Is the sum which the borrower of a capital obliges himself to pay to the lender for its use. Formerly it was universally believed that, in the event of all legislative enactments fixing and regulating the rate of interest being repealed, its increase or diminution would depend wholly on the comparative scarcity or abundance of money; or, in other words, that it would rise as money became scarce, and fall as it became more plentiful. Mr Hume was the first to point out the fallacy of this opinion, and to show that the rate of interest is not determined by the amount of the currency, but by the average rate of profit derived from the employment of capital. No doubt it most frequently happens that, when a loan is made, it is made in the currency of the country. This, however, Interest is really of no consequence. There is obviously no difference between one individual furnishing another with 100 bushels of corn, to be repaid at the expiration of a twelve-month by the delivery of 104 or 105 bushels, or with as much money at four or five per cent. as would have purchased the corn. Besides, it is easy to perceive that the same identical sum of money might serve to negotiate an infinity of loans. Suppose A lends to X L.1000, which X immediately pays away to B for commodities of equal value; but B has no use for the money, and he therefore lends it to Y, who pays it away for commodities to C, who again lends it to Z, and so on; it is plain the borrowers X, Y, Z, have really received a loan of commodities, or capital, from the lenders A, B, C, worth three times (and it might have been worth three hundred or three thousand times) as much as the money employed in settling the transactions. According as the supply of currency, compared with the business it has to perform, is greater or less, we are obliged to give a greater or less number of guineas or livres, pound notes or assignats, for the commodities we wish to obtain. It is plainly, however, by the advantage or profit we expect to derive from the acquisition of the commodities which constitute capital, and not from the accidental, and, in this respect, unimportant, circumstance of a larger or smaller number of pieces of gold or silver, or of bits of engraved paper, being given for them, that the rate of interest, or the compensation given to the lender for the use of his stock, must be determined. It may perhaps be supposed, that when the quantity of metallic money is increased, goldsmiths, jewelers, &c. obtain the raw material for carrying on their business with greater facility; but this is not always the case, and, though it were, it would not affect the rate of interest. No coins are ever sent to the melting pot unless when the currency is either degraded or depreciated; that is, unless it be deficient in weight, or relatively redundant in quantity. And it is clear that the inducement to promise a high or low rate of interest for loans of metallic money, which it was intended to work up into some species of manufactured goods, would depend, not on the supply of such money, but on the profit to be derived from the operation, a circumstance totally unconnected with the scarcity or abundance of coin.
It appears, therefore, that the rate of interest, at any given period, depends exclusively on the supply of real disposable capital, such as land, machinery, raw and manufactured products, &c. compared with the power of profitably employing it. An increase of metallic money adds only very inconsiderably, and an increase of paper money adds nothing whatever, to the real capital of the country, or to the material of which all loans are really composed. If an increase of paper money was equivalent to an increase of capital, bank notes could not be too much multiplied, and France would have been about twenty times as rich at the era of the assignats as at this moment. It is not denied that considerable mischief and derangement must always be experienced in a highly manufacturing and commercial country like Great Britain, when any sudden check is given to the facility with which discounts are generally obtained, or when the currency is suddenly contracted. But the frottement and inconvenience occasioned by a contraction of the currency could only be temporary. It is impossible it could have any lasting effect on the industry of the country. We should still possess the same amount of real capital; and as neither its productive power, nor the liberty to transfer it from one individual to another, would be at all impaired, the real revenue of the state would continue as great as ever, and the same or a greater amount of stock might be disposed of by way of loan. Money prices would certainly fall proportionally to the reduction of the currency; or, which is the same thing, the value of commodities would henceforth have to be ascertained by comparing them with a smaller number of bits of gold or paper. But, in every other respect, the business of society would continue exactly on its former footing; and, without some change in the rate of profit, on which fluctuations in the value of money have almost no effect, the rate of interest would continue invariable.
Mr Ricardo has set this principle in a clear and striking point of view. "The rate of interest," he observes, in answer to those who had contended that it would be increased by a diminution of the discounts of the Bank of England, "is not regulated by the rate at which the bank will lend, whether it be five, four, or three per cent., but by the rate of profit which can be made by the employment of capital, and which is totally independent of the quantity and of the value of money. Whether a bank lend one million, ten millions, or a hundred millions, they would not permanently alter the market rate of interest; they would alter only the value of the money which they thus issued. In one case ten or twenty times more money might be required to carry on the same business, than what might be required on the other. The applications to the bank for money, then, depend on the comparison between the rate of profits that may be made by the employment of it, and the rate at which they are willing to lend it. If they charge less than the market rate of interest, there is no amount of money which they might not lend; if they charge more than that rate, none but spendthrifts and prodigals would be found to borrow of them. We accordingly find, that when the market rate of interest exceeds the rate of five per cent. at which the bank uniformly lend, the discount office is besieged with applicants for money; and, on the contrary, when the market rate is even temporarily under five per cent., the clerks of that office have no employment."
It is foreign to the object of this article to enter into any detailed examination of the causes which tend to elevate or depress the rate of profit. Whatever diversity of opinion may be entertained respecting them, it is abundantly evident that the rate of interest afforded for the use of borrowed capital must be proportional to the profits which might be derived from its employment. In the United States, the market rate of interest varies from ten to fourteen per cent.; and in Holland, previously to the invasion of the French in 1794, it did not exceed two or three per cent. The immense extent of fertile and uncultivated land in America, the lowness of taxation, and the absence of all restrictive regulations, naturally occasion high profits, and consequently high interest; whilst the sterility and limited extent of the soil of Holland, the excessive load of taxes, laid equally on necessaries and luxuries, and the injudicious restraints imposed upon various branches of commerce, by rendering it impossible to derive large returns from capital, proportionally sink the rate of interest. Had the soil of Holland been as fertile, and taxation as light, as in the United States, profits and interest would, notwithstanding the abundant supply of capital, have been equally high in the one republic as in the other. It is not by the absolute amount of the stock of a country, but by the comparative facilities for its advantageous employment, that the compensation or interest which a borrower can afford for its use must always be regulated. Previously to the termination of the late war, the market rate of interest in this country, for sums which could not be immediately demanded, fluctuated from five to twelve
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1 Ricardo's Principles of Political Economy, 1st edit. p. 511. per cent. It has since fallen to four or five per cent.; a decline which has not certainly been occasioned by any sudden increase of capital, but by the extraordinary depression of commerce, and the consequent impossibility of investing stock so as to yield as large a profit as it did during the period when we engrossed almost the whole trade of the world.
