An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) / Being an essay on the science of domestic policy in free nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes

by Sir James Steuart

But although a statesman has it in his power to guard his people against the oppression of usury, by preventing the rate of money from rising above the ordinary standard of demand, he cannot equally force it down below this standard, even although the interests of trade should require it: because if the monied men can lend their capitals abroad, at a higher interest than they can procure for them at home, they will distress the landed interest, by demanding what they owe, and all the money will be sent abroad, as was the case in Scotland in 1762.

This was not the case a hundred years ago. No money then could be lent abroad by Englishmen; because those who would give high interest had no credit. Thus government could bring it down at will; monied men were forced to consent; and the price of land rose in proportion as interest fell.

As it is the extravagance of men of property which raises the rate of money above what is consistent with the interest of trade, the expedients to bring it down, are, 1. To circumscribe borrowing by the prodigal: 2. To suspend borrowing by the state: and 3. To throw as much public money as possible into the market, by paying off debts. When a statesman has by such measures brought the rate of money considerably below the legal price, he may, by a new statute, prevent its rising again so high as formerly; but still he must keep in his eye the rate of money, and state of credit in rival nations, in order to avoid the inconveniences already mentioned.

Chap. VI. If Great Britain were to regulate the rate of money below what the fluctuations of demand are commonly found to carry it, then in time of war, as soon as demand, which can be subject to no statute, got up to the high standard, the whole landed interest would be torn to pieces by their creditors: for the debtors could not borrow from one to pay another, because no man would give them credit. This would put an end to all their expence; the funds which supply it at present (the land-rents) would be carried off by creditors; and all the industrious who serve such proprietors of land would suffer considerably for want of employment. The conclusion which the generality of people would draw from this phænomenon would be, that high interest, instead of being hurtful, is advantageous to trade.

Chap. VII. Hence we may conclude, that low interest is principally advantageous for carrying on foreign commerce, and that the best method to keep it low, is to keep circulation full, by facilitating the melting down of property.

This expedient has been contrived by merchants in the establishment of banks upon mortgage; and there is a possibility that landed men, some centuries hence, may find out that they may imitate the example of traders, and contrive the means of borrowing cheaper than they can do at present.

Were a particular nation to carry such expedients into execution with success, it would have the effect of bringing down the rate of money every where. This would sink the general average of the whole, but never would prevent the operation of those principles by which it had been brought down; and the most intelligent nations would still have the same advantages as before, of keeping their interest low relatively to their neighbours, which is the great desideratum for the support of public credit, as well as of foreign trade.

Chap. VIII. But although it is of very great advantage to trade to have interest low, we cannot judge of the prosperity of trade from this circumstance alone.

That nation gains the most upon her trade who draws the greatest balance from the rest of the world. Now the balance cannot be judged of by the rate of interest; because this depends more upon manners and policy than upon the state of industry. Industry must be supported by superior dexterity, natural advantages, and promptitude of payments, as well as by low interest. Prompt payment alone, is of more consequence to the industrious populace, than a small difference upon the rate of interest. That encourages the whole class of manufacturers. Low interest is principally an advantage to the merchants who are obliged to employ credit for collecting their work; and merchants themselves who trade upon credit, often gain more by quick returns than what will compensate a considerable difference in the rate of interest. Low interest may more properly be called the barometer of public credit than of foreign commerce.

Chap. IX. From what has been said, I conclude, that the rate of interest does not sink as wealth increases; because it is influenced by many circumstances, which do not depend upon opulence. It depends upon the spirit and manners of a people, and will fluctuate with them.