Chap. VII : Methods of bringing down the Rate of Interest, in Consequence of the Principles of Demand and Competition

I hope the arguments used in the foregoing chapter will not be construed as an apology for the high interest of money.

I entirely agree with Sir Josiah Child, that low interest is the soul of trade; the most active principle for promoting industry, and the improvement of land; and a requisite, without which it is hardly possible that foreign commerce can long be supported.

This proposition I take to be at this time universally admitted to be true; and did there remain, concerning it, the least doubt in the mind of any one, the writings of many, much better qualified than I can pretend to be, and among the rest those of the author just now cited, are sufficiently capable to remove it. I shall not therefore trouble my reader with a chapter upon this head, but only observe, that the terms high and low are constantly relative. Here the relation must be understood to regard other states, because when we speak of a rate of interest, we are supposed to mean something general in the country we are speaking of: accordingly, if we could suppose that, within the same state, the rate of interest should be lower in one city than any where else, this circumstance would give an advantage to such a city in all its mercantile operations.

I must farther observe, for the sake of connecting this part of our subject with our general plan, that the low interest for money is most essential to such states as carry on the most extensive foreign commerce.

In the infancy of industry, and before trade comes to be established, it is very natural that the coin of the country should be found in a great measure locked up in treasures: high interest tends to bring it forth, and in this respect works a good effect.

In proportion as alienation augments, money may be multiplied, by the melting down of solid property, as has been explained; and then the business of a statesman will be to contrive expedients for bringing the rate of it as low as possible, in order to support foreign trade, and to rival all neighbouring nations, where interest is higher. When foreign trade again comes to decline, from the multiplication of abuses introduced by luxury, low interest still continues to be useful, for supporting public credit, so necessary for defending a nation against her enemies.

If money consisted merely in the precious metals, which are not to be found in every country, but must be purchased with the produce of industry, and brought from far; and if no other expedient could be fallen upon to supply their place for the uses of circulation; then the possessors of these metals would in a manner be masters to establish for the use of them what rate of interest they thought fit.

But if this be not the case, and if money can be made of paper, to the value of all the solid property of a nation, (as far as occasion is found for it, by the owners of that property,) the use of the metals will be in a manner reduced to that of serving as a standard, for ascertaining the value of the denominations of money of accompt; perhaps for facilitating the circulation of small sums, and for paying a balance of trade to other nations.

When this comes to be the case, a statesman has it in his power to increase or diminish the extent of credit and paper money in circulation, by various expedients, which greatly influence the rate of interest.

The progress of credit has been very rapid since the beginning of this century. This has been almost entirely owing to the mechanical contrivances of trading men. Lawgivers have hitherto had but imperfect notions concerning the nature of it; and there still remains, in the womb of nature, some mighty genius, born to govern a commercial nation, who alone will be able to set it on its true principles. Let us in the mean time speculate concerning them.

We have said, and every one feels, that interest falls in proportion to the redundancy of money to be lent.

Now what is this money but property, of one kind or other, thrown into circulation? I speak of trading nations, who are not confined to the quantity of their specie alone.

When a man of property wants money, may he not go to a bank, which lends upon mortgage, and by pledging his security, receive money, which is in the same instant created for his use? Do not those notes circulate as long as they are found necessary for carrying on the affairs of the nation? that is to say, the accompts of debtors and creditors of all denominations; and as soon as the quantity of them exceeds this proportion, they stagnate, and return on the debtors in them, (the bank,) who is enabled to realize them, because the original security is still in their hands, which was at first pledged when the notes were issued. This realization is commonly made in the metals; because they are the money of the world: they are real and true riches, as much as land; and they have this advantage over land, that they are transportable everywhere.

Now, does it not appear evident, that what we have been describing is a round-about operation, which it is possible to shorten?

I beg of my reader, to attend to one thing; namely, that I am not here treating of, or proposing a plan, but labouring to deduce principles in an intricate subject.

I say, when landed men go to such a bank, and receive paper for a land security, that this operation may be shortened.

Do not the notes he gets stand (though this be not expressed) upon the security of his land? Now, can any man assign any other reason but custom, why his own notes, caring expressly in their bosom the same security, might not be issued, without his being obliged to interpose the bank between the public and himself: And for what does he pay this interest? Not because he has gratuitously received any value from the bank, since in his obligation he has given a full equivalent for the notes; but the obligation he has given carries interest, and the notes carry none. Why? Because the one circulates like money, the other does not. For this advantage, therefore, of circulation, not for any additional value, does the landed man pay interest to the bank.

Had landed men, and not merchants, invented this method of turning their property into circulation, and had they been all assembled in one body, with a legislative authority, I imagine they would have had wit enough to find out that a land bank was a thing practicable in its nature.

Suppose they should agree that all their lands should be let by the acre, and that land property should be esteemed at a certain number of years purchase, in proportion to the rate of interest at the time, where would be the great difficulty in paying in lands?

