The real exceptions to the above rules are caused by a prevention of the leveling influx and outflow of capital. Among nations in a low stage of civilization, there is wont to be a mult.i.tude of legal impediments in this respect. The existence of a difference of cla.s.ses, of privileged corporations, etc., not only restrains the transition of workmen, but also of capital from one branch of industry to another. But even the mere routine of capitalists, that blind distrust of everything new so frequently characteristic of easily contented men, may produce the same result.[181-1] In the higher stages of civilization, patents for inventions and bank privileges, are causes of a lastingly higher rate of interest than is usual in the country.[181-2] Finally, since in many enterprises only a large amount of capital can be used at all, or at least with most advantage, the aggregation of which from many small sources is ordinarily much more difficult than the division of a large one into small fractional parts; the rate of interest for very small amounts of capital, and especially in the higher stages of civilization, is usually lower than that of large amounts of capital. We need only mention interest paid by savings-bank investments.[181-3]
If circulating capital has been changed into fixed capital, its yield will depend upon the price of the particular goods in the production of which it has been made to serve. Compared with the cost of restoration of fixed capital, this yield may, in a favorable case, const.i.tute an extraordinarily high rate of interest, in an unfavorable a very low one; and the former of these two extremes has a greater chance of being realized, in proportion as it is difficult to multiply fixed capital of the same kind; the latter, the more exclusively it can be employed in only one kind of production, and the longer time it takes to be used up by wear.[181-4] When fixed and circulating capital cooperate in production, the latter, because it can be more easily withdrawn, but also more easily replaced, first takes out its own profit, that is the profit usual in the country and leaves all the rest to the former. When fixed capital is sold, practically no attention is paid to what it originally cost. The purchaser pays only for the prospective revenue it will yield, which he capitalizes at the rate of interest usual in the country. The seller henceforth looks upon his gain as an accretion to capital, his loss as a diminution of capital, and no longer as high or low interest.[181-5] That accretion might be considered the wages, paid once for all, for the intelligent labor which governed the original investment of the capital, and _vice versa_.
[Footnote 181-1: Thus the rate of interest in the Schappach valley remained for a long time much lower than in the vicinity, for the reason that the peasantry who had grown rich through the lumber trade possessed notwithstanding little of the spirit of enterprise. (_Rau_, Lehrbuch, I, -- 233.)]
[Footnote 181-2: Here the law produces a species of artificial fixation.]
[Footnote 181-3: _Von Mangoldt_, Unternehmergewinn, 150.]
[Footnote 181-4: In other words, the more fixed they are.
Thus, for instance, dwelling houses in declining cities, ca.n.a.ls, etc. which have been supplanted by better commercial routes; or again, the shafts and stulms of a mine which has been abandoned. When Versailles ceased to be a royal residence, the value of inhabited houses sank to one-fourth of what it had been. (_Zinkeisen_ in _Raumer"s_ histor.
Taschenbuch, 1837, 426.) A rate of interest greater than that usual in a country is seldom found where freedom of compet.i.tion prevails, since it is necessary there to distinguish between rent and interest on capital. When in an open city, the capital employed in the construction of dwelling houses _detractis detrahendis_ pays 8 per cent., while the rate of interest customary in the country is only 4 per cent., the supply of houses will grow continually greater. Only the difficulties in the way of transferring capital from one business to another could here r.e.t.a.r.d the leveling process, which where the political prospect for instance was bad, might last a long time--one of the princ.i.p.al reasons why, in 1848, the rent of houses declined much less than their purchase prices. The conjuncture was not serious enough to prevent the increase of population; but it entirely stopped the building of new houses. On the other hand, a bridge or railroad company may maintain a high rate of profit because compet.i.tion cannot exist in the face of the great expense such enterprises require; but especially because the party who has here the advantage of priority may lower the price of transportation to such a point as to entirely discourage his rival. Compare _Hermann_, Staatsw. Untersuchungen, 145 ff. Interesting example of the London gas and water companies in _Senior_, Outlines, 101.]
[Footnote 181-5: Thus, for instance, Leipzig-Dresden railroad stock cost originally 100 thalers per share, and was taken at that rate. The yearly dividends amounted in 1856 to 13 thalers; that is, 13 per cent. for the original stockholders. But a person who on the 30th September, 1856, paid 285 thalers for a share, received but an interest of 4 per cent. on his capital. It is characteristic, how _Serra_, Sulle Cause, etc., 1613, I, 9, calls the high and the low rate of interest _prezzo ba.s.so e alto delle entrate_.]
