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

We have shewn in the 28th chapter of the second book, in examining the principles which regulate the prices of subsistence, that the only thing which can fix a standard there, is frequent and familiar alienation. The same holds true of money. Were we to suppose a state, where borrowing and lending are not common, and where the laws fix no determinate interest for money, it would hardly be possible to ascertain the rate of it at any time. This was the case of old.

Before the reign of Henry VIII. of England, anno 1545, there was no statute regulating the rate of interest in that kingdom. The reason is very plain. In those days there was little circulation, and the borrowing upon interest was considered as a mortal sin. The consequence of this was, that usurers, having nothing but conscience to restrain them, carried the price of their money to a level with the pressing occasion of spendthrifts, while others, from friendship, lent for no interest at all. Henry fixed the rate of interest at 10 per cent. and his cotemporary, Francis I. of France, anno 1522, (who was the first who borrowed money in a regular manner upon the town-house of Paris) fixed the interest at the 12th penny, that is, at 8⅓ per cent.

In those days, it was impossible for a statesman to determine any just rate for interest; and accordingly we find history filled with the extortion of usurers, on one hand, and the violence and injustice of Princes and ministers towards those who had lent them money, on the other: was it then any wonder, that lending at interest was universally cried out against? It really produced very little good, and was the cause of manifold calamities to a state. When the Prince borrowed, it was when in the most urgent distress: those who lent to him, foresaw the danger of being plundered if they refused, and of being defrauded as soon as the public distress was over: for this reason they exacted the most exorbitant interest: the consequence was, that the people were loaded with the most grievous taxes, and the tax-gatherers were the Prince’s creditors, to whom such taxes were assigned.

In our days, trade, industry, and a call for money for such purposes, enable the borrower to enrich himself, to supply the wants of the state, and to pay his interest regularly.

If we compare the two situations, we shall find every disadvantage attending the former, and every advantage connected with the latter.

Without good faith there is no credit; without credit there is no borrowing of money, no trade, no industry, no circulation, no bread for the lower classes, no luxury, not even the conveniencies of life, for the rich. Under these circumstances, there can be no rule for the rate of interest; because borrowing cannot be frequent and familiar.

In proportion, therefore, as borrowing becomes frequent and familiar, the rule for fixing the rate of a legal interest becomes more practicable to a statesman. Let me take a step farther.

We have said, that it is the fluctuation of the double competition between borrowers and lenders, which occasions the rise and fall of the rate of interest; I must now point out the principles which occasion this fluctuation.

Were the interests of trade and industry so exactly established, as to produce the same profit on every branch, the money borrowed for carrying them on, would naturally be taken at the same rate; but this is not the case: some branches afford more, some less profit. In proportion, therefore, to the advantages to be reaped from borrowed money, the borrowers offer more or less for the use of it.

Besides the class of men who borrow in order to profit by the loan, there is another class, who borrow in order to dissipate. The first class never can offer an interest which exceeds the proportion of their gains: the second class, finding nothing but want of credit to limit their expence, become a prey to usurers. Were it not then upon account of these last, there would be no occasion for a statute to regulate the rate of interest. The profits on trade would strike an average among the industrious classes; and that average would fall and rise, in proportion to the flourishing or decay of commerce.