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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 tlie 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 judifferent; nothing has astually 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 loans ; 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.
ECONOMY.. 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 versa.
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 principles by which the rate of interest ought to be regulated.
He says, the rate of intereșt 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 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 leur pays, et ruineroit le crédit de “ ceux qui, avec les meilleures suretés, ne pourroient s'en procurer « que par le moyen des usuriers et au taux le plus exorbitant.” 1 have preferred Adam Smith's own words. Wealth of Nations, vol. ii. book ii, c. 4, p. 45. Edition of 1805, 8v0-T.
would be unwilling to pay this high interest ; so that a great part of the capital of the country would be kept out of the hands most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. - This doctrine, notwithstanding its wisdom, has not been adopted by later writers, and the French translator of Adam Smith's work, whom I mentioned before, has combated it with the energy and force proceeding from the consciousness of defending a truth useful and profitable to his country.
"In every case,” says that French writer, “in " which the parties concerned have themselves stipu“lated the interest, it is absurd or unjust in the law " to pretend to interfere with their agreement: to " competition alone it belongs to fix the rate of in“terest, just as it ought to fix the rate of wages and "profits, or the price of commodities. When the “parties concerned deviate from the market price of "interest, they probably have been induced to it by " peculiar circumstances which the vigilance of pri“vate interest is better able to appreciate than the "most enlightened magistrate."*
This opinion has prevailed over that of Adam Smith; and for the last five-and-twenty years none of the best writers on political economy have professed any other.
* Abrégé Elémentaire de l'Economie Politique, par le Sénateur Germain Garnier. Paris, 1796. Chap. iv. article iv. section 3, 94.
But governments have paid little attention to the opinions of philosophers, and seem to cling still faster to a legal rate of interest. Whether they are afraid of the check which this innovation might give to circulation, or whether experience has taught them that the wants of debtors would exceed the means of creditors, and made them apprehensive that, in this struggle, the rate of interest might rise aboye the limits which national prosperity allows; or whether they suppose that the law will restrain and regulate private interest, and change the relations established by the nature of things, it is certain that the rate of interest is every-where fixed by law; whence it is clear that theory and practice are at variance.
There are, however, few absolute principles in political economy, as I observed once before; they are continually. modified by circumstances, and all that can be desired from an enlightened government is, that it should shorten the duration of modifications and accelerate as much as possible the return to fixed rules and good principles...
But though he opposes a legal rate of interest, the author just quoted thinks it ought to be fixed by law, whenever it has not been stipulated by the contracting parties. He says: “ The rate of interest must be “fixed by law, whenever it adjudges interest io the “ creditor by way of indemnity in cases where none “had been stipulated by the parties. And this rate “ being fixed to supply the stipulation of the parties, it 6 follows that it ought to be according to the market“ rate of interest, as being the rate which the parties.