SECTION CLx.x.xII.
VARIATIONS OF THE RATE OF DISCOUNT.
The fact that in commerce, etc., the rate of interest on capital loaned for short periods of time (discount) is subject to great fluctuations, while the mortgage rate of interest, for instance, remains the same throughout, depends on similar causes.[182-1] Yet there are contingencies in trade which, when taken immediate advantage of, promise enormous profits, but which may disappear within a month; risks of the most dangerous kind which can be conjured only by the immediate aid of capital. These are both sufficient grounds of a high rate of interest.
Again, there are times of the profoundest calm in the commercial world, during which capitalists are perfectly willing to make loans at a low rate of interest, provided they are sure to be able to get back their capital with the first favorable breeze that blows. Agriculture is too immovable to come opportunely to the a.s.sistance of capitalists, here as a receiver and there as a loaner of capital. As the cycle of its operations is gone through usually only in a series of years, sudden influxes or outflows of capital would cause it the greatest injury.[182-2]
[Footnote 182-1: _Nebenius_, ff. Credit, I, 74 ff. Thus, Hamburg discount towards the end of the last century fluctuated between 2 and 12 per cent., while the capital invested in agriculture brought an interest almost invariably of 4 per cent. (_Busch_, Geldumlauf, VI, 4, 19.) At the same time, in Pennsylvania, the usual rate of interest was 6 per cent. per annum, and the rate of discount not unfrequently from 2 to 3 per cent. a month. (_Ebeling_ Geschichte und Erdbeschreib. von Amerika, IV, 442.) During the crisis of 1837, it happened that per cent. a day was paid. (_Rau_, Archiv. N. F. IV, 382.) In the Prussian ports, during the crisis of 1810, it is said that in July the rate of discount was 2 per cent. a month. (_Tooke_, Thoughts and Details, I, 111.) In Hamburg and Frankfort the rate of discount rose in the spring of 1848, but declined in June to 2; until December it was 1, until the summer of 1849, per cent. (Tub. Zeitschr., 1856, 95.) Rate of discount in France, about 1798, at least 2 per cent. a month.
(_Busch_, loc. cit., IV, 52.) Half a year previous, capital employed in the purchase of land paid an interest of from 3 to 4 per cent. Legal interest was 5 per cent.; discount, at most, 6 per cent.; in very prosperous times 8-9, per cent.
(_Forbonnais_, Recherches et Considerations, I, 372.)]
[Footnote 182-2: Remarkable case in _Cicero"s_ time in which bribery, carried on on a large scale, raised the rate of discount from 4 to 8 per cent. _Cicero_ ad. Quint. M, 15; ad. Att. IV, 15.]
SECTION CLx.x.xIII.
EFFECT OF INCREASED DEMAND FOR LOANS.
The price paid for the use of capital naturally depends on the relation between the supply and demand, and especially of circulating capital.
The increase of the supply need no more unconditionally lower the rate of interest than the price of any other commodity. If 50 hunters kill 1,000 deer yearly, and give 100 deer per annum as interest to the capitalists who provided them with ammunition and rifles, a second capitalist with an equal number of rifles and an equal amount of ammunition may appear on the scene. If now 2,000 deer a year are killed, the rate of profit of the capitalists will probably remain the same. But if the woods are not rich enough in game for this, or the hunters not numerous enough, too indolent, or too easily satisfied, the rate of interest falls.[183-1]
The difficulties in the way of the desired increase of capital are here of great importance. The smaller the surplus over and above their absolutely necessary wants, which the people produce, the less their tendency to make savings, the less the inclination to capitalization; and the less the security afforded by the law is, the higher must the rate of interest be to induce people to face these difficulties. We may very well transfer the idea of cost of production to this condition.[183-2]
The demand for capital depends, on the one hand, on the number and the solvability of borrowers, especially of non-capitalists like landowners and workmen; and, on the other hand, on the value in use of the capital itself. Hence the growth of population is, other circ.u.mstances being the same, a means to raise the rate of interest; because it infallibly increases the compet.i.tion of borrowers of capital, even if the increased rate must take place at the expense of wages. The solvability or paying capacity of the land-owning cla.s.s as contrasted with the capitalists can, in the last a.n.a.lysis, depend only on the extent and fertility of their lands and on the quality of their agricultural husbandry; the solvability or paying capacity of the working cla.s.s, only on their skill and industry. Where these have grown, an increase of the rate of interest may be found in connection with an absolute growth of the rate of wages and of rent, because the aggregate income of the nation has become greater.
