Chapter Seven Continuation of the same subject

As gold, silver, and copper have an intrinsic value proportionable to the land and labour which enter into their production at the mines added to the cost of their importation or introduction into states which have no mines, the quantity of money, as of all other commodities, determines its value in the bargaining of the market against other things. If England begins for the first time to make use of gold, silver, and copper in exchanges money will be valued according to the quantity of it in circulation proportionably to its power of exchange against all other merchandise and produce, and their value will be arrived at roughly by the altercations of the markets. On the footing of this estimation the landowners and Undertakers will fix the wages of their Domestic Servants and Workmen at so much a day or a year, so that they and their families may be able to live on the wages they receive. Suppose now that the residence of Ambassadors and foreign travellers in England have introduced as much money into the circulation there as there was before; this money will at first pass into the hands of various mechanics, Domestic Servants, Undertakers and others who have had a share in providing the equipages, amusements, etc. of these Foreigners; the manufacturers, farmers, and other Undertakers will feel the effect of this increase of money which will habituate a great number of people to a larger expense than before, and this will in consequence send up market prices. Even the children of these Undertakers and mechanics will embark upon new expense: in this abundance of money their Fathers will give them a little money for their petty pleasures, and with this they will buy cakes and patties, and this new quantity of money will spread itself in such a way that many who lived without handling money will now have some. Many purchases which used to be made on credit will now be made for cash, and there will therefore be greater rapidity in the circulation of money in England than there was before. From all this I conclude that by doubling the quantity of money in a state the prices of products and merchandise are not always doubled. A River which runs and winds about in its bed will not flow with double the speed when the amount of its water is doubled. The proportion of the dearness which the increased quantity of money brings about in the state will depend on the turn which this money will impart to consumption and circulation. Through whatever hands the money which is introduced may pass it will naturally increase the consumption; but this consumption will be more or less great according to circumstances. It will be directed more or less to certain kinds of products or merchandise according to the idea of those who acquire the money. Market prices will rise more for certain things than for others however abundant the money may be. In England the price of meat might be tripled while the price of corn went up only one fourth. In England it is always permitted to bring in corn from foreign countries, but not cattle. For this reason however great the increase of hard money may be in England the price of corn can only be raised above the price in other countries where money is scarce by the cost and risks of importing corn from these foreign countries. It is not the same with the price of Cattle, which will necessarily be proportioned to the quantity of money offered for meat in proportion to the quantity of meat and the number of Cattle bred there. An ox weighing 800 pounds sells in Poland and Hungary for two or three ounces of silver, but commonly sells in the London market for more than 40. Yet the bushel of flour does not sell in London for double the price in Poland and Hungary. Increase of money only increases the price of products and merchandise by the difference of the cost of transport, when this transport is allowed. But in many cases the carriage would cost more than the thing is worth, and so timber is useless in many places. This cost of carriage is the reason why milk, fresh butter, salads, game, etc. are almost given away in the provinces distant from the capital. I conclude that an increase of money circulating in a state always causes there an increase of consumption and a higher standard of expense. But the dearness caused by this money does not affect equally all the kinds of products and merchandise, proportionably to the quantity of money, unless what is added continues in the same circulation as the money before, that is to say unless those who offer in the market one ounce of silver be the same and only ones who now offer two ounces when the amount of money in circulation is doubled in quantity, and that is hardly ever the case. I conceive that when a large surplus of money is brought into a state the new money gives a new turn to consumption and even a new speed to circulation. But it is not possible to say exactly to what extent.

