It is to-day evident to all sensible minds, that capital, like work, has a right to remuneration. Why? Because without the expectation of this remuneration, the possessor of the capital would forthwith consume it himself or allow it to waste away without use. This will be better understood in considering the two principal forms of remuneration for capital: interest and rent. Interest and rent are both the product of a capital loaned, but with this difference, that rent is the product of a fixed capital (house, field, workshop); while interest is the product of a circulating capital (money or paper).
The interest of capital represents two things: 1, the deprivation of him who loans, and who might consume his capital; 2, the risk he incurs, for capital is never loaned except to be invested, and consequently it may be lost. These are the two fundamental reasons which establish the legitimacy of interest, despite the prejudices which have long condemned it as usury, and the utopias which would establish the gratuity of credit.[24]
The principal reason against the legitimacy of interest is deduced from the sterility of money. “Interest,” says Aristotle, “is money bred from money; and nothing is more contrary to nature.” But, as Bentham remarks (Defense of Usury, letter 10), “if it be true that a sum of money is of itself incapable to breed, it is not the less true that with this same borrowed sum, a man can buy a ram and a sheep, which, at the end of a year, will have produced two or three lambs.” In other terms, as Calvin says, “it is not from the money itself that the benefit comes, it is from the use that is made of it.”
It has been said that he who loans does not deprive himself of his money, since he can do without it. (Proudhon, Letters to Bastiat, 3d letter.) But he does deprive himself of it, since he might have consumed it himself. The proof that a loan is a privation, is the pain men have in economizing and in investing their money. How many men are there who, in possession of a sum of one hundred francs, would not rather spend it than place it on interest?
As to what is called gratuitous credit, it could be possible only by being reciprocal. In fact, if I loan you my house, and you loan me in return your land, supposing they are of equal value, it is evident that, the one being worth as much as the other, and the two services equivalent, we need not pay each other anything; for it would be only an exchange of money. But nothing can be inferred from this, touching the most usual case: namely, where the capital is loaned by the possessor to him who does not possess; for then there is no reciprocity, consequently no gratuity.
As to the rate of interest it varies like all values according to the law of supply and demand in the money market. (See the Cours d’Economie Politique.) The greater the supply of capital the less dear it is. It is, then, the increase of capital that is to diminish interest and bring about a sort of relative gratuity. Every enterprise against capital will produce a contrary result.
As to the rent of capital, it has generally raised fewer objections than interest; for it is easier to understand that if I give myself the trouble to build a house, it is that it will bring me in something; but it is, on the whole, the same thing, with this difference, that circulating capital, running more risks than fixed capital, seems to have a still better right to remuneration.
The lender has then the right to exact a certain amount over and above the sum loaned. Certainly, he cannot exact it, as it often occurs among friends, and for very small sums. But as a principle, one is no more obliged to lend gratuitously, than to give to others gratuitously what they need.
In admitting that the interest of money is a legitimate thing, is one obliged also to admit that the money-lender has a right to fix the rate of interest as high as he wishes? Beyond a certain limit, will not the interest become what we call usury?
To which may be replied: