Capital and Interest: A Critical History of Economical Theory

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
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William A. Smart, trans.
First Pub. Date
London: Macmillan and Co.
Pub. Date

Book I, Chapter II

The Defence of Interest From the Sixteenth Till the Eighteenth Century


The canon doctrine of interest had to all appearance reached its zenith sometime during the thirteenth century. Its principles held almost undisputed sway in legislation, temporal as well as spiritual. Pope Clement V, at the Council of Vienna in 1311, could go so far as to threaten with excommunication those secular magistrates who passed laws favourable to interest, or who did not repeal such laws, where already passed, within three months.*31 Nor were the laws inspired by the canon doctrine content with opposing interest in its naked and undisguised form; by the aid of much ingenious casuistry they had even taken measures to prosecute it under many of the disguises by which the prohibition had been evaded.*32 Finally, literature no less than legislation fell under the sway of the canon doctrine, and for centuries not a trace of opposition to the principle of the prohibition dared show itself.


There was only one opponent that the canon doctrine had never been entirely able to subdue, the economic practice of the people. In face of all the threatened penalties of earth and heaven, interest continued to be offered and taken; partly without disguise, partly under the manifold forms which the inventive spirit of the business classes had devised, and by which they slipped through the meshes of the prohibitionist laws in spite of all their casuistry. And the more flourishing the economical condition of a country the stronger was the reaction of practice against the dominant theory.


In this battle victory remained with the more stubborn party, and that party was the one whose very existence was endangered by the prohibition.


One of its first results, not marked by much outward circumstance, but actually of great importance, was obtained even when the canon doctrine was still, to all appearance, at the height of its authority. Too weak to hazard open war against the principle of prohibition, the business world yet managed to prevent its strict and complete legal enforcement, and to establish a number of exceptions some direct and some indirect.


The following, among others, may be regarded as direct exceptions: the privileges of the Mons de Piété, the toleration of other kinds of banks, and the very extensive indulgence shown to the usury practices of the Jews—an indulgence which, here and there, was extended, at least by secular legislation, into a formal legal permission.*33


Of indirect exceptions there were: the buying of annuities, the taking of land in mortgage for lent money, the use of bills of exchange, partnership arrangements, and above all, the possibility of getting compensation from the borrower in the shape of interesse on the deferred payment (damnum emergens et lucrum cessans). Independent of this, the lender had had a claim to compensation in the shape of interesse, but only in the case of a culpable neglect (technically called mora) on the part of the borrower to fulfil his contract obligations; and the existence and amount of the interesse had to be authenticated in each case. But now a step farther in this direction was taken, although under protest of the strict canonists, by the introduction of two contract clauses. Under one clause the borrower agreed beforehand that the lender should be released from the obligation of authenticating the borrower's mora; and under the other a definite rate of interesse was agreed on in advance. Practically it came to this, that the loan was given nominally without interest, but that the creditor actually received, under the name of interesse, a regular percentage for the whole period of the loan, the borrower by a fiction being put in mora for that period.*34


Practical results like these had in the long run their effect on principles.


To the observer of men and things it must in time have become questionable whether the obstinate and always increasing resistance of practical life really had its root, as the canonists affirmed, only in human wickedness and hardness of heart. Those who took the trouble to go more deeply into the technicalities of business life must have seen that practice not only would not, but could not dispense with interest; that interest being the soul of credit, where credit exists to any considerable extent interest cannot be prevented; and that to suppress it would be to suppress nine-tenths of credit transactions. They must have seen, in a word, that, even in a half-developed system of economy, interest is an organic necessity. It was inevitable that the recognition of such facts that had for long been commonplaces among practical men, should in the end force its way into literary circles.


The effects which it there exerted were various.


One party remained unshaken in their theoretical conviction that loan interest was a parasitic profit, admitting of no defence before any strict tribunal; but they consented to a practical compromise with the imperfection of man, on which they laid the blame of its obstinate vitality. From the standpoint of an ideal order of society, interest could not be permitted, but men being so imperfect, it cannot conveniently be eradicated, and so it were better to allow it within certain limits. This was the view taken, among others, by several of the great reformers, e.g. as Zwingli,*35 by Luther in his later days (although earlier he had been a relentless enemy of usury),*36 and, with still greater reserve, by Melanchthon.*37


It had naturally a great effect on public opinion, and indirectly also on the later development of law, that such influential men as these declared for tolerance in the matter. However, as they were guided in their conduct not by principles, but altogether by motives of expediency, their views have no deeper importance in the history of theory, and we need not pursue them farther.


Another party of thinking and observing men went farther. Convinced by experience of the necessity of loan interest, they began to re-examine the theoretical foundations of the prohibition, and finding that these would not bear investigation, they commenced to write in opposition to the canon doctrine, basing their opposition on principles. This movement becomes observable about the middle of the sixteenth century, gathers impetus and power in the course of the seventeenth, and towards its end obtains so distinct an ascendency that during the next hundred years it has only to do battle with a few isolated writers who still represent the canon doctrine. And towards the end of the eighteenth century if any one had professed to defend that doctrine with the old specific arguments, he would have been thought too eccentric to be taken seriously.


The first combatants of the new school were the reformer Calvin and the French jurist Dumoulin (Carolus Molinaeus).


Calvin has defined his attitude towards our question in a letter to his friend Oekolampadius.*38 In this letter he does not treat it comprehensively, but he is very decided. At the outset he rejects the usual authoritative foundation for the prohibition, and tries to show that, of the writings adduced in its support, some are to be understood in a different sense, and some have lost their validity through entire change of circumstances.*39


The proof from authority being thus disposed of, Calvin turns to the rational arguments usually given for the prohibition. Its strongest argument, that of the barrenness of money (pecunia non parit pecuniam), he finds of "little weight." It is with money as it is with a house or a field. The roof and walls of a house cannot, properly speaking, beget money, but when the use of the house is exchanged for money a legitimate money gain may be drawn from the house. In the same way money can be made fruitful. When land is purchased for money, it is quite correct to think of the money as producing other sums of money in the shape of the yearly revenues from the land. Unemployed money is certainly barren, but the borrower does not let it lie unemployed. The borrower therefore is not defrauded in having to pay interest. He pays it ex proventu, out of the gain that he makes with the money.


But Calvin would have the whole question judged in a reasonable spirit, and he shows, by the following example, how the lender's claim of interest may, from this point of view, be well grounded.


A rich man who has plenty of landed property and general income, but little ready money, applies for a money loan to one who is not so wealthy, but happens to have a great command over ready money. The lender could with the money purchase land for himself, or he could request that the land bought with his money be hypothecated to him till the debt is wiped out. If, instead of doing so, he contents himself with the interest, the fruit of the money, how should this be blameworthy when the much harder bargain is regarded as fair? As Calvin vigorously expresses it, that were a childish game to play with God, "Et quid aliud est quam puerorum instar ludere cum Deo, cum de rebus ex verbis nudis, ac non ex eo quod inest in re ipsa judicatur."


He concludes then that the taking of interest cannot be universally condemned. But neither is it to be universally permitted, but only so far as it does not run counter to fairness and charity. In carrying out this principle he lays down a number of exceptions in which interest is not to be allowed. The most noteworthy of these are: that no interest should be asked from men who are in urgent need; that due consideration should be paid to the "poor brethren"; that the "welfare of the state" should be considered; and that the maximum rate of interest established by the laws should in no case be exceeded.


As Calvin is the first theologian, so Molinaeus is the first jurist to oppose the canon prohibition on theoretical grounds. Both writers agree in their principles, but the way in which they state them differs as widely as do their callings. Calvin goes shortly and directly at what to him is the heart of the matter, without troubling himself to refute secondary objections. Thus he gets his convictions more from impressions he receives than from logical argument. Molinaeus, on the other hand, is inexhaustible in distinctions and casuistry. He is indefatigable in pursuing his opponents in all their scholastic turnings and twistings, and takes the most elaborate pains to confute them formally and point by point. Moreover, although more cautious in expression than the impetuous Calvin, he is quite as frank, pithy, and straightforward.


The principal deliverance of Molinaeus on the subject is the Tractatus Contractuum et Usurarum redituumque pecunia Constitutorum,*40 published in 1546. The first part of it has a great resemblance, perhaps accidental, to Calvin's line of argument. After a few introductory definitions, he turns to the examination of the jus divinum, and finds that the relevant passages of Holy Writ are misinterpreted. They are not intended to forbid the taking of interest in general, but only such interest as violates the laws of charity and brotherly love. And then he also introduces the effective illustration used by Calvin of the rich man who purchases land with borrowed money.*41


But further on the reasoning is much fuller than that of Calvin. He points out conclusively (No. 75) that in almost every loan there is an "interesse" of the creditor—some injury caused or some use foregone,—the compensation for which is just and economically necessary. This compensation is interest or usura, in the right and proper sense of the word. The laws of Justinian which allow interest, and only limit its amount, are consequently not to be considered unjust, but actually in the interest of the borrower, inasmuch as the payment of a moderate interest gives him the chance of making a greater profit (No. 76).


