[Footnote 192-8: When Catherine II. reduced the rate of interest in Livonia, in 1785, from 6 to 5 per cent., it soon became impossible, even on the best security, to borrow at less than 7 per cent. (_Storch_, Handbuch, II, 26.) And so, when in New York, in 1717, the rate of interest was reduced to 6 per cent., it became necessary, the following year, to raise it again to 8 per cent. The merchants, themselves, pet.i.tioned that it might be so raised, because they found it impossible to get any loans whatever. (_Ebeling_, Geschichte und Erdbeschreib. von Nord Amerika, III, 152.) In Chili, the legal rate of interest is 6 per cent., the actual rate, however, never under 12 per cent., and frequently 18 to 24 per cent. In Peru, on the other hand, the repeal of the usury laws rapidly reduced the rate of interest from 50 to 24 per cent., and finally to 12. (_Poppig_, I, 118.)]

SECTION CXCIII.

INTEREST-POLICY.--EFFORTS TO AVOID THE EVIL EFFECTS OF A FIXED RATE.

It has been thought possible to avoid the evil effects of a fixed legal rate of interest, by regulating it in such a way as to make it coincident with the rate customary in the country.[193-1] But there are numberless transactions in which an insurance premium, or premium for risk or certain expenses of administration[193-2] on the part of the loaner is inseparable from the true interest. Here, even the law which entered most into detail could never properly provide for the infinite gradations or shades of risk and trouble; and the rate in a great many transactions would, therefore, be placed below the natural height.

Turgot long since observed that the value of a promise of future payment is different not only for different persons, but at different times.

Thus, for instance, it is really less after there have been numerous cases of bankruptcy than at other times.[193-3] If, now, it was desired to fix the maximum rate of interest in such a way that it should equal the rate customary in the country, where the security is good, the best real property security for instance, the consequence would be, that those persons who had no such guaranty to offer (leaving the loaning "among brothers" out of the question) would either be unable to borrow money at all, or, by evading the law, only at an artificially higher rate. Hence the legislator causes injury where he wished to favor. This has been observed in England in almost all past commercial crises.[193-4] The man who makes it his business to loan his capital, on short time and in small sums, undertakes a trade which the examination, and the surveillance of a large number of small debtors, and the necessity of reinvesting the many small sums paid him, render exceedingly troublesome and disagreeable. Moreover, in loaning on short terms of payment, there is always danger that his money may lie idle for some length of time. These are reasons sufficient, why, in such cases, when the whole compensation is denominated interest, a rate of interest greater than usual in the country is equitable and even necessary. (-- 179.)[193-5]

It has been frequently suggested that spendthrifts and adventurers should be hindered using, or to speak more correctly, abusing the nation's wealth by laws prohibiting the rate of interest at which they might be expected to obtain credit; and this in the interest alike of the creditors they might possibly find and in their own.[193-6] But almost every inventor of genius, from Columbus to Stephenson, has been obliged to be considered "an adventurer" for a time by "solid men." The law limits him thus, and more especially during the critical period of outlay which precedes the undoubted triumph of his idea, to his own means or the gifts of others.[193-7] And how inadequate, as rule, are both. The rich are as seldom discoverers, as discoverers are skillful supplicants. And, as regards spendthrifts, they may ruin themselves in so many thousands of ways, especially by buying or selling, and unhindered by the state, that it is scarcely apparent why the one way of borrowing should be legally closed to them.[193-8] How is it, if the law itself drives them into the hands of a worse cla.s.s of creditors, and compels them to pay yet a higher rate of interest? Are they not simply more rapidly ruined? States, themselves, have scarcely ever given any heed to their own usury laws in borrowing or loaning.[193-9]

[Footnote 193-1: In Austria, in 1803, in loaning on pledge, 4 per cent.; in other loans and in the trade of merchants with one another, 6 per cent. In France, since 1807, with merchants, 6 per cent.; with others, 5. _Salmasins_, De Mono Usur., c. 1, advises that the maximum should be fixed as high as that usual in the most unfavorable cases. The reduction from such rate, where possible, would regulate itself.]

[Footnote 193-2: _Petty_, Quantulumcunque concerning money, 1682.]

[Footnote 193-3: Sur le Pret d'Argent, -- 36.]

