Essai sur la Nature du Commerce in Général (Essay on the Nature of Trade in General)

Part II, Chapter IX

Of the Interest of Money and its Causes

Just as the Prices of things are fixed in the altercations of the Market by the quantity of things offered for sale in proportion to the quantity of money offered for them, or, what comes to the same thing, by the proportionate number of Sellers and Buyers, so in the same way the Interest of Money in a State is settled by the proportionate number of Lenders and Borrowers.

Though money passes for a pledge in exchange it does not multiply itself or beget an interest in simple circulation. The needs of man seem to have introduced the usage of Interest. A man who lends his money on good security or on mortgage runs at least the risk of the ill will of the Borrower, or of expenses, lawsuits and losses. But when he lends without security he runs the risk of losing everything. For this reason needy men must in the beginning have tempted Lenders by the bait of a profit. And this profit must have been proportionate to the needs of the Borrowers and the fear and avarice of the Lenders. This seems to me the origin of Interest. But its constant usage in States seems based upon the Profits which the Undertakers can make out of it.

The Land naturally produces, aided by human Labour, 4, 10, 20, 50, 100, 150 times the amount of corn sown upon it, according to the fertility of the soil and the industry of the inhabitants. It multiplies Fruits and Cattle. The Farmer who conducts the working of it has generally two thirds of the produce, one third pays his expenses and upkeep, the other remains for the profit of his enterprise.

If the Farmer have enough capital to carry on his enterprise, if he have the needful tools and instruments, horses for ploughing, cattle to make the Land pay, etc. he will take for himself after paying all expense a third of the produce of his Farm. But if a competent Labourer who lives from day to day on his wages and has no capital, can find some one willing to lend him land or money to buy some, he will be able to give the Lender all the third rent, or third part of the produce of a Farm of which he will become the Farmer or Undertaker. However he will think his position improved since he will find his upkeep in the second rent and will become Master instead of Man. If by great oeconomy and pinching himself somewhat of his necessities he can gradually accumulate some little capital, he will have every year less to borrow, and will at last arrive at keeping the whole of his third rent.

If this new Undertaker finds means to buy corn or cattle on credit, to be paid off at a long date when he can make money by the sale of his farm produce, he will gladly pay more than the market price for ready money. The result will be the same as if he borrowed cash to buy corn for ready money, paying as interest the difference between the cash price and the price payable at a future date. But whether he borrow cash or goods there must be enough left to him for upkeep or he will become bankrupt. The risk of this is the reason why he will be required to pay 20 or 30 per cent. profit or interest on the amount of money or value of the produce or merchandise lent to him.

Again, a master Hatter who has capital to carry on his manufacture of Hats, either to rent a house, buy beaver, wool, dye, etc. or to pay for the subsistence of his workmen every week, ought not only to find his upkeep in this enterprise, but also a profit like that of the Farmer who has his third part for himself. This upkeep and the profit should come from the sale of the Hats whose price ought to cover not only the materials but also the upkeep of the Hatter and his Workmen and also the profit in question.

But a capable Journeyman Hatter with no capital may undertake the same Manufacture by borrowing money and materials and abandoning the profit to anybody who is willing to lend him the money or entrust him with the beaver, wool, etc. for which he will pay only some time later when he has sold his hats. If when his bills are due the Lender requires his capital back, or if the Wool-Merchant and other Lenders will not grant him further credit he must give up his business, in which case he may prefer to go bankrupt. But if he is prudent and industrious he may be able to prove to his creditors that he has in cash or in hats about the value of what he has borrowed and they will probably choose to continue to give him credit and be satisfied for the present with their interest or profit. In this way he will carry on and will perhaps gradually save some capital by retrenching a little upon his necessities. With the aid of this he will have every year less to borrow, and when he has collected a capital sufficient to conduct his manufacture, which will always be proportionable to his sales, the profit will remain to him entirely and he will grow rich if he does not increase his expenditure.

It is well to observe that the upkeep of such a Manufacturer is small compared with the sums he borrows in his trade or with the materials entrusted to him, and therefore the Lenders run no great risk of losing their capital if he is respectable and hard working: but as it is quite possible that he is not so the Lenders always require from him a profit or interest of 20 to 30 per cent. of the value of their loan. Even then only those who have a good opinion of him will trust him. The same inductions may be made with regard to all the Masters, Artisans, Manufacturers and other Undertakers in the State who carry on enterprises in which the Capital considerably carry on enterprises in which the Capital considerably exceeds the value of their annual upkeep.

But if a water-carrier in Paris sets up as the Undertaker of his own work, all the capital he needs will be the price of two buckets which he can buy for an ounce of silver and then all his gains are profit. If by his labour he gains 50 ounces of silver a year, the amount of his capital or borrowing will be to that of his profit as 1 to 50. That is he will gain 5000 per cent. while the Hatter will gain only 50 per cent. and will also have to pay 20 or 30 per cent. to the lender.