Besides such variations as are proportional to variations in the general and average rate of profit, and which equally affect all loans, the rate of interest must vary according to the degree of security afforded for the repayment of the principal, and the duration of the loan. No capital would lend on the personal security of a gunpowder manufacturer, and on mortgage over a valuable estate, at the same rate of interest. The extraordinary hazard of the gunpowder trade exposes the stock invested in it to an extreme degree of risk. It may be dissipated in an instant, and the power of the borrower to refund the capital he had borrowed annihilated forever. A lender of money on mortgage is almost entirely relieved from such contingencies. The owner of an estate on which a loan is secured may become bankrupt; but the estate itself will remain, and may either be sold or taken possession of by the lender. It is plain, therefore, that there must be a very great difference in the rate of interest paid by those whose security for the repayment of the principal is so exceedingly different. The gunpowder manufacturer, besides paying a rate or percentage equivalent to the common and average rate of interest derived from the most secure investments, would have to pay an additional rate, which, although it might not be designated by that name, would really constitute a premium of insurance proportioned to the greater risk to which the lender was exposed of losing his principal. The preferable security offered by the landlord would relieve him from the necessity of paying any considerable premium, or excess of interest, on account of risk; and of course he would be able to borrow at so much less than the manufacturer. We should mistake, however, if we supposed that the latter was thus placed in a comparatively disadvantageous situation. He would be completely indemnified for the greater risk to which his stock was exposed, and for the higher rate of interest which he was in consequence obliged to pay, by the greater gross profits he would derive from his business. The constantly operating principle of competition will not permit, taking every thing into account, a greater net profit to be permanently derived from one department of industry than from another. But those who invest their stock in employments of more than ordinary hazard, must be able to dispose of their produce at such a price as will yield them the common and average rate of profit, besides affording a surplus adequate to insure their stock against the extra risk to which it is exposed. If this were not the case, no capitalist would place his property in a state of comparative danger, and no undertakings of a hazardous nature would be entered into. Wherever there is risk, that risk must be compensated. And it may, and very frequently does, happen, that the manager of a hazardous branch of industry, paying from ten to twenty per cent. for borrowed capital, is realizing a larger net profit than the landlord who has purchased an estate with money for which he only pays three or four per cent.
But supposing the securities to be equal, capital lent for short periods, or in such a way that the lender may obtain possession of it at pleasure, will always bring a lower rate of interest than capital lent for a considerable or definite period. No borrower could afford to pay so high a rate of interest for a capital whose productive services he might be deprived of in an instant, and which he could not therefore venture to invest in any employment from which it might not be easily withdrawn, as for a capital lent for a fixed period, especially if that period was of considerable length. But here, as in every other case, the real interests of the borrower and lender coincide. The same circumstances which prevent a borrower from giving as high a rate of interest for a loan payable on demand as if it were payable at a fixed and distant term, induces the lender to rest satisfied with a smaller compensation in the one case than in the other. We wish to be able to exercise a complete command over our capital. No merchant would ever consent to lend his stock on mortgage. If he did, he would no longer be able to carry on his business with advantage. He would be deprived of all power of speculating; and although this might in many instances be for his advantage, yet the flattering opinion which every one entertains of his own abilities and good fortune would but seldom allow him to doubt of its being a very material disadvantage. It is by this principle that we are able to account for the comparatively low rate of interest at which banking companies who pay the sums deposited with them on demand, and governments whose circumstances are perfectly desperate, are able to borrow. A stockholder's mortgage (his claim on the revenue of the country) can be immediately converted into cash at the current prices. And, however much the majority of the public creditors may be impressed with a conviction of the inability of the state to discharge all the claims upon it, every particular individual, confident in his own good fortune, foresight, and acuteness, flatters himself with the idea that he, at least, will be able to predict the coming tempest, and that he will be able to sell out before a national bankruptcy.
Instead, however, of leaving the rate of interest to be interfered with by the unfettered competition of the borrowers and lenders, on the principles we have thus briefly explained, the governments of most countries have interfered, either to prohibit the taking interest altogether, or to fix certain rates which it was declared legal to exact, at interest. In Athens, the rate of interest was not regulated by law; and it is distinctly mentioned by ancient authors, that the average rate of interest paid by those who employed their stock in the shipping trade with the countries situated on the Euxine and Mediterranean Seas amounted, on account of the hazard of the voyage, to about thirty per cent.; whilst bankers, agriculturists, and others, whose security was preferable, paid only about twelve per cent. Say, in noticing this striking fact, supposes that the thirty per cent. was charged by the voyage; and that, as two voyages to the Crimea or Sicily might be made annually, maritime interest really amounted at Athens to sixty per cent. There does not, however, appear to be the least ground for this assertion. It is the average annual rate of interest that is always spoken of. (Travels of Anacharsis, vol. iv. p. 368, Eng. Transl.; De Pauw, Recherches sur les Grecs, tom. i. p. 297; Say, tom. ii. p. 132.) Interest.ferred from the money's worth to the money itself; and the wealth of states and of individuals came to be measured, not by the abundance of their disposable produce, by the quantity or value of the commodities with which they could afford to purchase the precious metals, but by the quantity of these metals actually in their possession. Because it sometimes happened that the holders of ordinary commodities were unable easily to dispose of them at any price, whilst money was always sure to find a ready and advantageous market, it was considered as something mysterious, as a real merchandise par excellence. We cannot, therefore, be surprised at the measures to which the erroneous opinions entertained respecting it necessarily led; or that efforts should have been made to protect the interests of those who were unprovided with so powerful an instrument, from becoming a prey to the encroachments of their more fortunate neighbours. Every individual was allowed freely to dispose of his corn, cattle, land, &c.; but it was imagined, there was something peculiar in money, and that the desire to obtain it was so great, that, unless the lenders were restrained in their demands, they would, by taking advantage of the necessities of the borrowers, infallibly ruin them, and engross the whole property of the country.
Another source of the prejudice against stipulating for interest must be sought for in the dislike so universally entertained in remote ages to accumulation. There can be no accumulation without economy, without a saving of income; and this was then not only considered as indicative of a sordid and avaricious disposition, but as being positively hurtful. Before the nature and functions of capital were properly understood, it was believed that it could not be increased otherwise than by injuriously abstracting a portion of the national revenue, and that any advantage it might give to the proprietor must have been obtained at the public expense. It did not occur to our ancestors, that an individual who, by his economy, has accumulated stock, has really added to the wealth of the state, without diminishing that of others; nor were they aware that this stock, when afterwards expended, as is almost always the case, in the support of productive industry, would afford the means of producing an increased income. But reckoning, as they did, the savings of individuals as so much withdrawn from the public income, it was natural enough that they should endeavour to limit the advantage to be derived from their employment.
