May not the burdens and disadvantages of interest be mitigated or minimised? Such a result could conceivably be reached in two ways: the sum total of interest might be reduced, and the incomes derived from interest might be more widely distributed.
Reducing the Rate of Interest
No considerable diminution of the interest-volume can be expected through a decline in the interest rate. As far back as the middle of the eighteenth century, England and Holland were able to borrow money at three per cent. During the period that has since intervened, the rate has varied from three to six per cent. on this class of loans. Between 1870 and 1890, the general rate of interest declined about two per cent., but it has risen since the latter date about one per cent. The Great War now (1916) in action is destroying an enormous amount of capital, and it will, as in the case of all previous military conflicts of importance, undoubtedly be followed by a marked rise in the rate of interest.
On the other hand, the only definite grounds upon which a decline in the rate can be hoped for are either uncertain or unimportant. They are the rapid increase of capital, and the extension of government ownership and operation of natural monopolies.
The first is uncertain in its effects upon the rate of interest because the increased supply of capital is often neutralised by the process of substitution. That is, a large part of the new capital does not compete with and bring down the price of the old capital. Instead, it is absorbed in new inventions, new types of machinery, and new processes of production, all of which take the place of labour, thus tending to increase rather than diminish the demand for capital and the rate of interest. To be sure, the demand for capital thus arising has not always been sufficient to offset the enlarged supply. Since the Industrial Revolution capital has at certain periods and in certain regions increased so rapidly that it could not all find employment in new forms and in old forms at the old rate. In some instances a decline in the rate of interest can be clearly traced to the disproportionately quick growth of capital. But this phenomenon has been far from uniform, and there is no indication that it will become so in the future. The possibilities of the process of substitution have been by no means exhausted.
The effects of government ownership are even more problematical. States and cities are, indeed, able to obtain capital more cheaply than private corporations for such public utilities as railways, telegraphs, tramways, and street lighting; and public ownership of all such concerns will probably become general in the not remote future. Nevertheless the social gain is not likely to be proportionate to the reduction of interest on this section of capital. A part, possibly a considerable part, of the saving in interest will be neutralised by the lower efficiency and greater cost of operation; for in this respect publicly managed are inferior to privately managed enterprises. Consequently, the charges to the public for the services rendered by these utilities cannot be reduced to the same degree as the rate of interest on the capital. On the other hand, the exclusion of private operating capital from this very large field of public utilities should increase competition among the various units of capital, and thus bring down its rewards. To what extent this would happen cannot be estimated even approximately. The only safe statement is that the decline in the general rate of interest would probably be slight.
Need for a Wider Distribution of Capital
The main hope of lightening the social burden of interest lies in the possible reduction in the necessary volume of capital, and especially in a wider distribution of interest-incomes. In many parts of the industrial field there is a considerable waste of capital through unnecessary duplication. This means that a large amount of unnecessary interest is paid by the consumer in the form of unnecessarily high prices. Again, the owners of capital and receivers of interest constitute only a minority of the population of all countries, with the possible exception of the United States. The great majority of the wage earners in all lands possess no capital, and obtain no interest. Not only are their incomes small, often pitiably small, but their lack of capital deprives them of the security, confidence, and independence which are required for comfortable existence and efficient citizenship. They have no income from productive property to protect them against the cessation of wages. During periods of unemployment they are frequently compelled to have recourse to charity, and to forego many of the necessary comforts of life. So long as the bulk of the means of production remains in the hands of a distinct capitalist class, this demoralising insecurity of the workers must continue as an essential part of our industrial system. While it might conceivably be eliminated through a comprehensive scheme of State insurance, this arrangement would substitute dependence upon the State for dependence upon the capitalist, and be much less desirable than ownership of income-bearing property.
The workers who possess no capital do not enjoy a normal and reasonable degree of independence, self respect, or self confidence. They have not sufficient control over the wage contract and the other conditions of employment, and they have nothing at all to say concerning the goods that they shall produce, or the persons to whom their product shall be sold. They lack the incentive to put forth their best efforts in production. They cannot satisfy adequately the instinct of property, the desire to control some of the determining forms of material possession. They are deprived of that consciousness of power which is generated exclusively by property, and which contributes so powerfully toward the making of a contended and efficient life. They do not possess a normal amount of freedom in politics, nor in those civic and social relations which lie outside the spheres of industry and politics. In a word, the worker without capital has not sufficient power over the ordering of his own life.