[Footnote 193-4: How many merchants would have avoided bankruptcy here if they had been allowed to borrow at 8 per cent.! The established rate of 5 per cent. was certainly too low, considering the great demand for capital and the want of confidence at the moment, to permit capital to be loaned at that rate. Many saw themselves compelled to sell their merchandise or evidences of state indebtedness at a loss of 30 per cent., in order to meet their obligations. But the person who, to antic.i.p.ate the receipts due in 6 months, for instance, consents to suffer a loss of 30 per cent., pays, in a certain sense, interest at the rate of 60 per cent. a year. Compare _Tooke_, Considerations on the State of the Currency, 60, and History of Prices, II, 163, on the Crisis of 1825-26. Since the Bank, least of all, could exceed the legal rate of interest, numberless applications were made to it in times of war in order to obtain the difference between the legal rate and the rate usual in the country.

(_Thornton_, Paper Credit of Great Britain, ch. 10.) Prussia, November 27, 1857, suspended the usury laws for 3 months, on account of the commercial crisis, except the provisions relating to p.a.w.n-broker and minors.]

[Footnote 193-5: _Turgot_ tells of Parisian "usurers" who made weekly advances to the market women of la Halle, and received for 3 livres, 2 sous interest; that is 173 per cent. a year. The premium for insurance may have been very high here. When such loaners were brought before the courts, and they were sentenced to the galleys, the usual punishment for usury, their debtors came and testified their grat.i.tude by begging for mercy to them! (Memoire sur le Pret d'Argent, -- 14, 31.) Compare _Cantillon_, Nature du Commerce, 276.]

[Footnote 193-6: Thus, _Adam Smith_, Wealth of Nations, II, ch. 4. Similarly, _Roesler_ Grundsatze, 495 ff. Compare, _per contra_, _Jer. Bentham_, Defense of Usury: showing the Impolicy of the present legal Restraints on the Terms of pecuniary Bargains in Letters to a Friend. To which is added a Letter to Adam Smith on the Discouragement imposed by the above Restraints to the Progress of inventive Industry, 1787; 3 ed., 1816.]

[Footnote 193-7: The first steamboat in the United States was, for a long time, called the "Fulton-folly!"]

[Footnote 193-8: It is just as hard to see why only money-capital should have a fixed rate of interest, and not buildings, etc. likewise.]

[Footnote 193-9: In Holland, the legal rate of interest was lowered, in 1640, to 5 per cent., and in 1655 to 4; but not since. (_Sir J. Child_, Discourse of Trade, 151.) Besides, _Locke_, Considerations on the Lowering of Interest, Works, III, 34, a.s.sures us that, in his time, a man in England could make contracts for unlimited interest.]

SECTION CXCIV.

INTEREST-POLICY.--REPEAL OF THE USURY LAWS.

However, the complete repeal of the usury laws[194-1] has not under all circ.u.mstances accomplished what it was supposed it would; and the state should take great care, lest by an incautious framing of its laws, it should put judges in such a position that they may be compelled to cooperate in the execution of immoral contracts.[194-2] In the lowest strata, so to speak, of the loaning business, the medieval condition continues to exist (-- 190) after it has disappeared in the upper. Here, the loan is effected scarcely ever for the purposes of production, but most generally because of the most urgent necessity; and the debtor is not in a condition, from want of education, and especially from his ignorance of arithmetic, to estimate the magnitude of the burthen he has undertaken. The business of loaning is, under such circ.u.mstances, considered dishonorable, to some extent, by the public. And when a business necessary in itself is held disreputable by public opinion, the usual result is that bad men alone engage in it.[194-3] Real compet.i.tion which would but fix the natural price is wanting here in proportion as the debtor is anxious for secrecy.[194-4]

Abuses in this respect are best guarded against by the establishment of government loan-inst.i.tutions, and by the publicity of the administration of justice to debtors.[194-5] Besides, every contract might be prohibited the terms of which were such that an inexperienced borrower could not from them obtain a clear conception of the burthen he accepts, or which hindered him from paying the debt at a proper time.[194-6]

Lastly, there should be a rate of legal interest fixed by the state to be charged in such cases as interest is found to be in justice due, but in which none is provided for by contract; and this rate should approximate as nearly as possible to the rate usual in the country.[194-7] [194-8]