Later (No. 528) Molinaeus passes under review the chief arguments of the canonists against interest, and completely refutes them by a running commentary.


To the old objection of Thomas Aquinas, that the lender who takes interest either sells the same thing twice, or sells something that has no existence at all (vide p. 22), Molinaeus answers that the use of money is a thing independent of the capital sum, and consequently may be sold independently. We must not regard the first immediate spending of the money as its use: the use that follows—the use of those goods that a man has acquired by means of the loaned money, or has got command over—is also its use (Nos. 510, 530). If, further, it be maintained that, along with the money itself, its use also has passed over into the legal property of the borrower, and that he therefore is paying in interest for his own property, Molinaeus answers (No. 530) that one is quite justified in selling another man's property if it be a debt due him, and that this is exactly the case with loans: "Usus pecuniae mihi pure a te debitae est mihi pure a te debitus, ergo vel tibi vendere possum."


Finally, to the argument of the natural barrenness of money Molinaeus replies (No. 530) that the everyday experience of business life shows that the use of any considerable sum of money yields a service of no trifling importance, and that this service, even in legal language, is designated as the "fruit" of money. To argue that money of itself can bring forth no fruit is not to the point, for even land brings forth nothing of itself without expense, exertion, and human industry. And quite in the same way does money when assisted by human effort bring forth notable fruits. The rest of the polemic against the canonists has little theoretical interest.


On the basis of this comprehensive consideration of the subject, Molinaeus ends by formulating his thesis (No. 535): First of all, it is necessary and useful that a certain practice of taking interest be retained and permitted. The contrary opinion, that interest in itself is absolutely objectionable, is foolish, pernicious, and superstitious (Stulta illa et non minus perniciosa quam superstitiosa opinio de usura de se absoluta mala) (No. 534).


In these words Molinaeus sets himself in the most direct opposition to the Church's doctrine. To modify them in some degree—as a Catholic might be compelled to do from other considerations—he makes certain practical concessions, without, however, yielding anything in principle. The most important of these is that, on grounds of expediency, and on account of prevailing abuses, he acquiesces for the present in the Church's prohibition of interest pure and simple in the shape of undisguised usury, wishing to retain only the milder and more humane form of annuities,—which, however, he rightly looks on as a "true species of usury business."*42


The deliverances of Calvin and Molinaeus remained for a long time quite by themselves, and the reason of this is easily understood. To pronounce that to be right which the Church, the law, and the learned world had condemned with one voice, and opposed with arguments drawn from all sources, required not only a rare independence of intellect, but a rare strength of character which did not shrink from suspicion and persecution. The fate of the leaders in this movement showed clearly enough that there was cause for fear. Not to mention Calvin, who, indeed, had given the Catholic world quite other causes of offence, Molinaeus had much to suffer; he himself was exiled, and his book, carefully and moderately as it was written, was put on the Index. Nevertheless the book made its way, was read, repeated, and published again and again, and so scattered a seed destined to bear fruit in the end.*43


Passing over the immediate disciples of Calvin, who naturally agreed with the views of their master, there were few writers in the sixteenth century who ventured to argue in favour of interest on economical grounds. Among them may be specially mentioned the humanist Camerarius,*44 Bornitz,*45 and above all, Besold.


Besold argues fully and ably against the canon doctrine in the dissertations entitled Questiones Aliquot de Usuris, (1598), the work with which he began his very prolific career as a writer.*46 He finds the origin of interest in the institutions of trade and commerce, in which money ceases to be barren. And as every man must be allowed to pursue his own advantage, so far as that is possible without injury to others, natural justice is not opposed to the taking of interest. Like Molinaeus, whom he often quotes with approval, he adduces on its behalf the analogy between the loan against interest and the hire against payment. The loan at interest stands to the loan not at interest in the same relation as the hire against payment—which is perfectly allowable—to the Leihe, where no payment is required (commodatum). He points out very well that the height of loan interest must at all times correspond with the height of natural interest, the latter indeed being the ground and source of the former; and he maintains that, where, owing to the use of money, the current rate of profit is higher, a higher limit of loan interest should be allowed (p. 32). Finally, he is as little impressed by the passages in Holy Writ which have been interpreted as forbidding interest (p. 38, etc.) as by the arguments of the "philosophers,"—considering these arguments very weak if one looks at the matter from the proper standpoint (p. 32).


From this short abstract it will be seen that Besold is a frank and able follower of Molinaeus. From Molinaeus indeed, as the numerous quotations show, he has taken the better part of his doctrine.*47 But it would be difficult to find in his writings any advance on that author.*48


This is still more true of the great English philosopher Bacon, who wrote on the subject almost contemporaneously with Besold. He is not misled by the old ideas of the "unnaturalness" of interest. He has enough intellectual freedom and apprehension of the needs of economic life to weigh impartially its advantages and disadvantages, and to pronounce interest an economical necessity. But nevertheless he gives it sufferance only on the ground of expediency. "Since of necessity men must give and take money on loan, and since they are so hard of heart (sintque tam duro corde) that they will not lend it otherwise, there is nothing for it but that interest should be permitted."*49


In the course of the seventeenth century the new doctrine made great strides, particularly in the Netherlands. There the conditions were peculiarly favourable to its further development. During the political and religious troubles among which the young free state was born, men had learned to emancipate themselves from the shackles of a slavish following of authority. It happened too that the decaying theory of the fathers of the Church and of the scholastics nowhere came into sharper conflict with the needs of actual life than in the Netherlands, where a highly developed economy had created for itself a complete system of credit and banking; where, consequently, transactions involving interest were common and regular; and where, moreover, temporal legislation, yielding to the pressure of practice, had long allowed the taking of interest.*50 In such circumstances a theory which pronounced interest to be a godless defrauding of the debtor was unnatural, and its continuance for any length of time was an impossibility.


Hugo Grotius may be regarded as forerunner of the change.


His attitude towards our subject is peculiarly nondescript. On the one hand, he clearly recognises that it is not possible to base the prohibition theoretically in natural right, as the canonists had done. He sees no force in the argument of the barrenness of money, for "houses also, and other things barren by nature, the skill of man has made productive." To the argument that the use of money, consisting as it does in being spent, cannot be separated from money itself, and therefore cannot be paid for independently, he finds an apt rejoinder; and, speaking generally, the arguments which represent interest as contrary to natural right appear to him "not of a kind to compel assent" (non talia ut assensum extorqueant). But, on the other hand, he considers the passages in Holy Writ forbidding interest to be undoubtedly binding. So that in his conclusions he remains—in principle at least—on the side of the canonists. Practically he does resile from the principle of prohibition by allowing and approving of many kinds of compensation for loss, for renunciation of profit, for lender's trouble and risk,—describing these as "of the nature of interest."*51


Thus Grotius takes a hesitating middle course between the old and the new doctrine.*52


Undecided views like these were speedily left behind. In a few years more others openly threw overboard not only the rational basis of the prohibition as he had done, but the prohibition itself. The decisive point was reached shortly before the year 1640. As if the barriers of long restraint had all been torn down in one day, a perfect flood of writings broke out in which interest was defended with the utmost vigour, and the flood did not fall till the principle of interest, in the Netherlands at least, had conquered. In this abundant literature the first place, both in time and rank, was taken by the celebrated Claudius Salmasius. Of his writings, which from 1638 followed each other at short intervals, the most important are: De Usuris, 1638; De Modo Usurarum, 1639; De Foenore Trapezitico, 1640. To these may be added some shorter controversial writings that appeared under the pseudonym of Alexius a Massalia: Diatriba de Mutuo: mutuum non esse alienationem, 1640.*53 These writings almost by themselves determined the direction and substance of the theory of interest for more than a hundred years, and even in the doctrine of to-day, as we shall see, we may recognise many of their after-effects. His doctrine therefore deserves a thorough consideration.


