SHORT OBSERVATIONS ON THE INJUSTICE AND IMPOLICY OF FORCED REDUCTIONS OF THE RATE OF INTEREST
Since the writing of the preceding Letters, I have heard of some other advantages supposed to result from the limitation of the rate of interest which, I must confess, had not then occurred to me as resulting from the restraints thus laid on the liberty of contracting. These are
1. Encreasing the sum of national wealth.
2. Enabling the state to take and to keep money at interest upon more advantageous terms than it could otherwise, and thus diminishing the sum of the public burthens which are the deductions from national wealth, encreasing therefore in this negative way the clear sum of national wealth upon the whole.
Examine into these supposed advantages, you will find them both altogether illusory, and that, did they not only exist, but exist in the utmost degree that was ever attributed to them, they could not be obtained but at the expence of inconveniences much more considerable.
The first of them does not exist in point of fact: such a limitation has scarce any perceptible tendency in any way whatever to add to the mass of national wealth, and it tends in a variety of ways to diminish it.
As to the second, neither does that exist in the shape of an advantage. The public may or may not hold money of individuals at interest upon more advantageous terms, but from this circumstance the mass of national wealth is not rendered a jot more considerable than it would be otherwise.
At no time, therefore, does the nation, collectively considered, derive any advantage from this limitation: and as often as any fresh imitation is applied whereby the restraint is drawn tighter, the nation suffers the inconvenience of an unequal and very heavy tax. without reaping the advantages that it does from other taxes.
First supposed advantage -- Encreasing in a direct way the mass of national wealth in the hands of individuals.
This advantage, I say, will not be found to result in any degree from this measure.
Every accession made to the national stock of wealth, is the result of labour employed by the help of capital, the result of preceding labour.
No accession to wealth in any hands, public or private, can take place but in one or other of two ways: 1. By the augmentation of the mass of capital employed in giving motion to industry: 2. By a more advantageous application of the existing stock of capital, its application in a more advantageous manner.
That the measure in question can contribute in the latter of these two modes to the encrease of wealth, has never been, nor ever will be supposed.
On the other hand I have already shewn that it has a contrary effect. Every more advantageous mode than was before known of applying a part of the quantity of capital in hand is, previously to trial and success, a Project: and the effect of this limitation in discouraging projects has already been displayed.
2. It has no particular tendency to encrease the quantity of capital.
It has, it is true, a tendency to modify in a certain manner the distribution of wealth among the different sharers: it is only in proportion as it has this tendency, that this or any other regulation relative to property can have any effect at all.
It must also be admitted that, if in any degree it tends to augment the quantity of wealth employed in the shape of capital, with reference to, and at the expence of, that part which is employed in the shape of unproductive consumption and expenditure, it must in proportion operate in augmentation of the mass of capital employed as capital in the production of wealth, and thence of the growing stock of national wealth.
Whoever saves money, as the phrase is, adds proportionably to the general mass of capital.
There is scarce any description of people that does not include some individuals that save money: but some descriptions are likely to include more such frugal individuals than others. If the tendency of the measure in question be to throw or to keep money in the hands of persons of particular descriptions in preference to others, and those descriptions are more likely to be of a frugal cast upon the whole than the descriptions of people at whose expence it is thus disposed of, the measure possesses in so far a tendency to produce the intended effect. But no such particular tendency is discoverable in it.
The persons on whom it operates, belong to one or other of two classes, borrowers and lenders: its property is to favour the former at the expence of the latter. If of borrowers in general it could be said that they were more frugal than lenders, a favour shewn to borrowers as such would be a help given to frugality.
But no such proposition thus taken in the lump can be received as true. Neither reason nor so much as prejudice plead in favour of it. Ask prejudice, the answer will be that, in comparison of borrowers, lenders are not only frugal, but frugal to such a degree as to be. avaricious. The supposition of their proneness to avarice is the very thing that excites prejudice against them, and disposes the bulk of mankind to favour all regulations, the tendency of which is to lay them under a disadvantage. It is because they are hoarders that they are to be discouraged -- to what end? -- in order to encourage hoarding. Such is the consistency of blind and vulgar prejudice, hitherto in so many important points the arbiter of the destiny of nations.
Setting prejudice aside, and taking reason for our guide, it is impossible to say whether the cause of frugality be prejudiced or served by the favour thus shewn to borrowers, untill it be specified for what purpose a man means to borrow.
When a man borrows, it is either to spend or to accumulate.
So far as it favours the dissipating class of borrowers, the measure directly counteracts this its proposed object: it adds, as far as it operates, to the amount of what they are enabled to employ in dissipation.
It is not incumbent on those who take the side I take, to go about to prove a negative, viz. that in the class of borrowers there is not likely to be more frugality than in the class of lenders. It is incumbent on those who take the side I combat, to establish the opposite affirmative proposition. Every restraint on liberty is so far an evil: and it lies on him who proposes any such restraint, to shew the greater good by which this evil is counterbalanced. This has never been attempted: nor, howsoever it may have been tacitly taken for granted, has it in any instance been directly and explicitly affirmed. Propositions diametrically opposite are both received with open arms, to justify the propensity to injure and oppress the class of lenders. At one time lenders are to be pinched, because borrowers are more likely to be spendthrifts than hoarders: at another time, because they are more likely to be hoarders than spendthrifts.
Persons concerned in bargains of this kind may be distinguished into three classes: possessors of capital who risk to lend it, i.e. money lenders; dissipating borrowers; and accumulating borrowers. The restraint in question favours the two latter classes at the expence of the former. That in as far as it favours dissipating borrowers, it counteracts its avowed purpose, is manifest at any rate: does it promote that purpose in as far as it favours accumulating borrowers? This can not so clearly be averred. It does so only in as far as the accumulating borrowers are greater accumulators than the persons of whom they borrow.