Much, also, of the prejudice against bargaining for interest, so prevalent in the middle ages, may be traced to the authority of some texts of Scripture, which were understood entirely to prohibit its exactation. It has, however, been shown, that these texts will not really bear this interpretation; but, supposing that they did, nothing, it is plain, could be more absurd than to consider the municipal regulations of a people placed in such peculiar circumstances as the Jews, as general and fixed principles, applicable in all ages and countries.
But, whatever may have been the causes of the efforts so generally made to regulate and limit the rate of interest, it is certain that, so far from succeeding in their object, they have had a precisely opposite effect. Should a borrower find it for his advantage to offer six, seven, or eight per cent. for a loan (and unless it were for his advantage, nothing could possibly induce him to make such an offer), what right has the legislator to interfere, and to prohibit the lender from receiving, and the borrower from paying, more than four or five per cent.? Such an interference is not only uncalled for and unnecessary, but it is, in the highest degree, prejudicial. Restrictive laws, instead of reducing, have uniformly contributed to raise the rate of interest. Nor is this anything more than might have been foreseen and expected. It is plain that no law can be so framed as to prevent a borrower from offering a higher rate of interest than what is fixed by statute; and if the lender had implicit confidence in the secrecy and solvency of the borrower, he might accommodate him with the sum wanted, without requiring any additional interest or premium of insurance because of the danger of entering into what the law declares to be an illegal transaction. But this must be a very rare case. Gratitude, and a sense of benefits received, are, unfortunately, when they come into contact with self-interest, but slender securities for honourable conduct. Numberless unforeseen events occur to weaken and dissolve the best cemented friendships; and a transaction of this kind would undoubtedly afford an additional source of jealousies and divisions. In such matters, indeed, men are more than usually sharp-sighted, and are very little disposed to trust to moral guarantees for the security of their property. But neither the threatenings of the law, nor the powerful inducements which it holds out to dishonest debtors to break their engagements, and treacherously to recede from the stipulations to which they had agreed, have been able to prevent, or even greatly to lessen, what are termed usurious bargains. Their only effect has been, to oblige the lender to demand, and the borrower to bind himself to pay, a higher rate of interest than would otherwise have been required. A bargain for more than the statute rate of interest being declared illegal, the lender is thus exposed to an additional risk. But no person will gratuitously place his fortune in a situation of comparative hazard; and, therefore, the sum necessary to cover this risk must be proportioned to the greater or less anxiety on the part of government to prevent and punish such bargains; or, in other words, the rate of interest is invariably increased according as the laws intended to reduce it become more severe, and diminished according as they are relaxed.
Thus a capitalist might be inclined to lend a sum at six or seven per cent.; but as the law declares that any individual who shall stipulate for more than five per cent. shall, if detected, forfeit three times the principal, it is clear, provided there was no method of defeating this statute, that there must be an end of all borrowing, except when the market rate of interest was below the statutory rate. Whenever it was above that rate, no person would be able to obtain a single farthing in the way of loan. There could, then, be no transference of capital. It would continue locked up in the same hands; and the national property and welfare would, in consequence, suffer severely. Luckily, however, the mutual interest and ingenuity of borrowers and lenders have always proved an overmatch for the enactments of the law. These have done nothing but fetter the transference of stock, and force the borrowers to pay a higher rate of interest for it. What might have been borrowed at six per cent., had there been no hazard from anti-usurious statutes, is, on account of that hazard, raised to perhaps eight or even ten per cent.; and, what is still worse, a contempt for the institutions of society, and a habit of carrying on business in a secret and underhand manner, are generated. The odium which attaches to a positively pernicious regulation, weakens the respect which would otherwise be felt for those which are acknowledged to be advantageous; and that spirit of frankness, openness, and sincerity, which, wherever it predominates, is so highly valuable, is cramped in its development, or altogether supplanted, by duplicity, extortion, and cunning.
These conclusions do not rest on theory only, but are supported by a constant and uniform experience. At Rome, during the period of the republic, the ordinary rate of interest was excessively high. The debtors, or plebeians, were every now and then threatening to deprive their creditors, who were generally of the patrician order, not only of the interest of their capital, but of the principal itself. Repeated instances occurred to show that these were not mere empty threats; and the patri- cians were therefore obliged to indemnify themselves, by means of a corresponding premium, for the risks to which they were exposed. "Des continuelles change- ments," says Montesquieu, "soit par des loix, soit par des plebiscites, naturalisèrent à Rome l'usure; car les créanciers, voyant le peuple leur débiteur, leur legisla- teur, et leur juge, n'eurent plus de confiance dans les contrats. Le peuple, comme un débiteur décrépit, ne tentait à lui prêter que par des gros profits; d'autant plus que, si les loix ne venaient que de temps en temps, les plaintes du peuple étoient continues, et intimidaient toujours les créanciers. Cela fit que tous les moyens honnêtes de prêter et d'emprunter furent abolis à Rome, et qu'une usure affreuse, toujours foudroyée, et toujours re- naissante, s'y établit. Le mal venoient de ce que les choses n'avoient pas été ménagées. Les loix extrêmes dans le bien font naître le mal extrême: il fallut payer pour le prêt de l'argent, et pour le danger des peines de la loi." (Esprit des Loix, livre xxii, chap. 21.)
In Mahommedan countries, notwithstanding the posi- tive prohibition in the Koran, the ordinary rate of interest is at least ten or twenty times as high as its ordinary rate in Europe. "L'usure augmente dans les pays Maho- medans à proportion de la sévérité de la défense: le prêteur s'indemnise du péril de la contravention." (Esprit des Loix, liv. xxi, ch. 19.)
During the middle ages, the average rate of profit could not be much higher than at present: "But the clamour and persecution raised against those who took interest for the use of money was so violent, that they were obliged to charge it much higher than the natural price, which, if it had been let alone, would have found its level, in order to compensate for the opprobrium, and frequently the plunder, which they suffered; and hence the usual rate of interest was what we should now call most exhorbitant and scandalous usury!" The extraordinary risks to which lenders were exposed rendered the premium of insu- rance on all sorts of capital excessively high; for, of the fifty and even a hundred per cent, which borrowers then frequently engaged to pay as interest, not more than eight or ten per cent, can properly be said to have been given for the productive services of capital. The rest must be considered as a bonus, to compensate the lender for the hazard he encountered of losing the principal itself.
