Chap. VI : What would be the Consequence of reducing, by a British Statue, the legal Interest of Money below the present

When Great Britain borrows money upon the public faith, the rate of interest is always stipulated, and these stipulations must be religiously fulfilled, or credit will be at an end.

The regulations then proposed to be made, must refer to contracts of loan entered into by private parties only.

The current value of money, I think, is best to be determined by the price of stocks. If a 4 per cent sells at par, money may be said to be then at 4 per cent. If the same stock fall to 89, then the value of money rises to near 4 1/2: if the same stock rise to 114, then the value of money falls to about 3 1/2; and so in proportion.

According, therefore, as stock is found to rise, the price of money falls, and vice versa.

Suppose, then, the price of money to be at 4 per cent and that government should pass a law, forbidding any man to lend at above 3 per cent what would be the consequence? This is exactly the expedient proposed by Child: money then was at 6 per cent and he proposes, by a law, to bring it, all at once, to 4 per cent without alleging that money was then commonly got by private convention at so low a rate.

Would not the consequence be, that the creditors of private people would demand their money, in order to get 4 per cent in buying stock, and would not this additional demand for stocks make them rise? I answer in the affirmative, unless money could be employed abroad, so as to produce at least 4 per cent to the lenders, free of all charge of commission, etc. If it could not, I have little doubt, but that money would soon fall to the legal interest of 3 per cent land would rise to 40 years purchase; and landed men would profit of the rise, as Child says was the case in his time. The whole inconvenience would be limited to the immediate effects of the sudden revolution; which would occasion so great a demand upon the landed interest for the capitals due by them as to reduce them to an utter incapacity of answering it. This might be, in some measure, prevented, by a clause in the act, allowing a certain time for the liquidation of their debts. But who will pretend to foretell the immediate consequences of so great a stagnation of credit, and borrowing on land security? The purses of all monied people, would, for some time at least, be fast shut against their demand. What a shock again, would this be to all inland trade, what a discouragement to all the manufacturing interest, what distress upon all creditors for accounts furnished, and upon those who supply daily wants! I think, that although in a year or two, the first effects might come to disappear, and a notable advantage result, in the main, to the commercial interest of Great Britain, yet the distress in the interval might prove so hurtful, as to render it quite intolerable. The common people who live by the luxury of the rich, in the city of London, and who are constantly actuated by the immediate feelings of present inconveniences, might lose all patience; and being blown into a ferment, by the address of the monied interest (whose condition would be made to suffer by the scheme) might throw the state into confusion, and even impress the nation with a belief, that high interest for money, instead of being hurtful, was essential to their prosperity.

I have said above, that if we suppose that the money drawn from debtors, could not be placed abroad, free of all deductions, at a rate equal to the then value of money (supposed for the sake of an example, to be at 4 per cent), then money would fall to 3 per cent and the stocks would rise in proportion.

But let us suppose (what perhaps is the matter of fact) that the extensive operations of trade and credit, do actually fix an average for the price of stocks, from the value of money in other nations in Europe. Would not then the consequence of bringing down the rate of legal interest, below this level, be, to send out of the kingdom all the money now circulating on private security, real and personal? Would not this destroy all private credit at one blow? Would it not have the effect of preventing, among individuals, the loan upon interest altogether? What would become of the bank of England, and all other banks, whose paper in circulation is all in the hands of private people? Is not every man who has a bank note, a creditor on the bank? And would not the same interest which moved other creditors to exact their debts, under such circumstances, also move many holders of bank notes to demand payment of them? Would not a run of this nature, for a few weeks only, throw the whole nation into the most dreadful distress? May we not even suppose, that upon such an occasion, the monied interest (from a certainty of disappointing the intention of government in making the law) might form a concert among themselves to lock up their money, even although it should remain dead in their hands for a few months? What would then become of the improvement of land? Is there an industrious farmer any where to be met with, who does not borrow money, which he can so profitably turn to account upon his farm, even though he receive it at the highest legal interest? These and many more inconveniences might manifest themselves, were government to force down the value of money, beyond the ordinary operations of demand and competition: and to what purpose have recourse to authority, when it is most certain, that without any such expedient the same end may be compassed?

If it be true, as I believe it is, that the funds, or public debts of a state where credit is well established, are commonly negotiated abroad; there must, from such negotiations result an average for the value of money, by the operations of credit over the commercial world: and if it be true, that no law can be framed so as to restrain mercantile people, and those who trade in money, from turning it to the best account; then all that should be proposed by government, is, to preserve the value of it at home, within this standard. For which purpose, nothing more is necessary than to prevent the competition of the dissipating class of inhabitants, from disturbing the rate which commerce may establish from time to time. This is accomplished by the methods above hinted at, and which in the next chapter shall be more largely insisted on. If, by prudent management, the conventional rate of interest, can thus be brought below the legal, then there may be no harm in diminishing the latter by statue, not however quite so low as the conventional standard; but so as to leave a reasonable latitude for gentle fluctuations above it. From what I have said, I still think I had reason to object to Child's plan for forcing down the interest of money by statute: and had he lived to the present time, I am persuaded he would have come into this opinion.