The views of Salmasius on interest are put together most concisely and suggestively in the eighth chapter of his book De Usuris. He begins by giving his own theory. Interest is a payment for the use of sums of money lent. Lending belongs to that class of legal transactions in which the use of a thing is made over by its owner to another person. In the case where the article in question is not perishable, if the use that is transferred is not to be paid for, the legal transaction is a Commodatum: if it is to be paid for, the transaction is a Locatio or Conductio. In the case where the article in question is a perishable or a fungible thing, if the use is not to be paid for, it is a loan bearing no interest (mutuum): if to be paid for, it is a loan at interest (foenus). The interest bearing loan accordingly stands to the loan which bears no interest in exactly the same relation as the Locatio to the Commodatum, and is just as legitimate as it.*54


The only conceivable ground for judging differently about the allowableness of payment in the case of the Commodatum (where a non-perishable good, as a book or a slave, is lent) as compared with the Mutuum (where a fungible good, like corn or money, is lent) might be the different nature of the "use" in the two cases. In the circumstances of the latter—where a perishable or fungible good is transferred—the use consists in one complete consumption; and it might be objected that, in such a case the use of a thing could not be separated from the thing itself. But to this Salmasius answers: (1) Such an argument would lead as well to the condemning and abolition of the loan bearing no interest, inasmuch as it is impossible, in the case of a perishable thing, to transfer a "use," whose existence is denied, even if no interest is asked for it. (2) On the contrary, the perishableness of loaned goods constitutes another reason why the loan should be paid. For in the case of the hire (locatio) the lender can take back his property at any moment, because he remains the owner of it. In the case of the loan he cannot do so, because his property is destroyed in the consumption. Consequently the lender of money suffers delays, anxieties, and losses, and by reason of these the claim of the loan to payment is even more consistent with fairness than that of the Commodatum.


After thus stating his own position Salmasius devotes himself to refuting the arguments of his opponents point by point. As we read these refutations we begin to understand how Salmasius so brilliantly succeeded where Molinaeus a hundred years before had failed, in convincing his contemporaries. They are extremely effective pieces of writing, indeed gems of sparkling polemic. The materials for them were, of course, in great part provided by his predecessors, principally by Molinaeus;*55 but the happy manner in which Salmasius employs these materials, and the many pithy sallies with which he enriches them, places his polemic far above anything that had gone before.


It may not be unwelcome to some of my readers to have a few complete examples of Salmasius's style. They will serve to give a more accurate idea of the spirit in which people were accustomed to deal with our problem in the seventeenth century, and far into the eighteenth, and to make the reader better acquainted with a writer whom nowadays many quote, but few read. I therefore give below in his own words one or two passages from the polemic.*56


What follows has less bearing on the history of theory. First comes a long-winded, and, it must be confessed, for all its subtlety a very lame attempt to prove that in the loan there is no alienation of the thing lent—a subject to which also the whole Diatriba de Mutuo is devoted. Then follows the reply to some of the arguments based by the canonists on fairness and expediency; such as, that it is unfair to the borrower, who assumes the risk of the principal sum lent him, to burden him with interest in addition, and to make him hand over the fruit of the money to another who takes no risk; that usury would lead to the neglect of agriculture, commerce, and the other bonae artes, to the injury of the common weal, and so on. In replying to this latter argument Salmasius gets an opportunity of commending the use of competition. The more usurers there are the better; their emulation will press down the rate of interest. Then, from the ninth chapter onwards, with extraordinary display of force and erudition, with many passages full of striking eloquence, but, it must be said, with endless prolixity, comes the disproof of the argument that interest is "unnatural." Quite at the end (De Usuris, chap. xx.), the question is finally put whether interest, thus sanctioned by the jus naturale, also expresses the jus divinum, and this naturally is answered in the affirmative.


These are the essential features of Salmasius's doctrine. Not only does it indicate an advance, but it long indicates the high-water mark of the advance. For more than a hundred years any development there was consisted in nothing more than the adoption of it in wider circles, the repetition of it with more or less skilful variations, and the adapting of its arguments to the fashion of the time. But there was no essential advance on Salmasius till the time of Smith and Turgot.


As the number of those who accepted the doctrine represented by Salmasius increased, so did the number of those who adhered to the canon doctrine diminish. This defection, as may be easily understood, went on more rapidly in the Reformation countries and in those speaking the German language, more slowly in countries purely Catholic and in those speaking the Romance tongues.


In the Netherlands, as I have already said, the works of Salmasius were almost immediately followed by a whole series of writings of similar tenor. As early as the year 1640 we meet with the works of Kloppenburg, Boxhorn, Maresius, Graswinckel.*57 A little later, about 1644, the Tafelhalterstreit*58 gave occasion to a fiery literary feud between the two parties, and in 1658 this practically ended in a victory for the supporters of interest. Within the next few years, among the ever-increasing adherents of the new theory, stands out prominently the renowned and influential lawyer Gerhard Noodt, who in his three books, De Foenore et Usuris, discusses the whole interest question very thoroughly, and with great knowledge of facts and literature.*59 After that there are fewer and fewer expressions of hostility to interest, especially from professional men; still they do occur occasionally up till the second half of the eighteenth century.*60


In Germany, whose political economy during the seventeenth and even during the eighteenth century is not of much account, the Salmasian doctrine made its way slowly and unsensationally, gaining nothing in development. On German soil the power of practical life was very clearly shown. It was to its pressure that the revolution in opinion was due, theory meanwhile halting clumsily behind the reform in public opinion and legislation. Half a century before the first German lawyer, in the person of Besold, had given his approval to it, the taking of interest, or at least the claim to a fixed interesse arranged in advance (which practically came to the same thing), was allowed in much of the German local law;*61 and when in 1654 the German imperial legislation followed this example,*62 few theorists sided with Besold and Salmasius. So late as 1629 it was possible for one Adam Contzen to demand that lenders at interest should be punished by criminal law like thieves, and that all Jews should be hunted out of the country like venenatae bestiae.*63 Not till the end of the seventeenth century does the conviction of the legitimacy of interest become firmly established in theory. The secession of such prominent men as Pufendorf*64 and Leibnitz*65 to the new doctrine hastened its victory, and in the course of the eighteenth century it is at last gradually taken out of the region of controversy.


In this position we find it in the two great cameralists who flourish at the end of our period, Justi and Sonnenfels. Justi's Staatswirthschaft*66 does not contain a single line relating to the great question on which in former times so many bulky volumes had been written, certainly none that could be taken as a theory of interest. He tacitly assumes it as a fact requiring no explanation that interest is paid for a loan; and if in one or two short notes (vol. i. § 268) he speaks against usury, he understands by that—but still tacitly—only an excessive interest.


Sonnenfels is not so silent on the subject as Justi. But even he, in the earlier editions of his Handlungswisenschaft*67 never once touches on the controversy as to the theoretic legitimacy of interest. In the fifth edition (published 1787) he refers to it, indeed, but in the kind of tone which one usually adopts towards a foregone conclusion. In a simple note on p. 496, he dismisses with a few decided words the prohibition of the canonists, ridicules their absurd way of writing, and finds it preposterous to forbid 6 per cent interest for money when 100 per cent can be got when money is changed into commodities.


Sonnenfels's contempt for the canon doctrine carries all the more weight that he has nothing good to say of interest in other respects. Influenced by Forbonnais he finds its origin in an interception of the circulation of money by the capitalists, out of whose hands it can only be attracted by a tribute in the shape of interest.*68 He ascribes to it many injurious effects; such as, that it makes commodities dear, reduces the profits of industry, and allows the owner of money to share in these profits.*69 Indeed in one place he speaks of the capitalists as the class of those "who do no work, and are nourished on the sweat of the working classes."*70


But alongside of expressions like these we find the accepted Salmasian doctrine. In one place, quite in the spirit of Salmasius, Sonnenfels adduces as arguments for the capitalists' claim, the want of their money, their risk, and the uses they might have got by the purchase of things that produced fruit.*71 In another place he recognises that a lowering of the legal rate is not the best means to repress the evils of high interest.*72 At another time he finds that, since the above mentioned conditions that determine interest are variable, a fixed legal rate is generally unsuitable as being either superfluous or hurtful.*73


The deep silence which Justi maintains, if considered along with the inconsistent eloquence expended by Sonnenfels, seems to me to be a very characteristic proof of two things; (1) that, when these men wrote, the Salmasian doctrine had already secured so firm a footing in Germany, that even writers who felt most hostile towards interest could not think of going back to the strict canonist standpoint, but (2) that up till now the acceptance of the Salmasian doctrine had not been accompanied by any kind of further development in it.


England appears to have been the country where the throwing off of the canon doctrine was attended with the least amount of literary excitement. Through the rapid rise of its commerce and industry, interest transactions had early entered into its economy, and its legislation had early given way to the wants of industrial life. Henry VIII had by 1545 removed the prohibition of interest, and replaced it by a simple legal rate. For a little, indeed, the prohibition was reimposed under Edward VI, but in 1571 it was once more taken off by Queen Elizabeth, and this time for ever.*74 Thus the theoretical question whether loan interest was justifiable or not was practically answered before there was any theoretic economic doctrine, and when an economic literature at last emerged, the prohibition, now removed, had but little interest for it. All the more strongly was its attention drawn to a new controverted question raised by the change in legislation—the question whether there should be a legal rate, and what should be the height of it.


These circumstances have left their stamp on the interest literature of England during the seventeenth and eighteenth centuries. We find numerous and eager discussions as to the height of interest, as to its advantages and disadvantages, and as to the advisability, or otherwise, of limiting it by law. But they now touch only rarely, and then, as a rule, quite casually, on the question of its economic nature, of its origin, and of its legitimacy. One or two short proofs of this stage in the development of the problem will suffice.