In France the rate of interest was fixed at five per cent, so early as 1665; and this, a few short intervals only excepted, continued to be the legal rate until the Revolution. Laverdy, in 1766, reduced it from five to four per cent. Instead, however, of the market rate being proportionally reduced, it was raised from five to six per cent. Previously to the promulgation of the edict, loans might have been obtained on good security at five per cent.; but an additional per cent. was now required to cover the risk of illegality. This caused the speedy aban- donment of the measure.
The same thing happened in Livonia in 1786, when the Empress Catherine reduced the legal rate of interest from six to five per cent. Hitherto, says Storch (in loco supra citato), those who had good security to offer were able to borrow at six per cent.; but henceforth they had to pay seven per cent. or upwards. And such will be found to have been invariably the case, wherever governments have interfered to reduce the statutory below the market rate of interest.
From the earliest period of the history of England down to the reign of Henry VIII., the taking of interest was absolutely forbidden to all persons within the realm except Jews and foreigners, who, nevertheless, were frequently plundered for the sake of enriching the crown, under the pretext of punishing them for what were then called their "hellish extortions." The disorders occasioned by this ruinous interference on the part of govern- ment at length became so obvious, that, notwithstanding the powerful prejudices to the contrary, a statute was passed in 1546 (37 Hen. VIII. cap. 7), legalizing the taking of interest to the extent of ten per cent. per annum; and this because, as is recited in the words of the act, the statutes "prohibiting interest altogether have so little force, that little or no punishment hath ensued to the offenders."
In the reign of Edward VI. the horror against taking inter- est seems to have revived in full force; for, in 1552, the taking of any interest was again prohibited, "as a vice most odious and detestable," and "contrary to the word of God." But, in spite of this tremendous denunciation, the ordinary rate of interest, instead of being reduced, immediately rose to fourteen per cent., and continued at this rate until, in 1571, an act was passed (13 Eliz. cap. 8) repealing the act of Edward VI., and reviving the act of Henry VIII., allowing ten per cent. interest. In the preamble to this act it is stated, "that the prohibiting act of King Edward VI. had not done so much good as was hoped for; but that rather the vice of usury hath much more exceedingly abounded, to the utter undoing of many gentlemen, merchants, occupiers, and others, and to the im- portable hurt of the commonwealth." This salutary statute was opposed, even by those who, it might have been expected, would have been among the first to emancipate themselves from the prejudices of the age, with all the violence of ignorant superstition. Dr John Wilson, a man famous in his day, and celebrated for the extent and soli- dity of his learning, stated, in his place in the House of Commons, that "it was not the amount of the interest taken that constituted the crime; but that all lending for any gain, be it ever so little, was wickedness before God and man, and a damnable deed in itself, and that there was no mean in this vice any more than in murder or theft."
In order to quiet the consciences of the bench of bishops, a clause was actually inserted, declaring all usury to have been forbidden by the law of God, and to be in its nature sin, and detestable. When first enacted, this statute was limited to a period of five years; but, "forasmuch as it was by proof and experience found to be very necessary and profitable for the commonwealth of this realm," it was, in the same reign, made perpetual. (39 Eliz. cap. 18.)
In the 21st of James I. the legal rate of interest was re-
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1 Macpherson's History of Commerce, vol. i. p. 400. 2 It is impossible to form any very accurate estimate of the rate of profit in the middle ages; yet several striking facts may be adduced in support of the opinion advanced in the text. At Verona, in 1229, the interest of money was fixed by law at twelve and a half per cent. Towards the end of the fourteenth century, the republic of Genoa paid only from seven to ten per cent, to her creditors; and the average discount on gold bills at Barcelona, in 1435, is stated to have been about ten per cent. But whilst the rate of interest in Italy and Catalonia, where a considerable degree of freedom was allowed to the parties concerned in bargaining for a loan, was thus comparatively moderate, it was, in despite of its total prohibition, incomparably higher in France and England. Matthew Paris mentions that, in the reign of Henry III., the debtor paid ten per cent. every two months; and this, though absolutely impossible as a general practice, may not have been very far from the average interest charged on the few loans that were then contracted for. (Hallam's History of the Middle Ages, vol. iii. p. 402.) 3 Storch, Traité d'Economie Politique, tome iii. p. 167. duced to eight per cent., by an act to continue for seven years only, but which was made perpetual in the succeeding reign. (3 Car. I. cap. 4.) During the commonwealth, the legal rate of interest was reduced to six per cent., a reduction which was afterwards confirmed by the act 12 Car. II. And, finally, in the reign of Queen Anne, a statute (12 Anne, cap. 16) was framed, reducing the rate of interest to five per cent., at which it now stands.
In the preamble to this statute, it is stated, that, "whereas the reducing interest to ten, and from thence to eight, and thence to six, in the hundred, hath from time to time, by experience, been found very beneficial to the advancement of trade and the improvement of lands, it is become absolutely necessary to reduce the high rate of interest of six per cent. to a nearer proportion to the interest allowed for money in foreign states." It was for these reasons enacted, that all bargains or contracts stipulating for a higher rate of interest than five per cent. should be utterly void. And "that all persons who should after that time receive, by means of any corrupt bargain, loan, exchange, chevizance, or interest, of any wares, merchandise, or other thing whatever, or by any deceitful way or means, or by any covin, engine, or deceitful conveyance for the forbearing or giving day of payment, for one whole year, for their money or other thing, above the sum of L5 for L100 for a year, should forfeit, for every such offence, the triple value of the monies or other things so lent, bargained," &c.
In Scotland, previously to the Reformation, no interest could be legally exacted for money. But this great event, by weakening the force of those religious prejudices, which had chiefly dictated the laws prohibiting interest, occasioned the adoption of sounder opinions on the subject, and led to the enactment of the statute of 1587 (11 Parl. Jac. VI. cap. 52), which legalized the taking of interest to the extent of ten per cent. In 1633 the legal rate was reduced to eight per cent., and in 1661 to six per cent. The statute of Queen Anne, reducing the rate of interest to five per cent., extended to both kingdoms.
In Ireland, the statutes prohibiting the taking of interest in Ireland were not repealed until 1635, when, by the statute 10 Car. I. cap. 22, liberty was given to stipulate for interest to the extent of ten per cent. In 1704 this rate was reduced to eight per cent.; in 1722 it was reduced to seven per cent.; and in 1732 it was further reduced to six per cent., at which it has since continued fixed.