Chapter Eight Further Reflections on the same subject

We have seen that the quantity of money circulating in a state may be increased by working the mines which are found in it, by subsidies from foreign powers, by the immigration of Families of foreigners, by the residence of Ambassadors and Travellers, but above all by a regular and annual balance of trade from supplying merchandise to Foreigners and drawing from them at least part of the price in gold and silver. It is by this last means that a state grows most substantially, especially when its trade is accompanied and supported by ample navigation and by a considerable raw produce at home supplying the material necessary for the goods and manufactures sent abroad. As however the continuation of this Commerce gradually introduces a great abundance of money and little by little increases consumption, and as to meet this much Foreign produce must be brought in, part of the annual balance goes out to pay for it. On the other hand the habit of spending increasing the employment of labourers the prices of manufactured goods always go up. Without fail some foreign countries endeavour to set up for themselves the same kinds of manufactures, and so cease to buy those of the state in question; and though these new establishments of crafts and manufactures be not at first perfect they slacken and even prevent the exportation of those of the neighbouring state into their own country where they can be got cheaper. Thus it is that the state begins to lose some branches of its profitable trade: and many of its workmen and mechanics who see labour Fallen off leave the state to find more work in the countries with the new manufacture. In spite of this diminution in the balance of trade the custom of importing various products will continue. The articles and manufactures of the state having a great reputation, and the facility of navigation affording the means of sending them at little cost into distant countries, the state will for many years keep the upper hand over the new manufactures of which we have spoken and will still maintain a small Balance of trade, or at least will keep it even. If however some other maritime state tries to perfect the same articles and its navigation at the same time it will owing to the cheapness of its manufactures take away several branches of trade from the state in question. In consequence this state will begin to lose its balance of trade and will be forced to send every year a part of its money abroad to pay for its importations. Moreover, even if the state in question could keep a balance of trade in its greater abundance of money it is reasonable to suppose that this abundance will not arrive without many wealthy individuals springing up who will plunge into luxury. They will buy pictures and gems from the foreigner, will procure their silks and rare objects, and set such an example of luxury in the state that in spite of the advantage of its ordinary trade its money will flow abroad annually to pay for this luxury. This will gradually impoverish the state and cause it to pass from great power into great weakness. When a state has arrived at the highest point of wealth (I assume always that the comparative wealth of states consists principally in the respective quantities of money which they possess) it will inevitably fall into poverty by the ordinary course of things. The too great abundance of money, which so long as it lasts forms the power of states, throws them back imperceptibly but naturally into poverty. Thus it would seem that when a state expands by trade and the abundance of money raises the price of land and labour, the Prince or the Legislator ought to withdraw money from circulation, keep it for emergencies, and try to retard its circulation by every means except compulsion and bad faith, so as to forestall the too great dearness of its articles and prevent the drawbacks of luxury. But as it is not easy to discover the time opportune for this, nor to know when money has become more abundant than it ought to be for the good and preservation of the advantages of the state, the Princes and Heads of Republics, who do not concern themselves much with this sort of knowledge, attach themselves only to make use of the facility which they find through the abundance of their state revenues, to extend their power and to insult other countries on the most frivolous pretexts. And all things considered they do not perhaps so badly in working to perpetuate the glory of their reigns and administrations, and to leave monuments of their power and wealth; for since, according to the natural course of humanity, the state must collapse of itself they do but accelerate its fall a little. Nevertheless it seems that they ought to endeavour to make their power last all the time of their own administration. It does not need a great many years to raise abundance to the highest point in a state, still fewer are needed to bring it to poverty for lack of commerce and manufactures. Not to speak of the power and fall of the Republic of Venice, the Hanseatic Towns, Flanders and Brabant, the Dutch Republic, etc. who have succeeded each other in the profitable branches of trade, one may say that the power of France has been on the increase only from 1646 (when manufactures of cloths were set up there, which were until then imported) to 1684 when a number of Protestant Undertakers and artisans were driven out of it, and that kingdom has done nothing but recede since this last date. To judge of the abundance and scarcity of money in circulation. I know no better measure than the leases and rents of landowners. When land is let at high rents it is a sign that there is plenty of money in the state; but when land has to be let much lower it shows, other things being equal, that