Of Bacon, who flourished very shortly after the age of the prohibition, and had avowed himself, on very shallow practical grounds, in favour of interest, we have already spoken.*75 Some twenty years later, Sir Thomas Culpepper, himself a violent opponent of interest, does not venture to put forward the canon arguments under his own name, but characteristically passes over the subject with the remark that he leaves it to the theologians to prove the unlawfulness of interest, while he will limit himself to showing how much evil is done by it.*76 In doing so, however, he directs his attacks not so much against interest in general as against high interest.*77


In the same way another writer, very unfavourably disposed towards interest, Josiah Child, will no longer meddle with the question of its lawfulness, but simply refers*78 the reader who wishes to go deeper into the matter to an older and apparently anonymous work, which appeared in 1634 under the title of "The English Usurer." Further, he frequently calls interest the "price of money,"—an expression which certainly betrays no deep insight into its nature; expresses his opinion in passing that through it the creator enriches himself at the expense of the debtor; but all the same contents himself with pleading for the limitation of the legal rate, not for entire abolition.*79


His opponent, again, North, who takes the side of interest, conceives of it quite in the manner of Salmasius, as a "rent for stock," similar to land-rent; but cannot say anything more, in explanation of either of them, than that owners hire out their superfluous land and capital to such as are in want of them.*80


Only one writer of the seventeenth century forms any exception to this superficial treatment of the problem, the philosopher John Locke.


Locke has left a very remarkable tract on the origin of loan interest, entitled "Some Considerations of the Consequences of lowering the Interest and raising the Value of Money" 1691. He begins with a few propositions that remind one very much of the canonists' standpoint. "Money,"*81 he says, "is a barren thing, and produces nothing; but by compact transfers that profit, that was the reward of one man's labour, into another man's pocket." Nevertheless Locke finds that loan interest is justified. To prove this, and to bridge over his own paradox, he uses the complete analogy that, in his opinion, exists between loan interest and land-rent. The proximate cause of both is unequal distribution. One has more money than he uses, and another has less, and so the former finds a tenant for his money*82 for the very same reason as the landlord finds a tenant for his land, namely, that the one has too much land, while the other has too little.


But why does the borrower consent to pay interest for the money lent? Again, on the same ground as the tenant consents to pay rent for the use of land. For money—of course only through the industry of the borrower, as Locke expressly adds—is able when employed in trade to "produce" more than 6 per cent to the borrower, just in the same way as land, "through the labour of the tenant," is able to produce more fruit than the amount of its rent. If, then, the interest which the capitalist draws from the loan is to be looked on as the fruit of another man's labour, this is only true of it as it is true of rent. Indeed, it is not so true. For the payment of land-rent usually leaves the tenant a much smaller proportion of the fruit of his industry than the borrower of money can save, after paying the interest, out of the profit made with the money. And so Locke comes to the conclusion: "Borrowing money upon use is not only, by the necessity of affairs and the constitution of human society, unavoidable to some men; but to receive profit from the loan of money is as equitable and lawful as receiving rent for land, and more tolerable to the borrower, notwithstanding the opinion of some over-scrupulous men" (p. 37).


It will scarcely be maintained that this theory is particularly happy. There is too marked a contrast between its starting-point and its conclusion. If it be true that loan interest transfers the hard-earned wage of the man who works into the pocket of another man who does nothing, and whose money besides is a "barren thing," it is absolutely inconsistent to say that loan interest is nevertheless "equitable and lawful." That there is undoubtedly an analogy between interest and the profit from land rent, was very likely to lead logically to a conclusion involving land rent in the same condemnation as interest. To this Locke's theory would have presented sufficient support, since he expressly declares rent also to be the fruit of another man's industry. But with Locke the legitimacy of rent appears to have been beyond question.


But, however unsatisfactory Locke's theory of interest may be, there is one circumstance at any rate that confers on it an important interest for us; in the background of it stands the proposition that human labour produces all wealth. In the present case Locke has not expressed the proposition so much as made use of it, and has not, indeed, made a very happy use of it. But in another place he has given it clear utterance where he says: "For it is labour indeed that put the difference of value on everything."*83 We shall soon see how great a place this proposition is to have in the later development of the interest problem.


A certain affinity to Locke's conception of loan interest is shown somewhat later by Sir James Steuart. "The interest," he writes, "they pay for the money borrowed is inconsiderable when compared with the value created (as it were) by the proper employment of their time and talents." "If it be said that this is a vague assertion, supported by no proof, I answer, that the value of a man's work may be estimated by the proportion between the manufacture when brought to market and the first matter."*84


The words I have emphasised indicate that Steuart, like Locke, looks upon the whole increment of value got by production as the product of the borrower's labour, and on loan interest, therefore, as a fruit of that labour.


If, however, both Locke and Steuart were quite uncertain as to the nature of that which we now call the borrower's natural profit, they were far from making any mistake about the fact that loan interest has its origin and its foundation in this profit. Thus Steuart in one place writes: "In proportion, therefore, to the advantages to be reaped from borrowed money, the borrowers offer more or less for the use of it."*85


Generally speaking, in England the literature on the subject took great pains to discuss the connection between loan interest and profit. In doing so it certainly did not surpass the Salmasian doctrine in clearness as to principles, but it enriched it by extending its knowledge of details. The favorite inquiry was, whether a high loan interest is the cause or the effect of a high profit. Hume passes judgment on the controversy by saying that they are alternately cause and effect "It is needless," he says, "to inquire which of these circumstances, to wit, low interest or low profits, is the cause and which the effect. They both arise from an extensive commerce, and mutually forward each other. No man will accept of low profits where he can have high interest; and no man will accept of low interest where he can have high profits."*86


Of more value than this somewhat superficial opinion is another discovery associated with the name of Hume. It was he who first clearly distinguished the conception of money from that of capital, and showed that the height of the interest rate in a country does not depend on the amount of currency that the country possesses, but on the amount of its riches or stocks.*87 But it was not till a later period that this important discovery was applied to the investigation of the source of interest.


How strange in the meantime the once widespread doctrine of the canonists had become to the busy England of the eighteenth century may be seen by the manner in which Bentham could treat the subject, towards the end of that century, in his Defence of Usury, 1787. He no longer thinks of seriously attempting to justify the taking of interest. The arguments of the ancient writers and of the canonists are only mentioned to afford welcome matter for witty remarks, and Aristotle, as the discoverer of the argument of the sterility of money, is bantered in the words: "As fate would have it, that great philosopher, with all his industry and all his penetration, notwithstanding the great number of pieces of money that had passed through his hands (more perhaps than ever passed through the hands of philosopher before or since), and notwithstanding the enormous pains he had bestowed on the subject of generation, had never been able to discover in any piece of money any organs for generating any other such piece."


Italy stood immediately under the eye of the Roman church. But Italy was the country in Europe that earliest attained a great position in trade and commerce; and on that account it was bound to be the first to find the pressure of the canon prohibition unbearable. The general attitude towards it may be explained by two considerations; that nowhere in Europe did the prohibition of interest remain in fact more inoperative, and that nowhere in Europe was it so late before the theorists ventured to oppose the Church's statute.


Everything that could be done to evade the formally valid prohibition was done; and it seems that these attempts were sufficiently successful for all the requirements of practical life. The most convenient forms of evasion were offered by the traffic in bills, which had its home in Italy, and by the stipulation of interesse for "indemnification." The temporal legislation offered ready and willing assistance to such evasion from a very early period by allowing the interest to be arranged beforehand, at a fixed rate of percentage on the capital lent. It only fixed a maximum which could not be exceeded.*88


On the other hand, no Italian writer appears to have made any open theoretic attack on the canon doctrine before the eighteenth century. Galiani in 1750 mentions Salmasius as the first who had given a complete statement of the doctrine of interest from the new point of view; and, in Italian literature previous to that time, the only mention he can find of the subject is the quarrel which had flared up a little before between the Marchese Maffei and the preaching monk Fra Daniello Concina.*89 Other prominent writers of the same period usually quote among their predecessors Salmasius as most important, and after him some other foreigners, as Locke, Hume, and Forbonnais; but the first name that occurs among native writers is the Marchese Maffei.*90 Here again, in Italy also, we find Salmasius accepted as the pioneer of the new views.


The tardy acceptance which his doctrine met in that country does not appear to have been attended by any special improvement on it. There is only one writer who can be excepted from this criticism, Galiani. But he deals with the question of the nature and legitimacy of loan interest in a way that is altogether peculiar.


If interest, he says,*91 really were what it is usually taken to be, a profit or an advantage which the lender makes with his money, then indeed it would be objectionable, for "whatever profit, be it great or small, that is yielded by naturally barren money, is objectionable; nor can any one call such a profit the fruit of exertion, when the one who puts forth the exertion is the one who takes the loan, not the one who gives it" (p. 244).