[Footnote 194-1: In 1787, Joseph II. abolished the penalties for usury, but allowed the provisions denying a legal remedy, in cases of usurious demand of over 4 per cent. for hypothecations, 6 per cent. for bills and 5 per cent. for other loans, to remain. Compare the prize essay by _Gunther_, Versuch einer vollstandigen Untersuchung uber Wucher und Wuchergesetze, 1790; _v. Kees_, uber die Aufhebung der Wuchergesetze, 1791; _Vasco_, Usura libera, 1792. The opposite view represented by _Ortes_, E. N., II, 24, and _v. Sonnenfels_, Ueber Wucher und Wuchergesetze, 1789, and zu Herrn _von Kees_, Abhandlung, etc., 1791. The debates on the repeal of the usury laws in the French Chamber of Deputies, after which _Lherbette's_ motion in favor of their repeal was rejected. In France they were, during the a.s.signat-period of bewilderment virtually, and in 1804-1807 expressly (C. C., Art. 1907), but only provisionally repealed. In Wurtemberg, all those having the right to draw bills of exchange were exempted from them in 1839. Since the law of 1848, governing bills of exchange, gave all persons capable of contracting, the right to draw bills of exchange, the usury laws have ceased to have any existence; without much noise before and without much complaint after. (A. Allgem. Ztg., 24 Marz, 1857.) Recent complete or partial repeal of the usury laws: in England, in 1854; in Denmark, in 1855; in Spain, in 1856; Sardinia, Holland, Norway and Geneva, 1857; Oldenburg, 1858; Bremen, 1859; in the kingdoms of Saxony and Sweden, in 1864; Belgium, 1865; Prussia, the North German Confederation, and to some extent Austria, in 1867.]

[Footnote 194-2: Compare _F. X. Funck_, Zins und Wucher, 1868, a moral theological treatise which rightly demands a more rigid popular morality in relation to real usury, after the repeal of the usury laws. The recent cases in which courts have juridically acquitted usurers because they could not do otherwise, but have branded them morally, are of very questionable propriety, in view of the facility with which high and usurious rates of interest may be confounded. _R.

Meyer_, Emanc.i.p.ationskampf, I, 78, advises that the capitalist be allowed to ask whatever interest he wishes, but that the state, as judge and executor of the laws, should enforce payment only at a certain rate determined by law.]

[Footnote 194-3: Many laws seem to purposely permit this, inasmuch as they allow a rate of interest, higher in proportion as the position of the creditor is less respectable. Thus, formerly, in some places, the Jews might require higher interest than the Christians. Justinian allows _personis ill.u.s.tribus_ only 4 per cent.; ordinary private persons, 6 per cent.; money-changers, etc., 8 per cent. (L. 26, Cod. IV, 32.) On the other hand, according to the Indian legislation of Menu, the Brahman is obliged to confine himself to 2, the warrior to 3, the _vaysya_ to 4, the _sudra_ to 5 per cent. per month at most. (Cap. 8.)]

[Footnote 194-4: _Turgot_ considered that only the _preteurs a la pet.i.te semaine_, p.a.w.nbrokers who loaned to hard-pressed people on the confines of the middle cla.s.s and artisans, and the infamous characters who advanced money to the sons of rich men to spend in dissipation, still pa.s.sed for usurers.

Only the latter are injurious; not, however, because of the high rate of interest they charge, but because they help in a bad cause. (Sur le Pret d'Argent, -- 32.) According to _Colquhoun_, Police of the Metropolis, 167, there are women in London from whom the hucksteresses borrow 5 shillings every day and return them every evening with shilling interest. Something a.n.a.logous happens much more frequently in the country, especially in the loaning in kind of productive capital to poor persons. Thus, in Tessin, there are many "iron cattle" which the borrower is obliged to return at their original value, plus an interest of about 36 per cent. (_Franscini_, C. Tessin, 152.) On the Rhine, frequently as much as 200 per cent. a year, is stipulated for in such contracts. _Morstadt_, der N. Oekonom. Heft., IX, 727.]