money is scarce. I have read in an Etat de la France that the acre of vineyard which was let in 1660 near Mantes, and therefore not far from the capital of France, for 200 livres tournois in money of full weight, only let in 1700 for 100 livres tournois in lighter money, though the silver brought from the West Indies in the interval should naturally have sent up the price of land in Europe. The author [of the Etat] attributes this fall in rent to defective consumption. And it seems that he had in fact observed that the consumption of Wine had diminished. But I think he has mistaken the effect for the cause. The cause was a greater rarity of money in France, and the effect of this was naturally a falling off in consumption. In this Essay I have always suggested, on the contrary, that abundant money naturally increases consumption and contributes above everything to the cultivation of land. When abundant money raises produce to respectable prices the inhabitants make haste to work to acquire it; but they are not in the same hurry to acquire produce or merchandise beyond what is needed for their maintenance. It is clear that every state which has more money in circulation than its neighbours has an advantage over them so long as it maintains this abundance of money. In the first place in all branches of trade it gives less land and labour than it receives: the price of land and labour being everywhere reckoned in money is higher in the state where money is most abundant. Thus the state in question receives sometimes the produce of two acres of land in exchange for that of one acre, and the work of two men for that of only one. It is because of this abundance of money in circulation in London that the work of one English embroiderer costs more than that of 10 Chinese embroiderers, though the Chinese embroider much better and turn out more work in a day. In Europe one is astonished how these Indians can live, working so cheap, and how the admirable stuffs which they send us cost so little. In the second place, the revenues of the state where money abounds, are raised more easily and in comparatively much larger amount. This gives the state, in case of war or dispute, the means to gain all sorts of advantages over its adversaries with whom money is scarce. If of two Princes who war upon each other for the sovereignty or conquest of a state one have much money and the other little money but many estates which may be worth twice as much as all the money of his enemy, the first will be better able to attach to himself Generals and Officers by gifts of money than the second will be by giving twice the value in lands and estates. Grants of land are subject to challenge and revocation and cannot be relied upon so well as the money which is received. With money munitions of war and food are bought even from the enemies of the state. Money can be given without witnesses for secret service. Lands, Produce, merchandise would not serve for these purposes, not even jewels or diamonds, because they are easily recognised. After all it seems to me that the comparative power and wealth of states consist, other things being equal, in the greater or less abundance of money circulating in them hic et nunc. It remains to mention two other methods of increasing the amount of money in active circulation in a state The first is when Undertakers and private individual borrow money from their foreign correspondents a interest, or individuals abroad send their money into the state to buy shares or government stocks there. This often amounts to very considerable sums upon which the state must annually pay interest to these foreigners These methods of increasing the money in the state make it more abundant there and diminish the rate of interest. By means of this money the Undertakers in the state find it possible to borrow more cheaply to set people on work and to establish manufactories in the hope of profit. The Artisans and all those through whose hands this money passes, consume more than they would have done if they had not been employed by means of this money, which consequently increases prices just as if it belonged to the state, and through the increased consumption or expense thus caused the public revenues derived from taxes on consumption are augmented. Sums lent to the state in this way bring with them many present advantages, but the end of them is always burdensome and harmful. The state must pay the interest to the foreigners every year, and besides this is at the mercy of the foreigners who can always put it into difficulty when they take it into their heads to withdraw their capital. It will certainly arrive that they will want to withdraw it at the moment when the state has most need of it, as when preparations for war are in hand and a hitch is feared. The interest paid to the foreigner is always much more considerable than the increase of pubic revenue which his money occasions. These loans of money are often seen to pass from one country to another according to the confidence of investors in the states to which they are sent. But to tell the truth it most commonly happens that states loaded with these loans, who have paid heavy interest on them for many years, fall at length by bankruptcy into inability to pay the capital. As soon as distrust is awakened the shares or public stocks fall, the foreign shareholders do not like to realise them at a loss and prefer to content themselves with the interest, hoping that confidence will revive. But sometimes it never revives. In states which decline into decay the principal object of ministers is usually to restore confidence and so attract foreign money by loans of this kind. For unless the ministry fails to keep faith and to observe its engagements the money of the subjects will circulate