But interest is not a true profit at all; it is only a supplementing of that which is needed to equalise service and counter-service. Properly speaking, service and counter-service should be of equal value. Since value is the relation in which things stand to our needs, we should be quite mistaken were we to seek for such an equivalence in an equality of weight, or in number of pieces, or in external form. What is required is simply an equality of use. Now in this respect present and future sums of money of equal amount are not of equal value, just as in bill transactions equally large sums of money are not of equal value at different places. And just as the profit of exchange (cambio), notwithstanding that it seems to be an additional sum (soprappił), is in truth an equalisation, which, when added sometimes to the money on the spot, sometimes to the foreign money, establishes the equality of real value between the two, so is loan interest nothing else than the equalisation of the difference there is between the value of present and future sums of money (p. 243, etc.)


In this interesting idea Galiani has hit on a new method of justifying loan interest, and one which relieves him from a certain doubtful line of argument that his predecessors were obliged to take. Salmasius and his followers, to avoid the reproach of destroying the equality between service and counter-service, were obliged to attempt to prove that in perishable as well as in durable things, and even in articles actually consumed at the beginning of the loan period, there is an enduring use which may be separately transferred, and for which a separate remuneration, namely, interest, is rightly claimed. This line of reasoning, always somewhat fatal, was rendered superfluous by the aspect which Galiani now gave to the argument.


But unfortunately the inference which Galiani draws from this idea is very unsatisfactory. The reason that present sums of money are, as a rule, more valuable than future sums he finds exclusively in the different degree of their security. A claim to future payment of a sum of money is exposed to many dangers, and on that account is less valued than an equally large present sum. In so far as interest is paid to balance these dangers, it appears in the light of an insurance premium. Galiani gives this conception very strong expression by speaking in one place of the "so-called fruit of money" as a price of heart-beats (prezzo del batticuore), p. 247; and at another time he uses the very words that that thing which is called the fruit of money might be more properly called the price of insurance (p. 252). This was of course thoroughly to misunderstand the nature of loan interest.


The way in which later Italian authors of the eighteenth century treated the interest problem is less worthy of notice. Even the more prominent men among them, such as Genovesi*92 and Beccaria,*93 as also those who wrote monographs on the subject, like Vasco,*94 follow for the most part in the tracks of the Salmasian doctrine, now become traditional.


The most worthy of mention among those is Beccaria. He draws a sharp distinction between interesse and usura. The former is the immediate use of a thing, the latter is the use of a use (l'utilità dell' utilità). An immediate use (interesse) is rendered by all goods. The special interesse of money consists of the use which the goods represented by it may render, for money is the common measure and representative of the value of all other goods. Since, in particular, every sum of money represents, or may represent, a definite piece of land, it follows that the interesse of the money is represented by the annual return of that land. Consequently it varies with the amount of this return, and the average rate of money-interesse is equalised with the average return of land (p. 116).


In this analysis the word interesse evidently means the same thing as we should call natural profit, and in it accordingly we may find an attempt—although a primitive one—to explain the existence and amount of natural interest by the possibility of a purchase of land. As we shall see later, however, the same thought had already, some years before, received much fuller treatment from another writer.


In one place Beccaria also touches on the influence of time, first brought forward by Galiani, and speaks of the analogy between exchange interest, which is an interesse of place, and loan interest, which is an interesse of time (p. 122), but he passes over it much more cursorily.


Catholic France was all this time far behind, both in theory and practice. Its state legislation against interest enjoyed for centuries the reputation of being the severest in Europe. At a time when in other countries it had been agreed either to allow the taking of interest quite openly, or to allow it under the very transparent disguise of previously arranged interesse, Louis XIV thought fit to renew the existing prohibition, and to extend it in such a way that even interest for commercial debts was forbidden,*95 Lyons being the only market exempted. A century later, when in other countries the long obsolete prohibitions of interest were scoffed at in the tone of a Sonnenfels or a Bentham, they remained in force and in baneful activity among the tribunals of France. It was only in the year 1789, when so many institutions that still breathed the spirit of the middle ages were cleared away, that this institution also was got rid of. By a law of 12th October 1789 the prohibition of interest was formally rescinded, and its place taken by a maximum rate of 5 per cent.


French theory, like French legislation, held most religiously by the strictest standpoint of the canon. How little success Molinaeus had in the middle of the sixteenth century we have already seen. At the end of that century a writer so enlightened in other respects as Johannes Bodinus finds the prohibition fully justified; praises the wisdom of those legislators who publish it; and considers it safest to destroy it root and branch (usurarum non modo radices sed etiam fibras omnes amputare).*96 In the seventeenth century, it is true, the French Salmasius wrote brilliantly on the side of interest, but that was outside of France. In the eighteenth century the number of writers who take this side increases. Law already contends for the entire freeing of interest transactions, even from the fixed rate.*97 Melon pronounces interest a social necessity that cannot be refused, and leaves it to the theologians to reconcile their moral scruples with this necessity.*98 Montesquieu declares that lending a man money without interest is indeed a very good action, but one that can only be a matter of religious consideration, and not of civil law.*99 But notwithstanding, there are always writers who oppose such ideas, and contend for the old strict doctrine.


Among these late champions of the canon two are particularly prominent: the highly esteemed jurist Pothier and the physiocrat Mirabeau.


Pothier succeeded in collecting the most tenable arguments from the chaotic répertoire of the canon, and working them up with great skill and acuteness into a doctrine in which they really became very effective. I have added below the characteristic passage which has already attracted the attention of several writers on our subject.*100


He was seconded—with more zeal than success—by the author of the Philosophie Rurale, Mirabeau.*101 Mirabeau's lucubrations on interest are among the most confused that have ever been written on the subject. A fanatical opponent of loan interest, he is inexhaustible in his arguments against it. He argues, among other things, that loaned money has no legitimate claim on payment. For, first, money has no natural use, but only represents. "But to obtain a profit from this representative character is to seek in a glass for the figure it represents." It is no argument then for the owners of money to say that they must live from the produce of their money, for to this it may be answered that they could change the money into other goods, and live from the produce obtained by hiring out those goods! Lastly, there is not the same wear and tear in the case of money as there is in the case of houses, furniture, and such like, and for that reason there should not, properly speaking, be any charge made to cover wear and tear.*102


Probably the reader will think these arguments weak enough. But Mirabeau, in his blind zeal, gets still deeper. He cannot help seeing that the debtor, by employing the money (emploi), may obtain means to pay interest for the capital borrowed. But even this he turns against interest. He argues from it that the borrower must always suffer injury, because it is impossible to establish an equality between interest and emploi. One does not know how much agriculture will yield to the borrowing agriculturist. Unforeseen accidents happen, and on that account the borrower will always lose!*103 And more than this. In one place, from the very natural fact that any private person is more willing to take interest than to pay it, he deduces, in all seriousness, an argument to prove that the paying of interest must be hurtful to the borrower!*104


Fortified by reasoning like this, his condemnation of money interest is not lacking in vigour. "Take it all in all," he says,*105 "money interest ruins society by giving incomes into the hands of people who are neither owners of land nor producers, nor industrial workers, and these people can only be looked upon as hornets, who live by robbing the hoards of the bees of society."


But for all that Mirabeau cannot avoid admitting that interest may be justified in certain cases. Sorely against his inclination, therefore, he is compelled to break through the principle of the prohibition and make some exceptions, the selection of which is based on quite arbitrary and untenable distinctions.*106


Seldom can there have been a more grateful task than was the refutation of this doctrine in the second half of the eighteenth century. Long ago smitten with internal decay—detested by some, despised by others—forced to lean on very pitiful scientific props—it had long outlived its life, and only raised its head in the present like some old ruin. The task was taken up by Turgot, and performed with ability as remarkable as its results were brilliant. His Mémoire sur les Prêts d'Argent*107 may be named as companion-piece to Salmasius's writings on Usury. It is true that the student of to-day will find in his reasoning some good arguments, and not a few bad ones. But, good and bad alike, they are given with so much verve and acuteness, with such rhetorical and dialectical skill, and with such striking play of fancy, that we can easily understand how the effect on his times was nothing less than triumphant.


As the charm of his work lies not so much in the ideas themselves,—which for the most part we have already discussed in the arguments of his predecessors,—as in the charming way in which they are put, it would only repay us to go thoroughly into the contents of the Mémoire if a great deal of it were reproduced in his own words, which space forbids. I content myself, therefore, with bringing out some of the more marked features of Turgot's treatment.


The weightiest justification of interest he finds in the right of property which the creditor has in his own money. In virtue of this he has an "inviolable" right to dispose of the money as he will, and to lay such conditions on its alienation and hire as seem to him good—e.g. the condition of interest being duly paid (§ 23, etc.) Evidently a crooked argument which might prove the legitimacy and inoffensiveness of a usurious interest of 100 per cent, just as well as the legitimacy of interest in general.