Take an instance. The money that is borrowed by accumulators engaged in trade, of whom is it borrowed principally? of persons who spend all their income? No, but of other accumulators -- of other persons as great accumulators as themselves: of shopkeepers or wholesale dealers in the way of goods ordered on credit: or of bankers or merchants in the way of discount. And thus far, therefore, it is evident that accumulation is not more favoured by the restraint in one way, than it is checked in the other.
In another way the restraint in question counteracts this part of its object in a more manifest and conspicuous manner: viz. by lessening the quantity of borrowed capital employed in accumulation.
The world can augment its capital only in one way: viz. by parsimony. A nation may augment its capital, as an individual may augment his capital, in either of two ways: by saving, or by borrowing. By borrowing capital for the purpose of accumulation, is it likely to add to the stock of national wealth? Yes: if the value of what is thereby produced is greater than the value of what is paid for interest: in that case the clear amount of the accumulation, the clear gain to the nation, is to the amount of the difference. But this it may always be reckoned, and that on two different accounts which concurr in encreasing the advantage: 1. In the first place, the general rate of mercantile profit is greater every where than the rate of interest: it is in general at least double: 2. In the next place, in manufactures(33*) the rate of profit encreases with the encrease of capital by the advantages derivable from the division of labour, and the making the same quantity of machinery and warehouse room and even labour in some cases serve for a larger quantity of work than would have been necessary for a smaller.
It has already been shewn in the body of the work that the quantity of good success in all branches of industry taken together is much superior to the quantity of ill success: and this it is not less likely to be in the instances where a man aids his original by borrowed capital than in others. If a man engaged in industry did not expect to get more by the money he borrows than he pays for it, he would not borrow it: and it has been shewn that such expectations are much more frequently realised than frustrated. To seek to restrain industrious men from borrowing money under the apprehension of its not answering to them would be an additional instance, but an instance not more flagrant than those which are perpetually exhibited, of the ignorance and folly, and blindness, and vanity, and presumption, and despotism that hitherto have been endemial among legislators.
Look into pamphlets and debates, you will find people disposed to quarrel with outlandish money, because it is outlandish, at least for the purpose of the argument. The popular notion that ill-gotten money does not thrive, howsoever hacknied by superstition, has not only a much better effect, but even a more rational ground.
Two ill effects are attributed to outlandish money:
1st. That the interest paid for it is so much money sent out of the country. But were not the interest sent out of the country, the profit would not come into it. And profit, we have seen, ought to be estimated at more than double the value of the interest. The force of this argument depends upon the forgetting altogether the chapter of profit: and supposing that the money thus sent out of the country, is sent out for nothing. It is an argument that applies against selling any thing to foreigners: or indeed to any body on any terms.
What are the particular courses taken by such imported money, whether for example it being laid out in the public funds or lent out to individuals, makes no sort of difference. If the money laid out by the Dutch in the English funds, that is, lent to the English government, had not been so disposed of, English money to the same amount must have lain there: there would therefore have been so much less English money to be applied in the support of English industry, in the encrease of the sum of the national wealth of England.(34*)
2dly. That money borrowed of foreigners will be perpetually liable to be recalled.
To render this an objection, two circumstances must concur.
1. The foreign money must be more liable to be recalled than home money.
2. When recalled, the prejudice resulting from the recall must be likely to be greater than all the advantage reaped before the recall.
Neither of these propositions has ever been attempted to be proved: nor does either seem likely to be true.
1. It may happen to any lender to recall his money: but this is not more likely to happen to a man of one country than of another. You may put cases where an Englishman who has lend his money in Ireland(35*) may be disposed to recall that money: but it is just as easy to put cases in which an Irishman who has lent his money in Ireland may be disposed to do the same thing. An Irishman who is upon the spot is more likely to look for, to spy out, and to improve such opportunities, than an Englishman who is at a distance, and who, if he lends his money in such a way, is more likely to have lent it with views of permanence, and as a means of providing himself for life, without farther sollicitude, a settled income.
2. If there were any reason to apprehend that the time when the foreign lender may call in his money would be more inconvenient to the lender than the time when a home lender might call in his, the danger of recall might sooner afford an objection to the importation of foreign capital. But no such reason can be assigned. The disposition of the foreign lender to call in his money will not be governed by the consideration of the inconvenience to the borrower, but by the consideration of his own convenience. But that convenience is not the more likely to clash with the convenience of the borrower on account of the lender's being a foreigner: not more likely to do so than that of a lender at home. We have seen that on one account it is less likely: because a foreign lender is less likely to be tempted by opportunities of occasional profit to clasp and change his security than a native. It is also on another account: a lender at home is more in the way of being acquainted with the circumstances and exigencies of his borrower.. more in the way of having quarrels with him: of watching opportunities of distressing him in a time of need, either for the sake of hurting him, or for the sake of making a profit of his distress.
Whatever may, by accident, be the disadvantage resulting to A or B in this way from a recall of a foreign capital, a capital thus imported will, so long as it continues unrecalled, be productive to the nation that has imported it, of a clear revenue to the amount just stated. If the use of a million for ten years would have been worth *600,000, the use of the same million for one year will have been *60,000. Recall it when you will, it will have had its value from the time of its importation to the time of its recall. To furnish an argument against the import, the inconvenience likely to result from the recall must be not only very considerable, but superior to the whole amount of the benefit reaped previously to the recall.
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