It has been observed by Dr Smith, that the different statutory regulations, reducing the rate of interest in England, were made with great propriety. Instead of preceding, they followed the fall which was gradually taking place in the market rate of interest; and, therefore, did not contribute, as they otherwise must have done, to raise the rate which they were intended to reduce. Sir Josiah Child, whose celebrated Treatise, recommending a reduction of interest to four per cent. was published about 1670, states positively, that the goldsmiths in London, who then acted as bankers, could obtain as much money as they pleased, upon their servants' notes only, at four and a half per cent. The supposed insecurity of the revolutionary establishment, and the novelty of the practice of funding, occasioned the payment of a high rate of interest for a considerable portion of the sums borrowed by the public in the reigns of William III. and Anne; but private persons, of undoubted credit, could then borrow at less than five per cent. During the reign of George II. the market rate of interest fluctuated from three to four and four and a half per cent.
Dr Smith mentions, that the increased means of profitably investing capital acquired during the war which terminated in 1763, raised the market rate of interest, subsequently to the peace of Paris, to a level with the statutory rate, or perhaps higher. But this rise was only temporary, and it was not until the late war that any very material or general inconvenience was found to result from the limitation of the rate of interest to five per cent.
It is necessary, however, to observe, that this remark applies exclusively to the loans negotiated by individuals who could offer unexceptionable security; for, ever since the passing of the act 1714, persons engaged in employments of more than ordinary hazard, whose character for prudence and punctuality did not stand high, or who could not only offer inferior security, were unable to borrow at five per cent., and have in consequence been compelled to resort to a variety of schemes for defeating and evading the enactments in the statute. The most common device was the sale of an annuity. Thus, supposing an individual whose personal credit was not good, and who had only the liberet of an estate to give in security, wanted to borrow any given sum, he sold an annuity to the lender sufficient to pay the interest stipulated for, which, because of the risks and odium attending such transactions, was always higher than the market rate, and also to pay the premium necessary to insure payment of the principal on the death of the borrower. It is curious to observe, that although the sale of an irredeemable life annuity, at a rate exceeding legal interest, was not reckoned fraudulent or usurious; yet, so late as 1743, Lord Hardwicke held, that in their less exceptionable form, or when they were redeemable, annuities could only be looked upon as an evasion of the statute of usury, and a loan of money. But the extreme inexpediency of this distinction soon became obvious, and the law on this subject is now entirely changed. The greater extension of the traffic in annuities, and the advantage of giving as much publicity as possible to such transactions, led to various parliamentary inquiries and regulations respecting them in the early part of the reign of his late majesty. The consequence has been, that irredeemable annuities are now nearly unknown, and that the sale of a redeemable annuity cannot be impeached, although it should appear on the face of the deeds that the lender had secured the principal by effecting an assurance of the borrower's life.
During the greater part of the late war, however, the usury laws operated, not to the prejudice of one, but of all classes of borrowers. The extent of the loans, the high rate of interest given by the state, the facility of selling out of the funds, the regularity with which the dividends were paid, and the temptations arising from the fluctuations in the price of funded property, diverted so large a proportion of the floating capital of the country into the coffers of the treasury, as to render it next to impossible for a private individual to borrow at the legal rate of interest, except from the trustees of public companies, or
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1 On the 18th of December 1752, the three per cents. brought the highest price they have hitherto reached, namely, 106½ per cent. On the 29th of September 1797, the day on which the failure of Lord Malmesbury's attempt to negotiate with the French republic transpired, consols fell to 47½, being the lowest price at which they have ever been sold.
2 Considerations on the Rate of Interest, by E. B. Sugden, Esq. Pamphlet, vol. viii. p. 278.
3 By the act 53 Geo. III. cap. 141, it is enacted, "That a memorial, setting forth the date of every deed, bond, instrument, or other assurance, whereby an annuity or rent-charge shall be granted for one or more life or lives, or for a certain number of years, the names of all the witnesses, and of all the parties thereto, the sum given for the security, and the amount of the annuity itself, shall be registered in the Court of Chancery." This act only applies to England and Wales. through the influence of circumstances of a very peculiar nature. The proprietors of unencumbered freehold estates, of which they had the absolute disposal, were almost universally obliged to resort to those destructive expedients which had formerly been the resource only of spendthrifts, and persons in the most desperate circumstances. Annuities were not unfrequently granted for the term of several lives, at the rate of twelve, fourteen, fifteen, and even twenty per cent, exclusive of the premium of insurance on the lives of the persons named in the grant of the annuities. Mr Onslow, in his speech on the usury laws, 23d of May 1816, mentions that he knew the case of a gentleman possessed of a very large estate in fec- simple, who had been compelled to grant an annuity for four lives (and the survivor of them), named by the grantee, for eight years' purchase.
The Report of the Committee on the Usury Laws, laid before the House of Commons in 1818, contains much valuable evidence, establishing the impolicy and the pernicious effects of these laws in the clearest manner. Mr Sugden, a gentleman very extensively concerned in the management of landed property, stated, that when the market rate of interest rose above the legal rate, the landed proprietor was compelled to resort to some shift to evade the usury laws. For this purpose, Mr Sugden informed the committee he had known annuities granted for three lives, at ten per cent, upon fec-simple estates, unencumbered, and of great annual value, in a register county. He had also known annuities granted for four lives, and more would have been added, but for the danger of equity setting aside the transaction on account of the inadequacy of the consideration. Latterly many annuities were granted for a term of years certain, not depending upon lives. On being asked whether, if there were no laws limiting the rate of interest, better terms could or could not have been obtained, Mr Sugden answered, "I am decidedly of opinion that better terms could have been obtained; for there is a stigma which attaches to men who lend money upon annuities, that drives all respectable men out of the market. Some leading men did latterly embark in such transactions, but I never knew a man of reputation in my own profession lend money in such a manner, although we have the best means of ascertaining the safest securities, and of obtaining the best terms. In all loans, two solicitors are invariably concerned, one for the borrower and one for the lender; and although the borrower always pays the expense of the securities, yet a regular professional bill is invariably made out; whereas, in the case of an annuity, although it is in strictness a loan, only one solicitor is employed, and he never makes out a regular bill, but charges what is termed a lumping sum, for all his expense and trouble in the transaction." And, in another place, Mr Sugden observes, "the temptation on the part of a solicitor to lend money upon annuities is very strong, because, without any check upon his charges, he demands whatever sum he pleases, and he takes care that it is instantly paid; for in no instance is the borrower allowed to leave the room until he has paid the solicitor's charge." "Nothing," Mr Sugden justly adds, "short of a repeal of the usury laws can put a stop to the abuses which attend grants of annuities; they strongly encourage a spirit of gambling; for, as the repayment of the money lent cannot be enforced, and the annuity is granted upon a contingency, the borrower too frequently neglects to provide for the payment of the loan, and trusts to chance for the determination of the annuity."