without interruption. It is the money of the foreigners which has the power of increasing the circulating currency in the state. But the resource of these borrowings which gives a present ease comes to a bad end and is a fire of straw. To revive a state it is needful to have a care to bring about the influx of an annual, a constant and a real balance of trade, to make flourishing by Navigation the articles and manufactures which can always be sent abroad cheaper when the state is in a low condition and has a shortage of money. Merchants are first to begin to make their fortunes, then the lawyers may get part of it, the Prince and the farmers of the revenue get a share at the expense of these, and distribute their graces as they please. When money becomes too plentiful in the state, luxury will instal itself and the state will fall into decay. Such is approximately the circle which may be run by a considerable state which has both capital and industrious inhabitants. An able minister is always able to make it recommence this round. Not many years are needed to see it tried and succeed, at least at the beginning which is its most interesting position. The increased quantity of money in circulation will be perceived in several ways which my argument does not allow me to examine now. As for states which have not much capital and can only increase by accidents and conjuncture it is difficult to find means to make them flourish by trade. No ministers can restore the Republics of Venice and Holland to the brilliant situation from which they have fallen. But as to Italy, Spain, France, and England, however low they may be fallen, they are always capable of being raised by good administration to a high degree of power by trade alone, provided it be undertaken separately, for if all these states were equally well administered they would be great only in proportion to their respective capital and to the greater or less industry of their people. The last method I can think of to increase the quantity of money actually circulating in a state is by violence and arms and this is often blended with the others, since in all Treaties of Peace it is generally provided to retain the trading rights and privileges which it has been possible to derive from them. When a state exacts contributions or makes several other states tributary to it, this is a very sure method of obtaining their money. I will not undertake to examine the methods of putting this device into practice, but will content myself with saying that all the nations who have flourished in this way have not failed to decline, like states who have nourished through their trade. The ancient Romans were more powerful in this wise than all the other peoples we know of. Yet these same Romans before losing an inch of the land of their vast states fell into decline by luxury and brought themselves low by the diminution of the money which had circulated among them, but which luxury caused to pass from their great Empire into oriental countries. So long as the luxury of the Romans (which did not begin till after the defeat of Antiochus, King of Asia about A.U.C. 564) was confined to the produce of the land and labour of all the vast estates of their dominion, the circulation of money increased instead of diminishing. The public was in possession of all the mines of gold, silver, and copper in the Empire. They had the gold mines of Asia, Macedonia, Aquilaea and the rich mines both of gold and silver of Spain and other countries. They had several mints where gold, silver and copper coins were struck. The consumption at Rome of all the articles and merchandise which they drew from their vast Provinces did not diminish the circulation of the currency, any more than pictures, statues and jewels which they drew from them. Though the patricians laid out excessive amounts for their feasts and paid 15,000 ounces of silver for a single fish, all that did not diminish the quantity of money circulating in Rome, seeing that the tribute of the Provinces regularly brought it back, to say nothing of what Praetors and Governors brought thither by their extortions. The amounts annually extracted from the mines merely increased the circulation at Rome during the whole reign of Augustus. Luxury was however already on a very great scale, and there was much eagerness not only for curiosities produced in the Empire but also for jewels from India, pepper and spices, and all the rarities of Arabia, and the silks which were not made with raw materials of the Empire began to be in demand there. The money drawn from the mines still exceeded however the sums sent out of the Empire to buy all these things. Nevertheless under Tiberius a scarcity of money was felt. That Emperor had shut up in his Treasury 2 milliards and 700 millions of sesterces. To restore abundance of circulation he had only to borrow 300 millions on the mortgage of his estates. Caligula in less than one year spent all this treasure of Tibetius after his death, and it was then that the abundance of money in circulation was at its highest in Rome. The fury of luxury kept on increasing. In the time of Pliny, the historian, there was exported from the Empire, as he estimated, at least 100 millions of sesterces annually. This was more than was drawn from the mines. Under Trajan the price of land had fallen by one-third or more, according to the younger Pliny, and money continued to decrease until the time of the Emperor Septimus Severus. It was then so scarce at Rome that the Emperor made enormous granaries, being unable to collect large treasure for his enterprises. Thus the Roman Empire fell into decline through the loss of its money before losing any of its estates. Behold what luxury brought about and what it always will bring about in similar circumstances.