The argument based on the barrenness of money Turgot dismisses on the same grounds as those taken by his predecessors (§ 25).


He gives special attention to the reasoning of Pothier just mentioned. Pothier's thesis that, in justice, service and counter-service should be equal to each other, and that this is not the case in the loan, he answers by saying that objects which, freely and without fraud or force, are exchanged against each other always have, in a certain sense, equal value. To the fatal argument that, in the case of a perishable thing, it is not possible to conceive of any use separate from the thing itself, he answers by charging his opponents with legal hair-splitting and metaphysical abstraction, and brings forward the old and favourite analog between the hiring of money and the hiring of any durable thing like a diamond. "What!" he says, "that some one should be able to make me pay for the petty use that I make of a piece of furniture or a trinket, and that it should be a crime to charge me anything for the immense advantage that I get from the use of a sum of money for the same time; and all because the subtle intellect of a lawyer can separate in the one case the use of a thing from the thing itself, and in the other case cannot! It is really too ridiculous!" (p. 128).


But a moment later Turgot himself does not hesitate at metaphysical abstraction and legal hair-splitting. To refute the argument that the debtor becomes proprietor of the borrowed money, and that its use consequently belongs to him, he makes out a property in the value of the money, and distinguishes it from the property in the piece of metal; the latter of course passing over to the debtor, the former remaining behind with the creditor.


Very remarkable, finally, are some passages in which Turgot, following Galiani's example, emphasises the influence of time on the valuation of goods. In one place he draws the parallel already familiar to us between exchange and loans. Just as in exchange transactions we give less money in one place to receive a greater sum in another place, so in the loan we give less money at one point of time to receive more money at another point of time. The reason of both phenomena is, that the difference of time, like that of place, indicates a real difference in the value of money (§ 23). On another occasion he alludes to the notorious difference that exists between the value of a present sum and the value of a sum only obtainable at a future period (§ 27); and a little later he exclaims: "If these gentlemen suppose that a sum of 1000 francs and a promise of 1000 francs possess exactly the same value, they put forward a still more absurd supposition; for if these two things were of equal value, why should any one borrow at all?"


Unfortunately, however, Turgot has not followed out this pregnant idea. It is, I might say, thrown in with his other arguments, without having any organic connection with them; indeed, properly speaking, it stands in opposition to them. For if interest and the replacement of capital only make up together the equivalent of the capital that was lent, the interest is then a part equivalent of the principal sum. How then can it be a payment for a separate use of the principal sum, as Turgot has just taken so much trouble to prove?


We may look on Turgot's controversy with Pothier as the closing act of the three hundred years' war which jurisprudence and political economy had waged against the old canon doctrine of interest. After Turgot the doctrine disappeared from the sphere of political economy. Within the sphere of theology it dragged out a kind of life for some twenty years longer, till, finally, in our century this also ended. When the Roman Penitentiary pronounced the taking of interest to be allowable, even without any peculiar title, the Church itself had confirmed the defeat of its erstwhile doctrine.*108


Pausing for a moment, let us look back critically over the period we have traversed. What are its results; what has science gained during it towards the elucidation of the interest problem?


The ancient and the canon writers had said, Loan interest is an unjust defrauding of the borrower by the lender, for money is barren, and there is no special "use" of money which the lender may justly sell for a separate remuneration. In opposition to this the new doctrine runs, Loan interest is just; for, first, money is not barren so long as, by proper employment, the lender might make a profit with it, and by lending it gives up the possibility of this profit in favour of the borrower; and, second, there is a use of capital that is separable from capital itself, and may be sold separately from it.


If we put aside in the meantime the latter more formal point—it will come up again later in another connection—the central idea of the new doctrine is the suggestion that capital produces fruits to him who employs it. After an immense expenditure of ingenuity, dialectic, polemic, and verbiage, at bottom it is the emergence of the same idea that Adam Smith in his wonderfully simple way expressed shortly afterwards in the words that contain his solution of the whole question whether interest is justifiable or not: "As something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it."*109 Translated into our modern terminology, this idea would run, "There is loan interest because there is natural interest."


Thus the theory of Salmasius and his followers in substance amounts to explaining contract interest or loan interest from the existence of natural interest.


How much did the elucidation of the interest problem gain by this? That the gain was not inconsiderable is attested by the fact that the intellectual labour of centuries was needed to secure credence for the new doctrine, in the face of opposing impressions and prejudices. But just as certain is it that, when this explanation was given, much remained still to be done. The problem of loan interest was not solved; it was only shifted a stage farther back. To the question, Why does the lender get from his loaned capital a permanent income not due to work? the answer was given, Because he could have obtained it if he had employed the capital himself. But why could he have obtained this income himself? This last question obviously is the first to point to the true origin of interest; but, in the period of which we have been speaking, not only was this question not answered, it was not even put.


All attempts at explanation got the length of this fact, that the man who has a capital in his hand can make a profit with it. But here they halt. They accept this as a fact without in the least attempting to further explain it. Thus Molinaeus, with his proposition that money, assisted by human exertion, brings forth fruit, and with his appeal to everyday experience. Thus Salmasius himself, with his delightful badinage over the fruitfulness of money, where he simply appeals to the fact without explaining it. And thus too even the later and most advanced economists of the whole period; such men as Locke, Law, Hume, James Steuart, Justi, Sonnenfels. Now and then they advance extremely clear and thorough statements of how loan interest is bound to emerge from the possibility of making a profit, and in the amount of that profit must find the measure of its own amount.*110 But not one of them ever comes to the question as to the why and wherefore of that profit.*111


What Salmasius and his time had done for the interest problem cannot be better illustrated than by comparing it with the problem of land-rent. Salmasius—of course under accessory circumstances that made it much more difficult—did for the interest problem what never required to be done for the land-rent problem, just because it was too self-evident; he proved that the hirer pays the rent he has agreed to pay because that which is hired produces it. But he failed to do for the interest problem—indeed, did not in the least try to do—the one thing that required scientific effort in the sphere of land-rent; he did not explain why that which bears a rent when hired out should bear a rent if it remain in the hands of its owner.


Thus everything that had been done in the period we have just been considering was, as it were, the driving back of an advanced post on the main army. The problem of loan interest is pursued till it falls in with the general problem of interest. But this general problem is neither mastered nor even attacked; at the end of the period the heart of the interest problem is as good as untouched.


All the same, the period was not quite barren of results as regards the solution of the chief problem; it at least prepared the way for future work by elevating natural interest, the real subject of the problem, out of confused and hesitating statements, and bringing it gradually to clear presentation. The fact that every one who works with a capital makes a profit had long been known. But it was a long time before any one clearly distinguished the nature of this profit, and there was a tendency to ascribe the whole of it to the undertaker's activity. Thus Locke himself looks on the interest which the borrower pays to the lender as the "fruit of another man's labour," and, while conceding that the borrowed money employed in business may produce fruit, expressly ascribes the possibility of this to the exertion of the borrower. Now when, in justifying interest, one was led to accent the influence of capital in the emergence of such profits, he was bound in the end to come to see clearly that a part of the undertaker's profit was a branch of income sui generis, not to be confounded with the produce of labour—was, in fact, a peculiar profit of capital. This insight, which is to be found quite clearly in germ in Molinaeus and Salmasius, comes out with perfect distinctness at the end of the period in the writings of Hume and others. But once attention was called to the phenomenon of natural interest, it was inevitable that, sooner or later, people should begin to ask about the causes of this phenomenon. And with this the history of the problem entered on a new epoch.