"The laws against usury," says Mr Holland, partner of the house of Baring, Brothers, and Company, and one of the best informed merchants in the country, "drive men in distress, or in want of money, to much more disastrous modes of raising it than they would adopt if no usury laws existed. The landowner requires capital to increase his live stock, or improve his land, or for any other purpose, Interest at a period when the government is borrowing money at above five per cent, or when the funds give a greater interest than five per cent; no one will then lend to the landowner, because his money is worth more to him than the law allows him to take; the landowner must, therefore, either give up his improvements, or borrow money on annuity interests, on much more disadvantageous terms than he could have done if no law existed against usury. The man in trade, in want of money for an unexpected demand, or disappointed in his returns, must fulfil his engagements, or forfeit his credit. He might have borrowed money at six per cent, but the law allows no one to lend it to him, and he must sell some of the commodity he holds, at a reduced price, in order to meet his engagements. For example, he holds sugar which is worth 90s.; but he is compelled to sell it immediately for 70s.; to the man who will give him cash for it, and thus actually borrows money at twelve and a half per cent, which, had the law allowed him, he might have borrowed from a money dealer at six per cent. It is known to every merchant, that cases of this kind are common occurrences in every commercial town, and more especially in the metropolis. A man in distress for money pays more interest, owing to the usury laws, than he would if no such laws existed; because now he is obliged to go to some of the disreputable money lenders to borrow, as he knows the respectable money lender will not break the laws of his country. The disreputable money lender knows that he has the ordinary risk of his debtor to incur in lending his money, and he has further to encounter the penalty of the law, for both of which risks the borrower must pay. If no usury laws existed, in common cases, and where a person is respectable, he might obtain a loan from the respectable money lender, who would then only have to calculate his ordinary risk, and the compensation for the use of his money."
In every part of the appendix to the Report, we meet resolutions with equally conclusive evidence of the pernicious effects of the laws restraining the rate of interest. And the committee admitted the full force of this evidence, by agreeing to the following resolutions: 1st, "That it is the opinion of this committee, that the laws regulating or restraining the rate of interest have been extensively evaded, and have failed of the effect of imposing a maximum on such rate; and that, of late years, from the constant excess of the market rate of interest above the rate limited by law, they have added to the expense incurred by borrowers on real security, and that such borrowers have been compelled to resort to the mode of granting annuities on lives; a mode which has been made a cover for obtaining a higher rate of interest than the rate limited by law, and has further subjected the borrowers to enormous charges, or forced them to make very disadvantageous sales of their estates. 2nd, That it is the opinion of this committee, that the construction of such laws, as applicable to the transactions of commerce as at present carried on, have been attended with much uncertainty as to the legality of many transactions of frequent occurrence, and consequently been productive of much embarrassment and litigation. 3rd, That it is the opinion of this committee, that the present period, when the market rate of interest is below the legal rate, affords an opportunity peculiarly favourable for the repeal of the said laws."
In spite, however, of the recommendation of the committee, and of the clear and satisfactory nature of the evidence on which it is founded, the popular prejudice on this subject continues so strong, that there does not seem much reason to expect that this desirable measure will be speedily effected.
It is most absurdly supposed, that, were the laws limiting the rate of interest repealed, every individual who has effects of laws. capital to lend would henceforth indulge in all those mean and disgraceful practices which at present characterise the lowest class of money brokers. But it might just as reasonably be supposed, that were country gentlemen allowed to sell game, they would immediately become addicted to all the vices of the poacher. The truth is, that if the rate of interest was left to be adjusted by the unrestricted competition of the parties, there would be almost no employment for the inferior class of money dealers. Except when the market rate of interest is below the legal rate, the usury laws prevent all persons, whose credit is not extremely good, from obtaining loans from capitalists of the highest character, and force them to have recourse to those who are less scrupulous. Supposing the market rate of interest to be six or seven per cent., an individual in ordinarily good credit might, were the usury laws abolished, easily obtain a loan at that rate. But the law having declared that no more than five per cent. shall be taken, and consequently having affixed a species of stigma to those lenders who bargain for a higher rate, necessarily excludes the rich and more respectable capitalists from the market, and obliges borrowers to resort to those of an inferior character, who, in addition to the premium for the risk incurred by entering into an illegal transaction, must receive an indemnification for the odium which, in such cases, always attaches to the lender. It is idle and ridiculous to attempt to secure individuals against the risk of imposition in pecuniary, more than in any other species of transactions. But although the object were really desirable, it could not possibly be obtained by such inadequate means. The usury laws generate the very mischief they are intended to suppress. Far from diminishing, they most unquestionably multiply usurious transactions in a tenfold proportion, and powerfully aggravate all the evils they were designed either to mitigate or remove.
Nothing can be more unreasonable, or more entirely unfounded, than the clamour that has been set up against usurers, as money-lenders are sometimes termed, because of their exacting a higher rate of interest than ordinary from prodigals and spendthrifts. This, surely, is the most proper and efficient check that can be put upon the thoughtless or unprincipled extravagance of such persons. Supposing the security of a prodigal and of an industrious man to be nearly equal, and this can scarcely ever be the case, does not the capitalist who would lend to the latter at a lower rate of interest than he would lend to the former, confer a real service on his country? Does he not prevent those funds which ought to be employed in supporting useful labour, and in adding to the real wealth of the nation, from being wasted in ridiculous extravagances or boisterous dissipation?
