Chap. VIII : Is the Rate of Interest the certain measure of the State of Commerce?

Some political writers are fond of every expedient to reduce within a narrow compass many questions, which being involved in combinations, cannot be reduced to one principle. This throws them into what I call systems; of which we have an example in the question now before us.

There is nothing more difficult than to determine how far commerce runs favourably, and how far unfavourably for a nation. This would not be the case, were the rate of interest the certain measure of it. I have found it however advanced, that nothing more is necessary to be known, in order to estimate the relative profits upon the foreign trade of two nations, than to compare the common rate of interest in both, and to decide the preference in favour of that nation where it is found to be lowest.

We may say concerning this proposition, as concerning the course of exchange; that the lowness of interest and of the price of exchange are both exceedingly favourable to trade; but they are no adequate measure of the profits arising from it.

The best argument in favour of this opinion with regard to interest is, that the nation which sells the cheapest at foreign markets is constantly preferred; and, consequently, where the use of money is the lowest, the merchant can sell the cheapest.

I answer, that this consequence would be just, were all trade carried on with borrowed money, were the difference of the price of the materials or first matter, the ease of procuring them, the promptitude of payments, the industry of the manufacturer, and his dexterity, all reckoned for nothing. But such advantages are frequently found in these articles, as to be more than sufficient to counterbalance the additional interest which may be paid for the money employed in trade. This is so true, that we see the dexterity alone of the workman (living in an expensive capital, where the charge of living may be double of what it is in the country) enabling him to undersell his competitors every where: the same may be true with regard to the other articles. Farther, how absurd is it to say, that all trade is carried on with borrowed money? A very inconsiderable part of trade is carried on with borrowed money, in any country in Europe; and that part, which is carried on with borrowed money, is not so much clogged by the high rate of interest, as by want of punctuality in payments. A merchant who can turn his money in three months, borrows as cheaply at 6 per cent as another who turns his in six months, when he borrows at 3 per cent.

The object of trade is produce and manufacture. These are prepared for the market by farmers and tradesmen. Let us compare the value of them, when sold at market to the merchant, with the interest of the money borrowed by the farmers and tradesmen, in order to carry on their industry, and we shall find that the interest paid by them, bears hardly any proportion at all, to the value of what they produce. Example. A sheep borrows no money in order to produce wool; spinners and weavers borrow no money in order to enable them to spin and to weave. Thus the whole manufacture comes to market without any charge for interest.

Do we not see every day, that ingenious workmen, who obtain credit for very small sums, are soon enabled, by the means of their own industry, to produce a surprising value in manufactures, and not only to subsist, but to increase in riches? The interest they pay for the money borrowed is inconsiderable, when compared with the value, created (as it were) by the proper employment of their time and talents.

If it be said, that this is a vague assertion, supported by no proof; I answer, that the value of a man's work may be estimated by the proportion between the manufacture when brought to market, and the first matter. Nothing but the first matter, and the instruments of manufacture, can be considered as the objects of borrowed money; unless we go so far as to estimate the nourishment, and every expence of the manufacturer, and suppose that these are also supplied from borrowed money. To affirm this, would be turning arguments into cavil.

The object, therefore, of borrowed money for carrying on trade, is more relative to the merchant than to the manufacturer. Borrowing is necessary for collecting all this product and manufacture into the hands of merchants. This, no doubt, is very commonly the operation of credit: interest of money, here, comes in, to indemnify the giver of credit, for the use of his money: but this interest is due from the time only, when the borrower pays those from whom he collects, to the time he receives payment from those to whom he sells. This interval it is of the highest importance to the merchant to shorten. In proportion as it is long, and in proportion to the rate of interest, he must raise his profits; and in proportion as payments are quick and regular, and interest low, he may diminish them. Whether merchants do regulate their profits, in all commercial nations, according to the exact proportion of the respective rates of interest, and promptitude of payments among them; or whether these are determined by the circumstances of demand and competition in the several foreign markets where the trade is carried on, I leave to merchants to determine. All I shall remark is, that a well founded credit, and prompt payments, will do more service to trade, than any advantage trading men can reap from the different rate of interest in different countries.

It must not be concluded from this, that low interest is not a very great advantage to trade; all I contend for, is, that it is not the measure of it.

Another circumstance which puts nations, in our days, much more on a level than they were in former times, I have already hinted at. It is that general average which the great loads of national debts, and the extension of credit, through the several nations of Europe, who pay annually large sums of interest to their creditors, has established. Let me suppose the Dutch, for example, to have fixed, by placard, the rate of their interest at 3 per cent. I say, that as soon as the general average of interest comes to stand above this rate, from the price of public funds in England and France, we may safely conclude, that their trade can no longer be carried on with any very considerable sum of money borrowed at 3 per cent. The consequence then must be, to send the money which regorges in the hands of the frugal Dutch, into other countries, where it can produce a better return, exclusive of all expences of remitting and drawing. What the consequences of this lending to foreigners may be to Holland, shall be afterwards examined.

To conclude; I reckon it will be found, that what had led some to believe that low interest is the measure of commerce, has been owing to this; that in some of the most commercial countries and cities interest has been found to be lower than in great kingdoms: but this, I imagine, is entirely owing to the frugality of their manners, which cuts off the borrowing of the rich for the sake of dissipation. When this is accomplished, trade alone will absorb the stagnations of the frugal, and the price of interest will fall to that rate which is the best proportioned to the profits upon commerce; but this also will be less and less the case every day, in proportion to the credit and circulation of public funds in different nations.