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An Inquiry Into The Nature And Causes Of The Wealth Of Nations - Chapter 4

1. Introduction And Plan Of The Work

2. Book 1, Chapter 1

3. Chapter 2

4. Chapter 3

5. Chapter 4

6. Chapter 5

7. Chapter 6

8. Chapter 7

9. Chapter 8

10. Chapter 8 continue

11. Chapter 9

12. Chapter 10

13. Chapter 10 continue

14. Chapter 11

15. Chapter 11 continue

16. Chapter 11 continue.

17. Chapter 11 continue..

18. Chapter 11 continue...

19. Conclusion of the Chapter 11

20. Book 2 Introduction

21. Chapter 1

22. Chapter II

23. Chapter II continue

24. Chapter II continue

25. Chapter 3

26. Chapter 4

27. Chapter 5

28. Book 3, Chapter 1

29. Chapter 2

30. Chapter 3

31. Chapter 4

32. Book 4, Chapter 1

33. Chapter 1 continue

34. Chapter 2

35. Chapter 3, Part 1

36. Chapter 3, Part 2

37. Chapter 4

38. Chapter 5

39. Chapter 5 continue

40. Chapter 6

41. Chapter 7, Part 1

42. Chapter 7, Part 2

43. Chapter 7, Part 3

44. Chapter 7, Part 3 continue

45. Chapter 8

46. Chapter 9

47. Book 5, Chapter 1, Part 1

48. Chapter 1, Part 2

49. Chapter 1, Part 3

50. Chapter 1, Part 3 continue

51. Chapter 1, Part 3 continue B

52. Chapter 1, Part 4

53. Chapter 2, Part 1

54. Chapter 2, Part 2

55. Chapter 2, Part 2 continue

56. Chapter 2, Part 2 continue B

57. Chapter 2, Part 2 continue C

58. Chapter 2, Part 2 continue D

59. Chapter 3

60. Chapter 3 continue

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 mean time, 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 shop-keepers 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 shop-keepers 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
readily 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 1000, with which W immediately
purchases of B 1000 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 1000 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 of 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, assigned to the three borrowers, W, X, and 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

A capital lent at interest may, in this manner, be considered as an
assignment, from the lender to the borrower, of a certain considerable
portion of the annual produce, upon condition that the burrower in
return shall, during the continuance of the loan, annually assign to the
lender a small 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 justle 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 Lawe, 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 so plausible, has
been so fully exposed by Mr Hume, that it is, perhaps, unnecessary
to say any thing 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 100 are in those countries now of no more value than 50 were then,
10 must now be of no more value than 5 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 never been altered.
By altering the rate, on the contrary, the proportion between those two
values is necessarily altered. If 100 now are worth no more than
50 were then, 5 now can be worth no more than 2:10s. 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.

An 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 to be increased, though
they may sometimes be no greater than before. But the profits of stock
are not computed by the number of pieces of silver with which they are
paid, but by the proportion which those pieces bear to the whole capital
employed. Thus, in a particular country, 5s. a-week are said to be the
common wages of labour, and ten per cent. the common profits of stock;
but the whole capital of the country being the same as before, the
competition between the different capitals of individuals into which it
was divided would likewise be the same. They would all trade with the
same advantages and disadvantages. The common proportion between capital
and profit, therefore, would be the same, and consequently the common
interest of money; what can commonly be given for the use of money being
necessarily regulated by what can commonly be made by the use of it.

Any increase in the quantity of commodities annually circulated within
the country, while that of the money which circulated them remained
the same, would, on the contrary, produce many other important effects,
besides that of raising the value of the money. The capital of the
country, though it might nominally be the same, would really be
augmented. It might continue to be expressed by the same quantity of
money, but it would command a greater quantity of labour. The quantity
of productive labour which it could maintain and employ would be
increased, and consequently the demand for that labour. Its wages would
naturally rise with the demand, and yet might appear to sink. They might
be paid with a smaller quantity of money, but that smaller quantity
might purchase a greater quantity of goods than a greater had done
before. The profits of stock would be diminished, both really and
in appearance. The whole capital of the country being augmented, the
competition between the different capitals of which it was composed
would naturally be augmented along with it. The owners of those
particular capitals would be obliged to content themselves with a
smaller proportion of the produce of that labour which their respective
capitals employed. The interest of money, keeping pace always with the
profits of stock, might, in this manner, be greatly diminished, though
the value of money, or the quantity of goods which any particular sum
could purchase, was greatly augmented.