Notes for this chapter

Clem. c. un. de Usuris, 5. 5.
See Endemann, Grundsätze, pp. 9, 21.
The opinion very commonly held that the Jews were generally exempted from the Church's prohibition of interest is pronounced erroneous by the late and very complete work of Endemann (Studien, ii. p. 383, etc.)
Endemann, Studien, ii. pp. 243, 366.
Wiskemann, Darstellung der in Deutschland zur Zeit der Reformation herrschenden national-ökonomischen Ansichten (Prize Essays of the Jablonowski'sche Society, vol. x. p. 71).
Wiskemann, p. 54. Neumann, Geschichte des Wuchers, p. 480, etc.
Wiskemann, p. 65.
Ep. 383, in the collection of his letters and answers, Hanover, 1597.
"Ac primum nullo testimonio Scripturae mihi constat usuras omnino damnatas esse. Illa enim Christi sententia quae maxime obvia et aperta haberi solet: Mutuum dato nihil inde sperantes, male huc deterta est.... Lex vero Mosis politica cum sit, non tenemur illa ultra quam aequitas ferat atque humanitas. Nostra conjunctio hodie per omnia non respondet...."
Previous to this, in the same year, was published the Extricatio Labyrinthi de eo quod Interest, in which the question of interesse was freely handled, but no definite side taken on the interest question.—See Endemann, Studien, i. p. 63.
Tractatus, No. 10.
"Ea taxatio" (the fixing of a maximum rate which was attached to the principle of the permission of interest in Justinian's Code) "nunquam in se fuit iniqua. Sed ut tempore suo summa et absoluta, ita processu temporis propter abusum hominum nimis in quibusdam dissoluta et vaga inventa est, et omnino super foenore negociativo forma juris civilis incommoda et perniciosa debitoribus apparuit. Unde merito abrogata fuit, et alia tutior et commodior forma inventa, videlicet per abalienationem sortis, servata debitori libera facultate luendi. Et haec forma nova, ut mitior et civilior, ita minus habet de ratione foenoris, propter alienationem sortis, quam forma juris civilis. Est tamen foenus large sumptum, et vera species negociationis foenoratoriae...." (No. 536)
Endemann, Studien, i. p. 64, etc. Endemann, however, underrates the influence that Molinaeus had on the later development. See below.
In his notes on Aristotle's Politics; see Roscher, Geschichte der National-Oekonomik in Deutschland, p. 54.
Roscher, Ibid. p. 188.
Besold resumed the discussion later, in an enlarged and improved form, as he says, in another work, Vitae et Mortis Consideratio Politica (1623), in which it occupies the fifth chapter of the first book. I had only this latter work at my disposal, and the quotations in the text are taken from it.
There is a long quotation even in the first chapter of the first book (p. 6). In the fifth chapter the quotations are numerous.
I think Roscher (Geschichte der National-Oekonomik, p. 201) does Besold too much honour when, in comparing him with Salmasius and Hugo Grotius, he gives him the honourable position of a forerunner on whom Salmasius has scarcely improved, and to whom Grotius is even inferior. Instead of Besold, who drew at second hand, Roscher should have named Molinaeus. Besold is not more original than Salmasius, and certainly less adroit and ingenious.
Sermones Fideles, cap. xxxix. (1597)
See Grotius, De Jure Pacis ac Belli, book ii. chap. xii. p. 22.
De Jure Pacis ac Belli, book ii. cap. xii. pp. 20, 21.
Thus it is not possible to regard Grotius as a pioneer of the new theory. This view, held among others by Neumann, Geschichte des Wuchers in Deutschland, p. 499, and by Laspeyres, Geschichte, pp. 10 and 257, is anthoritatively corrected by Endemann, Studien, I. p. 66, etc.
The list of writing in which our extremely prolific author expatiates on the subject of interest is by no means exhausted by the works mentioned in the text. There is, e.g. a Disquisitio de Mutuo, qua probatur non esse alienationem, of the year 1645, whose author signs with the initials S. D. B., a signature which points, as does the whole style of writing, to Salmasius (Dijonicus Burgundus). There is besides in the same year an anonymous writing, also undoubtedly traceable to Salmasius, Confutatio Diatribae de Mutuo tribus disputationibus ventilatae, auctore et preside Jo. Jacobo Vissembachio, etc. Those named in the text, however, were the first to break ground.
"Quae res facit ex commodato locatum, eadem praestat, ut pro mutuo sit foenus, nempe merces. Qui eam in commodato probant, cur in mutuo improbent, nescio, nec ullam hujus diversitatis rationem video. Locatio aedium, vestis animalis, servi, agri, operae, operis, licita erit; non erit foeneratio quae proprie locatio est pecuniae, tritici, hordei, vini, et aliarum hujusmodi specierum frugumque tam arentium quam humidarum?"
To prove the relation in which Salmasius stands to Molinaeus, it may not be superfluous, considering the explicit statement of Endemann (Studien, i. p. 65) that Salmasius does not quote Molinaeus, to establish the fact that such quotations do exist in considerable number. The list of authors appended to the works of Salmasius shows three quotations from Molinaeus for the book De Usuris, twelve for the De Modo Usurarum, and one for the De Foenore Trapezitico. These quotations are principally taken from Molinaeus's chief work on the subject, the Contractus Contractuum et Usurarum. One of them (De Usuris, p. 21) refers directly to a passage which stands in the middle of the most pertinent of his writings (Tractatus, No. 529. Nos. 528, etc., contain the statement and refutation of the arguments of the ancient philosophy and of the canonists against interest). There can, therefore, be no doubt that Salmasius accurately knew the writings of Molinaeus, and it is just as much beyond doubt—as indeed his substantial agreement would lead us to suspect—that he has drawn from them. In the Confutatio Diatribae mentioned above (p. 36) it is said in one place (p. 290) that Salmasius at the time when, under the pseudonym of Alexis a Massalia, he wrote the Diatriba de Mutuo, was not acquainted with the similar writings of Molinaeus in his Tractatus de Usuris. But this expression must only relate to his ignorance of those quite special passages in which Molinaeus denies the nature of the loan as an alienation, or else, if what I have said be true, it is simple incorrect. [Note from Econlib Editor: Original reads "simple incorrect," not "simply incorrect."]
Salmasius begins with the argument of the improper double claim for one commodity. His opponents had contended that whatever was taken over and above the principal sum lent could only be taken either for the use of a thing which was already consumed—that is for nothing at all—or for the principal sum itself, in which case the same thing was sold twice. To this replies Salmasius: "Quae ridicula sunt, et nullo negotio difflari possunt. Non enim pro sorte usura exigitur, sed pro usu sortis. Usus autem ille non est nihilum, nec pro nihilo datur. Quod haberet rationem, si alicui pecunism mutuam darem, ea lege ut statim in flumen eam projiceret aut alio modo perderet sibi non profuturam. Sed qui pecuniam ab alio mutuam desiderat, ad necessarios sibi usus illam expetit. Aut enim aedes inde comparat, quas ipse habitet, ne in conducto diutius maneat, vel quas alii cum fructu et compendio locet: aut fundum ex ea pecunia emit salubri pretio, unde fructus et reditus magnos percipiat: aut servum, ex cujus operis locatis multum quaestus faciat: aut ut denique alias merces praestinet, quas vili emptas pluris vendat" (p. 195).

And after showing that one who lends money to an undertaking is not under any obligation to inquire whether it is usefully employed by the borrower, any more than the hirer of a house need make similar inquiry, he continues: "Hoc non est sortem bis vendere, nec pro nihilo aliquid percipere. An pro nihilo computandum, quod tu dum meis nummis uteris, sive ad ea quae tuae postulant necessitates, sive ad tua compendia, ego interim his careo cum meo interdum damno et jactura? Et cum mutuum non in sola sit pecunia numerata, sed etiam in aliis rebus quae pendere et mensura continentur, ut in frugibus humidis vel aridis, an, qui indigenti mutuum vinum aut triticum dederit, quod usurae nomine pro usu eorum censequetur, pro nihilo id capere existimabitur? Qui fruges meas in egestate sua consumpserit, quas care emere ad victum coactus esset, aut qui eas aliis care vendiderit, praeter ipsam mensuram quam accepit, si aliquid vice mercedis propter usum admensus fuerit, an id injustum habebitur? Atqui poteram, si eas servassem, carius fortasse in foro vendere, et plus lucri ex illis venditis efficere, quam quantum possim percipere ex usuris quas mihi reddent" (p. 196, etc.) Particularly biting is his reply to the argument of the unfruitfulness of money: "Facilis responsio. Nihil non sterile est, quod tibi sterile esse volueris. Ut contra nihil non fructuosum, quod cultura exercere, ut fructum ferat, institueris. Nec de agrorum fertilitate regeram, qui non essent feraces nisi humana industria redderet tales.... Magis mirum de aëre, et hunc quaestuosum imperio factum. Qui aerikon imposuerunt vectigal singulis domibus Constantinopolitani imperatores, aërem sterilem esse pati non potuerunt. Sed haec minus cum foenore conveniunt. Nec mare hic sollicitandum, quod piscatoribus, urinatoribus, ac nautis ad quaestum patet, ceteris sterilitate occlusum est. Quid sterilius aegroto? Nec ferre se, nec movere interdum potest. Hunc tamen in redditu habet medicus. Una res est aegroto sterilior, nempe mortuus.... Hic tamen sterilis non est pollinctoribus, neque sardapilonibus, neque vespillonibus, neque fossariis. Immo nec praeficis olim, nec nunc sacerdotibus, qui eum ad sepulcrum cantando deducunt. Quae corpus alit corpore, etiamsi liberos non pariat, non tamen sibi infecunda est. Nec artem hic cogites; natura potius victum quaerit. Meretricem me dicere nemo non sentit.... De pecunia quod ajunt, nihil ex se producere natura, cur non idem de ceteris rebus, et frugibus omne genus, quae mutuo dantur, asserunt? Sed triticum duplici modo frugiferum est, et cum in terram jacitur, et cum in foenus locatur. Utrobique foenus est. Nam et terra id reddit cum foenore. Cur natura aedium, quas mercede pacta locavero, magis potest videri foecunda, quam nummorum quos foenore dedero? Si gratis eas commodavero, aeque ac si hos gratis mutuo dedero, tum steriles tam hi quam illae mihi evadent. Vis scire igitur, quae pecunia proprie sterilis sit dicenda, immo et dicta sit? Illa certe, quae foenore non erit occupata, quaeque nihil mihi pariet usuraram, quas et propterea Graeci tokon nomine appellarunt" (p. 198). The third argument of his opponents, that the loan should not bear interest because the things lent are a property of the debtor, Salmasius finds "ridiculous": "At injustum est, ajunt, me tibi vendere quod tuum est, videlicet usum aeris tuae. Potens sane argumentum. Atqui non fit tuum, nisi hac lege, ut pro eo, quod accepisti utendum, certam mihi praestes mercedem, usurae nomine, absque qua frustra tuum id esse cuperes. Non igitur tibi, quod tuum est, vendo, sed, quod meum est, ea conditione ad te transfero, ut pro usu ejus, quamdiu te uti patiar, mihi, quod pactum inter nos est, persolvas."

