Limitations of the Sacrifice Principle
Nevertheless these men would suffer no injustice if interest were now to be abolished. Up to the moment of the change, they would have been in receipt of adequate compensation; thereafter, they would be in exactly the same position as when they originally chose to save rather than consume. They would still be able to sell their capital, and convert the proceeds to their immediate uses and pleasures. In this case they would obviously have no further claim upon the community for interest. On the other hand, they could retain the ownership of their capital, and postpone its consumption to some future time. In making this choice they would regard future as more important than present consumption, and the superiority of future enjoyment as sufficiently great to compensate them for the sacrifice of postponement. Hence they would have no moral claim to interest on the ground of abstinence. In general, then, the sacrifice-justification of interest continues only so long as the interest continues. It extends only to the interest received by certain capitalists in certain circumstances, not to all interest in all circumstances. Therefore, it presents no moral obstacle to the complete abolition of interest.
Since probably the greater part of the interest now received cannot be justified on intrinsic grounds, and since that part of it which is thus justified could be abolished consistently with the rights of the recipients, let us see whether it is capable of justification for reasons of social welfare. Would its suppression be socially beneficial or socially detrimental?
The Value of Capital in a No-Interest Régime
The interest that we have in mind is pure interest, not undertaker's profit, nor insurance against risk, nor gross interest. Even if all pure interest were abolished the capitalist who loaned his money would still receive something from the borrower in addition to the repayment of the principal, while the active capitalist would get from the consumer more than the expenses of production. The former would require a premium of, say, one or two per cent. to protect him against the loss of his loan. The latter would demand the same kind of insurance, and an additional sum to repay him for his labour and enterprise. None of these payments could be avoided in any system of privately directed production. The return whose suppression is considered here is that which the capitalist receives over and above these payments, and which in this country seems to be about three or four per cent.
Would capital still have value in a no-interest régime, and if so how would its value be determined? At present the lower limit of the value of productive capital, as of all other artificial goods, is fixed in the long run by the cost of production. Capital instruments that do not bring this price will not continue to be made. In other words, cost of production is the governing factor of the value of capital from the side of supply. It would likewise fix the lower limit of value in a no-interest régime; only, the cost of producing capital instruments would then be somewhat lower than to-day, owing to the absence of an interest charge for the working capital during the productive process.
But the cost of production is not a constant and accurate measure of the value of artificial capital. The true measure is found in the revenue or interest that a given piece of capital yields to its owners. If the current rate of interest is five per cent., a factory that brings in ten thousand dollars net return will have a value of about two hundred thousand dollars. This is the governing factor of value from the side of demand. In a no-interest economy the demand factor would be quite different. Capital instruments would be in demand, not as revenue producers, but as the concrete embodiments, the indispensable requisites of saving and accumulation. For it is impossible that saving should in any considerable amount take the form of cash hoards. In the words of Sir Robert Giffen: "The accumulations of a single year, even taking it at one hundred and fifty millions only, ... would absorb more than the entire metallic currency of the country [Great Britain]. They cannot, therefore, be made in cash."[142] The instruments of production would be sought and valued by savers for the same reason that safes and safety deposit boxes are in demand now. They would be the only means of carrying savings into the future, and they would necessarily bring a price sufficiently high to cover the cost of producing them. One man might deposit his savings in a bank, whence they would be borrowed without interest by some director of industry. When the owner of the savings desired to recover them he could obtain from the bank the fund of some other depositor, or get the proceeds of the sale of the concrete capital in which his own savings had been embodied. Another man might prefer to invest his savings directly in a building, a machine, or a mercantile business, whence he could recover them later from the sale of the property. Hence the absence of interest would not change essentially the processes of saving or investment. Capital would still have value, but its valuation from the demand side would rest on a different basis. It would be valued not in proportion to its power to yield interest, but because of its capacity to become a receptacle for savings, and to carry into the future the consuming power of the present.
The question whether the abolition of interest by the State would be socially helpful or socially harmful is mainly, though not entirely, a question of the supply of capital. If the community would not have sufficient capital to provide for all its needs, actual and progressive, the suppression of interest would obviously be a bad policy. Most economists seem inclined to think that this condition would be realised; that, without the inducement of interest, men would neither make new savings nor conserve existing capital in sufficient quantity to supply the wants of society. Very few of them, however, pretend to be able to prove this proposition. So many complex factors with regard to the possibilities of saving and the motives of savers, enter into the situation that no opinion on the subject can have any stronger basis than probability. As a preliminary to our consideration of the question of abolition, let us inquire whether there exists any definite relation between the present supply of capital and the current rate of interest.
Whether the Present Rate of Interest Is Necessary
It is sometimes contended that the interest rate must be kept up to the present level if the existing supply of capital is to be maintained. The underlying assumption is that some of the present savers would discontinue that function at any lower rate, with the consequence that the supply of capital would fall below the demand. Owing to this excess of demand over supply, the rate of interest would rise, or tend to rise, to the former level. Therefore, the rate existing at any given time is the socially necessary rate. The rate of interest is said to be analogous to the rate of wages. For example; of ten thousand men receiving five dollars a day, nine thousand may be willing to work for four dollars rather than quit their present jobs. But the other thousand set their minimum price at five dollars. If the wage is reduced to four dollars these men will get employment elsewhere, thus causing such an excess of demand over supply as to force the wage rate back to five dollars. The same thing, it is contended, will happen when the high-priced section of the savers, "the marginal savers," discontinue saving on account of the artificial lowering of the rate of interest.