The every-day operations of a farming community illustrate both interest and rent in all their complications and definitions. Every farmer, in estimating the cost of his wheat crop, may properly calculate both the interest on his capital invested in tools, teams, machinery and wages, and the rent of his land, keeping distinct accounts of interest and rent; or he may combine in one account as interest the use of capital in machinery and land. If he owns the whole establishment, he is likely to combine both interest and rent with the return for his foresight and energy in managing the farm under the name profits. All these returns, however, come for different reasons, though under the same general principle of values expressed in the law of supply and demand. The farmer working a rented farm and the one working a mortgaged farm are alike paying both rent and interest, since every farm involves both the wealth accumulated by exertion and the wealth advanced by increasing population. While the owner of the mortgaged farm apparently pays interest, if at the end of the term of the mortgage the farm is returned to its former owner by foreclosure, the result is that the mortgagee, while nominally owner of the land, has simply been a renter. In a fair settlement of equities he will have paid [pg 282] for the use of the land he has cultivated. Interest and rent are thus seen to be terms separated rather by peculiarities of application than by difference of principle. It is proper, however, to treat them separately for the sake of more perfect understanding of the conditions applicable to each.
Chapter XXI. Principles Of Interest.
Reasons for interest.—The propriety of interest under any circumstances has often been questioned, and its rightfulness is still bitterly disputed. Both church and state have at times denounced the receiving of interest as criminal. Yet in actual practice of commercial life throughout the world interest has been sustained in all ages. The Jewish law prohibited interest between neighbors, where the reason for borrowing was assumed to be poverty, but authorized it in dealings with foreigners, where the transaction was assumed to be in trade. The principle upon which interest in all productive industry is actually founded is that capital, gained by exertion and saved by self-control, secures to its present possessor such advantages of time and choice of use for his abilities as can be given by nothing else. In the study of production we have seen that time-saving is an important result of capital in its various forms. A carpenter's kit of tools represents a value in use equal at least to the time he might consume in making them. He can afford to keep them for another's use only while they bring to him the advantage of that time-saving. His neighbor is willing to secure him in that advantage by paying him for the use of the [pg 284] tools all, or nearly all, that he gains by using tools over what he would have without them. The borrower will still be the gainer by opportunity to do work not possible without the tools. The bargain between borrower and lender, like any bargain, is a fair one only when both are benefited. The limits of fairness in the deal are naturally reached when a clear understanding of all conditions is had in open market. Neither borrower nor lender can take advantage of the other without fraud. Neither is under obligation to give to the other without an equivalent. The whole question rests upon service rendered, as truly as in any other bargain.
A large proportion of the opposition to interest arises from a misconception of the phrase, “borrowed money.” The fact is that borrowing and lending have to do chiefly with other forms of wealth. Most notes are given for the transfer of all sorts of property under a promise to return equal value in the future. Money may not enter into the transaction at all, except as the standard of value is in terms of money. Even when money is exchanged for a note, the borrower hastens to part with the money for the tools or provisions which make him a profitable producer. In payment of his note he offers money again, simply because it commands every desirable form of value for the owner of the wealth. If a farmer wants a wagon without the present means to buy, he offers the dealer his promise to pay after six months, when the corn crop just planted shall have matured. If the dealer cannot afford to hold the note because he needs the capital in his business, that others may be supplied with wagons, either the farmer [pg 285] or the dealer carries the note to some one who can afford to wait for returns, which may be either a banker, whose business provides just such accommodation, or a neighboring farmer who has just sold his wool. In either case, the first farmer borrows what he wants in carrying on his business, and at the end of six months, through a similar transaction of finding some one ready to take his product, pays his note with corn. (See p. [164].)
Interest is never confined to money transactions, nor even to those in which terms of money are used. All owners of productive wealth gain interest in its use as truly as in lending it. The farmer is not a money-lender in general, because his wealth will bring him larger profit by its use as stock or machinery. Even when he borrows from his neighbors, it is possible that he secures a larger interest, though he calls it profit, than he pays the lender. Interest is often paid in kind. The laughable story of borrowing a hen from one neighbor and a sitting of eggs from another, to be returned after a time with advantage, is actually paralleled by some transactions. A friend of mine having a magnificent pasture agreed with his neighbor, who owned a fine flock of ewes, to pasture that flock for three years, returning at the end of that time just twice the number of sheep received. He explained to me that he had made a great bargain, since the wool would pay for the use of the pasture, and he should have at the end of the three years a flock about equal to the flock he returned. This bargain involved interest at the rate of 33-⅓ per cent, without any terms of money, and an indefinite profit to the owner of the pasture in [pg 286] addition to an average price for such use. This profit is his return for the risk undertaken; since he promised to double the flock under any circumstances, and if foot-rot or scab had ruined the flock under his management, he would still have the same obligation toward the owner.
Such bargains will always be made so long as both parties are benefited, for no possible construction of laws and no diatribes of fanatics can prevent them. Any calculation as to the enormous growth of wealth by interest is more than balanced by a similar calculation of the multiplication of wealth by production. If Abraham's shekels at compound interest make an impossible sum of money, Abraham's flock of sheep with the ordinary rate of increase makes an equally impossible worldful.
Varying rates of interest.—Interest rates are subject to fluctuation and variations under the natural relations of borrowers and lenders very much as are prices of commodities. Variations, in comparison of different regions, are due to several causes. In any community where enterprise is great and industrial forces are unusually productive, the interest rates are high as compared with another community with few competitors in industrial enterprise and less productive forces. Thus in countries having new land producing large crops with moderate exertion and an increasing population ready to put in such crops, the return for the use of capital in provisions, stock and machinery is great, and the lender gets high rates of interest. If, added to this apparent productiveness, there are risks of failure from [pg 287] droughts, storms and injurious insects, the bargain is more favorable to the lender in expressed terms, though it may be less favorable in actual results. Thus risk enters practically into calculations of interest, whatever the circumstances.
Interest varies in the same region with a variation of energy and productive enterprise or of the speculative spirit undertaking great improvements, and on the other hand with any change of circumstances affecting universal credit. Distrust on the part of anybody reduces the readiness with which borrowers find lenders. In times of widespread lack of confidence, when all credit becomes debt, the borrower is likely to offer unusual rates of interest. And the few who are willing to lend at all expect enormous profits in such interest.