In some countries the interest of money has been prohibited by law. But
as something can everywhere be made by the use of money, something ought
everywhere to be paid for the use of it. This regulation, instead of
preventing, has been found from experience to increase the evil of
usury. The debtor being obliged to pay, not only for the use of
the money, but for the risk which his creditor runs by accepting a
compensation for that use, he is obliged, if one may say so, to insure
his creditor from the penalties of usury.

In countries where interest is permitted, the law in order to prevent
the extortion of usury, generally fixes the highest rate which can be
taken without incurring a penalty. This rate ought always to be somewhat
above the lowest market price, or the price which is commonly paid for
the use of money by those who can give the most undoubted security.
If this legal rate should be fixed below the lowest market rate, the
effects of this fixation must be nearly the same as those of a total
prohibition of interest. The creditor will not lend his money for less
than the use of it is worth, and the debtor must pay him for the risk
which he runs by accepting the full value of that use. If it is fixed
precisely at the lowest market price, it ruins, with honest people who
respect the laws of their country, the credit of all those who cannot
give the very best security, and obliges them to have recourse to
exorbitant usurers. In a country such as Great Britain, where money is
lent to government at three per cent. and to private people, upon good
security, at four and four and a-half, the present legal rate, five per
cent. is perhaps as proper as any.

The legal rate, it is to be observed, though it ought to be somewhat
above, ought not to be much above the lowest market rate. If the legal
rate of interest in Great Britain, for example, was fixed so high as
eight or ten per cent. the greater part of the money which was to be
lent, would be lent to prodigals and projectors, who alone would be
willing to give this high interest. Sober people, who will give for the
use of money no more than a part of what they are likely to make by the
use of it, would not venture into the competition. A great part of the
capital of the country would thus be kept out of the hands which were
most likely to make a profitable and advantageous use of it, and thrown
into those which were most likely to waste and destroy it. Where the
legal rate of interest, on the contrary, is fixed but a very little
above the lowest market rate, sober people are universally preferred, as
borrowers, to prodigals and projectors. The person who lends money gets
nearly as much interest from the former as he dares to take from the
latter, and his money is much safer in the hands of the one set of
people than in those of the other. A great part of the capital of the
country is thus thrown into the hands in which it is most likely to be
employed with advantage.

No law can reduce the common rate of interest below the lowest ordinary
market rate at the time when that law is made. Notwithstanding the
edict of 1766, by which the French king attempted to reduce the rate
of interest from five to four per cent. money continued to be lent in
France at five per cent. the law being evaded in several different ways.

The ordinary market price of land, it is to be observed, depends
everywhere upon the ordinary market rate of interest. The person who has
a capital from which he wishes to derive a revenue, without taking the
trouble to employ it himself, deliberates whether he should buy land
with it, or lend it out at interest. The superior security of land,
together with some other advantages which almost everywhere attend upon
this species of property, will generally dispose him to content himself
with a smaller revenue from land, than what he might have by lending out
his money at interest. These advantages are sufficient to compensate
a certain difference of revenue; but they will compensate a certain
difference only; and if the rent of land should fall short of the
interest of money by a greater difference, nobody would buy land, which
would soon reduce its ordinary price. On the contrary, if the advantages
should much more than compensate the difference, everybody would buy
land, which again would soon raise its ordinary price. When interest
was at ten per cent. land was commonly sold for ten or twelve years
purchase. As interest sunk to six, five, and four per cent. the price
of land rose to twenty, five-and-twenty, and thirty years purchase. The
market rate of interest is higher in France than in England, and the
common price of land is lower. In England it commonly sells at thirty,
in France at twenty years purchase.

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