Laspeyres, p. 257.
Very fully described by Laspeyres, p. 258, etc.
Noodt is very much quoted as an authority in the learned literature of the eighteenth century; e.g. by Böhmer, Protest. Kirchenrecht, vol. v. p. 19 passim. Barbeyrac, the editor of several editions of Hugo Grotius, says that, on the matter of interest, there is an "opus absolutissimum et plenissimum summi jurisconsulti et non minus judicio quam eruditione insinis, Clariss. Noodtii" (De Jure Belli ac Pacis: edition of Amsterdam, 1720, p. 384).
Laspeyres, p. 269.
Neumann, Geschichte des Wuchers in Deutschland, p. 546, mentions permissions by local law of contract interest about the years 1520-30. Endemann, it is true (Studien, ii. pp. 316 and 365, etc.) would interpret these permissions as applying only to stipulated interesse, which, theoretically at least, was different from interest proper (usura). In any case the taking of interest had thus practically received toleration from the state.
In the last Reichsabschied. On the disputed interpretation of the passages referred to, see Neumann, p. 559, etc.
Roscher, Geschichte, p. 205.
Ibid. p. 312, etc.
Ibid. p. 338, etc.
Second edition, 1758.
Second edition, Vienna, 1771.
Ibid. pp. 419, 425, etc.
Ibid. p. 427.
Ibid. p. 430.
Ibid. p. 426, etc.
Ibid. p. 432, etc.
Fifth edition, p. 497.
See Schanz, Englische Handelspolitik, Leipzig, 1881, vol. i. p. 552, etc.
See above, p. 34. [Book I, Chapter II. pars. I.II.31.—Econlib Ed.]
Tract against the high rate of usury, 1621.
E.g. in "A Small Treatise against Usury," annexed to Child's Discourses, 1690, p. 229: "It is agreed by all the Divines that ever were, without exception of any; yea, and by the Usurers themselves, that biting Usury is unlawful: Now since it hath been proved that ten in the hundred doth bite the Landed men, doth bite the Poor, doth bite Trade, doth bite the King in his Customs, doth bite the Fruits of the Land, and most of all the Land itself: doth bite all works of Piety, of Vertue, and Glory to the State; no man can deny but ten in the hundred is absolutely unlawful, howsoever happily a lesser rate may be otherwise."
In his introduction to Brief Observations concerning Trade, 1668.
"New Discourse of Trade," 1690. See Roscher, p. 59, etc.
Roscher, p. 89.
I quote from the collected edition of Locke's works, London, 1777, vol. ii. p. 24. "Some Considerations," p. 36.
In other places (e.g. p. 4) Locke calls interest a price for the "hire of money."
Of Civil Government, vol. ii. chap. v. § 40. See also Roscher, p. 95, etc.
Inquiry into the Principles of Political Economy, 1767, vol ii. book iv. part i. chap. viii. p. 137.
Inquiry into the Principles of Political Economy, 1767, vol. ii. book iv. part i. chap. iv. p. 117.
"Of Interest," Essays, part. ii. chap. iv. [See Hume, Of Interest, par. II.IV.14.—Econlib Ed.]
Ibid. passim.
See the historical works of Vasco, L'Usura Libera (Scrittori Classici Italiani Parte Moderna, vol. xxxiv. p. 182, etc.; particularly pp. 195, 198, etc., 210, etc.)
Galiani, Della Moneta (Scritt. Class. Ital. Parte Moderna, vol. iv. p. 240, etc.)
Impiego del Danaro. Unfortunately I have not seen the book.
Della Moneta, book v. chap. i.
Lezioni di Economia Civile, 1769 (Scritt. Class. Ital. Parte Moderna, vol. ix. part ii. chap. xiii.)
Elementi di Economia Pubblica, written 1769-71; first printed, l804, in the Section of the Scrittori, vols. xi. and xii., particularly part iv. chaps. vi. and vii.
L'Usura Libera, vol. xxxiv. of above collection.
Vasco, p. 209.
De Republica, second edition, 1591, v. ii. p. 799, etc.
E.g. IIde. Mémoire sur les Banques; Economistes Financiers du xviii. Siècle, Edition Daire, Paris, 1851, p. 571.
Essai Politique sur le Commerce, ebenda p. 742.
Esprit des Lois, xxii.
The passage has been quoted by Rizy; by Turgot, Mémoire sur les Prêts d'Argent, § 26; and also by Knies, Kredit, part i. p. 347. It runs thus: "It is a fair claim that the values given in the case of a contract which is not gratuitous should be equal on either side, and that no party should give more than he has received, or receive more than he has given. Everything, therefore, that the lender may demand from the borrower over and above the principal sum, he demands over and above what he has given; for, if he get repayment of the principal sum, he receives the exact equivalent of what he gave. For things that can be used without being destroyed a hire may certainly be demanded, because, this use being separable at any moment (in thought at least) from the things themselves, it can be priced; it has a price distinct from the thing. So that, if I have given a thing of this sort to any one for his use, I am able to demand the hire, which is the price of the use that I have allowed him in it beyond the restitution of the thing itself, the thing having never ceased to be my property.

"It is not the same, however, with those objects that are known to lawyers as fungible goods—things that are consumed in the using. For since, in the using, these are necessarily destroyed, it is impossible in regard to them to imagine a use of the thing as distinct from the thing itself, and as having a price distinct from the thing itself. From this it follows that one cannot make over to another the using of a thing without making over to him wholly and entirely the thing itself, and transferring to him the property in it. If I lend you a sum of money for your use under the condition of paying me back as much again, then you receive from me simply that sum of money, and nothing more. The use that you will make of this sum of money is included in the right of property that you acquire in this sum. There is nothing that you have received outside of the sum of money. I have given you this sum, and nothing but this sum. I can therefore ask you to give me back nothing more than this amount lent, without being unjust; for justice would have it that only that should be claimed which was given."

Amsterdam, 1764.
P. 269, etc.
Pp. 257-262.
P. 267.
P. 284.
See particularly pp. 276, 290, 292, 298, etc.
Written in 1769; published twenty years later, 1789. I quote from the collected edition of Turgot's work, Daire, Paris, 1844, vol. i. pp. 106-152.
Funk, Zins und Wucher, Tübingen, 1868, p. 116. On the reception that this liberal decision of Rome, 18th August 1830, met from a portion of the French clergy, see Molinari, Cours d'Economie Politique, second edition, vol. i. p. 333.
Wealth of Nations, book ii. chap. iv.
E.g. Sonnenfels, Handlung, fifth edition, pp. 488, 497; Steuart, book iv. part i. p. 24; Hume, as above, p. 60. See above, pp. 42, 47. [Book I, Chapter II. pars. I.II.47-49, I.II.64-66.—Econlib Ed.]
Some historians of theory, who are at the same time adherents of the Productivity theory (which we have to examine later), such as Roscher, Funk, and Endemann, are fond of ascribing to the writers of this period "presentiments" of the "productivity of capital," even "insight" into it; and of claiming them as forerunners of that theory. I think this is a misunderstanding. These writers do speak of the "fruitfulness" of money, and of all sorts of other things, but this expression with them serves rather to name the fact that certain things bring forth a profit than to explain it. They simply call everything "fruitful" that yields a profit or a "fruit," and it does not occur to them to give any formal theoretical explanation of the origin of these profits. This is very plain from the writings of Salmasius on the subject. When Salmasius calls air, disease, death, prostitution, "fruitful" (see note to p. 39 above), it is evidently only a strong way of putting the fact that the state which lays taxes on the air, the physician, the gravedigger, the prostitute, all draw a profit from the things just named. But it is just as evident that Salmasius did not in the least seriously think of deriving the sexton's fee from a productive power that resides in death. And the fruitfulness of money, which Salmasius wished to illustrate by comparing it with these, is not to be taken any more seriously.

End of Notes

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