Chapter 9 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 horses for ploughing, cattle to make the land he will take for himself after paying all expense 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 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 in the second rent and will become master instead man. If by great economy 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 he 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 ecu 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.

Chapter 10 and last Of the Causes of the Increase and Decrease of the Interest of Money in a State

It is a common idea, received of all those who have written on trade, that the increased quantity of currency in a state brings down the price of interest there, because when money is plentiful it is more easy to find some to borrow. This idea is not always true or accurate. For proof it needs only to be recalled that in 1720, nearly all the money in England was brought to London and over and above this the number of notes put out accelerated the movement of money extraordinarily. Yet this abundance of money and currency instead of lowering the current rate of interest which was before at 5 per cent and under, served only to increase the rate which was carried up to 50 and 60 per cent. It is easy to account for this increased rate of interest by the principles and the causes of interest laid down in the previous chapter. The reason is that everybody had become an undertaker in the South Sea scheme and wanted to borrow money to buy shares, expecting to make an immense profit out which it would be easy to pay this high rate of interest. If the abundance of money in the state comes from the hands of moneylenders it will doubtless bring down the current rate of interest by increasing the number of money lenders: but if it comes from the intervention of spenders it will have just the opposite effect and will raise the rate of interest by increasing the number of Undertakers who will have employment from this increased expense, and will need to borrow to equip their business in all classes of interest. Plenty or scarcity of money in a state always raises or lowers the price of everything in bargaining without any necessary connection with the rate of interest, which may very well be high in states where there is plenty of money and low in those where money is scarcer: high where everything is dear, and low where everything is cheap: high in London, low in Genoa. The rate of interest rises and falls every day upon mere rumours which tend to diminish or increase the security of lenders, without the prices of things in exchange being affected thereby. The most regular cause of a high rate of interest in a state is the great expense of nobles and landowners or other rich people. Undertakers and master craftsmen are in the custom of supplying the great houses in all their branches of expenditure. These Undertakers have nearly always need to borrow money in order to supply them: and when the nobility consume their revenues in advance and borrow money they contribute doubly to raise the rate of interest. On the contrary when the nobility of the state live economically and buy at first hand so far as they can, they get through their servants many things without their passing through the hands of Dealers, they diminish the profits and numbers of the Undertakers in the state and therefore of borrowers as well as the rate of interest, because this class of Undertakers working on their own capital borrow the least they can, and contenting themselves with small profits prevent those who have no capital from embarking in these enterprises on borrowed money. Such is today the position of the Republics of Genoa and Holland, where interest is sometimes at 2 per cent or under in the highest class, whilst in Germany, Poland, France, Spain, England and other countries the easiness and expense of noblemen and landowners always keep the Undertakers and master craftsmen of the country accustomed to large profits enabling them to pay a high rate of interest, which is higher still when they import everything from abroad with attendant risk. When the Prince or the state incurs heavy expense, such as making war, the rate of interest is raised for two such as making war, the rate of interest is raised for two reasons: the first is that this multiplies the number of Undertakers by several new large enterprises for war supplies, and so increases borrowing. The second is because of the greater risk which war always involves. On the contrary when the war is over risk diminishes, the number of Undertakers is lessened and war-contractors ceasing to be so retrench their expenses and become lenders of the money they have gained. If now the Prince or state offer to repay part of the debt it will interest, and this will have considerably reduce the rate of interest, and this will have a more assured result if part of the debt