The Revenue of Capital

The capital used in productiion establishes a demand for capital to be so employed. It enables its owners to charge for that service.

“The profit of capital” earned by capitalist is distinct from the profit of the industry employing it.

• If he employs his capital himself, it becomes the revenue of his capital, which is added to that of his personal talent and industry, and often confounded with it.
• If he lends it, the revenue of capital is the interest paid for its use, the proprietor abandoning to the borrower the profit derivable from his personal employment of the capital lent.

The increasing prosperity of manufacture and commerce has raised them in the scale of estimation. The object of war is changed, from the spoliation and destruction of the sources of wealth, to their quiet and exclusive possession.

For the last two centuries, where war has not been made to gratify the childish vanity of a nation or a monarch, the bone of contention has always been, either colonial sovereignty, or commercial monopoly. Instead of a contest. of hungry barbarians against their wealthy and industrious neighbours, it has been one between civilized nations on either side; wherein the victor has shown the greatest anxiety to preserve the resources of the conquered territory. The invasion of Greece by the Turks, in the fifteenth century, appears to have been the final effort of pure barbarism arrayed against civilization.

The As the investigation of the interest of capital lent will help to throw light on the subject of the profit derivable from its personal employment, it may be as well, in the first instance, to acquire a just idea of the nature and variation of interest.

Section 1: Loans at Interest

The interest of capital lent is improperly called the interest of money. It was formerly called usury, as rent for its use and enjoyment.

Rent is the correct term for interest is nothing more than the price, or rent, paid for the enjoyment of an object of value. But the word has acquired an odious meaning, and now presents to the mind the idea of illegal, exorbitant interest only, a milder but less expressive term having been substituted by common usage.

The progressive advance of industry has taught us to view the loan of capital in a different light. In ordinary cases, it is no longer a resource in the hour of emergency, but an agent, an instrument, which may be turned to the great benefit, as well of society, as of the individual.

Henceforward, it will be reckoned no more avaricious or immoral to take interest, than to receive rent for land, or wages for labour; it is an equitable compensation adjusted by mutual convenience; and the con- tract, fixing the terms between borrower and lender, is of precisely the same nature, as any other contract whatsoever.

Before the functions and utility of capital were known, it is probable, that the demand of rent for it by lenders was considered an abuse and oppression, — an expedient to favour the rich and prejudice the poor; nay, further, that frugality, the sole means of amassing capital, was regarded as parsimony, and deemed a public mischief by the populace, in whose eyes, the sums not spent by great proprietors were looked on as lost to themselves. They could not comprehend, that money, laid by to be turned to account in some beneficial employment, must be equally spent; for, if it were buried. it could never be turned to account at all; that it is, in fact, spent in a manner a thousand times more profitable to the poor; 56 and that a labouring man is never sure of earning a subsis- tence, except where there is a capital in reserve for him to work upon. This prejudice against rich individuals, who do not spend their whole income, still exists pretty generally; formerly it was universal; lenders themselves were not alto- gether free from it, but were so much ashamed of the part they were acting, as to employ the most disreputable agents in the collection of profits perfectly just, and highly advanta- geous to society.

In ordinary cases of exchange, the transaction is ended as soon as the exchange is completed. Whereas, in a loan, there remains to be calculated the risk the lender incurs of never recovering the whole, or at least a part of his capital.

The risk is practically estimated, and indemnified by some addition of interest, in the nature of a premium of insurance.

Whenever there happens to be a question about the interest of advances, a careful distinction should be made between these, its two component parts; otherwise, there is always danger of error; and individuals, or even the agents of public authority, will be apt to involve themselves in useless and disastrous operations.

Thus, the practice of usury has been uniformly revived, whenever it has been attempted to limit the rate of interest, or abolish it altogether.