This is merely a hint, to which a thousand objections may be made, as matters stand: all I say, is, that there is nothing here against principles; and though inconveniences might result to the landed interest, in every way such a plan could be laid down; yet still these inconveniences would hardly counterbalance that of landed men's being obliged to pay interest for every penny they borrow.

It is demanded, what advantage would result to the nation from such a regulation?

I answer, that by it all the borrowings of landed men would be struck out of the competition at the money-market. The monied interest alone would borrow among themselves for the purposes of trade, (for monied men do not borrow to squander,) and landed men would consequently pay with their own paper, in every case, where now they borrow in order to pay. Thus interest would be regulated by the demands of trade, and the rate of it would not be disturbed by the competition of spendthrifts.

Who can say how far the consequences of such a scheme might reach? Might not landed men begin in time to issue notes by way of loan, at a very inconsiderable interest? But I am not disposed to carry my speculations farther: perhaps what has been said may appear sufficiently aerial.

If a statesman shall find every modification of this idea impracticable; either from his own want of power, or of skill, or, which is more probable, from the opposition of the monied interest; he must take other measures for striking out, as much as possible, the competition of spendthrifts in the money-market. Entails, and lame securities, are good expedients; though they are productive of many inconveniences. His own frugal oeconomy in state affairs will go much farther than any such trifling expedients.

Did a nation enjoying peace, although indebted perhaps 140 millions sterling, begin by paying off but 2 per cent of their capital yearly, besides the current interest; while no neighbouring state was borrowing any; what would interest fall to in a short time! It may be answered, that the consequence would be, to enrich other nations; because the money regorging at home, would be sent abroad. To which I reply, by asking how any state can be enriched by their borrowing? And in what does such lending to foreigners differ from the nation's paying off their foreign creditors? Will not the return of interest from abroad compensate, pro tanto, the sums sent out for the like purpose?

But if it be said, that the consequence will be to enable other nations to bring down their own rate of interest; I allow it to be so; and so much the better, as long as it remains proportionally lower with us; which it must do, as long as we can lend abroad. We have said, and I believe with truth, that as credit is now extended, a general average is struck every where upon the value of money well secured, consequently, the lower that interest is reduced abroad, the lower still will it remain at home, as long as merchants and exchangers do subsist.

From this circumstance of the average on the rate of interest, the Dutch must, I think, have lost the great advantage they formerly enjoyed, from the low rate of it in Holland, relatively to other nations.

In Child's time, the Dutch were familiarly buying up sugars in London, above the price paid by English sugar-bakers; and, notwithstanding the additional freight and charges, they grew rich by their trade, while the others were hardly making any profit. This he accounts for from the low rate of their interest. He supposes both Dutch and English to have carried on this trade with borrowed money; for which the first paid 3 per cent and the other 6 per cent.

But at present, were it possible to get 6 per cent for money in London, what Dutchman would lend his father a shilling at 3 per cent? The English stocks are as currently bought and sold, nay, all the stockjobbing tricks are practised with the same subtlety at Amsterdam as in Change-Alley: from which I conclude, that a great part of the advantage of low interest is now lost to that nation; and I conclude farther, that it is the common interest of all trading nations to bring interest as low as possible every where.

Another cause of high interest proceeds from certain clogs laid upon circulation, which flow merely from custom and prejudice. Of this nature is the obligation laid upon debtors to pay in the metals, nothing but coin being a legal tender.

The only reason for such a regulation was the precariousness of credit in former times. Were all the circulating paper in a nation secured by law, either upon the lands or revenue of the country appropriated for that purpose, there could be no injustice or inconvenience in making paper (so secured) a legal tender in all payments. Again, how extraordinary must it appear to any reasonable man, that the same paper which passes on one side of a river, running through the same country, should not pass on its opposite bank?

The reason of this is indeed very plain: the subaltern jurisdictions on each side are different; and the debtors in the paper are different: but if the paper of both stood upon a security equally good, what is to hinder both to be received as a legal tender in all payments over the kingdom? Should not little private objects of profit among bankers (who are the servants of the state, and who are so well paid for their service) be over-ruled, when the consequences of their disputes are found to be so hurtful? But of this more, when we come to speak of banks.

The only occasion where a large quantity of coin is necessary in the liquidation of paper, is for payment of the balance of trade with foreign nations. Of this also we shall treat more at large, when we come to the doctrine of exchange. But surely nothing can be so ill judged, as to create an imaginary balance within the same state; or rather, to permit money-jobbers to create it; at the expence of raising interest, and hurting trade, in the very places where it stands most in need of encouragement.

From these principles, and others which naturally flow from them, may a statesman steer a very certain course, towards bringing the rate of interest as low as the prosperity of trade requires, or the principles of double competition between borrowers and lenders will permit.