The value in use of capital, which is more h.o.m.ogeneous in proportion as it has the character of circulating capital (_res fungibiles_) is, in most instances, synonymous with the skill of the working cla.s.s, and the richness of the natural forces connected with it. The deciding element, therefore, is the yield of the least productive investment of capital which must be made to employ all the capital seeking employment. This least productive employment of capital must determine the rate of interest customary in a country precisely as cost of production on the most unfavorable land determines the price of corn (---- 110, 150), and as the result of the work of the laborer last employed does the rate of wages. (-- 165.)
What portion of the total national income, after deduction is made of rent, shall go to the capitalists and what portion to the working cla.s.s, will depend mainly on whether the capitalists compete more greedily for labor or the laboring cla.s.ses for capital.[183-3] If, for instance, capital should increase more rapidly than population, there must be a relative increase in wages, and _vice versa_.[183-4] This is true especially of that peculiar kind of higher wages which we shall (-- 145, ff.) designate as the "undertaker"s profit." The smaller the number of persons engaged in enterprises is, in comparison with the number of retired persons who live on their rents, incomes, etc., the smaller is the portion of the so-called net profit of enterprise the latter must be satisfied with in the shape of interest.[183-5]
[Footnote 183-1: It is one of _Ricardo"s_ (Principles, ch.
21) chief merits, that he demonstrated the groundlessness of the opinion that the mere increase of capital must, on account of the compet.i.tion of capitalists, lower the rate of interest, as is a.s.sumed by _Adam Smith_, I, ch. 9, _J. B.
Say_, Traite, II, 8, and others. Compare also, _John Stuart Mill_, Principles, IV, ch. IV, 1.]
[Footnote 183-2: _Storch_, Handbuch, II, 20.]
[Footnote 183-3: Frequent withdrawals of capital must, other circ.u.mstances being the same, temporarily raise the rate of interest. In the long run, however, the question is decided by this: whether public opinion considers labor a greater sacrifice than the saving of capital. Compare _Roesler_, loc. cit., 8.]
[Footnote 183-4: Compare _Hermann_, Staatsw. Unters., 240 ff. Very much depends on whether the new increased consumption (of workmen when wages are rising, of capitalists when wages are declining) is of goods which are mainly the product of large capital, large factories, etc., or chiefly of common labor, (_von Mangoldt_, Grundriss, 155 seq.) When _Adam Smith_ suggests that the relation between wages and the profit of capital is determined by this: whether there is a market demand for more work or more commodities, for more "work to be done" or "work done" (I, ch. 7), he is, spite of appearances, very unsatisfactory.
_Malthus_ distinguishes a restrictive principle of the rate of interest, viz.: the return made to the least productive agricultural capital, and a regulative one, viz.: the reciprocal relation between demand and supply of capital and labor. (Principles, ch. 5, sec. 4.) _Ricardo_, ch. 6, makes the profit of capital at all times and in every country depend on the quant.i.ty of labor which it is necessary to expend on the land which pays no rent, in order to satisfy the wants of workmen--a very correct theory.
Only _Ricardo_ himself (ch. 21) and his school postulate altogether too unconditionally that their wants would always coincide with the minimum of maintenance or support. Thus, for instance, _J. S. Mill_, Principles, IV, ch. 3, 4.
However, _Mill_ instead of _Ricardo"s_ "wages" employs the better expression, "cost of labor." _Senior_ teaches that the distribution of the aggregate result between laborers and capitalists depends on the anterior course of both cla.s.ses: on the value of the capital previously employed by capitalists to produce the means of satisfying working men"s wants, and on the number of workmen which the previous laboring population have brought into existence. (Outlines, 188 ff.) Concerning _von Thunen"s_ vain attempt at a general formula, see _supra_, -- 173. _Fourier"s_ idea that 5/12 of the product should be distributed among labor, 3/12 among talent, and 4/12 among capital, is entirely baseless. (N.
Monde, 309 ff.) _Considerant_, Destinee sociale, 192 ff. As early a writer as _H. Boden_, Furstliche Machtkunst, 1700 and 1740, 42, came strikingly near the truth. According to him, a low rate of interest is produced by four circ.u.mstances: surplus capital, a dearth of landed estates, a want of credit and exact justice, and lastly, the heavy taxation of capital.]
