purchasing such durable commodities, he often spends the whole
upon his own person, and gives nothing to anybody without an
equivalent. The latter species of expense, therefore, especially
when directed towards frivolous objects, the little ornaments of
dress and furniture, jewels, trinkets, gewgaws, frequently
indicates, not only a trifling, but a base and selfish
disposition. All that I mean is, that the one sort of expense, as
it always occasions some accumulation of valuable commodities, as
it is more favourable to private frugality, and, consequently, to
the increase of the public capital, and as it maintains
productive, rather than unproductive hands, conduces more than
the other to the growth of public opulence.
CHAPTER IV
Of Stock Lent at Interest
THE stock which is lent at interest is always considered as
a capital by the lender. He expects that in due time it is to be
restored to him, and that in the meantime the borrower is to pay
him a certain annual rent for the use of it. The borrower may use
it either as a capital, or as a stock reserved for immediate
consumption. If he uses it as a capital, he employs it in the
maintenance of productive labourers, who reproduce the value with
a profit. He can, in this case, both restore the capital and pay
the interest without alienating or encroaching upon any other
source of revenue. If he uses it as a stock reserved for
immediate consumption, he acts the part of a prodigal, and
dissipates in the maintenance of the idle what was destined for
the support of the industrious. He can, in this case, neither
restore the capital nor pay the interest without either
alienating or encroaching upon some other source of revenue, such
as the property or the rent of land.
The stock which is lent at interest is, no doubt,
occasionally employed in both these ways, but in the former much
more frequently than in the latter. The man who borrows in order
to spend will soon be ruined, and he who lends to him will
generally have occasion to repent of his folly. To borrow or to
lend for such a purpose, therefore, is in all cases, where gross
usury is out of the question, contrary to the interest of both
parties; and though it no doubt happens sometimes that people do
both the one and the other; yet, from the regard that all men
have for their own interest, we may be assured that it cannot
happen so very frequently as we are sometimes apt to imagine. Ask
any rich man of common prudence to which of the two sorts of
people he has lent the greater part of his stock, to those who,
he thinks, will employ it profitably, or to those who will spend
it idly, and he will laugh at you for proposing the question.
Even among borrowers, therefore, not the people in the world most
famous for frugality, the number of the frugal and industrious
surpasses considerably that of the prodigal and idle.
The only people to whom stock is commonly lent, without
their being expected to make any very profitable use of it, are
country gentlemen who borrow upon mortgage. Even they scarce ever
borrow merely to spend. What they borrow, one may say, is
commonly spent before they borrow it. They have generally
consumed so great a quantity of goods, advanced to them upon
credit by shopkeepers and tradesmen, that they find it necessary
to borrow at interest in order to pay the debt. The capital
borrowed replaces the capitals of those shopkeepers and
tradesmen, which the country gentlemen could not have replaced
from the rents of their estates. It is not properly borrowed in
order to be spent, but in order to replace a capital which had
been spent before.
Almost all loans at interest are made in money, either of
paper, or of gold and silver. But what the borrower really wants,
and what the lender really supplies him with, is not the money,
but the money's worth, or the goods which it can purchase. If he
wants it as a stock for immediate consumption, it is those goods
only which he can place in that stock. If he wants it as a
capital for employing industry, it is from those goods only that
the industrious can be furnished with the tools, materials, and
maintenance necessary for carrying on their work. By means of the
loan, the lender, as it were, assigns to the borrower his right
to a certain portion of the annual produce of the land and labour
of the country to be employed as the borrower pleases.
The quantity of stock, therefore, or, as it is commonly
expressed, of money which can be lent at interest in any country,
is not regulated by the value of the money, whether paper or
coin, which serves as the instrument of the different loans made
in that country, but by the value of that part of the annual
produce which, as soon as it comes either from the ground, or
from the hands of the productive labourers, is destined not only
for replacing a capital, but such a capital as the owner does not
care to be at the trouble of employing himself. As such capitals
are commonly lent out and paid back in money, they constitute
what is called the monied interest. It is distinct, not only from
the landed, but from the trading and manufacturing interests, as
in these last the owners themselves employ their own capitals.
Even in the monied interest, however, the money is, as it were,
but the deed of assignment, which conveys from one hand to
another those capitals which the owners do not care to employ
themselves. Those capitals may be greater in almost any
proportion than the amount of the money which serves as the
instrument of their conveyance; the same pieces of money
successively serving for many different loans, as well as for
many different purchases. A, for example, lends to W a thousand
pounds, with which W immediately purchases of B a thousand
pounds' worth of goods. B having no occasion for the money
himself, lends the identical pieces to X, with which X
immediately purchases of C another thousand pounds' worth of
goods. C in the same manner, and for the same reason, lends them
to Y, who again purchases goods with them of D. In this manner
the same pieces, either of coin or paper, may in the course of a
few days, serve as the instrument of three different loans, and
of three different purchases, each of which is, in value, equal
to the whole amount of those pieces. What the three monied men A,
B, and C assign to the three borrowers, W, X, Y, is the power of
making those purchases. In this power consist both the value and
the use of the loans. The stock lent by the three monied men is
equal to the value of the goods which can be purchased with it,
and is three times greater than that of the money with which the
purchases are made. Those loans however, may be all perfectly
well secured, the goods purchased by the different debtors being
so employed as, in due time, to bring back, with a profit, an
equal value either of coin or of paper. And as the same pieces of
money can thus serve as the instrument of different loans to
three, or for the same reason, to thirty times their value, so
they may likewise successively serve as the instrument of
repayment.
