected at a disproportionally high rate of interest. This also operates momentarily on the general rate of interest, to the injury of persons engaged in business enterprises; who, by the very fact of the withdrawal of so much capital, become involved in an unfavorable compet.i.tion. In the long run, indeed, the high or low rates of interest paid by national debts, in so far as the creditor cannot demand reimburs.e.m.e.nt, has no influence on the rate of interest usual in the country. Such debts as cannot be declared due a.s.sume the character of stationary capital, the value in exchange of which is determined by their yearly return, capitalized at the rate of interest usual in the country.

(_Hermann_, Staatswirthschaftliche Untersuch., 223.)]

[Footnote 186-10: The cooperation of most of the causes above mentioned raised the English rate of interest which had sunk to 3 per cent. to an average of 5, from about 1760 to 1816. Thus _Gauss_, in a ma.n.u.script work which I have used, relates that the fund for the support of professors'

widows in Gottingen was, in 1794, expected to pay only 3 per cent. In 1799, the trustees observed that their capital could often be safely invested at 4 per cent.; somewhat later the rate of interest rose to 5 per cent., at which point it remained for years. About 1843 ff. the rate of interest in old Bavaria was only 4 per cent.; in more highly cultured Rhenish Bavaria, 5 per cent.]

SECTION CLx.x.xVII.

HISTORY OF THE RATE OF INTEREST.--EMIGRATION OF CAPITAL.

Midway between these cla.s.ses of obstacles lies the very usual proceeding of highly civilized nations whose rate of interest is low, to transfer their capital into countries with a higher rate of interest, where the production of raw material is predominant.[187-1] This is most thoroughly accomplished by the emigration for good of the capitalists themselves; but also least frequently, because the natural attachment of man to his native country is usually too powerful, among the well-to-do cla.s.ses, to be overcome by the attraction of a higher rate of interest.

Temporary settlements in foreign countries are by far more frequent.

Either the capitalist removes there himself, for a time, to return enriched, at farthest, in his old age; or he establishes a permanent branch of his business there, and superintends it through the agency of a trusted representative. The inhabitants of northern Italy, during the last centuries of the middle ages, maintained such establishments, not only for the purpose of carrying on commerce in merchandise along the sh.o.r.es of the Levant, but also the money trade in the princ.i.p.al countries of the west.[187-2] Similarly, the Hanseatic cities contemporaneously in the north and northeast of Europe; and, to-day, the English in almost all the important seaport cities in the world.[187-3]

Such enterprises are always somewhat dangerous, especially in countries but little advanced in civilization.[187-4]

The best means to facilitate the migration of capital is credit. It is, indeed, true, that in international trade, ordinary private loans are seldom made. To make such loans would be to run too many risks; risks through a want of knowledge of persons or circ.u.mstances, on account of the difficulties in the way of continued supervision, and of being able to a.s.sert and defend one's rights away from home.[187-5] Loans are much more readily made to foreign states, to great corporations, or joint-stock companies, whose condition is well-known; and which, by reason of their perpetuity, have a deep and obvious interest in maintaining an honorable reputation. The issuing of certificates of stock, etc., has greatly facilitated international trade in capital.[187-6] But the mode of loaning in foreign parts preferred is to sell them commodities, and to require payment for them only after some time has elapsed, of course, with interest. Purchases, on the contrary, are paid for immediately, possibly even in advance.[187-7] The lower the rate of interest in a country is, the longer and more cheaply can it give credit to others; a new reason why the less civilized countries are particularly fond of trading with the most civilized.[187-8] [187-9]

[Footnote 187-1: _Nebenius_, Der offentliche Credit, 83 ff.

After the end of the Napoleonic war, English capital flowed, by way of preference, towards South America, afterwards towards Spain and Portugal; after 1830, to North America; after 1840, towards Germany and France, to be invested in the construction of railways in the latter countries.]