[Footnote 183-5: Thus, in the last century, Spanish capitalists loaned capital readily to sure commercial companies, at from 2 to 3 per cent. per annum. (_Bourgoing,_ Tableau de l"Espagne, I, 248.) The contemporary low rates of interest in Hannover, _Busch_, Geldumlauf, VI, 4, 12, endeavors to explain by the absence of opportunities for investment, as no one dared to loan to any extent on fiefs or on the land of the peasantry, and because there was no law governing bills of exchange, etc.]
SECTION CLx.x.xIV.
HISTORY OF THE RATE OF INTEREST.
Among barbarous nations, the loaning of capital is wont to happen so seldom, and to be limited so strictly to near relations, that it does not yet occur to any one to stipulate for a regular compensation therefor.[184-1] But, however, when they pa.s.s from this state to interest proper, the rate must be, of course, very high.[184-2] The premium for insurance is here very great, the possibility and inclination to acc.u.mulate capital exceedingly small. Even of the existing supply of capital, a great part remains idle, because the faculty and the inst.i.tutions necessary to concentrate it and permit it to flow are wanting. (-- 43.) The unskillfulness of labor is more than overcome by the excess of fertile and naturally productive land, of rich sites still unoccupied, the cream of which, as it were, needs only to be culled. Population is indeed spa.r.s.e, but the usually prevailing absence of freedom of the lower cla.s.ses prevents wages claiming the full benefit of compet.i.tion.[184-3] This last circ.u.mstance is especially important.[184-4] For a given amount of the national income and of rent, every depression of wages must obviously raise the rate of interest, and every enhancement of wages lower it.[184-5]
[Footnote 184-1: _Tacit._, Germ., 26; _Marculf_, Form., 18, 25 ff., 35; _Savigny_, Ueber das altromische Schuldrecht, in the transactions of the Berlin Academy, 1833, 78 seq.]
[Footnote 184-2: According to the Lex Visig., V, 5, -- 8, the maximum rate of interest allowed on loans of money was 12 per cent., and on other _res fungibiles_, 50 per cent. From the 12th to the 14th century, the Lombards and the Jews in France and England took generally (?) 20 per cent. a year. (_Anderson_, Origin of Commerce, _a._, 1300.) Philip V. of France, in 1311, fixed the rate of interest at the fairs in Champagne at 15 per cent. (a species of discount) at most, and at a maximum everywhere of 20 per cent. (Ordonnances de la France, I, 484, 494, 508.) The legal rate of interest in Verona, in 1288, was fixed at a maximum of 12 per cent.; in Modena, 1270, at 20 per cent. (_Muratori_, Antiquitt. Ital., I, 894); in Bresica, 1268, at 10 per cent. (_v. Raumer_, Geschichte der Hohenstaufen, V, 395 ff.) Frederick II. wished to reduce it to 10 per cent. for Naples, but failed. (_Bianchini_, Storia delle Finanze di Nap., I, 299.) The tables of _Cibrario_, Economia polit. del medio Evo., III, 380, for 1306-1399, show for upper Italy interest to have been at 20, 15, 14, 10, and also 5 per cent. About 1430 the Florentines, in order to moderate the enormously high rate of interest, called Jews to their city, and the latter promised not to charge over 20 per cent. (_Cibrario_, III, 318.) In the Rhine country, the Kowerzens, during the 14th century, took from 60 to 70 per cent., for which they had, however, to pay a heavy tax to the archbishop. (_Bodmann_, Rh. Alterthumer, 716.) Of Jewish maximum rates of interest, in the 14th and 15th centuries, see _s...o...b.._, Juden in Deutschland wahrend des M. Alters, 103, 110, 234 seq.; _Hegel_, Stra.s.sb. Chr., II, 977, 984.
The rate of interest usual in these countries must not however be calculated from the data furnished by these usurious rates and fixed rates of interest, simply. In Germany, the rate of interest promised by princes in the 13th and 14th centuries was usually 10 per cent. The Frankfort munic.i.p.al loans made by Jews in the 14th century bore interest at the rate of 9, 11-2/3, 13, 18, 26, and even 45 per cent. (_Kriegk_, F."s Burgerzwiste, 343, 539.) The rate of interest in the purchase of annuities continually declined between 1300 and 1500, especially in the time of the emanc.i.p.ation of manual laborers. Old Base doc.u.ments give, between 1284 and 1580, as the highest rate, 11-3/9, and as the least, 5 per cent. The latter became more and more usual later, especially in the sale of house-rents (_Hauszins_), so that in 1841 all annuities (_Renten_) might be canceled by a payment of their amounts multiplied by 20.