can be really paid off without borrowing elsewhere, because the repayments increase the number of lenders in the highest class of interest which will affect all the other classes. When the plentifulness of money in the state is due to a continuous Balance of trade, this money first passes through the hands of Undertakers, and although it increases consumption it does not fail to bring down the rate of interest, because most of the Undertakers then acquire enough capital to carry on their business without money, and even become lenders of the sums they have gained beyond what they need to carry on their trade. If there are not in the state a great number of noblemen and rich people who spend heavily then the abundance of money will certainly bring down the rate of interest, while increasing the price of goods and merchandise in exchange. This is what usually happens in Republics which have neither much capital nor considerable landed property and grow rich merely by foreign trade. But in states which have a large capital and great landowners the money brought in by foreign trade increases their rents, and enables them to incur heavy expenditure which maintains several Undertakers and mechanics besides those who trade with the foreigner. This always keeps interest at a high rate in spite of the abundance of money. When the nobility and landowners ruin themselves by extravagances, the money lenders who have mortgages on their lands often acquire the absolute ownership of them, and it may well arrive in the state that the lenders are creditors for much more money than there is circulating there, in which case one may consider them as subaltern owners of the land and goods mortgaged for their security. If not their capital will be lost by bankruptcies. In the same way one may consider the owners of shares and public funds as subaltern owners of the revenues of the state devoted to payment of their interest. But if the Legislature were compelled by the necessities of the state to employ these revenues for other purposes, the shareholders or owners of public funds would lose everything without the money circulating in the state being diminished on that account by a single liard. If the Prince or administrators of the state wish to regulate the current rate of interest by law, the regulation must be fixed on the basis of the current market rate in the highest class, or thereabout. Otherwise the law will be futile, because the contracting parties, obedient to the force of competition or the current price settled by the proportion of lenders to borrowers, will make secret bargains, and this legal constraint will only embarrass trade and raise the rate of interest instead of settling it. The Romans of old after several laws to restrict interest passed one to forbid altogether the lending of money. This law had no more success than its predecessors. The law of Justinian to restrain patricians from taking more than 4 per cent, those of a lower order 6 per cent, and traders 8 per cent was equally amusing and unjust, whilst it was not forbidden to make 50 and 100 per cent profit in all sorts of business. If it is allowable and respectable for a landlord to let a farm to a poor farmer at a high rental, risking the loss of the rent of a whole year, it seems that it should be permissible to a lender to advance his money to a needy borrower, at the risk of losing not only his interest or profit but also his capital, and to stipulate for so much interest as the borrower will freely consent to pay him. It is true that Loans of this character make more people wretched. Making away with both capital and interest they are more impotent to recover themselves than the farmer who does not carry off the land. But the bankruptcy laws being favourable enough to debtors to allow them to start again it seems that usury laws should always be adjusted to market rates, as in Holland. The current rate of interest in a state seems to serve as a basis and measure for the purchase price of land. If the current interest is 5 per cent or one-twentieth part the price of land should be the same. But as the ownership of land gives a standing and a certain jurisdiction in the state it happens that when interest is one-twentieth part, the price of land is at 1/24 or 1/25, though mortgages on the same land hardly pass the current rate of interest. After all, the price of land, like all other prices, naturally settles itself by the proportion of sellers to buyers, etc.; and as there will be many more buyers in London, for example, than in the Provinces, and as these buyers who live in the capital will prefer to buy land in their locality rather than in distant Provinces, they will rather buy land in the vicinity at 1/30 or 1/35 than land at a distance 1/25 or 1/22. There are often other reasons of expediency affecting the price of land, unnecessary to mention here, since they do not invalidate our explanations of the nature of interest.