The severer the penalties, and the more rigid their exaction, the higher the interest of money was sure to rise; and this is what might naturally have been expected; for the greater the risk, the greater premium of insurance did it require to tempt the lender. At Rome, while the republican form of government lasted, the interest of money was enor- mous, as it was natural to suppose, even if it were not a mat- ter of history. The debtors, who are always the plebeians, were continually threatening their patrician creditors. The laws of Mahomet have prohibited loans at interest; and what is the consequence in the Mussulman dominions? Money is lent at interest, but the lender must be indeminified for the use of his capital, and, moreover, for the risk incurred in the contraven- tion of the law. It was the same in Christian countries, so long as loans at interest were illegal= and where the necessity of borrowing enforced the toleration of the practice amongst the Jews, such were the humiliation, oppression, and extortion, to which, on one pretext or another, that nation was exposed on this score, that nothing short of a very heavy rate of inter- est could indemnify for such repeated loss and mortification. Letters patent of the French king John, bearing date in the year 1360, are now extant, which authorises the Jews to lend on pledges at the rate of four deniers per week for every livre of twenty sous, which is more than eighty-six per cent per It is, therefore, not surprising that the ecclesiastical, and at several periods, the civil codes, likewise, should have inter- dicted loans at interest; and that, during the whole of the middle ages, throughout the larger states of Europe, this traf- fic should have been reputed infamous, and abandoned to the Jews. — The little manufacturing or commercial industry of those days was kept alive by the scanty capital of the dealers and mechanics themselves= and agricultural industry, which was pursued with somewhat better success, was supported by the advances of the lords and great proprietors, who em- ployed their serfs or retainers on their own account. Loans were contracted for, not with a view of profitably employing the money, but merely to satisfy some urgent want, so that the exactor of interest was profiting by a neighbour’s distress; and it may easily be conceived, that a religion, founded on the principle of fraternal love, as the Christian religion is, must disapprove a calculating spirit, that even now is a stranger to generous bosoms, and repugnant to the common maxims of morality. — Montesquieu 57 attributes the decline of com- merce to this proscription of loans at interest; which was un- 183Jean-Baptise Say, A Treatise on Political Economy annum; but in the year following,, the same monarch, though recorded as one of the most scrupulous performers of his royal word that our annals can boast of, caused the quantity of pure metal contained in the coin to be reduced; so that the lenders no longer received back a value equal to what they had lent. barous habits then prevalent among the nations with whom they traded; for different nations were then much greater strangers to each other, than they are at present, and commer- cial laws and customs much less respected; and in part to the imperfections of the art of navigation. There was more dan- ger in a voyage from the Pireaus to Trapezus, though but three hundred leagues distant, than there is now in one from L’Orient to China, which is a distance of seven thousand. Thus, the improvements of geography and navigation have contributed to lower the rate of interest, and ultimately to reduce the cost price of products. Loans are sometimes contracted not for a productive investment, but for mere barren consumption. Transactions of this kind should always awaken the suspi- cion of the lender, inasmuch as they engender no means of repayment of either principal or interest. If charged upon a growing revenue, they are, at all events, an anticipation of that revenue; and if charged upon any of the sources of rev- enue, they afford the means of dissipating the particular source itself. If there be the security neither of revenue nor of its source, they barely place the property of one person at the wanton disposition of another.

This explanation will alone suffice to justify the very heavy interest demanded, without at all taking into calculation, that at a period, when loans were negotiated, not to forward in- dustrious enterprises, but to support war, to feed extravagance, and to further the most hazardous projects; at a period when laws were powerless, and lenders unable legally to enforce their claims against their debtors, it required a very ample premium to cover the risk of non-payment.

In fact, the premium of insurance absorbed the far greater part of what passed under the name of interest, or usury= and the actual bonafide interest, the rent for the use of capital lent, was reduced to a very trifle; for, though capital was scarce, there is reason to suppose. that productive employment was still more so. Of the 86 per cent interest paid in the reign of king John, per- haps not more than 3 or 4% was the equivalent for the productive service of the capital advanced; for all productive labour is better paid now, than it was in those days; and even now-a-days the rent of capital can scarcely be reckoned higher than 5 per cent; the excess is so much premium of insurance for the lender’s indemnity.

Among the circumstances incident to the nature of the em- ployment, which influence the rate of interest, the duration of the loan must not be forgotten; ceteris paribus, interest is lower when the lender can withdraw his funds at pleasure, or at least in a very short period; and that both on account of the positive advantage of having capital readily at command, and because there is less dread of a risk, which may probably be avoided by timely retreat.

The facility of immediate negotiation presented by the transferable bills and notes of modern governments, is one principal cause of the low rate of interest, at which many of these governments are enabled to borrow. 59

This interest, in my opinion, hardly covers the risk of the lender; but he always reckons on the certainty of selling his securities before the moment of catastrophe, should any serious alarm be entertained.

The public securities that are not negotiable, bear a much higher interest; such, for instance, as the old personal annuities in France, which the government generally sold at the rate of 10 per cent a high average for young lives. Wherefore the Genevese acted with excellent judgment, in settling their annuities on thirty lives of well- known public characters. By this means, they made their annuities negotiable, and so contrived to get the rate of interest of securities not negotiable, upon securities that were nego- tiable.