Until the beginning of the 15th century, in the city, the rule was 6 to 7 per cent.; outside of it, 8 to 10 per cent.
(_Arnold_, Geschichte des Eigenthums in den deutschen Stadten, 222 seq., 227 seq.) According to the Bremen Jahrb.
of 1784, 164 seq., the rate of interest in the case of _Handfesten,_ in 1295, = 10 per cent., gradually sank: in the 15th century it was never over 6-2/3; after 1450, generally 5; in 1511 only 4 per cent. In 1441 ff., in Augsburg, people were satisfied with a business profit of 7-2/3 per cent., while the usual rate of interest paid by house-rent, etc. was 5 per cent. (_Hegel_, Augsb. Chr., II, 134 seq., 157.) Handsome tables in the rate of interest in the purchase of annuities for all Germany, from 1215 to 1620, give as the rule, 7 to 10, scarcely ever over 15 per cent., in _M. Neumann_, Geschichte des Wuchers, 266 ff. For the upper Rhine, compare _Mone"s_ Zeitschr., 26 ff. Among the Fathers of the councils of Constance and Basil 5 per cent. was considered equitable. Compare _F. Hammerlin_, 1389-1457, De Emtione et Venditione unius pro viginti.
Russian interest at 40 per cent., according to the laws of Jaroslaw (ob. 1054 after Christ). _Karamsin_, Russ. Gesch., II, 47.]
[Footnote 184-3: The high rate of interest in many countries at present may be thus accounted for. In the United States, during the last century, less than 8 per cent. was seldom paid. (_Ebeling_, III, 152.) According to _M. Chevalier_, Lettres sur l"Amerique du Nord, 1836, I, 59, the rate of interest in Pennsylvania was 6, in New York, 7, in most of the slave states, 8-9; in Louisiana, 10 per cent. In South Australia (1850) it was, with full security, 15-20 per cent.
(_Reimer_, Sudaustralien, 39.) In the West Indies, about the end of the last century, a strong negro might produce a revenue equal to one-fourth of his capital value. (_B.
Edwards_, History of the British West Indies, II, 129.) In Brazil, the lowest rate of interest was at 9 per cent., and 12-18 per cent. was nothing unusual. (_Wappaus_, M. and S.
Amerika, 1871, 1413.) In Cuba, for the government 10, for private parties, 12 to 16 per cent. (_Humboldt_, Cuba, I, 231.) In Potosi, in 1826, Temple got 30 per cent. interest on chattel mortgage, and from 2 to 4 per cent. a month was offered, while the rate of interest in Buenos Ayres amounted to 15 per cent. per annum. (_Temple_, Travels, II, 217.) In Russia, _Storch_, Handbuch, I, 262, speaks of 8-10 per cent.
According to _v. Haxthausen_, it was, in the interior, never less than from 8 to 12 per cent. per annum; at Kiew and Odessa, 1, 1 and 2 per cent. per month. (Studien, I, 58, 467; II, 495.) In _Greece_, the rate of interest on first mortgages is at least 10, on a second, 15-18 per cent.
(Ausland, 1843, No. 82.)]
[Footnote 184-4: _Nebenius_, ff. Credit, I, 55.]
[Footnote 184-5: Only in this particular instance is what _Ricardo_ so frequently insists on true, viz: that the rate of wages can be increased only at the expense of the profit of capital, and _vice versa_.]
SECTION CLx.x.xV.
HISTORY OF THE RATE OF INTEREST.--INFLUENCE OF AN ADVANCE IN CIVILIZATION.
With an advance in civilization, the rate of interest is wont to decline.[185-1] [185-2] One of the chief causes of this phenomenon is the necessity, as population and consumption increase, to employ capital in the fertilization of less productive land, and in less profitable investments.[185-3] An increase in the stock of money does not necessarily depreciate the rate of interest. If this increase comes in connection with a corresponding depreciation of the individual pieces of metal, it cannot be said that the nation has thereby become richer in capital. All that would be required in such case is only a greater number of pounds of gold or silver, or more paper bills to represent the same capital.[185-4] Only during the transition-period, during which the depreciation of money is still incomplete, is the rate of interest wont to be lowered; and all the more, since loaned capital is generally offered and sought after in the form of money.[185-5] [185-6]
The decline of the rate of interest generally shows itself earliest in the large cities, which are everywhere the national organ, in which the good and bad symptoms of later civilization may be soonest observed.[185-7]