[Footnote 194-5: Compare _J. J. Becher_, Polit. Discurs, 1668, 219; _v. Schroder_, F. Schatz- und Rentkammer, Bd. ---- 123, 133 ff. The first _montes pictatis_ were expressly intended to check the usury of the Jews. Thus, in Florence, in 1495, after the expulsion of the Jews, voluntary contributions were made to found a munic.i.p.al loaning establishment. Similarly, _Tiberius_, Tacit. Ann., VI, 16 seq. _Count Soden_, Nat-Oek., IV, 57; V, 319, advises that all contracts for interest should be recorded in a public registry, under pain of their being held not actionable.]

[Footnote 194-6: _Gunther_, loc. cit., thinks that, in every contract in which the rate of interest is masked, its real rate should be expressed under penalty of invalidity. In addition to this, he would have those who have attained their majority put in full control of their fortune only after they had undergone an examination.

It seems opportune that the old prohibition against interest on interest (_Cicero_, ad. Att., V, 21, and L, 26, Digest, XIV, 6) and the provision that the interest should not be permitted to be greater than the _alterum tantum_ (Digest, l. c.) should be permitted to continue. (Digest, l. c.) Both of these measures were first decreed by Lucullus, for the protection of Asia Minor. Compare -- 115. Florentine law, of 1693, that interest in arrears, or that interest on interest beyond 7 years, should not be added to the princ.i.p.al without an express contract to that effect. (_Vasco_, Usura libera, -- 155.) In England, the usury laws were by 2 and 3 Victor., c. 37, repealed, but only to the extent of excepting from their provisions bills of not over 12 months, and money loans not over 10. Compare _Rau_, Lehrbuch II, -- 323.]

[Footnote 194-7: Compare _Locke_, Considerations: Works, 10, 32 ff. In Spain, the Council of State is required to regulate the rate of legal interest yearly (law of 1856, art. 8); a thing which, according to _Braun_, would be better done in each individual case by the judges themselves. (_Faucher's_ Vierteljahrsschrift, 1868, II, 13.)]

[Footnote 194-8: In Athens, the rate of interest in general was voluntary from the time of Solon, who, however, did away with slavery for debt. (Lysias adv. Theomn., 360.) Yet there was a legal rate of interest of 18 per cent. for the case in which a divorced husband delayed the return of his wife's dowry. Compare _Bockh_, Staatshaushalt der Athener, I, 148.]

CHAPTER V.

THE UNDERTAKER'S PROFIT. (_UNTERNEHMERLOHN._)

SECTION CXCV.

THE REWARD OF ENTERPRISE.

The essence of an enterprise or undertaking, in the politico-economical sense of the word, consists in this, that the undertaking party engages in production for the purpose of commerce, at his own risk. In the earlier stages of a nation's economy, the production of consumers is, naturally enough, limited chiefly by their own personal wants. Somewhat later, when the division of labor has been further developed, the workman produces at first, enough to meet occasional determinate "orders;" and still later to meet them regularly and as a business.

Later yet, and in stages of civilization yet higher, especially when the freedom of labor constantly grows, as it is wont to, here, and the freedom of capital and trade becomes more extensive, enterprise plays a part which grows more important as time rolls on, and is usually carried on more at one's own risk.[195-1] This transition is a great advance, inasmuch as the advantages of the cooperation of labor and of _use_ may be utilized in a much higher degree by undertakers (_Unternehmer_) than by producers who labor only to satisfy their own household wants, or to meet "orders" already made. The awakening of latent wants, a matter of the utmost importance to a people who would advance in civilization, is something which can enter into the mind only of a man endowed with the spirit of enterprise (an undertaker).[195-2]

While most English political economists have confounded the personal gain of the undertaker with the interest on the capital used by him,[195-3] many German writers have called the "undertaker's earnings"

or profit a special, and fourth, branch of the national income, coordinate with rent, wages, and the interest on capital.[195-4] Yet, the net income of every undertaker is either the fruit of his own land used for purposes of production and of his capital, in which case it is subject to the usual laws of development of rent and interest; or, it must be considered as wages paid for his labor.[195-5] These wages he earns, as a rule, by organizing and inspecting the work, calculating the chances of the whole enterprise; frequently by, at the same time, keeping the books and acting as cashier; and, in the case of small undertakings, as a common fellow-workman. (Tradesman, peasant). In every case, however, even when he puts an agent paid by himself in his place, he earns these wages from the fact that his name keeps the whole enterprise together; and for the reason that, in the last instance,[195-6] he has to bear the care and responsibility attending it.[195-7] When a business goes wrong, the salaried director or foreman may permit himself to be called on to engage in another; but the weary, watchful nights belong to the undertaker or man of enterprise, alone; and "how productive such nights frequently are!"[195-8]

This profit of the undertaker is subject essentially to the same natural law as wages in general are; only it differs in this from all other branches of income, that it can never be stipulated for in advance.