But, perhaps, we shall be told, that this is mistaking the object of the usury laws; that they were not intended to force capitalists to lend to spendthrifts at the same rate of interest as to industrious persons, but to protect the prodigal and unwary from the extortion of usurers, by declaring any stipulation between them for more than a given rate of interest to be null and void. But why all this solicitude about the least valuable class of society? Why fetter and restrict the free circulation of capital amongst those who would turn it to the best account, lest any portion of it might chance to fall into the hands of those who would squander it away? If the prevention of prodigality be an object of sufficient importance to justify the interference of the legislature, why not at once put the prodigal under an interdict? This is the only way in which it is possible to restrict him. It is not so much by borrowing money at high interest, as by contracting debts to merchants, on whose charge there is no check, that spendthrifts generally run through their fortunes. Mr Bentham has justly observed, that so long as a man is looked upon as one who will pay, he can much easier get the goods he wants than he could the money to buy them with, though he were content to give for it twice or thrice the ordinary rate of interest. How ridiculous is it, then, to stimulate this natural facility of purchasing, to permit prodigals to borrow (for it is really borrowing) the largest supplies of food, clothes, &c. at twenty, thirty, or even a hundred per cent. interest, at the same time that we inflict a real injury on every other class of society, rather than permit them to borrow the smallest supply of money at more than five per cent. Instead of being of any service, this restriction is evidently injurious to the prodigal. It narrows his choice, and drives him from a market which might have proved much less disadvantageous, to one in which no disgrace attaches to the exaction of the most exorbitant interest, and where he can scarcely escape being ruined.
Neither is the outcry raised against capitalists for taking advantage of the necessities of industrious individuals, in any degree better founded than that which is raised against them for taking advantage of the extravagant and thoughtless disposition of the prodigal or the simple. According as a person has a character for sobriety, and for punctuality in making his engagements, and according to the presumed state of his affairs at the time, so will he be able to borrow. To say that a capitalist took advantage of the necessities of any individual, is only saying that he refused to lend to a person in suspicious or necessitous circumstances, at the same rate of interest he would have done had he been in high credit, or, which is the same thing, had there been no risk of losing the principal; and had he not acted in this manner, should we not have justly considered him as a fool or a madman?
But, as has already been shown, whatever may be the extortion of lenders, the usury laws afford no means of checking it; on the contrary, they compel the borrowers to pay, over and above the common rate of interest, a premium sufficient to indemnify the lender for the risk and odium incurred in breaking them. They attempt to remedy what is not an evil, and what, consequently, ought not to be interfered with; and in doing this they necessarily create a real grievance. What should we have thought of an act of parliament to compel the underwriters to insure a gunpowder magazine and a salt warehouse on the same terms? Yet this would not have been in any respect more absurd than to enact that the same rate of interest should be charged on capital lent to those whose security is widely different.
Luckily we are not left to infer from general principles, however well established, the many advantages that would result from a repeal of the laws limiting the rate of interest. The case of Holland furnishes a practical and striking proof of the correctness of the theory we have been endeavouring to establish. It is an undoubted fact, that the rate of interest has been, for a very long period, lower in Holland than in any other country in Europe; and yet Holland is the only country in which usury laws are altogether unknown, where capitalists are allowed to demand, and borrowers to pay, any rate of interest. Notwithstanding all the violent changes of the government, and the extraordinary derangement of her financial concerns in
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1 Strictly speaking, this applies only to the state of Holland previously to the Revolution in 1795. The enactments of the Code Napoleon were subsequently introduced; but it appears, from the Report of the Parliamentary Committee on the Usury Laws, that they have not, in any instance, been acted upon. the course of the last twenty years, the rate of interest in Holland has continued comparatively steady. During the whole of that period, persons who could offer unexceptionable security have been able to borrow at from three to five and a half per cent.; nor has the average rate of interest charged on capital, advanced on the worst species of security, ever exceeded six or seven per cent., except when the government was negotiating a forced loan. But, in this country, where the law declares that no more than five per cent. shall be taken, the rate of interest for capital advanced on the best landed security has, in the same period, varied from five to sixteen or seventeen per cent., or five times as much as in Holland. Surely this ought to put to rest all doubts as to the impolicy and the inefficiency of the usury laws.
In France the usury laws were abolished at the Revolution; and it is distinctly stated, that their abolition was not attended by any rise of interest. According to the Code Napoleon, only six per cent. interest is allowed to be taken in commercial affairs, and five per cent. when money is advanced on the security of real property. There is not, however, any difficulty in evading this law. The method resorted to for this purpose, is to give a bonus before completing the transaction, or, which is the same thing, to frame the obligation for the debt for a larger sum than was really advanced by the lender. None of the parties particularly interested can be called to swear to the fact of such a bonus being given; so that the transaction is unimpeachable, unless a third party, who was privy to the settling of the affair, can be produced as a witness. The Bank of France never discounts at a higher rate of interest than five per cent., but sometimes at a lower rate.
In Hamburg the rate of interest is quite unrestricted; or, if there be a written law restraining it, it has become altogether obsolete. The rate, therefore, varies according to circumstances. Occasionally it has been at seven, eight, and even ten per cent.; and, in 1799, a period of great mercantile embarrassment and insecurity, it was as high as fourteen per cent. Generally, however, the rate of discount on good bills does not exceed four or five per cent.
In Russia the legal rate of interest is six per cent. But as Russia is a country capable of much improvement, and where there are very great facilities for the advantageous employment of capital, the market rate of interest is invariably higher than the statute rate, and the law is as constantly as it is easily evaded.
At Trieste, and throughout the Austrian empire in general, the usual rate of interest is fixed by law at six per cent.; but capital can seldom be obtained for less than eight or ten per cent.
At Leghorn the ordinary rate of interest is a half per cent. per month, or six per cent. per annum; but there is no law to prevent the taking of a higher rate.
In Spain the ordinary rate of interest is six per cent.; but no law exists against taking a higher rate, and it seldom falls below five or rises above seven per cent.
In the United States legal interest is fixed at six per cent.; but the market rate fluctuates from ten to twelve United per cent. Efforts, Mr Birkbeck informs us, are now making in various parts of the Union, particularly in Virginia and North Carolina, to do away the restraints on usury, which, as he justly observes, "operate merely as a tax on the needy borrower."
If usury laws are to have any existence, they ought certainly to be made to operate on the greatest of all borrowers; on those who do not borrow on their own credit, but reach the on that of others. Is it not the extreme of folly, that, whilst an industrious manufacturer, or agriculturist, is prevented from giving more than five per cent. for capital, which he might be able to invest so as to yield ten or twelve per cent., government should be allowed to borrow at six, eight, ten, or twenty per cent.? What is this but holding out a bait to loan-mongers, and causing the capital of the country to flow with an accelerated and unnatural velocity into the treasury? Nothing surely can be more impolitic than this. If we are to have usury laws, they ought to operate alike on every class of borrowers; and, considering the superior attractions which the facility of repossessing the principal gives to the investment of capital in the funds, the rate of interest at which government should be allowed to borrow should be less than the rate at which private individuals might borrow.
