The fact that in commerce, etc., the rate of interest on capital loaned for short periods of time (discount) is subject to great fluctuations, while the mortgage rate of interest, for instance, remains the same throughout, depends on similar causes.[182-1] Yet there are contingencies in trade which, when taken immediate advantage of, promise enormous profits, but which may disappear within a month; risks of the most dangerous kind which can be conjured only by the immediate aid of capital. These are both sufficient grounds of a high rate of interest. Again, there are times of the profoundest calm in the commercial world, during which capitalists are perfectly willing to make loans at a low rate of interest, provided they are sure to be able to get back their capital with the first favorable breeze that blows. Agriculture is too immovable to come opportunely to the assistance of capitalists, here as a receiver and there as a loaner of capital. As the cycle of its operations is gone through usually only in a series of years, sudden influxes or outflows of capital would cause it the greatest injury.[182-2]
[182-1] Nebenius, Oeff. Credit, I, 74 ff. Thus, Hamburg discount towards the end of the last century fluctuated between 2½ and 12 per cent., while the capital invested in agriculture brought an interest almost invariably of 4 per cent. (Büsch, Geldumlauf, VI, 4, 19.) At the same time, in Pennsylvania, the usual rate of interest was 6 per cent. per annum, and the rate of discount not unfrequently from 2 to 3 per cent. a month. (Ebeling Geschichte und Erdbeschreib. von Amerika, IV, 442.) During the crisis of 1837, it happened that ¼ per cent. a day was paid. (Rau, Archiv. N. F. IV, 382.) In the Prussian ports, during the crisis of 1810, it is said that in July the rate of discount was 2½ per cent. a month. (Tooke, Thoughts and Details, I, 111.) In Hamburg and Frankfort the rate of discount rose in the spring of 1848, but declined in June to 2; until December it was 1¼, until the summer of 1849, ¾ per cent. (Tüb. Zeitschr., 1856, 95.) Rate of discount in France, about 1798, at least 2 per cent. a month. (Büsch, loc. cit., IV, 52.) Half a year previous, capital employed in the purchase of land paid an interest of from 3 to 4 per cent. Legal interest was 5 per cent.; discount, at most, 6 per cent.; in very prosperous times 8-9, per cent. (Forbonnais, Recherches et Considérations, I, 372.)
[182-2] Remarkable case in Cicero's time in which bribery, carried on on a large scale, raised the rate of discount from 4 to 8 per cent. Cicero ad. Quint. M, 15; ad. Att. IV, 15.
EFFECT OF INCREASED DEMAND FOR LOANS.
The price paid for the use of capital naturally depends on the relation between the supply and demand, and especially of circulating capital. The increase of the supply need no more unconditionally lower the rate of interest than the price of any other commodity. If 50 hunters kill 1,000 deer yearly, and give 100 deer per annum as interest to the capitalists who provided them with ammunition and rifles, a second capitalist with an equal number of rifles and an equal amount of ammunition may appear on the scene. If now 2,000 deer a year are killed, the rate of profit of the capitalists will probably remain the same. But if the woods are not rich enough in game for this, or the hunters not numerous enough, too indolent, or too easily satisfied, the rate of interest falls.[183-1]
The difficulties in the way of the desired increase of capital are here of great importance. The smaller the surplus over and above their absolutely necessary wants, which the people produce, the less their tendency to make savings, the less the inclination to capitalization; and the less the security afforded by the law is, the higher must the rate of interest be to induce people to face these difficulties. We may very well transfer the idea of cost of production to this condition.[183-2]
The demand for capital depends, on the one hand, on the number and the solvability of borrowers, especially of non-capitalists like landowners and workmen; and, on the other hand, on the value in use of the capital itself. Hence the growth of population is, other circumstances being the same, a means to raise the rate of interest; because it infallibly increases the competition of borrowers of capital, even if the increased rate must take place at the expense of wages. The solvability or paying capacity of the land-owning class as contrasted with the capitalists can, in the last analysis, depend only on the extent and fertility of their lands and on the quality of their agricultural husbandry; the solvability or paying capacity of the working class, only on their skill and industry. Where these have grown, an increase of the rate of interest may be found in connection with an absolute growth of the rate of wages and of rent, because the aggregate income of the nation has become greater.
The value in use of capital, which is more homogeneous in proportion as it has the character of circulating capital (res fungibiles) is, in most instances, synonymous with the skill of the working class, and the richness of the natural forces connected with it. The deciding element, therefore, is the yield of the least productive investment of capital which must be made to employ all the capital seeking employment. This least productive employment of capital must determine the rate of interest customary in a country precisely as cost of production on the most unfavorable land determines the price of corn (§§ 110, 150), and as the result of the work of the laborer last employed does the rate of wages. (§ 165.)
What portion of the total national income, after deduction is made of rent, shall go to the capitalists and what portion to the working class, will depend mainly on whether the capitalists compete more greedily for labor or the laboring classes for capital.[183-3] If, for instance, capital should increase more rapidly than population, there must be a relative increase in wages, and vice versa.[183-4] This is true especially of that peculiar kind of higher wages which we shall (§ 145, ff.) designate as the "undertaker's profit." The smaller the number of persons engaged in enterprises is, in comparison with the number of retired persons who live on their rents, incomes, etc., the smaller is the portion of the so-called net profit of enterprise the latter must be satisfied with in the shape of interest.[183-5]