Rather does it consist of the surplus which the product of the undertaking affords over and above all the rent stipulated for in advance or estimated at the rate usual in the country, the interest on capital, and wages of common labor.[195-9]

[Footnote 195-1: At first, usually imperfect enterprises in which the shop-instruments, etc., are kept ready for present orders; and then complete or perfect enterprises. (_v.

Mangoldt_, Volkswirthschaftslehre, 255.)]

[Footnote 195-2: _v. Mangoldt_, Lehre vom Unternehmergewinn, 1855, 49 ff. The same author shows, in his Volkswirthschaftslehre, that it is better for the general good that the risk should be borne by the producer than by the consumer. In the case of the taking of orders, there is danger only of a technic failure, but in enterprise proper, there is possible also an economic miscarriage of the work, even when successful from a technic point of view. But in the case of the undertaker (man of enterprise), responsibility is much more of an incentive, production much more steady, and therefore much better able to exhaust all means of help. Consumers are much more certain in their steps, as regards price, etc., since they find what they want ready made.]

[Footnote 195-3: Thus _John Stuart Mill_, Principles, II, ch. 15, 4, teaches with a certain amount of emphasis that the "gross profits of stock" are different not so much in the different branches in which capital is employed, as according to the personal capacity of the capitalist himself or of his agents. There are scarcely two producers who produce at precisely the same cost, even when their products are equal in quality, and equally cheap. Nor are there two who turn over their capital in precisely the same time.

These "gross profits" uniformly fall into three cla.s.ses: reward for abstinence, indemnity for risk, remuneration for the labor and skill required for superintendence. _Mill_ complains that there is in English no expression corresponding to the French _profit de l'entrepreneur_. [The translator has taken the liberty to use the expression "undertaker's profit," for what the French call the _profit de l'entrepreneur_, and the Germans _Unternehmerlohn_, spite of its funereal a.s.sociations, and because Mill himself employed it, although he recognized that it was not in good usage.--TR.] (II, ch. 15, 1) _Adam Smith_ had the true doctrine in germ (Wealth of Nat., I, ch. 6), but those who came after him did little to develop it. Compare _Ricardo_, Principles, ch. 6. 21. _Read_, Political Economy, 1829, 262 ff., and _Senior_, Outlines, 130 seq., were the first to divide profit into two parts: interest-rent (_Zinsrente_) and industrial gain. Similarly, _Sismondi_, N. P., IV, ch.

6. According to _A. Walker_, Science of Wealth, 1867, 253, 285, "profits are wages received by the employer."]

[Footnote 195-4: _Hufeland_, Grundlegung, I, 290 ff.; _Schon_, Nat-Oek., 87, 112 ff.; _Riedel_, Nat-Oek., II, 7 ff.; _von Thunen_, Der isolirte Staat, II, 1 80 ff.; _v.

Mangoldt_, Unternehmergewinn, 34 ff. The latter divides the undertaker's profit (_profit de l'entrepreneur_) into the following parts:

A. Indemnity for risk. If this be only an indemnity exactly corresponding to the risk, it cannot be looked upon at all as net income, but only as an indemnification for capital.

If individual undertakers, favored by fortune, receive a much larger indemnification than is necessary to cover their losses, such indemnification is not income either, but an extraordinary profit not unlike a lottery-gain, unless it be called, perhaps, the reward of extraordinary courage (_Eiselen_), i. e., wages. If, lastly, the indemnity is uniformly somewhat larger than the risk, in order to compensate for the continual feeling that one is running a risk, it must be remembered that all remuneration for present sacrifice, made directly for the sake of production, is wont to be embraced under the name of wages.