Nevertheless a Money Lender will prefer to lend 1000 ounces of silver to a Hatmaker at 20 per cent. interest rather than to lend 1000 ounces to 1000 water-carriers at 500 per cent. interest. The Water-carriers will quickly spend on their maintenance not only the money they gain by their daily labour but all that which is lent to them. These capitals lent to them are small compared with what they need for their maintenance: whether they be much or little employed they can easily spend all they earn. Therefore it is hardly possible to arrive at the profits of these little undertakers. It might well be that a Water-carrier gains 5000 per cent. of the value of the buckets which serve as his capital, even 10,000 per cent. if by hard work he gains 100 ounces of silver a year. But as he may spend on his living 100 ounces just as well as 50, it is only by knowing what he devotes to his upkeep that we can find how much he has of clear profit.

The subsistence and upkeep of Undertakers must always be deducted before arriving at their profit. We have done this in the example of the Farmer and of the Hatmaker, but it can hardly be determined in the case of the petty Undertakers, who are for the most part insolvent when they are in debt.

It is customary for the London Brewers to lend a few barrels of Beer to the keepers of Ale-houses, and when these pay for the first barrels to continue to lend them more. If these Ale-houses do a brisk business the Brewers sometimes make a profit of 500 per cent. per annum; and I have heard that the big Brewers grow rich when no more than half the Ale-houses go bankrupt upon them in the course of the year.

All the Merchants in a State are in the habit of lending merchandise or produce for a time to Retailers, and proportion the rate of their profit or interest to that of their risk. This risk is always great because of the high proportion of the Borrower’s upkeep to the loan. For if the borrower or retailer have not a quick turnover in small business he will quickly go to ruin and will spend all he has borrowed on his own subsistence and will therefore be forced into bankruptcy.

The Fishwives, who buy Fish at Billingsgate in London to sell again in the other quarters of the City, generally pay under a contract made by an expert scrivener, one shilling per guinea, or twenty-one shillings, interest per week, which amounts to 260 per cent. per annum. The Market-women at Paris, whose business is smaller, pay 5 sols for the week’s interest on an écu of 3 livres, which exceeds 430 per cent. per annum. And yet there are few Lenders who make a fortune from such high interest.

These high rates of interest are not only permitted but are in a way useful and necessary in a State. Those who buy Fish in the streets pay these high interest charges in the increased price. It suits them and they do not feel it. In like manner an Artisan who drinks a pot of Beer and pays for it a price which enables the Brewer to get his 500 per cent. profit, is satisfied with this convenience and does not feel the loss in so small a detail.

The Casuists, who seem hardly suitable people to judge the nature of Interest and of matters of Trade, have invented a term,
damnum emergens, by whose aid they consent to tolerate these high rates of interest; and rather than upset the custom and convenience of Society, they have agreed and allowed to those who lend at great risk to exact in proportion a high rate of interest: and this without limit, for they would be hard put to it to find any certain limit since the business depends in reality on the fears of the Lenders and the needs of the Borrowers.

Maritime Merchants are praised when they can make a profit on their Adventures, even though it be 10,000 per cent.; and whatever Profit wholesale Merchants may make or stipulate for in selling on long credit produce or Merchandise to smaller retail Merchants, I have not heard that the Casuists make it a crime. They are or seem to be a little more scrupulous about loans in hard cash though it is essentially the same thing. Yet they tolerate even these loans by a distinction,
lucrum cessans, which they have invented. I understand this to mean that a Man who has been in the habit of making his money bring in 500 per cent. in his trade may demand this profit when he lends it to another. Nothing is more amusing than the multitude of Laws and Canons made in every age on the subject of the Interest of Money, always by Wiseacres who were hardly acquainted with Trade and always without effect.

From these examples and inductions it seems that there are in a State many classes and channels of Interest or Profit, that in the lowest classes Interest is always highest in proportion to the greater risk, and that it diminishes from class to class up to the highest which is that of Merchants who are rich and reputed solvent. The Interest demanded in this class is called the current rate of Interest in the State and differs little from interest on the Mortgage of Land. The Bill of a solvent and solid Merchant is as much esteemed, at least for a short date, as a lien upon Land, because the possibility of a Lawsuit or a Dispute on this last makes up for the possibility of the Bankruptcy of the Merchant.

If there were in a State no Undertakers who could make a Profit on the Money or Goods which they borrow, the use of Interest would probably be less frequent than it is. Only extravagant and prodigal people would contract loans. But accustomed as every one is to make use of Undertakers there is a constant source for Loans and therefore for Interest. They are the Undertakers who cultivate the Land and supply Bread, Meat, Clothes, etc. to all the Inhabitants of a City. Those who work on wages for these Undertakers seek also to set themselves up as Undertakers, in emulation of each other. The multitude of Undertakers is much greater among the Chinese, and as they all have lively intelligence, a genius for enterprise, and great perseverance in carrying it out, there are among them many Undertakers who are among us people on fixed wages. They supply Labourers with meals, even in the Fields. It is perhaps this multitude of small Undertakers and others, from class to class, who finding the means to gain a good deal by ministering to consumption without its being felt by the consumers, keep up the rate of Interest in the highest class at 30 per cent. while it hardly exceeds 5 per cent. in our Europe. At Athens in the time of Solon interest was at 18 per cent. In the Roman Republic it was most commonly 12 per cent., but has been known to be 48, 20, 8, 6, and at the lowest 4 per cent. It was never so low in the free market as towards the end of the Republic and under Augustus after the conquest of Egypt. The Emperor Antoninus and Alexander Severus only reduced Interest to 4 per cent. by lending public money on the mortgage of Land.