We trust, however, that we have said enough to show the inexpediency and the pernicious tendency of all such regulations. If a landlord is to be allowed to take the highest rent he can get offered for his land, a farmer the highest price for his raw produce, a manufacturer for his goods, why should a capitalist be restricted and fettered in the employment of his stock? Every principle of natural justice, and of sound political expediency, is outraged by such a distinction.
So long as the market rate of interest continued higher than the statutory rate, it cannot be doubted that considerable inconvenience would have resulted from any sudden abolition of the usury laws. It is certain, indeed, that this inconvenience would have been very speedily compensated by the check which the abolition would have given to the traffic in annuities, and by the easier circulation and more advantageous distribution of capital. Now, however, when the market is fallen below the statutory
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1 The general rate of discount in Holland is from four to five per cent., and occasionally from three to three and a half per cent., but very seldom lower. During the Revolution it had been at six and seven per cent., and even at eight; but this was generally owing to some forced financial operation on account of the government, and was never of long duration. The following is the average rate of discount at Amsterdam and Rotterdam from 1795 to 1817:
| Year | Rate | |------|------| | 1795-4 | 4 | | 1796-4 | 4 | | 1797-4 | 4 | | 1798-4 | 4 | | 1799-3 | 4 | | 1800-4 | 4 | | 1801-4 | 4 | | 1802-4 | 4 | | 1803-4 | 4 | | 1804-4 | 4 | | 1805-4 | 4 | | 1806-4 | 4 |
The bank of Amsterdam never discounts at a higher rate than five per cent.; but they discount at a lower rate, and vary their discounts according to the abundance of capital, never exceeding five per cent., and occasionally as low as two and a half and three."
(Mr Holland's evidence, Report of the Committee on the Usury Laws, p. 45.)
2 Storch, Economic Politique, tome iii. p. 187.
3 Report on Usury Laws, p. 46.
4 Ibid. and Storch, tome iii. p. 207.
5 See Report, ubi supra.
6 Letters from Illinois, p. 36. rate of interest; no inconvenience could attend their repeal. It could not lead to any demand for payment of borrowed money, for no individual would require payment of what he could not rely on greater advantage. But, while their repeal would be in no respect disadvantageous, it would enable those who are engaged in employments of more than ordinary hazard, to procure adequate supplies of stock on more favourable terms; and it would also secure us against the risk of future mischief should the market again rise above the legal rate of interest. It is unnecessary, however, to urge the immediate repeal of the usury laws. We think it quite visionary to apprehend any danger from the instant application of a sponge to the whole of the anti-usurious statutes; but it is enough if they are repealed gradually. To avoid exciting any alarm in the minds of the most timid, the rate at which capital may be legally lent at interest might be annually raised one or one half per cent., until the rate had been extended to eight or ten per cent., when it is clear every restrictive regulation might be abolished, without the possibility of the smallest derangement happening in consequence.
Were the usury laws abolished, it would be proper to frame a statute which should fix the interest to be paid in those cases in which no previous agreement had been made respecting it. But as, in cases of this description, there is very frequently considerable doubt whether it was the intention of the parties at the time the transaction took place, that any interest should be charged, it would be proper to give the borrower the full benefit of this doubt, by fixing the rate payable in such cases at the lowest market rate.
Before concluding, we may remark, that, until the laws regulating the rate of profit and the increase of capital had been accurately investigated, the great wealth and commercial prosperity of Holland was invariably appealed to as a practical proof of the advantages of a low rate of interest. But Sir Josiah Child, and those who have insisted so much on this example, forget that the lowness of interest in Holland was the necessary effect of the circumstances in which that country was placed; of the lowness of profits, caused by the oppressiveness of taxation, and the deficient supply of fertile soil, and not of any interference on the part of the government. Neither was this lowness of interest any advantage, but a positive disadvantage. A country, whose average rate of profit, and consequently of interest, has been reduced considerably below the level of surrounding nations, may, notwithstanding, abound in wealth, and be possessed of an immense capital; but it would be the height of error to suppose that this reduction of profits and interest could have facilitated their accumulation. Capital cannot be accumulated otherwise than by a saving of income; and wherever incomes are large, and this will always be the case where the rate of profit is comparatively high, there must be a proportionably increased facility of gratifying the prevalent passion for accumulation. The case of Holland, far from contradicting, furnishes a striking example of the truth of this principle. Sir William Temple mentions that her trade was rather on the decline in 1670; and the large capital of which she was then in possession had been accumulated previously to her wars with Cromwell, and when the rate of profit was much higher than at any subsequent period. Low profits are a certain proof that society has become clogged in its progress. They show that it is approaching, if it has not already reached, the stationary state, and that, unless measures can be devised for relieving the pressure on the resources of the state, it will be thrown back in the career of improvement, and outstripped by its neighbors. The rate of profit and the rate of interest are ordinarily twice as high in the United States as in Great Britain or France, and it is to this that the more rapid advancement of the former in wealth and population is entirely to be ascribed. High profits, it is true, may not in every instance be accompanied by a great degree of prosperity; for a despotic government, or the want of sufficient protection, may paralyze all the efforts of those who are otherwise placed in the most favourable circumstances for the accumulation of wealth. But, if the government be equally liberal, and if property be equally well secured, the degree of national prosperity will be correspondent to the rate of profit.
The demand for labour, or, which is in effect the same thing, the funds for supporting the largest and most valuable portion of society, increase or diminish in exact proportion to the increase or diminution of profits. Wherever they are high, the labourer is well paid, and the society rapidly augments both its population and its riches; on the other hand, wherever they are low, the demand for labour is proportionably reduced, and the progress of society rendered so much the slower.
Instead, therefore, of a low rate of profit, and a low rate of interest, for the one must be always directly as the other, being any proof of the flourishing situation of a country, it is distinctly and completely the reverse. High profits show that capital may be readily and beneficially invested in the different branches of industry, and whenever this is the case, it will be better for the borrower to pay a high rate of interest than it would be for him to pay a lower rate, in countries where there is less facility of employing his stock with advantage. The borrower who pays ten or twelve per cent. for capital in the United States generally makes a more profitable bargain than the English borrower who pays only four or five per cent. It is obviously not by the circumstance of the rate of interest payable on loans being absolutely high or low, but by the proportion between that rate and the average rate of profit, that we must determine whether they have been obtained on favourable or unfavourable terms.
(c.c.)