A capital lent at interest may, in this manner, be
considered as an assignment from the lender to the borrowers of a
certain considerable portion of the annual produce; upon
condition that the borrower in return shall, during the
continuance of the loan, annually assign to the lender a smaller
portion, called the interest; and at the end of it a portion
equally considerable with that which had originally been assigned
to him, called the repayment. Though money, either coin or paper,
serves generally as the deed of assignment both to the smaller
and to the more considerable portion, it is itself altogether
different from what is assigned by it.
In proportion as that share of the annual produce which, as
soon as it comes either from the ground, or from the hands of the
productive labourers, is destined for replacing a capital,
increases in any country, what is called the monied interest
naturally increases with it. The increase of those particular
capitals from which the owners wish to derive a revenue, without
being at the trouble of employing them themselves, naturally
accompanies the general increase of capitals; or, in other words,
as stock increases, the quantity of stock to be lent at interest
grows gradually greater and greater.
As the quantity of stock to be lent at interest increases,
the interest, or the price which must be paid for the use of that
stock, necessarily diminishes, not only from those general causes
which make the market price of things commonly diminish as their
quantity increases, but from other causes which are peculiar to
this particular case. As capitals increase in any country, the
profits which can be made by employing them necessarily diminish.
It becomes gradually more and more difficult to find within the
country a profitable method of employing any new capital. There
arises in consequence a competition between different capitals,
the owner of one endeavouring to get possession of that
employment which is occupied by another. But upon most occasions
he can hope to jostle that other out of this employment by no
other means but by dealing upon more reasonable terms. He must
not only sell what he deals in somewhat cheaper, but in order to
get it to sell, he must sometimes, too, buy it dearer. The demand
for productive labour, by the increase of the funds which are
destined for maintaining it, grows every day greater and greater.
Labourers easily find employment, but the owners of capitals find
it difficult to get labourers to employ. Their competition raises
the wages of labour and sinks the profits of stock. But when the
profits which can be made by the use of a capital are in this
manner diminished, as it were, at both ends, the price which can
be paid for the use of it, that is, the rate of interest, must
necessarily be diminished with them.
Mr. Locke, Mr. Law, and Mr. Montesquieu, as well as many
other writers, seem to have imagined that the increase of the
quantity of gold and silver, in consequence of the discovery of
the Spanish West Indies, was the real cause of the lowering of
the rate of interest through the greater part of Europe. Those
metals, they say, having become of less value themselves, the use
of any particular portion of them necessarily became of less
value too, and consequently the price which could be paid for it.
This notion, which at first sight seems plausible, has been so
fully exposed by Mr. Hume that it is, perhaps, unnecessary to say
anything more about it. The following very short and plain
argument, however, may serve to explain more distinctly the
fallacy which seems to have misled those gentlemen.
Before the discovery of the Spanish West Indies, ten per
cent seems to have been the common rate of interest through the
greater part of Europe. It has since that time in different
countries sunk to six, five, four, and three per cent. Let us
suppose that in every particular country the value of silver has
sunk precisely in the same proportion as the rate of interest;
and that in those countries, for example, where interest has been
reduced from ten to five per cent, the same quantity of silver
can now purchase just half the quantity of goods which it could
have purchased before. This supposition will not, I believe, be
found anywhere agreeable to the truth, but it is the most
favourable to the opinion which we are going to examine; and even
upon this supposition it is utterly impossible that the lowering
of the value of silver could have the smallest tendency to lower
the rate of interest. If a hundred pounds are in those countries
now of no more value than fifty pounds were then, ten pounds must
now be of no more value than five pounds were then. Whatever were
the causes which lowered the value of the capital, the same must
necessarily have lowered that of the interest, and exactly in the
same proportion. The proportion between the value of the capital
and that of the interest must have remained the same, though the
rate had been altered. By altering the rate, on the contrary, the
proportion between those two values is necessarily altered. If a
hundred pounds now are worth no more than fifty were then, five
pounds now can be worth no more than two pounds ten shillings
were then. By reducing the rate of interest, therefore, from ten
to five per cent, we give for the use of a capital, which is
supposed to be equal to one half of its former value, an interest
which is equal to one fourth only of the value of the former
interest.
Any increase in the quantity of silver, while that of the
commodities circulated by means of it remained the same, could
have no other effect than to diminish the value of that metal.
The nominal value of all sorts of goods would be greater, but
their real value would be precisely the same as before. They
would be exchanged for a greater number of pieces of silver; but
the quantity of labour which they could command, the number of
people whom they could maintain and employ, would be precisely
the same. The capital of the country would be the same, though a
greater number of pieces might be requisite for conveying any
equal portion of it from one hand to another. The deeds of
assignment, like the conveyances of a verbose attorney, would be
more cumbersome, but the thing assigned would be precisely the
same as before, and could produce only the same effects. The
funds for maintaining productive labour being the same, the
demand for it would be the same. Its price or wages, therefore,
though nominally greater, would really be the same. They would be
paid in a greater number of pieces of silver; but they would
purchase only the same quantity of goods. The profits of stock
would be the same both nominally and really. The wages of labour
are commonly computed by the quantity of silver which is paid to
the labourer. When that is increased, therefore, his wages appear
