[183-1] It is one of Ricardo's (Principles, ch. 21) chief merits, that he demonstrated the groundlessness of the opinion that the mere increase of capital must, on account of the competition of capitalists, lower the rate of interest, as is assumed by Adam Smith, I, ch. 9, J. B. Say, Traité, II, 8, and others. Compare also, John Stuart Mill, Principles, IV, ch. IV, 1.
[183-2] Storch, Handbuch, II, 20.
[183-3] Frequent withdrawals of capital must, other circumstances being the same, temporarily raise the rate of interest. In the long run, however, the question is decided by this: whether public opinion considers labor a greater sacrifice than the saving of capital. Compare Roesler, loc. cit., 8.
[183-4] Compare Hermann, Staatsw. Unters., 240 ff. Very much depends on whether the new increased consumption (of workmen when wages are rising, of capitalists when wages are declining) is of goods which are mainly the product of large capital, large factories, etc., or chiefly of common labor, (von Mangoldt, Grundriss, 155 seq.) When Adam Smith suggests that the relation between wages and the profit of capital is determined by this: whether there is a market demand for more work or more commodities, for more "work to be done" or "work done" (I, ch. 7), he is, spite of appearances, very unsatisfactory. Malthus distinguishes a restrictive principle of the rate of interest, viz.: the return made to the least productive agricultural capital, and a regulative one, viz.: the reciprocal relation between demand and supply of capital and labor. (Principles, ch. 5, sec. 4.) Ricardo, ch. 6, makes the profit of capital at all times and in every country depend on the quantity of labor which it is necessary to expend on the land which pays no rent, in order to satisfy the wants of workmen—a very correct theory.
Only Ricardo himself (ch. 21) and his school postulate altogether too unconditionally that their wants would always coincide with the minimum of maintenance or support. Thus, for instance, J. S. Mill, Principles, IV, ch. 3, 4. However, Mill instead of Ricardo's "wages" employs the better expression, "cost of labor." Senior teaches that the distribution of the aggregate result between laborers and capitalists depends on the anterior course of both classes: on the value of the capital previously employed by capitalists to produce the means of satisfying working men's wants, and on the number of workmen which the previous laboring population have brought into existence. (Outlines, 188 ff.) Concerning von Thünen's vain attempt at a general formula, see supra, § 173. Fourier's idea that 5/12[TN 19] of the product should be distributed among labor, 3/12 among talent, and 4/12 among capital, is entirely baseless. (N. Monde, 309 ff.) Considérant, Destinée sociale, 192 ff. As early a writer as H. Boden, Fürstliche Machtkunst, 1700 and 1740, 42, came strikingly near the truth. According to him, a low rate of interest is produced by four circumstances: surplus capital, a dearth of landed estates, a want of credit and exact justice, and lastly, the heavy taxation of capital.
[183-5] Thus, in the last century, Spanish capitalists loaned capital readily to sure commercial companies, at from 2 to 3 per cent. per annum. (Bourgoing, Tableau de l'Espagne, I, 248.) The contemporary low rates of interest in Hannover, Büsch, Geldumlauf, VI, 4, 12, endeavors to explain by the absence of opportunities for investment, as no one dared to loan to any extent on fiefs or on the land of the peasantry, and because there was no law governing bills of exchange, etc.
HISTORY OF THE RATE OF INTEREST.
Among barbarous nations, the loaning of capital is wont to happen so seldom, and to be limited so strictly to near relations, that it does not yet occur to any one to stipulate for a regular compensation therefor.[184-1] But, however, when they pass from this state to interest proper, the rate must be, of course, very high.[184-2] The premium for insurance is here very great, the possibility and inclination to accumulate capital exceedingly small. Even of the existing supply of capital, a great part remains idle, because the faculty and the institutions necessary to concentrate it and permit it to flow are wanting. (§ 43.) The unskillfulness of labor is more than overcome by the excess of fertile and naturally productive land, of rich sites still unoccupied, the cream of which, as it were, needs only to be culled. Population is indeed sparse, but the usually prevailing absence of freedom of the lower classes prevents wages claiming the full benefit of competition.[184-3] This last circumstance is especially important.[184-4] For a given amount of the national income and of rent, every depression of wages must obviously raise the rate of interest, and every enhancement of wages lower it.[184-5]
[184-1] Tacit., Germ., 26; Marculf, Form., 18, 25 ff., 35; Savigny, Ueber das altrömische Schuldrecht, in the transactions of the Berlin Academy, 1833, 78 seq.