subject. He begins by ascertaining the part which metallic currency performs in the lending out of capital stock at interest; and clearly shews, that it is but the means, the instrument by which the lender conveys to the borrower the material productions of labour. "Money," says he, "is neither what the "borrower is actually in need of, nor what the lender "provides him with to supply his wants. The "former only requires, and the latter but gives the "value of the money, or rather the commodities "which the money may purchase:" whence he infers, that the abundance or scarcity of metallic currency has no influence whatever on the interest of capital.

He regulates this interest by the quantity of capitals to be lent out, by the competition between the various owners of capital, and by the profit of capital employed in the divers hrane...s of labour in general.

He examines the effects of this kind of employment of capital upon national weahh, and is of opinion that whenever the capital devoted to loans, is such as the owner does not chuse to employ himself, no injury arises, provided the borrower employs it in some productive labour; but that the matter is altered when such capitals are immediately consumed, and consumed without any reproduction, which is the case with public loans.

He admits, however, that the resource of public loans to which modern states resort, preserves the rest of the capitals employed in productive labour which might have been affected by the contributions required by the necessities of the state. But after having weighed

the advantages and disadvantages resulting from this method of providing for extraordinary wants, he still regards it as a cause of weakness or distress in every country where it is adopted.

This rapid analysis of the opinion of these two authors on capitals lent out at interest, plainly shews that they agree respecting public loans, and only differ about the causes which fix the rate of interest or profit of the capitals lent out at interest.

If the difficulties with which this subject is involved, concerned this single point, it would be easy to dispel them, and to shew that Adam Smith was right when he asserted that the abundance or scarcity of coin has no influence whatever upon the rate of interest or profit of capitals lent out.

But capital stock performs so conspicuous a part in the political economy of modern nations, governments pay so little regard to the tenets of philosophical inquirers, and theory and practice are so openly at variance, that it is important not to neglect any means to put an end to all doubts, to dispel the clouds in which this part of the science is still enveloped, and to throw upon it the same light which has been thrown upon the rest.

All capitals are derived from economy in consumption. They must therefore necessarily consist in a produce of labour susceptible of being consumed. In the same manner as metallic currency enables capitals to find three principal kinds of employment, which Adam Smith has so properly characterized by the denomination of fixed capital, circulating capital, and capital stock reserved for consumption, it enables

them to be employed in loans at interest; and just as the abundance or scarcity of metallic currency does not fix the rate of their employment in the first three instances, it neither fixes it in the last. I shall not examine whether there is a general law by which these four species of capital are regulated, or whether each follows a particular law; this discussion would lead me into too great a detail: I will only remark, that as the metallic currency is not the actual capital lent out at interest, but simply the means, the instrument which conveys the borrowed capital from the lender to the borrower; it is not by the size of the instrument that the rate of interest can be fixed. Whether it has required sixteen pieces of silver coin or four of gold coin to convey a quarter of wheat from the lender to the borrower, is perfectly indifferent; nothing has actually been lent but a quarter of wheat; and it is from this quarter of wheat that the interest is due, and not from the sixteen pieces of silver or four pieces of gold coin which helped to effect the loan; let the number of the gold or silver pieces be multiplied or diminished, there still is a quarter of wheat borrowed, neither more nor less, and consequently the interest which it ought to pay can neither be increased nor diminished *.

* The abundance or scarcity of money, the facility or difficulty of finding credit, which are the instruments of the loan of a quarter of wheat, may, it is true, have some influence on the rate of interest; but merely as accessaries, not as an efficient cause. Just as the carriage of a quarter of wheat does not constitute its price, so the dearness or cheapness of money or credit with which a loan is effected, does not determine the rate of its interest.

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But what is it that determines the rate of interest?

Several causes, independent of the abundance or scarcity of money, contribute more or less powerfully

to fix that rate.

The first, and no doubt the principal.cause, is the number of quarters of wheat ready to be lent out, compared to the number of those that are wanted to be borrowed. Even when the quantity is equal, the rate of interest differs according as the number of lenders is more or less considerable than that of borrowers, and vice versá.

The second cause is the safety or risk of the quarter of wheat being returned and the stipulated interest paid; and according as the borrower has the reputation of more or less probity, and solvency, and can be forced to pay at the expence of more or less money and time, the rate of interest is high or low.

Lastly, the rate of interest is lowered or raised in proportion to the benefit derived from a quarter of wheat employed in paying the wages of different labours.

These are the causes which contribute more or less powerfully to fix the gain of capital lent out at interest.

The uncertainty and continual fluctuation of these causes sufficiently account for the difficulty of fixing the interest in a steady and permanent way, and avoiding the inconvenience of allowing it to be arbitrary. Hence the controversy, whether the rate of interest is to be fixed by law?

Adam Smith saw no difficulty in the question. He not only acknowledges, that the law may fix it,

but he also states the principle's by which the rate of interest ought to be regulated.

He says, the rate of interest ought to be fixed somewhat above the lowest market-rate of interest usually paid by those who can give the greatest security to the lenders if it it were fixed below the lowest market-rate, it would be tantamount to a total prohibition of interest, the creditor would not lend at a lower rate than the current one, and the debtor would be obliged to pay, besides the market-rate of interest, a surplus to insure the creditor against the risk he is exposing himself to by lending money at a higher than the legal interest. If, on the contrary, 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 the latter to have recourse to exorbitant usurers *.

If the legal rate of interest were much above the lowest market-rate, 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 such high interest; and sober people would not find as much money as they want for their concerns, because they

The French author has not done strict justice to the opinion of Adam Smith by saying: "Si au contraire l' interêt étoit fixé au "taux le plus bas du marché, ce taux seroit onéreux aux honnêtes gens qui respectent les lois de lear pays, et ruineroit le crédit de

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ceux qui, avec les meilleures suretés, ne pourroient s'en procurer que par le moyen des usuriers et au taux le plus cxorbitant.' have preferred Adam Smith's own words. Wealth of Nations, vol. ii. book ii. c. 4, p. 45. Edition of 1805, 8vo,—T.