Similar variations in rates of interest are found between different classes of borrowers, due to the variation of risk. Thus promises to pay on demand, with personal security of two good paymasters, will usually be accepted at very low rates of interest, since the owner of wealth so loaned feels sure of having the wealth when he wants it. Government loans in times of peace and prosperity being essentially without risk, approach very near the same low rate of interest, since the owner of these securities believes himself at any time able to command the use of his wealth for any purpose by a transfer of these securities. If for any reason, official or legislative, public confidence is disturbed, rates of interest on such securities rise proportionally through the sale at a discount. Even a law prohibiting such sale would have exactly the contrary [pg 288] effect to that intended, because of creating additional distrust. Loans upon time, if secured by productive landed estate not subject to unusual risks, can usually be made at moderate rates, and form a fair basis for judging the normal interest in any region. Loans secured by chattel mortgage bring higher rates, because the chattels involved are a less certain means of payment than landed estate. Loans secured upon unproductive lands, whether in prospective farms or city lots, are made at high rates, not only because these lands fail to furnish in themselves the means of interest payment, but because they represent the speculative energy of their owners with unmeasured risk. All these variations and fluctuations are found in every community, and grow out of the natural wants of borrowers and the natural feelings of lenders. Custom may have something to do with rates in special cases, as it has to do with wages and retail prices, but in the range of frequent dealing between borrowers and lenders rates follow the higgling of the market as truly as prices of commodities.
Usury laws.—It has been the custom for ages to distinguish between interest and usury, interest being supposed to be a fair payment for use of borrowed wealth and usury a larger payment in the distress of a borrower. Usury once meant only use, the equivalent of interest, but since it was once prohibited by law in England, the name is now attached to what is still prohibited by law, an interest above a definite rate prescribed by statute. The object of such legal restrictions is evidently protection of the borrower against [pg 289] extortion. Yet it is practically proved by experience of the world that such restrictions operate against the borrower by limiting lenders in open market and sometimes closing the market entirely. The would-be borrower, under adverse conditions in the market, is obliged to find in some byway a lender whose scruples against infringement upon the law may be overcome by extra payment. Under such circumstances there is no market rate, and borrowers bind themselves in numerous ways to special payments not in direct conflict with the letter of the law. Evasions of restrictions under such circumstances are inevitable. A farmer buys a hundred-dollar horse, giving a note, payable in one year without interest, for $120; or he sells his note to a neighbor at what he will give; or he goes to a broker and pays him a commission for securing a loan at the legal rate of interest. Even at a bank, prohibited by law from taking more than the legal discount on the pain of losing its charter, a borrower may give his note for $500, tacitly agreeing to leave on deposit a fifth of the sum, thus paying interest on $500 for the use of $400.
All these forms of evasion are easily adopted with very little possibility of conviction, even when usury is charged. Even in the most flagrant violation of laws the chances of conviction are greatly restricted by the fact that a prosecuting witness, who, after making a contract in violation of law, takes advantage of that law to violate his contract, destroys all credit for himself, and so comes under the ban of society. The best methods of public restriction against extortion of any [pg 290] kind in interest, in rent or in prices of commodities are those that provide for publicity of contracts. Where no legal restrictions upon rates of interest are fixed, current rates are much more likely to be public and widely advertised, and extortion is less possible than where the law encourages secret contracts by the need of evasion. It is quite possible that society will find a way of securing against the extortion of pawn-shops and secret brokerage by a public organization competing honestly for the same patronage. Such companies have been organized in a few cities with success in meeting the wants of the distressed, under such restrictions of charter and management as insure fair dealing. It seems as possible to regulate such matters by license and inspection as it is to control the hack-men of a whole city.
Loan associations.—It is proper in this connection to refer to loan associations, the growth of recent years. The purpose of such associations is direct coöperation in borrowing and lending among neighbors similarly situated as to property. They are especially adapted to assist wage-earners in securing comfortable homes, for which they can pay gradually from their earnings. The system, however, has been widely extended, to the advantage of different classes of property owners, even to the establishment of coöperative banks among farmers. The essentials to success and safety in such associations are, first, that they shall be strictly local, confined to territory within which mutual acquaintance can give a fair basis for genuine credit; second, the objects sought by individual borrowers must be fairly equal in [pg 291] risk as well as in ends to be served; third, the management must be thoroughly trustworthy, with a genuine interest of all shareholders in the selection of officers; fourth, all shareholders should have similar relations to the association as both borrowers and lenders, and each shareholder's responsibility should cease at the final settlement of his obligation; fifth, provision should be made for frequent auditing of accounts, official reports and inspection.
Uses of interest.—In closing the subject of interest, it is well to recall the fact that interest exists in the very nature of productive energies, and that ability to transfer the use of property in any form of capital without transferring the interest is most useful to society. It sustains the aged, who must otherwise be wholly dependent, and the childhood of the race in all development of body, mind and soul. Interest sustains the mass of educational and charitable institutions, as well as the individual life of multitudes whose present earnings could not keep body and soul together. Moreover, the possibility of paying interest secures to the enterprising young men of the world the opportunity to make their highest energies productive. Thus the matter of interest pervades the thrift of society as well as the sustenance, and cultivates everywhere that present economy which provides for the rainy day. The fact that nearly one-fifteenth of the population of the United States are depositors in savings banks alone proves the extent and importance of interest to the general welfare. With added facilities for depositing small savings in postal savings banks, the advantage would be still more widely [pg 292] felt, and the general economy in the use of both earnings and capital would be promoted. All this extension of interest-bearing increases the tendency everywhere noticed to a diminution of current rates. With a multiplication of capital in any community, the rates of wages increase, while the rates of interest diminish. Both tendencies are natural effects of the same cause.
Chapter XXII. Principles Of Land Rent.
Rent values of land.—The general character of rent, as connected with the use of fixed capital and so associated with interest, has already been touched upon. In that sense it depends upon the fact that possession of wealth is universally an advantage in production of future wealth and is subject to all the peculiarities affecting interest. But land rent, as represented in the value of farms, city lots, mineral claims, fisheries, water privileges, wharves, etc., has peculiarities of its own. Its connection directly with rural wealth in the value of farm lands makes it of special importance in this discussion. While rent, as such, is comparatively unimportant to farming interests in the United States, where most of the land is worked by its owners, the principle is involved as fully in the transfer value of farms as it is in countries where land is almost universally rented for farm purposes, like England and Ireland. It is simply necessary to remember that the rent question in such a country as England, where land is seldom transferred from owner to owner (but all values are expressed in the terms of annual rental), is quite different in form from the question in our country, where transfer of landed property is free and common, and the rental is regulated [pg 294] largely by current rates of interest upon land values. In England, too, the rent question involves long standing relations between the people and landed proprietors who, for generation after generation, have been rulers of the people as well as landlords, and are still the natural magistrates over the renters upon their estates. Yet the principal occasion for rents in such countries is exactly the same as that for varying values of land in the United States. Peculiar intricacies of methods of rent-paying and of terms in leases, varying with the customs of different countries, have little importance in the United States, except for comparisons.
The United States afford superior advantages for the study of land values fairly independent of restrictive laws or customs. The rapid settlement of wild lands by farmers and the rapid building of cities under free competition give the fairest illustration of tendencies in land values to be found in the world. The fact that the government for the past fifty years has encouraged the settlement of new land at the bare cost of establishing ownership makes the problem almost as simple as if the government had no voice in the distribution.